Written by: Mini vandePol, Asia Pacific Head of the Investigations, Compliance & Ethics Group, Baker McKenzie (Hong Kong); Henry Chen, FenXun Partners (Baker McKenzie’s joint operation platform in China) (Shanghai); and Christine Cuthbert, Baker McKenzie (Hong Kong)
A culture relying solely on “ethical compliance” is not sufficient to protect against failures. Rather, it comes down to personal integrity shown by leaders and employees to “walk the talk”.
In our experience, there are four key pillars to creating a value-driven and ethical business culture: Transparency, Leadership, Communication, and Response.
- Introduction
Environmental, Social and Governance (ESG) continues to be a key strategic priority for corporate boards. For many, the United Nations’ Sustainable Development Goals (SDGs) have become a tangible means through which to move their ESG initiative. In fact, according to our report “From Strategy to Action — Advancing ESG in Asia Pacific”, 68% of respondents say they embed SDGs into their strategic planning. However, this figure varies across the region, with businesses in Japan and Australia leading the way (99% and 98% respectively), followed (closely) behind by Singapore (89%), India (83%), Hong Kong and Indonesia (each with 64%). With ethics being implicit across all 17 SDGs, companies are placing greater emphasis on being recognized as having a strong ‘ethical culture’.
In a professional context, ethical culture is characterized by honesty, fairness and equity. It also respects the dignity, diversity and rights of individuals and groups of people. However, do companies that espouse their ethical practices consistently satisfy all these criteria or is it merely a strategic aspiration? Can an ethical culture in a corporate context be measured and what is the impact on this culture when there is an integrity failure? These are the questions we consider in the context of a recent case from Australia.
- Ethics and Integrity
In the corporate context, ethics and integrity are used interchangeably—when discussing a company’s culture. It is not recommended to treat these two concepts as one and the same. A person with integrity will have the qualities of being honest and fair. This highlights that it is a personal choice. Corporate ethics, however, can be imposed on a person whether they agree or not, in the form of laws or codes of conduct—these are intended to guide the behaviour of an individual. Integrity cannot be forced upon an individual; it has to come from within. A person with integrity will be self-motivated towards the correct action, because it is the right thing to do.
The difference in outcomes between these two concepts was illustrated during the inquiry conducted by the New South Wales gaming regulator examining whether The Star Casino operated by The Star Entertainment Group Limited, an Australian listed company, should continue to hold its Sydney casino license. The 36-day inquiry has only recently concluded and a decision is yet to be delivered. The evidence provided by various senior executives and in house lawyers of Star is germane to the question of what constitutes “ethical” business practice and how it is impacted by the personal integrity failure of its most senior leaders and advisors.
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The Star inquiry considered allegations that the casino disregarded anti-money laundering procedures to avoid China’s strict capital flight and anti-gambling laws. While giving evidence in the inquiry, the former Star CEO acknowledged that Star repeatedly failed to manage risk and regulation, describing it as a “secretive and not transparent” company that followed the “letter of the law and not the spirit of the law”. The inquiry heard evidence that the former CEO personally approved a single high-roller to withdraw more than AU$22 million over three days without any anti-money laundering (AML) checks. Further evidence was also submitted that Star acted “as an ATM” for some guests, falsely disguising over AU$900 million of gaming transactions as hotel expenses such as food, beverage and room charges. The former CEO conceded that it was a “fundamental failing” of Star to allow the practice.
How a business deals with “grey areas” provides a key insight into whether it has a strong ethical culture – however this culture may be destroyed if leaders lack integrity to speak up or make tough decisions at a critical juncture to uphold the “the spirit of the law”. The Star Entertainment Group holds itself as upholding and enhancing standards in ethical behaviour across all areas of their business. Counsel assisting the inquiry suggested that all three of Star’s senior lawyers, who have since resigned, at times displayed unethical and dishonest conduct, singling out the former General Counsel for what she described as “deliberate obfuscation”.
- Key pillars to creating an “ethical” business culture
The evidence given by Star senior executives and in-house lawyers demonstrates that a culture relying solely on “ethical compliance” is not sufficient to protect against failures. Rather, it comes down to personal integrity shown by leaders and employees which are critical to promoting a sound ethical culture.
In our experience, there are four key pillars to creating a value-driven and ethical business culture: Transparency, Leadership, Communication, and Response.
- Transparency
Transparency is a key driver of ethical business culture. It is through transparency that a company is able to ensure its leaders and employees are accountable for their actions both personally and on behalf of the company. It also discourages secrecy and limits the opportunity to act in the shadows – the very “secrecy and not transparent” company behaviour that the ex-CEO notes was present that led to the AML issues at Star.
What does transparency look like? It does not mean that every decision made by the board needs to be open to public scrutiny. But it does require the company to ensure it has in place the policies and procedures to reinforce its values, and sufficient checks and balances on the other end to ensure nothing is slipping through the cracks. Those responsible for administering the various components of the policies and procedures do need to be held accountable, but they also need to feel empowered to raise issues – not just policy or legal issues but also those where their personal integrity calls them out – without worrying about retaliation.
- Leadership
Tone at the top and leadership buy-in is crucial in creating and maintaining a culture of ethics. Despite the strong words of commitment to ethical business in annual
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reports and town halls, the perception of personal integrity of leaders remain weak. In fact the honesty and integrity of business leaders surveyed by Gallup Polls over many years had 21% of poll respondents rating executives highly or very highly in 1991 however this has dropped in 2021 to just 15%.
