Balancing act: Fast growth, long-term ROI and the price tag of misconduct

  • Conduct risk extends across geographies and business operations, and blurs the lines between areas of risk and areas of the law.
  • When dealing with complex, evolving risks such as conduct, a culture of compliance is a measurable advantage for organisations which embed it in the planning, implementation and monitoring of their business strategies.
  • Designing a remuneration framework which supports a business’ desired culture is vital to managing conduct risk.

Dominoes

Millions around the world are taken with House of Cards, its onscreen plots and antiheroes. However, this infatuation with political glamour is at odds with the increasingly rigorous regulatory view of the business world, and customers’ growing expectations of ethical behaviour and sustainable business practices.

Proof of this enduring market trend is ubiquitous. Business is facing a different type of scrutiny, and damage to reputation following inappropriate conduct can be not only hefty, but also long-lasting. Wharton estimates the percentage of sudden stock price drops related to reputation at 12.6 per cent, and recovery time after an incident at 80 weeks.1 Consumers and activist investors alike are concerned with the behaviour displayed by large organisations across all industries. As a result, the ethical bar is set higher than ever, and regulators’ attention is focused on the conduct of companies and executives, as well as on their overall risk and compliance culture.

The Australian Securities and Investments Commission (ASIC) has incorporated consideration of a firm’s culture into the risk-based surveillance reviews of the entities it regulates, as outlined in the regulator’s four-year corporate plan. As a conduct and disclosure regulator, ASIC is not only taking a keen interest in companies’ risk cultures; it is also fostering a broader change in board members’ and executives’ perception of the importance of organisational culture.

Social media is enhancing the effect of this trend. Consumers’ praise and complaints are now aired in real time, as are employees’ occasionally unfiltered opinions of their organisations. Furthermore, certain regulators have taken to using social media in order to use brand reputational damage as a leverage tool and enhance the public pressure upon companies under investigation. For example, ASIC and the Fair Work Ombudsman both maintain active social media accounts with sizeable followings that issue warnings and share updates relating to ongoing legal proceedings and investigations.

How can companies identify and manage conduct risk in this evolving global landscape?

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