Considering cultural characteristics when implementing a compliance programme

September 8, 2014

In Malcolm Gladwell’s book Outliers: The Story of Success, a chapter is dedicated to the cultural legacy company employees inherit and the ramifications of those cultural values in the workplace. Using the Korean Air Flight 801 crash as an example, Gladwell demonstrates how a lack of cultural awareness can create uncertainty, even in an industry sector as heavily regulated and standardised as aerospace.

In Korean culture, the concept of authority and social hierarchy is imbued in the country’s values through the use of honorifics and the practice of addressing people by their titles. According to Gladwell, this social hierarchy remained present in the cockpit of Flight 801: despite the crew members attempting to warn the captain of a potential problem, the fact that they were lower in the hierarchy meant that their warnings were too weak for the captain to register.

So why did the first officer fail to directly confront the problem, as he had been trained to do? Gladwell believes that it was due to the first officer’s cultural legacy, which prioritised seniority, and the kind of discrepancy that occurs when you learn one method in the classroom but are expected to practice another in the field.

After Flight 801, Korean Air instructed outside consultants to train its staff to operate by means of a less hierarchical structure, and required its flight crew to adopt the English language, where honorifics and titles are not emphasised as much.

David Greenberg, who was brought in from Delta Air to reform Korean Air’s flight operations, claimed that these steps allowed the flight crew to adopt a second identity that differed from their culturally-defined roles in the cockpit. Today Korean Air is considered to be one of the safest airlines in the world.

To the trained eyes of compliance professionals, alarming analogies can immediately be drawn from Gladwell’s analysis. Surely if cultural legacies can lead to well-trained pilots ignoring protocol and failing to raise alerts when things go wrong, the same situation may happen in companies with highly diversified workforces conducting business across the globe.

While no particular culture endorses corruption, cultural dynamics can heighten the risks of non-compliance and corruption, particularly in cultures where decisions come from the top and are rarely challenged. As such, although policies and procedures should be universally adopted, the cultural characteristics of foreign business units should be a key consideration at each stage of programme implementation.

Change management

The introduction of a global compliance programme inevitably implies that previously-practised processes will be altered. This may prove a challenge in societies where change typically generates significant discomfort. A large part of instilling a culture of compliance is providing everyone in the company with the tools and guidance to make the right decisions; however, in cultures where there is a high deference to authority, employees may be nervous about making the right decisions alone.

For business units in these areas, more effort may be needed to encourage employees to mitigate cultural restraints or resistance. One possible way to do this is to run separate training sessions for management and employees, so that the latter can learn and discuss compliance principles without being under pressure from their superiors.

Process building

The 2012 corruption allegations involving Wal-Mart de Mexico were a nightmare for the company, and invariably led to questions of how senior executives in Mexico were able to circumvent multiple levels of the same compliance controls that had effectively prevented similar events from occurring in the United States.

If what effectively prevents and deters improper conduct in one society does not necessarily have the same effect in another, what must we then consider when designing processes and internal controls?

A large part of process building involves installing checks and balances that prevent rogue employees from conducting themselves in a manner contrary to the values and beliefs of the company. Consequently, cultural dynamics should be carefully considered when designing approval flows and the different levels of controls.

For example, would it be sufficient to rely solely on employees’ willingness to report mid-level manager non-compliance if societal norms made reporting of superiors a taboo? Conversely, should direct managers be the sole points of control for approving the expense claims of their reports?

Cultural dynamics also have an effect on whether policies are seriously treated and closely followed. For instance, subordinates in Japan and India will rarely challenge the decisions and views of senior management because those cultures consider elders to have more wisdom and insight.

Regional/country management and key influencers should be actively involved in the implementation process to minimise potential resistance and leverage on local expertise in devising the most appropriate communication strategy. Furthermore, the involvement of senior management and key influencers brings the additional benefit of ensuring consistent application and adherence to new policies and procedures.

In contrast, managers could detrimentally affect the implementation of these policies despite their verbal support and endorsement if they were to act in contradiction to the new framework. This could embolden employees to disregard the processes that have been introduced. Systemic corruption often thrives within a company when senior management takes the lead in ignoring company compliance controls.

Compliance reporting channels

What Gladwell demonstrated in his analysis of Korean Air Flight 801 and similar plane crashes is that problems often spiral out of control when communication is restrained or mitigated. This is equally applicable, if not more so, in the area of compliance, where management obliviousness to potential wrongdoing typically means exponentially larger penalties than if a company had self-reported and contained the situation at an earlier stage.

Establishing a reporting or whistleblowing channel should be one of the first things that come to mind for a compliance officer when developing a robust compliance programme. What differentiates an effective reporting mechanism from one that is merely there to ‘tick the box’ is that processes have been put in place to ensure that employees will feel comfortable using the reporting lines.

The effect of cultural heritage on compliance reporting is perhaps best exemplified by the 2011 Olympus accounting fraud scandal. This involved then-CEO Michael Woodford exposing billions of dollars’ worth of suspicious payments that were used to cover up secret historical debts.

At the time of the revelation, the Olympus board abruptly dismissed Woodford only two weeks after his promotion to CEO, citing ‘ignorance of Japanese culture’ as the reason. Japan has a collectivist culture where group interests are held highly. When Woodford confronted the board regarding the cover up, this was seen as a direct challenge to a decision made by the company as a whole, and therefore an unreasonable act of defiance.

In such environments it is easy for individuals to succumb to ‘groupthink’, where they refrain from questioning decisions that they consider are otherwise unanimous. Although employees should ideally be encouraged to report potential improprieties in a transparent manner so that investigators may take follow-up action and request further information, this would not hold true in cultures where employees are hesitant to be seen as non-conformist for raising questions.

To balance the cultural reluctance to openly question authority with the need for abnormalities in the business to be brought to the attention of management, confidential channels that allow for anonymous reporting should be made available so that employees feel protected from any retaliation.

Ongoing monitoring

The road to implementing a robust and defensible compliance programme does not stop after the initial rollout of policies and procedures. As with learning any other new subject matter, the application of newly-learned principles is often strongest during the period immediately following knowledge acquisition. If the impact of the programme is not periodically evaluated and employees are not reminded of the policies and principles, their knowledge will deteriorate and they will begin to abandon any learned practices.

Societal characteristics play a part in determining whether changes resulting from the implementation of a compliance programme will be continuously followed in the long run. Poland and Belgium, for example, have been regarded as countries with high levels of uncertainty avoidance. It is therefore unlikely that a singular step in implementing change would override pre-existing practices and ‘stick’.

For example, Hewlett-Packard’s Polish subsidiary was recently entangled in an investigation by Polish authorities for allegedly circumventing internal controls and offering cash, gifts, travel and entertainment to an official to secure technology contracts. This allegation highlights the critical nature of continuous programme monitoring and targeted refresher training in order to ensure a sustainable compliance framework.

Reporting analytics can be used to track the utilisation rates of tools and communication mediums, such as for whistleblower channel usage and gifts, travel and entertainment approval requests. This data can then allow companies to deploy targeted refresher training and communications. This, in turn, enables them to deeply root their compliance programmes into the organisation’s culture, and therefore compliance and ethics will form a stronger part of each employee’s values.

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