The design of an institutional compliance plan, its form and ways of enforcement, may affect, if not determine, the honest behavior of its employees. Honesty is hard to sell or to buy. Previous attempts to reward and pay for honesty, have not usually been successful. How can one pay a person who does not violate the law, or who does not gamble with the institution’s assets, or does not risk the institution’s reputation?
Some honesty and productivity rewards are not expressed in money. They can be awarded in the form of a medal, or a special insignia, or by an invitation to dine at the “Chief’s” home. These rewards may satisfy peoples’ desire for distinction and attention. However, these rewards hardly match up to financial payments because non-financial rewards are hard to measure and cannot be continuously gratifying. They are valuable for their uniqueness. Therefore, the more they are awarded to one or to more recipients, the less valuable they become.
Punishment for dishonest activities can be more effective. They include removal of an employee to another, less desirable location; demotion; termination of employment; or refusal to provide recommendation. In the United States such punishments have slowly reached higher level management as well. Yet negative deterrents often seem to offer weak incentives to abide by legal constraints. Pain does not bring approval. Punishment may be rejected and resented. In addition, employees, who notice and report violations of the law, are not viewed with approval. Rather, they are considered traitors to the institution as well as to other employees.
I was told about a system, adopted by one company, that offers an alternative to the main current model of punishment threats. This alternate model is designed to achieve institutional compliance by providing financial rewards for compliance with the law, and by building an appropriate law-abiding culture. Unlike special distinction, the value of money rises with the amount paid. Unlike punishment, money may bring desirable results and be linked to compliance with the law. This system seems to have overcome not only usual compliance problems, but the whistleblower’s stigma as well.
How should a compliance plan induce, and provide incentives for, the employees to follow its directives, and reduce the instances of violations? Here is a model to consider.
The Bottom-Up Model
To a great extent the proposed bottom-up system is similar to a legitimized form of “whistle-blowing.” However, its process, involved personnel, and effect, are fundamentally different. Whistle-blowing is considered by many to be a violation of an employee’s commitment and devotion to the employer. Therefore, laws have authorized the employees’ disclosure of the employer’s wrongful acts, and offered these employees protection from retaliation. In addition, getting paid for such disclosures is a must. The “disloyal” actions by the employees constitute a “career suicide” and make it very difficult for these employees to find another job. In fact, the government pays whistle-blowers significant amounts to sustain them, and some government cases sued employers who did terminate the employment of their whistle-blowing employees.
In contrast, the bottom-up system is an internal whistle-blowing system, which is both approved of, and financially compensated, by the employer. It rewards self-regulation. This model follows principal guidelines, focusing on elements that help create the culture that the company aspires to establish and retain. The following is the design of this program.
1. The company adopts a bottom-up compliance approach. The middle managers are the law-makers. They are the writers of the internal rules, and to some extent help enforce these rules.
a. The first stage. The managers receive a questionnaire outlining the directives to create rules of behavior. These middle managers are provided with guidance concerning the legal background, involved in these rules. They receive information about the conditions imposed by the applicable laws, as well as the reasons for the laws. The managers should understand and recognize the activities that could pose legal problems for the institution, and the rationale for these problems. They should understand the cost of the legal violations, both for the institution and for themselves. They should know and recognize the enormous harm that a reputation of having committed a crime might do to themselves and to their institution.
Years ago, one bank’s legal adviser used to circulate summaries of judicial decisions punishing bank-related violations, with the note: “For your information.” These “FYI”s were amazingly effective. They were easy to read, easier to remember, and most easy to apply to the readers without any order or threat. Similar information can be offered to corporate employees.
b. After the informational stage, middle managers are asked questions regarding compliance with the law applicable to their activities. After all, more than anyone else, these managers know what and how “things are done” in their units. The corporation’s compliance officers and lawyers should inform the middle managers about the law and answer their questions. The result of these discussions should be the production of Codes of Conduct.
The purpose of the Codes is to prevent violation of the law, in the context of the particular institution, its history, personnel, and its business. It is recognized that different groups within an institution may require different Codes of Conduct, depending on their activities and the legitimate purposes of the institution. The Code should reflect these differences.
