Yearbook 2023 for Global Ethics, Compliance & Integrity

2.3. The gate to personal crises

Now the essentials: all members of the organization – from the employees to management and the governing body – are those who, in the worst case, can act non-compliantly and breach their integrity. It is in the minds of these individuals where all the crises previously mentioned converge. First, it must be said that a personal crisis is capable of precipating a multilevel crisis: People are currently preoccupied with thoughts that, as little as a year ago, would not have arisen in their worst nightmares: whether the despot Putin will use nuclear weapons (geopolitical crisis), whether we will be able to heat our apartment or suffer power outages (energy crisis), whether tap water will run out (environmental crisis) or whether inflation will continue to break new records each month (currency crisis). Accordingly, this multidimensional crisis can quickly result in a personal / mental crisis. If a person falls victim to this, the result can be a noticeable shift / redefinition of the value system. If we see ourselves at the mercy of existential dangers, we usually think more in terms of the immediate future, self-interest and quick profit, our own safety and security, our family and friends. In view of such catastrophes – presented by the media as real and impending – we humans may find ourselves more tempted to fix prices, offer/accept bribes and accept infringements in a way which would have been unthinkable in “times of peace”. At the same time, the legislator (see above) and the media only make matters worse for us by enacting chaotic and poorly thought-out laws or, in case of some media providers, spreading fake news. This is a highly dangerous and complex situation that undermines one of law’s essential functions, namely that of subjective acceptance. Compliance as a whole is not at all well served. Thus, the multidimensional crisis acts as a springboard to a personal crisis.

2.4. Crisis and integrity

This is not all, however. In recent years, we have managed to transition from compliance to integrity – or so many companies claim. Even more organizations are introducing Integrity Management Systems (IMS) besides the existing CMS. According to this concept (which will not be discussed in detail here), members of an organization should not only know and follow rules and regulations (i.e. compliance), but do so out of conviction (integrity). In other words: If rules are incorporated into one’s own value system, it is much more difficult to justify a potential breach of rules to oneself. This is precisely where the multidimensional crisis comes into play. With its diverse variations, it offers an inexhaustible source of self-justification. In appeased times, these are usually rejected as unfair, devious and wrong; in times of crisis, they may induce individuals to break the rules. The multidimensional crisis can have an adverse effect on the state of integrity and the effects will remain invisible for years or even forever. This is because they take place in the so-called “forum internum”: i.e., our invisible portfolio of values that determines how we behave (so-called “intrinsic values”).

3. Possible actions

This gives rise to the question how to rescue ethics, compliance and integrity from this multidimensional crisis. The answer is not easy one. However, a good starting point is offered by Georg-Wilhelm Exler, who once said “It is not the crisis that is the problem, but how we deal with it.” This quotation provides us with some important lessons in relation to organizational ethics, compliance and integrity, which are discussed in general terms below.

3.1. General remarks

Before focusing on the role the elements of a Compliance Management System play in a crisis and how they can be optimized, it is necessary to make some general remarks. First of all, it is important to convince top management and the governing body – if at all necessary – of the need for robust ethics, compliance and integrity and their constituent elements in a crisis. This will prevent the compliance dilemma referred to above from arising. Second, open and broad communication about the new and increased risks presented by the crisis is of considerable importance in creating the awareness needed to reinforce compliance culture. Third, integrity and ethics are becoming increasingly important and so should be made an integral pillar of the CMS (if not already the case). In times of multilevel crisis, integrity needs to be actively and sustainably promoted because (as discussed earlier), it becomes more vulnerable. Fourth, before targeting the compliance and integrity department as a source of potential savings in times of crisis, the leaders should consider the potential for integration within their organization (i.e., whether it is possible to combine the common elements of diverse management systems within an integrated governance structure). Fifth, the system evaluation (which is anchored in the CMS anyway), is of considerable importance. This should be carried out at appropriate intervals and in light of new compliance risks.

In a crisis, these special rules serve to reinforce a CMS and allow consideration of what roles the individual elements of this system play in times of crisis and how they could be adapted. For this purpose, the proven and widely-used management cycle of PDCA: i.e. Planning, Doing (Implementing), Checking (Evaluating) and Acting (Improving) can be used.

3.2. Planning – Especially compliance risk assessment

Compliance risk assessment (CRA) may not be new but it is rarely associated with crises. Although there are different models of compliance management, all of them are based on a risk-approach. In other words, it is primarily about identifying the compliance obligations that apply to the organization, evaluating the risks of their breach (non-compliance) and addressing those risks accordingly. In times of multidimensional crisis, CRA assumes particular and rapid importance for two crucial reasons.

