If you have a responsibility for ethics in your company, you may be exposed to personal risks
Have you considered whether there are any risks associated with your role as an ethics champion in your company? What might be the consequences of, for example, delving into sensitive areas or being unable to respond when something seems wrong because of lack of support. Is it possible that you could be ostracized, dismissed or face legal action?
The increasing profile of ethics matters in business generally and the increased visibility of the ethics function has created new opportunities and responsibilities for ethics representatives, ie those working in an ethics role. Consequently, ERs may find themselves facing a new exposure to personal risk and, in some cases, legal liabilities.
In 2008, the head of internal audit and legal at a public cleaning service company, Berliner Stadtreinigung, was convicted for failing to act on evidence of customer overcharging. When he became aware of the systematic overcharging, in the region of some €23m, he informed a member of the company’s board, who instructed him not to correct the error. Subsequently the head of internal audit and legal was convicted and imprisoned on the basis that he had assisted fraud by failing to take his concerns to a s sufficiently high level (ie beyond the board member or externally).
In another case in November 2011, the UK Financial Services Authority imposed a fine of £14,000 on a compliance officer at Dynamic Decisions Capital Management, a hedge fund management company. She had failed “to challenge a colleague, [and] investigate and act on the information she received” following concerns raised by investors around the sale of a bond.
The FSA concluded that she “did not engage with her responsibilities ... and therefore failed to act with due skill and care” and neglected “to understand the importance of her role and the wider regulatory obligations it brings”.
In June 2009, a compliance officer received an order to sell Greenlight’s entire shareholding in Punch Taverns plc, despite being made aware that Greenlight had spoken to Punch a matter of minutes before the decision to sell. Six days later, Punch announced a fundraising, with the result that its share price fell by around 30% and Greenlight avoided losses of £5.8m.
The FSA took the view that the circumstances of the sell-order should have alerted the compliance officer to the risk that the trade was being conducted with the assistance of inside information. The regulator set a personal fine paid by the individual of £130,000 and made the point that it is not simply the job of the regulator to identify and tackle market abuse, but also the duty of compliance professionals and staff on sales and trading desks. “Approved persons should be in no doubt as to their responsibilities in this area and the FSA will not hesitate to take tough action where they fall down on these.”
Should those working in ethics and compliance roles be worried about these cases? Although such legal cases are rare and alone do not suggest a trend, they do suggest that ERs need clarity around their responsibilities and liabilities, and to understand how to protect themselves while also upholding and fulfilling their designated duties to the organisation.
They also suggest that employers of ERs would be advised to provide the right support to increase employee confidence, to emphasise the opportunities the role brings and to avoid employees feeling inclined to opt out of their voluntary ER roles.
Those with responsibilities at or just below executive or board level may be exposed to liability arising mainly from their directorship, and these should be explicit. But what of those in roles supporting the chief ethics officer or similar? Ethics representatives, such as champions or ambassadors, may work directly from the ethics/compliance office or may work as part time or voluntarily in the ethics role in addition to their “day job”.
Liability may arise where an ER either knowingly or unknowingly:
- fails to prevent or detect misconduct;
- fails to report misconduct;
- fails to act professionally or in accordance with her/his contracted duties; or
- fails to act with integrity.
Challenges of the role
There will be many factors influencing an ER’s exposure to personal liability. Since it is an unrecognised profession in any official sense, and of itself unregulated, there is little formal protection or guidance directed at ERs.
In many cases, the role of ERs within organisations is still being defined. There is no standard, one-size-fits-all job description as responsibilities will depend on the context and the needs of the organisation. These roles vary in companies and range from managing the different elements of the ethics programme such as training, providing advice to employees, carrying out investigations into misconduct and advising the ethics/compliance office on local issues.
While all employees have a responsibility to abide by the law and the terms and conditions of their employment contract (whether that be written or not), it is not always the case that employees understand their responsibilities (documented or assumed), nor their potential exposure to personal risk and liability.
This is particularly so where ERs are operating without a formal job description covering their ethics role and responsibilities, which is not uncommon.
ERs are held to higher standards than other employees. They are expected to “walk the talk” and demonstrate exemplary conduct. The nature of the ER role usually implies heightened duties to different stakeholder groups and a position of trust – for example, the trust of management around protecting the company and the trust of employees who share their concerns.
This can increase their chance of being in the line of fire, of their decisions and conduct being scrutinised, and perhaps of being a target for litigation or harassment following a case of misconduct, posing a significant risk to an ER’s career and reputation. There can be a tension for ERs between building trust with colleagues and the obligation to act on information given to them. Maintaining independence can be difficult where an ER also fulfils a full time operational role.
A significant challenge which ERs face is a more top-level one: insufficient sponsorship or buy-in to the ethics programme at executive level which can result in a lack of drive and support throughout the rest of the organisation. This can mean ERs have a lack of mandate and inadequate resources which make the discharge of their duties difficult. Lack of training, support or guidance for ERs is a prominent challenge for volunteer ERs.
This lack of mandate can mean that concerns or issues raised by ERs may not be followed through adequately by the company. For those ERs involved in investigations, challenging senior executives can be difficult.
Executives are likely to be sensitive to suggestions of omissions or misconduct made against them and, when the misconduct is substantiated, they often use their power to demand no or minimal enforcement against them. In some instances, ERs have lost their jobs when trying to hold executives accountable to ethics standards.
Legislation such as the Dodd-Frank Act in the US and the Public Interest Disclosure Act in the UK gives ERs reason to be more confident about bringing their complaints into the open since it prohibits company retaliation against those that speak up.
Generally speaking, ERs are unlikely to have legal or personal risk attached to them as long as they are diligent in fulfilling their responsibilities, ask the right questions and inform the right people of concerns that arise. Their employers need to play their part in enabling this.
However, while cases involving personal liability remain rare, legal trends and the rapidly evolving regulatory climate suggest that a more complex picture could be on the horizon. ERs need to be aware of the responsibilities they have accepted.
Thinking and planning ahead is advisable so that risks are avoided and liabilities mitigated, and so that when an ethical issue for the company or crisis for the ER does arise, no time is lost in identifying a source of good advice and putting in place an appropriate response.
In summary, there are a number of steps for managing and limiting liabilities:
- Be clear on what your role does and does not involve in your organisation. Ask for written clarification.
- Always follow up diligently on ethics and compliance concerns and issues that you become aware of, documenting your actions at every stage. This may or may not involve a thorough investigation, but you need to be able to show that you, or your colleagues within the organisation, have treated the concern seriously and in a professional manner and asked appropriate questions.
- Know what escalation channels are available to you. As an ER, you may need to ask tough questions and put yourself in conflict with other – possibly powerful – people within the organisation.
- Know who you will go to if you are unsatisfied with the instructions given to you or the approach adopted by your organisation.
- f you don’t have the expertise that you need, defer or escalate the issue to someone who does.
- Know how you would handle a situation where the local legal standards are below those of your company or recognised international standards.
- Share your concerns.
- Know your walk-away point.
Dr Nicole Dando is head of projects at the Institute of Business Ethics and co-author of Evolving Responsibilities and Liabilities of Ethics Representatives: a practical guide published by the European Business Ethics Forum.