For example, an employee who takes hone pencils worth eight dollars and an employee who takes home eight dollars in cash from the cash box pose very different concerns and dangers of future violations. That is so even if the employee leaves a note saying: “I owe 8 dollars.” The use of the assets taken and the importance of bringing them back differ. Hence the Code of Conduct for a financial department should be different and stricter from the Code for the cleaning or transportation department. In sum, the Code should be tailored to the activities and potential problems of the particular institutional units.
In addition, the Codes should answer questions regarding possible violations, such as:
- What would an employee or the middle manager do upon uncovering certain suspicious or potential behaviors or the results of such behavior?
- How would they report what they have uncovered, and to whom?
- What steps would they take or suggest designed to avoid such a behavior in the future?
This last question is crucial to the compliance system. After all, the system is designed to prevent violations and activities that might lead to violations. Moreover, the question middle managers to search for a solution to the problem, rather than merely pointing to a problem, expected to be resolved by others.
When middle managers write the answers to the questions, the answers shape the way the middle managers think about the issues. They are not the readers. They are the authors. Then, they are likely to refocus their attention to solutions. The message to these managers, whether explicitly or impliedly, is: “You are the experts; and you should be treated as such. You know the answers and prevention methods better than anyone else, including your supervisors or your bosses.” Then, the managers are likely to view themselves as the rule-givers and law-enforcers. Thus, this process reduces coercion and produces more empowerment.
2. In addition to the enforcement process, middle managers are offered financial rewards in enforcing the law. They should become “internal whistle blowers, and rewarded whistle blowers.” However, in this system they are respected and rewarded, rather than viewed as traitors.
To achieve the objective of rewarding the managers, a manager should receive “points.” Each point may be gained on the compliance performance of his or her group. The points are granted to managers that: (i) notice a problem; (ii) react to the problem by notifying their superior; and (iii) suggest solutions, and perhaps try to implement them. Thus, reporting is not enough. The program induces the managers to self-monitor. The managers should recognize and monitor a sensitive activities area and take steps to prevent the problems from recurring.
3. Then, once a year, financial reward arrives. The compliance division provides each middle manager with a certificate, evaluating the manager’s compliance performance. Informing of failed compliance is rewarded as well.
This evaluation is not expressed in words. It is expressed in points. The points are linked to specific activities, thus reducing the evaluators’ discretion. The even number of the scale (e.g., 4) helps avoid an easier choice of the middle grade. The scale includes an option of noticing “adequate” and “strong” to encourage innovation and reaching out, beyond the basic requirements. The managers’ bonuses are then linked to the points in this certificate. The points and grades are converted to money; they become part of the employees’ compensation.
The criteria, which are used to evaluate the employees’ contribution to compliance, are also aimed at creating and fostering the culture that the company aspires to maintain. These criteria form the basis for the grades awarded by the managers (and the internal controllers). The system and the criteria are used as part of the middle managers’ compensation. The grading is set in a mid-year review to highlight the areas that the actors need to improve, and encourage them to take action.
4. Another component of any compliance system is close attention to change: How can the program be adapted to changes in the outside, as well as the inside, changing environment? We are on a moving platform. Each person is changing and moving with age, knowledge, and experience.
Therefore, one of the questions that managers should continuously ask themselves, and attempt to answer is: where are the potential dangers of legal violations moving? How can we prevent these potential violations? These questions cannot be answered once, in advance. They should be continuously asked. The changes in the law and the court cases that might demonstrate violations may be food for information and thought. This is the kind of alertness that we are used to when crossing the street, especially if we cross the street in red lights.
5. Cooperation among the actors is crucial to the support and success of this process. Martin A. Nowak noted in Science magazine that, among others, the following mechanisms help create and maintain cooperation: direct and indirect reciprocity, “network reciprocity, and group selection.”
The process of reaching solutions to problems that have occurred should be based on a communal level—within a group, rather than on judging and blaming from the top. A culture of interaction and mutual support should be fostered. Then the problems are viewed as the problems of everyone, and the solutions may result in rewarding all employees. To the possible extent, the culture of the group should be “group think” where pride is based on membership in the group.
The Position of Top Management. The Impact of Business Consideration and of Culture
1. Who is the prime suspect? In a top-down self-regulatory design the assumed potential wrongdoers are the numerous employees (including, perhaps their supervisors or even top management). Otherwise, the design cannot be effective. Usually, however, it is assumed that top management is honest. We assume that this is the case as well. Therefore, the focus of compliance is on the employees; they are the target of the compliance rules.