First, the risk of non-compliance increases in times of crisis. This is related to several factors, but essentially to the influence of crises on integrity already mentioned (i.e., people in crisis may be more inclined to justify any non-compliance to themselves). However, beyond integrity, crises can also serve to increase risk: people simply do not know what rules apply to them because the legislature has reacted quickly, often with imperfect rules, and CRA has not been processed on time. If the members of an organization do not know what rules apply to them (e.g. due to delays in the CRA or communication of its results), they can hardly be expected to comply.

On the other hand, the multidimensional crisis can also generate completely new compliance risks. The best example of this are the various sanctions imposed on Russia by the European Union and other individual states in response to Russia’s war in the Ukraine. There have been several sanction packages so far, with the result that a whole group of companies (for whom this was not previously an issue), have a new source of compliance risks to contend with. These they have to identify, evaluate and adequately address. This shows that crisis situations can generate completely new compliance risks.

CRA is not the only issue that demands special attention in times of crisis during the first phase of CMS. Of course, further planning should react to the findings of both CRA and the crisis. In particular, compliance policy must be adjusted and the Code of Conduct as well as any other internal compliance regulations optimised and updated.

3.3 Implementation

The implementation (“Do”) phase must take a number of aspects affected by the crisis into account. First of all, it is crucial that the people in charge of compliance and integrity (i.e. the compliance and/ or integrity function) be appropriately trained and always up to date. If this is not the case, crisis management should be added to their knowledge and skills. However, the typical tools available (e.g. state-of-the-art digitalization tools), can also save costs without sacrificing the effectiveness of the entire system. During a crisis, appropriate communication and the active promotion of SpeakUp culture remains enormously important. Clearly, the members of an organization must have open and unrestricted access to appropriate reporting channels in order to be able to report out misbehavior quickly, effectively and (in particular) without fear of retaliation.

3.4. Audit and improvement (“Check & Act”)

Finally, the ongoing evaluation and improvement of the system is of crucial importance in times of multilevel crisis. However, these measures should not be limited to compliance management as a system. Its individual elements should also be evaluated for their effectiveness in light of the crisis and then directly improved. A crisis makes it even more imperative to have an effective, well thought-out and robust system of evaluation.

4. Conclusion

Economic, financial, energy and health crises are currently converging to create a multidimensional crisis – a mega-crisis – which negatively affects several areas. In terms of ethics, compliance and integrity this affects not only legislators but also organizations and their members. Legislators react with inadequate laws, companies cut corners and thus create a compliance dilemma. In times of crisis, people’s integrity can also suffer, further increasing the compliance risk. Compliance and integrity systems do not need to be reinvented, but they must be urgently evaluated and improved accordingly if they are to pass the stress test posed by the crises set to engulf us in 2023. As far as ethics, compliance and integrity is concerned, we are all responsible!

“Socially conscious investors around 1990 were largely focused on topics such as human rights and pollution; the idea there could be a link between ESG and financial performance was just emerging.”⁴ That was also the time when the Domini 400 Social Index was created as the first of its kind to track sustainable investment practices (known today as “MSCI KLD”). Other earlier events of importance included the initiative in the United Nations Framework Convention on Climate Change to control environmental impacts across the globe, the Kyoto Protocol of 1997, which committed countries to reduce greenhouse gases (“GHG”), and the Global Compact Initiative itself in 2000.

Academia also did a lot of work in this area. One highlight is “Governing the Commons: The Evolution of Institutions for Collective Action (1990)”, by the political economist Elinor Ostrom, for which she won the Nobel Prize. In this book, Ostrom provided groundbreaking work on the institutional economics involved in the management of renewable natural resources (one of the most complex topics facing people around the world). Her analysis also formed part of the important topics representing the core problem of ESG, i.e. the political economy of institutions and decisions that contained “tragedies of the commons” and ways in which those tragedies could be overcome.

Most recently, the interest in ESG has evolved to address emerging global challenges including health care issues around the pandemic, climate change and human rights and social justice issues.

3. Company and societal benefits associated with ESG

At a fundamental level there is a very strong alignment between company and societal benefits from ESG. Unless companies are responsible stewards of the resources they employ to generate value and operate in a manner consistent with the expectations of the societies in which they operate, they cannot perform effectively over time. Experience has shown that greed coupled with the single-minded pursuit of profit is incompatible with a sustainable approach to business.

According to the European Commission (European Commission, 2019), the benefits to companies from non-financial, climate-related ESG disclosures include: