Professional. Compliance & Ethics. 23 Some realism about risk assessments. 39 Measuring Jim McGrath

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1 Compliance & Ethics January 2015 Professional a publication of the society of corporate compliance and ethics Meet Barbara Harmon Compliance and Ethics Program Lead Alyeska Pipeline Service Company See page Some realism about risk assessments Scott Killingsworth 35 The evolving role of the chief compliance officer Patrick Quinlan 39 Measuring Jim McGrath Thomas R. Fox 41 The ends do not justify the means: Performance management and ethics Ruth Steinholtz This article, published in Compliance & Ethics Professional, appears here with permission from the Society of Corporate Compliance & Ethics. Call SCCE at or with reprint requests.

2 by Ruth Steinholtz The ends do not justify the means: Performance management and ethics Performance management contributes to the success of an organisation through the alignment of values and behaviour with business goals, through employee evaluation and reward, and through employee development. The more that employee goals and organisation values are aligned, the stronger the ethical culture will be. Perceived fairness in the performance management process is essential so that it is part of the solution, not part of the problem. A culture of continuous improvement that squarely faces and deals with the development needs of employees and leaders will benefit when people are able to learn from their mistakes and, therefore, develop sustainably. Fundamentally, performance management helps develop quality leadership, which is a key element in strong ethical culture and business success. How do organisations develop performance management processes that measure not only what employees achieve, but also how they do it? Performance management has a major influence on how employees perceive the company they work for and, therefore, on how they behave. It can be an important part of the process of weaving ethical behaviour into the fabric of corporate culture. The way that people are assessed, compensated, and rewarded has Steinholtz ramifications for both what an organisation achieves and how it achieves it. Performance management is a fundamental driver of company performance. Although Peter Drucker never actually said, If you can t measure it, you can t manage it, he did believe that measuring results and performance was key to organisational effectiveness. Ignoring company values and ethics when measuring overall performance not only risks serious ethical violations, but can lead to a toxic internal culture with low employee engagement. Low employee engagement is likely to raise compliance risk and have a negative effect on results. The sale of payment protection insurance (PPI) in the UK is an example of how target setting can create perverse incentives on staff, so they forget the how and focus on the what. According to the Financial Conduct Authority (FCA), sales staff at Lloyds Banking Group were put under pressure to hit targets in order to get a bonus or avoid being demoted. In one instance, as a result, an adviser sold protection products to himself, his wife, and a colleague. Financial incentive schemes are an important indicator of what management values and a key influence on the culture of the organisation, the FCA commented. The ends did not justify the means. So far, banks have earmarked over 22bn (about $34.5 billion US) or

3 to compensate the people they wrongly sold payment protection insurance to. Careful attention needs to be given to what is accomplished and rewarded so that the goals pursued support an organisation s values and ethical commitments. But it is also critical for employees to be assessed and rewarded based on how they achieve those goals. Although there is nothing new in measuring what employees achieve (e.g., Have they reached their targets? Have they generated new business? Have they realised their goals?), measuring the how is more complex (e.g., Did they reach their goals with integrity and by following the company s core values?). Although performance management by itself cannot guarantee behavioural change, it is one of the levers that can be used to support and reinforce efforts to change organisational culture. Moreover, the quality of the performance management process itself is key. If it is perceived as unfair, employees may become disengaged and feel able to rationalise unethical behaviour. The benefits of embedding ethical behaviour into a performance management process can be that it: Indicates to employees that the company is serious about the way business is done and underlines the belief that high ethical standards are linked to better business results. Is a driver of a strong ethical culture through performance conversations which convey how we do things around here and identify weak spots in the ethical culture. Ensures that the managers retained and promoted are good role models. Promotes trust and engagement among employees about what the organisation stands for and its deeper purpose. Makes clear what those values mean for employee behaviour and what is expected of them, and empowers employees to invest time and resources into doing business ethically. Allows issues to be discussed and training needs to be identified. Ensures that perverse incentives in conflict with stated policies and goals are recognised and removed. The challenge When 40 global chief compliance officers were asked in a 2013 Consero survey if their performance appraisal and incentive programmes positively supported their compliance and integrity objectives, 43% of respondents said no. 1 Indeed, the findings suggest that ethics managers are discovering that their own company s performance assessment and management systems are working against their efforts. Similarly, the IBE s 2013 Survey exploring corporate ethics policies and programmes found that less than 60% of FTSE 350 companies included ethics in employee performance appraisals. 2 Integrating values and behaviours into performance planning, monitoring, and reward is not without its challenges. There are arguments that rewarding ethical behaviour is the wrong approach, because ethical standards should be the norm not the exception. Others suggest that the subjectivity inherent in ethical judgment will undermine confidence in the appraisal process. Many believe that ethical performance cannot be measured. However, undeterred by these challenges, many organisations have developed effective ways of translating their core values into meaningful behaviours that can be fairly assessed and incentivised. When embedding ethical values into organisational culture, the roles of the company Ethics and Compliance (E&C) and HR functions frequently overlap. Cooperation is paramount, but it can be a problem or

