6 minute read 15 Dec 2020
How boards can drive business integrity

How boards can drive business integrity

By Stacy Chai

Partner, Forensic & Integrity Services, Ernst & Young Advisory Pte. Ltd.

Focuses on fraud and forensic investigations across Asia. ISCA Financial Forensic Professional. Certified Internal Auditor, The Institute of Internal Auditors Singapore.

6 minute read 15 Dec 2020

While businesses understand that integrity is crucial for success, ethical lapses persist, and boards play a key role in reducing this gap.

In brief

  • Boards can address the gap between the intention to build a culture of integrity and actual performance by driving a strategic integrity focus.
  • Organizations need to strengthen their governance framework, embed integrity into their culture, and ensure transparency and disclosures to stakeholders.
  • Boards should ensure there are mechanisms in place to identify and monitor early integrity-related warning signs and respond effectively to incidents.

Successful organizations count on their reputation for respecting laws, keeping promises and acting ethically to maintain stakeholders’ trust. A misalignment between business practices and the expectations of an ever-growing list of stakeholders can lead to a trust crisis.

While boards and business leaders generally understand that ethics lies at the core of corporate governance practices, organizational failures show that ethical lapses and shortcuts persist. Over the last five years, at least 33 public companies in Singapore have had major corporate governance or accounting lapses. The cost of getting it wrong has a devastating impact on shareholder value and the personal reputation of directors involved.

Clearly, there seems to be a gap between intentions and actual performance, and boards can play a critical role in reducing this gap by driving a strategic focus on integrity.

Clearly, there seems to be a gap between intentions and actual performance, and boards can play a critical role in reducing this gap by driving a strategic focus on integrity.
Stacy Chai
Partner, Forensic & Integrity Services, Ernst & Young Advisory Pte. Ltd.

Strengthen governance framework and embed integrity into culture

The governance framework is often seen as the formal structure for compliance management, together with policies that guide organizational behavior. However, employees also take their cue from experiences, and their behavior is often shaped by the words and actions of the board and senior management. The business landscape today includes complex corporate structures and broad global influences. In such an environment, the board must play a dual role of setting the company’s strategic direction toward growth, while ensuring checks and controls are enforced for all relevant areas, including the professional conduct of C-suite executives and senior management personnel.

According to the EY Global Integrity Report 2020 (pdf), 55% of board members are very confident that their managers demonstrate professional integrity, but only 40% of junior employees feel the same. Moreover, only 37% of junior employees say that they have heard the management communicate frequently about the importance of behaving with integrity over the last two years. This points to the need for greater organizational engagement on integrity risks, which can be achieved through several ways:

  • Holding candid focus group discussions outside of scheduled board meetings with frontline teams and employees working in high-risk areas
  • Conducting staff training on ethics that allows employees to participate and share ethical dilemmas that they face
  • Sharing lessons from past disciplinary matters with appropriate privacy protections
  • Advocating for and ensuring adequate clout and independence of the audit and compliance functions
  • Promoting and rewarding ethical behavior by linking it to employee performance indicators and incentives

These initiatives could help to create a supportive culture where employees can distinguish between taking entrepreneurial risks to drive growth and unethical business conduct that may adversely affect the organization. With such a culture, employees would be able to focus more on innovation and more easily recognize unethical behavior that should be avoided.

Ensure transparency and disclosure to stakeholders

Embracing integrity means viewing transparency and disclosures as more than just for compliance. It means not only focusing on materiality, but also putting information sharing that would help shareholders make informed investment decisions as a top priority.

Investigations have shown that companies with failed integrity agendas fell short of this standard. Boards must play a more active role in having a line of sight into outliers in disclosures, especially the ones that can create disproportionate risks. When assessing outliers, boards need to fundamentally change the overarching question from “Is this allowed?” to “Is this right?”.

Monitor and respond effectively

While boards are typically not directly involved in the company’s day-to-day operations, it is their role to gauge plausible early warning signs and probe the management by asking questions. This involves monitoring how business is conducted and responding effectively when things go wrong. Investigations have also revealed that in the majority of cases, early warning signs were actively hidden from the board or audit committee due to weak oversight mechanisms, or not thoroughly probed or investigated once known.

Many companies still do not test their practices and processes against fraud scenarios and find out whether fraudsters are able to exploit weaknesses in their systems. Boards can direct the management to mandate such reviews to identify weaknesses at both the entity level and the operations level.

Boards should steer the management to implement data analytics techniques and tests on matters beyond financial information for enhanced oversight and better monitoring of business practices. This can include using and linking data points from various sources, such as human resources, communication, IT security controls, operational key performance indicators, customer feedback and high-risk employee activities. Such analytics can be very effective in identifying early integrity-related warning signs.

If things go wrong, boards must ensure that the investigations are conducted independently, without the management’s influence, and that disciplinary actions are designed without relevance to the seniority of personnel involved in the matter. Regulators will also test if employees have knowledge of misconduct response procedures, and it is important for companies to help employees understand how these work in practice. This is an area where companies typically fall short in.

Ultimately, a proactive board approach is vital to maintaining the integrity of the organization. Boards should consider the following questions:

  • How does the organization define integrity and embody the relevant values?
  • How is the board monitoring key integrity risks and holding the management accountable?
  • How are staff engaged on ethics and integrity, and are reporting mechanisms available and effective?
  • Has the organization considered using technology and nonfinancial data points to identify and monitor early warning signs?
  • What is the maturity of the organization’s integrity framework and how does the organization plan to work toward industry best practices?

Summary

Companies need a strong culture of integrity to safeguard their reputation and maintain stakeholders’ trust. Boards play a critical role in advancing the company’s integrity agenda by reinforcing its governance framework, embedding integrity into the organizational culture, and ensuring transparency and disclosures to stakeholders.  Mechanisms to identify early integrity-related warning signs and respond effectively to incidents are also crucial.

About this article

By Stacy Chai

Partner, Forensic & Integrity Services, Ernst & Young Advisory Pte. Ltd.

Focuses on fraud and forensic investigations across Asia. ISCA Financial Forensic Professional. Certified Internal Auditor, The Institute of Internal Auditors Singapore.