Setting the Stage

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From the COMPLIANCE AND ETHICS LEADERSHIP COUNCIL ™

of the LEGAL AND COMPLIANCE PRACTICE www.celc.executiveboard.com

Setting the Stage

The Importance of Culture for Risk Management

and Business Success

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From the COMPLIANCE AND ETHICS LEADERSHIP

Compliance Offi cers rank improving risk detection and risk management among their most important initiatives for 2010.

■ Key portions of members’

plans to improve risk management involve improvements to employee culture (e.g., strengthening ethical leadership and employee speaking up).

A 2010 MEMBER FOCUS ON RISK MANAGEMENT AND CORPORATE CULTURE

Percentage of CELC Members Ranking as Very Important or Important for 2010

Top Five Priorities (of 19)

88.2%

83.6%

82.4%

79.5%

75.3%

57.4%

55.9%

55.3%

54.4%

41.4%

Bottom Five Priorities (of 19)

Improve Performance Measures in Demonstrating Program Eff ectiveness

Rewrite Code of Conduct to Drive Employee Awareness Strengthen Ethical Leadership Among Senior and Middle Management

Manage Expansion/Coordination of the Global Compliance and Ethics Program

Improve Risk Detection

Build an Eff ective Business Case for Compliance and Ethics Promote Employees Speaking Up

Improve Third-Party Oversight and Management Manage Shifting Regulatory Expectations

Make Policies More Applicable to the Business

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Corporate culture and employee behaviors signiﬁ cantly inﬂ uence both risk management systems and business outcomes.

■ Risk management processes and systems are ultimately only as strong as the people controlling them.

■ Eff ective risk management systems simply move relevant information from the “informed” to the empowered (senior management) in a timely manner.

CULTURE IMPROVES MORE THAN COMPLIANCE RISK MANAGEMENT

Corporate Culture

Risk Management Business Performance

Lower Compliance Misconduct—

CELC research found that employees in higher integrity cultures are 67% less likely to observe signiﬁ cant instances of business misconduct than employees in lower integrity cultures.

Improved Risk Detection—CELC research found that employees in higher integrity cultures are more likely to report noncompliance and operational failures than employees in lower integrity cultures.

Higher Employee Productivity—

Joint CELC and CLC Human Resources research found that managers that exhibit corporate values can improve employees’

performance by 12%.

Better Strategic Management—

Corporate Executive Board research reveals that companies with strong openness of communication deliver

shareholder returns ﬁ ve percentage- points higher than their peers.

Improved Business Performance—

CELC data analysis examines the positive correlations between business performance and speciﬁ c aspects of corporate culture.

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CELC’S CULTURAL DIAGNOSTIC SURVEY

The Council’s Cultural Diagnostic

Employee Survey and Scale

Multiple Industries

Participating companies represent the following industries:

Energy, Drilling and Gas, Insurance, Pharmaceuticals and Medical Supplies, Financial Services, Non-Proﬁ t, Professional Services, Retail, Construction and Building Materials, Manufacturing, Food Services, Chemical, and Consumer Product Goods.

Global Coverage

Respondents work in more than 80 countries across North America, Europe, Asia, the Paciﬁ c Rim, and Latin America.

All Employee Levels

Employees at all levels, from the CEO and senior management to middle management and frontline employees.

All Business Functions

Respondents represent all business functions, including Finance, Sales, Marketing, Information Technology, Call Centers, Human Resources, and Manufacturing.

Key Demographics of Survey Participants to Date

Survey Statements

Strongly Agree Agree

Slightly

Agree Neither

Slightly

Disagree Disagree

Strongly Disagree I can report unethical behavior or

practices without fear of retaliation.

My company responds quickly and consistently to veriﬁ ed or proven unethical behavior.

I am often exposed to situations that could lead to inappropriate conduct.

All CELC member companies can launch our Cultural diagnostic survey at their company—

more than 105 companies have in the past two years.

■ The survey allows members to rigorously assess culture across their organization and benchmark it against peers.

■ Approximately 400,000 employees from 105 companies have completed the Cultural Diagnostic Survey as of 30 April 2010.

1 3

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COMPLIANCE AND ETHICS LEADERSHIP COUNCIL™

www.celc.executiveboard.com

Note: All questions were coded or recorded in such a way to directionally be on the same scale.

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5.3 5.4 5.5 5.6 5.7 5.8 5.9 6 6.1 6.2 6.3

CHANGING STATE OF CORPORATE INTEGRITY

Integrity Index Score by Management Level, 2008–2009

Integrity Index Score

First Half 2008 Second Half 2008 First Half 2009 Second Half 2009

Non-Managers = (3.4%)

= (1.7%) = (2.1%)

= (1.4%) = (1.0%) = 0.5%

Middle Managers Senior Executives

n = 172,953 employees at 38 companies (2008 survey respondents) and 109,281 employees at 40 companies (2009 survey respondents).

While Integrity Index scores began to stabilize in 2009, they remain below pre-recession levels.

■ Senior executives believe that their companies’

cultures are healthier than middle and non-managers do.

■ Since the ﬁ rst half of 2009, this perception gap between senior executives and other employees has widened.

The Cultural Diagnostic survey scale ranges from 1 to 7.

7: Strongly Agree 6: Agree

5: Somewhat Agree 4: Neither Agree

nor Disagree 3: Somewhat Disagree 2: Disagree

1: Strongly Disagree

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SMALL DIFFERENCES, BIG CONSEQUENCES

Integrity Index Score

Individual Company Score

Relative to Employees at Top Quartile Companies, Employees at Bottom Quartile Companies Are…

1.6

times as likely to observe misconduct.

Two

times as likely to observe HR–related misconduct.

Three

times as likely to observe misconduct in high-risk compliance areas such as conﬂ icts of interest or accounting irregularities.

Bottom Quartile (25th Percentile)

Top Quartile (75th Percentile)

Even relatively small

changes in Integrity Index scores are linked to signiﬁ cant diff erences in misconduct levels.

■ A few ethical missteps can have a signiﬁ cant impact on overall employee perceptions of a company’s culture of integrity and can increase their risk proﬁ le.

4.8 5.0 5.2 5.4 5.6 5.8 6.0 6.2

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Top quartile companies outperformed the bottom quartile companies by more than 16 percentage points in 10-year total shareholder return.

HIGHER INTEGRITY, STRONGER LONG-TERM TOTAL STAKEHOLDER RETURNS

Average 10-Year Total Shareholder Return for Bottom and Top Quartile of 48 Companies

(7.4%)

8.8%

Top Quartile of Integrity Index Bottom Quartile of Integrity Index

Correlation (r) = 0.58

Signiﬁ cance level of Correlation: P-value < 0.01

n = 48.

Culture as Competitive Advantage?

While promoting a culture of integrity may not always be a high corporate priority, failure to properly engage with employees represents a strategic (as well as compliance) risk that threatens long-term competitive advantage.