Corporate integrity officers: proceed with caution
Updated: Sep 28, 2018
This article first appeared in the opinion section of the Australian Financial Review on the 19th August 2018. Click here to view the original version.
I am a big proponent for the concept of an integrity officer. Properly instituted it can add significant value to an organisation and provide benefits that stretch beyond improved corporate governance. However making the roles compulsory through a legislative mandate risks blunting their effectiveness.
To understand why, consider one of the most important duties of the "Principal Integrity Officer" as proposed by the Productivity Commission: to ensure the board is "well informed". This is a worthy goal because whenever wrongdoing is exposed within an organisation, a common theme that emerges is that the board failed to recognise or heed the warning signs.
In these scenarios, rarely is it the case that directors knowingly turned a blind eye. Rather, this outcome tends to be driven by three dynamics.
The first is that there simply were no warning signs. This usually occurs in organisations where speaking up is seen as a vice rather than a virtue. When an environment exists that ignores or chastises those who raise concerns, you can rest assured that the messages that matter aren't reaching the board.
Secondly, the messages that matter might be reaching the board, but they are sugar-coated and wrapped in lolly paper. Management in any organisation is motivated to present things in a positive light. This is not necessarily because management is devious or nefarious, but rather because the incentives in the system – be they formal or informal – encourage them to try to impress those who sit above them in the hierarchy.
Finally there are also instances where the message reaches the board, but for a whole variety of reasons directors fail to give it the required attention. They could be directing their attention to other matters or downplaying the severity of the issue, consciously or otherwise.
These dynamics, to varying degrees, play out in all large organisations. As much as some would like to believe, there are no formal systems or processes that can be put in place to overcome them. And although an integrity officer is also no panacea, it can act as an antidote. But as mentioned, for this to happen, the role must be properly instituted.
Among other things, this requires that the person occupying the role is truly independent and doesn't feel a need to curry favour with people within the organisation. It requires that the integrity officer is provided with unfettered access to the organisation so that they can identify where issues exist and whether people are reluctant to shine a light on them. And it requires that they are provided with the requisite platform and can speak truth to power.
These requirements are not insignificant. An organisation that fails to properly consider and embrace these will ensure that their integrity officer is all style and no substance. In these instances, the ability of the integrity officer to fulfil their duties to the board and keep them "well informed" will be significantly compromised.
And this is the risk one runs when legislating the role. In order to fulfil a regulatory requirement, organisations risk not properly instituting it. At worst, the role is created as a token gesture. In these scenarios the integrity officer can quickly become a sideshow and lose their relevance within the organisation.
There is some precedence that provides plausibility for this outcome. In 1991 the US Sentencing Commission published the Federal Sentencing Guidelines for Organisations. The guidelines provide clemency for organisations found guilty of criminal offences if they can demonstrate that they have programs in place that can "prevent and detect violations of law".
Sure enough, shortly after the guidelines were issued, companies across the US began appointing "chief ethics officers". Although these appointments were in many cases legitimate efforts to try to improve compliance within organisations, in some cases they have been dismissed as window-dressing exercises.
For organisations who are serious about improving governance, I strongly encourage them to consider appointing an integrity officer. Ensure the decision is given thorough consideration and the role is properly instituted. For regulators who see merit in the concept, I ask you to proceed with caution. You risk turning what could be a positive initiative into a tick-the-box compliance exercise.