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A Strong Ethics Culture: How Does Your Firm Rate?

A Strong Ethics Culture:  How Does Your Firm Rate?

Assessing your firm’s ethics culture is the first step in developing and maintaining a strong ethics culture and, ultimately, to earning investors’ trust in your firm. In remarks from the 2016 FINRA Annual Conference, Chairman and CEO of FINRA, Richard Ketchum stated:

“Having spent nearly four decades regulating the securities industry, and spending some time with a firm, I can say unequivocally that firm culture has a profound influence on how a securities firm conducts its business. I can’t count the number of times throughout my career where a culture that doesn’t value ethical behavior has led to compliance failures for a firm and significant harm to investors. High ethical standards are critical to maintaining investors’ trust in the financial markets and in the professionals and firms with which they work.”

Beyond the ‘big picture’ justification of “maintaining investors’ trust in the financial markets” there are at least two reasons for maintaining an ethical culture at the firm level:

  1. It is the right thing to do. Investment advisors have a fiduciary obligation to put its investors’ interests before their own personal interests. Despite this legal obligation, how you treat someone who has put their trust in you cannot be boiled down to a legal requirement. Acting ethically is always the right thing to do. Employees, clients and external stakeholders alike deserve to be treated ethically. Taken to the extreme, unethical behavior can lead to criminal activity, reputational damage and/or financial damage to the firm and it clients.
  2. It makes economic sense. A mounting body of evidence shows that emphasis on the softer sides of business, including ethics, positively influences the harder traditional bottom line. Having an ethical organization increases investor confidence and can help differentiate your firm from other firms with lower ethical standards.

Assessing Your Firm’s Culture of Compliance

In 2015, Deloitte & Touche LLP and Compliance Week conducted a survey of 364 compliance executives from across more than a dozen industries regarding their compliance programs. Quite notably, assessing the company’s culture for compliance ranked last as an area that compliance officers are viewed as being responsible for in their organizations.

At the most basic level, a firm’s CCO should be looking at the structure (or lack thereof) of their compliance program. First, does the designated CCO have sufficient authority to effect change within the organization? Second, do you have customized compliance policies and procedures? Third, are there consequences for failing to comply with the firm’s policies and procedures? If your answer to either of those questions is no, then it is likely that you are not working in an organization with a strong culture of compliance.

Three basic components of a compliance program are:

  1. A designated CCO with authority – The CCO should have the ability to work with executives at the highest level of the organization and the power to actually enforce policies and procedures.
  2. Customized compliance policies and procedures – Policies and procedures should be tailored to your business model and should clearly state the compliance and ethical duties of the firm and its employees. Furthermore; a process should be implemented to ensure that all employees read and are trained on the policies and procedures
  3. A process for ensuring compliance with policies and procedures – Rewards and disciplinary systems should be in place to ensure employees are following policies and procedures. Without consequences for non-compliance, it is unlikely that a firm will have a strong culture of compliance.

Once you have established that your firm has the basic structure of a compliance program, you are ready to take a deeper look into your firm’s ethical culture. Assessing your firm’s ethical culture is not something that can be determined simply by looking at its written policies and procedures. Ethics is about human behaviors and values. Firms with a strong ethical culture clearly articulate their vision, mission and values and establish systems, policies and procedures that align with those values.

One useful way to assess your firm’s ethical culture is to have your management staff complete an ethical checklist where they rate the extent to which a statement is true and/or the extent to which they currently practice this behavior. An ethical checklist is intended to help you enhance the presence of proactive ethical organizational behavior in your enterprise by illuminating areas of weakness within your firm’s culture. You can develop your own or use ICSGroup’s Ethics Culture Assessment Checklist.

ICSGroup can help your firm drive a strong culture of ethics and compliance throughout the organization with customized compliance and ethics training, and recommendations for communicating the company’s values and setting the right tone at the top. We can also provide real time guidance on navigating the ethical landscape. Contact us for information about our services related to compliance and ethics or for a free consultation regarding an ethical issue.

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