The Board and the C-Suite of the company must “walk the talk” to demonstrate that ethics is a priority and integrity is valued as, or even more highly than financial performance. For example, management needs to allocate sufficient resources and employees for the review of alleged ethical failures so that the issues are not casually disposed of but are instead effectively and independently probed using credible investigation processes. For this reason, it is important for the Board to have direct oversight of the ethics and integrity function to resolve conflicts when considering fairness, diversity and inclusion, transparency and personal privacy and making the most appropriate choices when formulating company policies.
The Ethisphere Honorees of the World’s Most Ethical Companies 2022 (the Honorees) reported that their Board or a committee of the Board is charged with overseeing the health of the organisation’s culture. The Honorees also arm their ethics and compliance programs with senior leaders, with 76% of them assigning the program ownership to a Chief Ethics and/or Compliance Officer.
The qualities required in ethical leadership was discussed by Kenneth Polite JR, the Head of the US Department of Justice’s Criminal Division. Mr. Polite noted that the Division, when evaluating corporate compliance programs, will look at the “qualifications and expertise of your compliance personnel and other gatekeeper roles.” He warned against those who still believe it is enough to paste an exalted title onto some junior person and call that person a “compliance officer” without independence, authority or status. We should add “personal integrity” to these qualities – after all, empowerment without integrity may simply result in failure such as that highlighted in the Star inquiry.
- Communication
Companies, especially those with many thousands of employees across the globe, also face challenges in creating one cohesive culture after setting the correct tone at the top. Periodic training is one of the top-down ways to ensure that the integrity messages are conveyed to all employees. In terms of compliance and ethics, it is as important to ask ‘whether the employees let down the company’ as ‘whether the company lets down the employees’. Another equally important way is to facilitate open discussions. Most of the Ethisphere Honorees leveraged managers to broadcast ethics and compliance messages to their respective business units. In fact, Ethisphere’s ethical culture data has shown that transparency and communication go hand in hand – employees’ perceptions of organizational justice, courage in speaking up, and perceived willingness to report, closely tie to whether and how often their immediate manager is engaging with them on these topics.
Response
The approach taken by a company in response to an ethical failure is directly related to the strength of its culture of ethics. How resourced is the response team? Is it empowered and funded by management to take appropriate steps? Is the same level of focus given to internal ethical failures and those involving external parties? While failures involving external parties may attract more immediate public scrutiny, reputational and monetary damage, internal ethical failures are potentially even more corrosive as they eat away the confidence of employees, contractors, investors, and other stakeholders. Acquiescence to an isolated breach may give a wrong signal to employees, leading to further systematic failures. Where the issue has arisen through a whistleblower hotline, compliance audit or other reporting mechanisms, a failure to properly address and remediate the breach also sends a signal about the ineffectiveness of such mechanisms, reducing the likelihood that they will be used or taken seriously in the future. Companies that have a credible ethical culture focus on long-term compliance sustainability over short-term success and call out unethical behaviour even when it has a detrimental financial or another business impact.
Our Investigations, Compliance & Ethics Group in Asia has seen first-hand how, ethical failures can be avoided by valuing and fostering personal integrity. When failures occur, this provides the perfect opportunity to test the mettle of companies and improve their culture. In many cases, where the allegation does not immediately implicate a breach of law or policy, companies may be reluctant to conduct an investigation—this is a further ethical failure demonstrating leadership integrity weakness and possibly exacerbating future failures such as those identified in the Star inquiry. In light of the higher expectations of regulators and stakeholders and the strategic priority placed on ESG, it is time for companies to stop conducting a box-ticking exercise or taking advantage of ‘grey areas’ in law, but instead adopt the key pillars of Transparency, Leadership, Communication, and Response to support and value both ethics and integrity within their business.
- The Independent Liquor and Gaming Authority of New South Wales (Australia) review of the Star by Adam Bell SC under the Casino Control Act 1992
- https://news.gallup.com/poll/1654/honesty-ethics-professions.aspx
- https://www.complianceweek.com/regulatory-enforcement/dojs-kenneth-polite-to-ccos-tell-me-your-compliance-success-stories/31692.article
About the Experts:
Mini vandePol is the Head of Baker McKenzie’s Asia Pacific Investigations, Compliance & Ethics Group, after successfully completing three years as the Global Chair. Mini focuses on ESG risk management and mitigation with an emphasis on anti-bribery and corruption, trade sanctions, fraud and other senior executive misconduct investigations across Asia but most particularly in Hong Kong, China and India. More on Mini here: https://www.bakermckenzie.com/en/people/v/vandepol-mini
Henry Chen has more than 15 years’ experience in handling cross-border compliance and investigation matters. As a US- and PRC-trained lawyer in Shanghai, he has advised many multinational corporations on compliance, risk management and investigations. More on Henry here: https://www.bakermckenziefenxun.com/en/people/chen-henry
Christine Cuthbert has a particular focus on investigations involving ESG risks, such as bribery, corruption, money laundering and other compliance matters. She has over 12 years’ experience in Australia and Hong Kong in all forms of contentious work, including assisting clients with cross-border investigations and litigation, as well as other managing their compliance risks. More on Christine here: https://www.bakermckenzie.com/en/people/c/cuthbert-christine