However, there are situations in which top management is not as innocent as it is presumed to be. What the management does not do, it may direct others to do. What it does not command, it might signal as wishes, which are sometimes interpreted as, and are equal to, commands. Top management’s inaction may also lead to inaction by others where action is required. The recent case of Wells Fargo bank may demonstrate this possibility.
2. Law v. Profits. A related issue to the very essence of compliance to the law is the issue of business profits that may be restricted by rules of law. In most, if not all, models of self-regulation, the institution and its actors face occasional temptations to violate the laws, especially when the laws restrict highly profitable activities and the rules are not very specific and clear. In addition, the laws may conflict with the actors’ beliefs and principles that offer justifications to resist enforcement of the law or misinterpreted it.
3. Cultural issues. If the law applies to institutions that exercise both, or either, top-down and bottom-up models, the issue may narrow down to the effectiveness of the self-regulatory models.
a. The top-down and the bottom-up self-regulatory models pose significant cultural issues. The bottom-up model may conflict with the legal and business model of most US institutions. Their business and compliance structure is usually a top-down structure, and so is their assumed and proposed culture. Most difficult would be an adjustment of the corporate culture from a competitive culture among the employees to cooperative employees’ “group think.”
b. The idea of “group think” or “self directed work-teams” has been practiced elsewhere, and is slowly finding its way into the United States. To be sure, currently, the United States practice is for the managers dictate what and how certain actions will be taken, and who will perform them: The managers of a team do not promise rewards to members that follow their detailed directives, nor threaten to punish employees who fail to follow the orders.
In the bottom-up system, managers do not impose detailed directives on employees but rather bring to the group the objectives to be achieved. Managers may create a new project or problem to be solved or new ideas to be examined. The details are for the group to develop. Group members may offer new ideas, projects, and arguments to the discussion. While a manager of the group may start the discussion, he or she encourages participation by all members.
c. The objective of this approach and exercise is to induce and encourage the group as a whole to seek and create positive results, rather than for one or more particular members of the group to succeed in his or her service as compared to the others. The bottom up format leads to a cooperative effort rather than a competitive one:
(i) The group has developed identical or very similar objectives; (ii) the satisfaction of the group members is in completing the project successfully, and (iii) each member’s contribution is usually acknowledged. In addition, the group may have received bonuses as a group.
d. This model does not imply that a group does not need a manager. It does. As Kimball Fisher in his book Leading Self-Directed Work-teams noted, the managers of the group have important management roles.
The leaders should recognize the nature and character of their group -members and learn to create the atmosphere that would lead to “group think” and “group performance. They should identify “group members who try to lead and those who try to complete and those who talk too much and those who are masters of intrigue and constrain them. “
Group managers have a significant role in creating the atmosphere within the group. That is why coaches should refrain from judgment statements like: “That won’t work.” In sum, the manager leads in terms of the objective, the focus, a timetable and other constraints, including the objective of efficiency to bring down costs and bring up profitability as well as good service to the clients.
e. The group should develop a culture of information-sharing. For example, “the employees of a firm that has more than 100 full-time knowledge managers and 65,000 employees, are expected to share their knowledge and keep their group current. They are rewarded in doing so. The most useful reports are being elevated and this behavior is crucial to support and encourage sharing.”
The physical environment can affect, and be affected by, the employees’ work. In a research group, for example, the manager provided a very large hall in which each researcher had a connected bench and research tools. There were no walls among the researchers and that physical environment helped establish a culture of team work, information sharing, and problem solving.
f. Among brokers, however, competition as well as cooperation may present problems. Brokers’ cooperation may be successful at the expense of their clients, but so may be competition among them. Fierce competition has induced management to impose on brokers limits on the areas of their operation and type of securities in which they may trade. In addition, to reduce the drive of competition, some employers, such as Vanguard mutual funds, pay brokers salaries. Brokers who do not rely exclusively on commissions for their livelihood are likely to be less competitive.
Needless to say, no system could succeed without the full and active support of top management. There are those who believe in a more competitive institutional culture. In their view the approach of bottom-up, described above, is questionable and debatable. Others are following it, experimenting, and believe in it. It may well be that for some groups, commands from the top are more effective to achieve the compliance purpose and that competition works; but for others the bottom-up and group cooperation is more effective. The main point in this case is to encourage considering the system, and perhaps trying it, partly or selectively, in some groups. Then management and employees could find out whether they like it.