4 area. Issues range from a reciprocal lack of communication and appreciation of roles, to territorial issues due to poorly defined and overlapping responsibilities. If HR professionals fail to consult with the E&C function when competencies and behaviours are being defined or revised, the result can be an absence of specific ethical behaviours or poorly drafted assessment criteria either so broad as to be impossible to assess, or so specific as to exclude important aspects of integrity. Similarly, if the E&C function does not seek the assistance of HR colleagues when attempting to incorporate values and ethics into an existing performance management system, the result will be poor take-up or no implementation. The best way to improve relations and mutual comprehension between E&C and HR is the simplest one open and honest communication. Taking time to routinely meet together, to each understand and share the other s perspectives and concerns will begin to build the trust and respect required to work together in a positive way. Performance management plays an important role in embedding ethical values and behaviour in the culture of the organisation. It is an excellent way to reinforce desired behaviour year after year. Knowing that they will be appraised on how they achieve their results, as well as what they achieve, will increase employee s focus on the ethical questions they may confront in their day-to-day business. Performance management for an ethical culture: Checklist Performance management systems must be designed and implemented in ways that support rather than undermine an organisation s ethical commitments. Although there are many challenges to this, not least identifying workable ways of assessing whether or how well employees have lived up to ethical standards in achieving the goals they have been set, it is important to begin the journey. This checklist summarises some of the steps that others have found helpful. Preparation Advocate for properly chosen core values in other words values that are chosen following a wide-ranging consultation and assessment process, not just picked out of the air in the executive suite. And include at least one core value relating to ethics, such as integrity, honesty, transparency, fairness, or commitment. Get senior management support for the incorporation of values/ethics into the performance assessment process. Encourage the CEO to incorporate the need for cooperation between their departments into the objectives of the heads of HR and the E&C functions. HR will have to lead, so ensure mechanisms are in place for the HR and E&C functions to collaborate effectively. Consider the level of awareness among employees regarding the organisation s values and principles, and the importance of values-led business behaviour. Encourage teams to discuss how the values and behaviours relate to them. Consider the level of confidence in the existing performance management system is it considered as transparent and fair? Introducing values to the performance management system Communicate early and often about the changes to the system, and do not rely purely on employees reading s or postings on the company intranet. Carefully clarify what is meant in behavioural terms by the values you wish to incorporate, and then give some or

5 examples to guide people in determining how the values might manifest themselves in their specific roles. Define the behaviours, competencies, and skills that are expected from all employees, and create an additional list for managers and senior managers. Insist on a well-designed and wellfunctioning performance management system that provides adequate training on all aspects of performance management. Appraisal Ensure training is offered to assessors on how to judge subjective matters. Involve ethics ambassadors as well as HR business partners in training. Specifically support leaders and managers in learning to appraise subjective matters use 360 feedback as appropriate. Give consistent guidelines as to how the how should be factored into the equation when determining compensation/bonus. Ensure fairness of application across the company. Communicate about consequences, both individually and in teams. Less is more. Make your guidance clear and concise. Are materials easy to use? Develop a mechanism in place to collect feedback on the process, especially the first few times it is done, and implement suggested improvements where feasible. Review Evaluate the success of the performance management system in supporting values. Is there a mechanism for calibrating assessments across the organisation? Do employees judge it to be transparent? Is the culture changing? How would you know? Communicate progress on a regular basis to sustain motivation. Conclusion Performance management contributes to the success of an organisation through the alignment of values and behaviour with business goals, through employee evaluation and reward, and through employee development. Each one of these aspects plays a role in developing an ethical culture. 1. Alignment. Aligning and focusing individual and team efforts with organisational goals and values ensures that everyone is pulling in the same direction. The more that employee goals and organisation values are aligned, the stronger the ethical culture will be. 2. Evaluation and reward. Being rewarded for doing the right thing in the right way reinforces desired behaviours in employees. Perceived fairness is essential so that the performance management process itself is part of the solution, not part of the problem. 3. Development. Performance assessments look to the future in that their goal is to develop and improve the performance of employees - and therefore of the organisation as a whole. A culture of continuous improvement that squarely faces and deals with the development needs of employees and leaders is one that will benefit from an ability of people to learn from their mistakes. 4. Leadership. Fundamentally, performance management helps develop quality leadership, a key element in strong ethical culture and business success. 1. Consero (2013) Global Compliance & Ethics Survey. Available 2. IBE (2013) Corporate Ethics Policies and Programmes: UK and Continental Europe Survey. Available Ruth N. Steinholtz (ruth@aretework.com) is a values-based Business Ethics Advisor, founder of Aretework, LLP in London. She is the author, with Nicole Dando, of the IBE Good Practice Guide: Performance Management for an Ethical Culture or