code of ethics concept. Paper signpost on a wooden desk

By David de Cremer

Compliance strategies are integral in creating a trustworthy, high performing and innovative work culture. As such, it is imperative for companies to evaluate the effectiveness of their compliance especially in today’s complex business world. In this article, the author highlights the advantage of putting forgiveness a part of the compliance strategy as implemented by China’s giant telecom Huawei.

 

In the last two decades, the importance of having a compliance team in office has increased significantly. Several ethical failures that took place at Tyco, WorldCom, Enron, Royal Dutch Shell and Volkswagen – to name just a few – all have been widely publicised and discussed. Consequently, the existence of these numerous international scandals pushed towards a rise in regulatory requirements across industries. Despite the enormous number of articles published on the need for effective compliance in today’s business world, it is somewhat disappointing to notice that most organisations are nevertheless only undertaking minimum requirements to maintain compliance.

As many will say, compliance activities usually involve a tick box approach with the aim to leave a paper trail behind. Looking at compliance this way unfortunately reduces it to an activity relying solely on the use of laws and rules but never going beyond it. The result of such an approach is that work cultures are created in which employees are fearful to undertake any risky legitimate action and shy away from using sound ethical judgments – “better to be safe than sorry” (De Cremer, 2014). If anything goes wrong, the dominating response is one of blame rather than support and efforts to prevent wrong behaviour in the future. If these descriptions fit with how compliance works in your organisation then realise that your company is missing out on many opportunities to create a trustworthy, high performing and innovative work culture.

Compliance efforts thus must go beyond exercising monitoring whether legal requirements are met and shift employee’s goals to improving the quality of their work and considering its impact on the different stakeholders involved.

Rather than treating compliance as an exercise in running down a tick-box list, I advocate a view that endorses compliance as way to help all people in the company to understand the values the organisation wishes to pursue and how those values relate to recognising the difference between “right” and “wrong.” One should not forget that even today many employees work with incomplete information under time pressure, making that they look for advice. Compliance efforts thus must go beyond exercising monitoring whether legal requirements are met and shift employee’s goals to improving the quality of their work and considering its impact on the different stakeholders involved. This way, organisations will be able to make the shift from a rule- or legal-based compliance system only to a value-driven compliance approach in which legal requirements are explained in terms of – and provided meaning by – the values the organisation aims to achieve. All of this may sound simple in theory, but reality proves that accomplishing such a work culture is more complex than one may realise. As a case in point consider the response of Jamie Dimon, CEO of JP Morgan, who said that since 2012 his bank hired an additional 13,000 people to work in compliance. In addition, the company spend an additional $4 billion on compliance and recruited extra 5,000 employees.

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On the limits of rule-Based compliance

This over-reliance on implementing a more rule-based compliance culture is fed strongly by the belief that a strong focus on compliance will make companies smarter by bringing dirt to the surface. As Dimon said in response to the London Whale case in 2012: “Since these losses occurred, we have made numerous changes that have made us a stronger, smarter, better company.” Unfortunately, simply recruiting more compliance officers to ensure legal requirements are met will not make a company smarter. It is important to realise that a rule-based only compliance system will only make your company smarter in a perfect rational world. In such a world, simply telling people what legally can be done and what not would indeed work and lead only the bad apples to display unethical behaviour. In fact, the prescriptive tones used in the codes of conduct that are issued by management assume that individuals are rational purposive actors who act in accordance with their intentions and understand the implications of their actions. This approach leads to the rather erroneous conclusion that most business scandals must be the responsibility of a few bad apples. Or, put in simple terms, it is only bad people who do bad things. This assumption is intuitively compelling and attractive in its simplicity. On a practical level it also facilitates both identification and actual punishment of those deemed responsible. However, the financial crisis in 2008 demonstrated very clearly that the invisible hand idea of Adam Smith does not work because completely rational markets composed of actors whose actions are 100% rationally predictable do not exist.

In a similar vein our work cultures do not consist of robots attuned carefully to the perfect use of information. As a matter fact, exactly because of our rather irrational nature (Ariely, 2009), good people do bad things. For example, humans tend to see themselves as more honest and fair than others and this becomes a problem if we all show this kind of biased perception. Indeed, because everyone believes that they are on average more honest than others, we do not consciously see our own initial ethical lapses and as result quickly end up on slippery slopes in which one unethical act is followed up by another more severe one. At the time that we realise that this is happening, we have often escalated already in significant ways. It is at this point that compliance should be able to intervene and encourage employees to voice their problems of escalation and work together in constructive ways to see what can be done to remedy the series of unethical actions that took place. However, too often we see that because a rule-based only compliance structure has created a culture where employees will not speak up out of fear to be blamed. As a result, once employees are on slippery slopes the company does not know that this is happening and only can wait until the ethical escalation results in severe damage once it cannot be hidden anymore. Although we believe that the use of stricter compliance approaches and clearly defined sets of rules will make operations more transparent and controlled, reality is that under such conditions sensitive cases and information go underground and stay there until they eventually explode in the face of the company (see e.g. De Cremer & Lemmich, 2015).

 

Forgiveness as a key aspect of compliance

It thus seems clear that compliance initiatives should primarily promote a work culture where employees know that advice is given when serious ethical concerns are experienced and fear of being blamed is removed from the equation. To achieve such a compliance system, it is needed that an environment exists in which the company communicates clearly that it wishes to learn from ethical escalations to more effectively prevent those in the future. And, in doing so, this learning process is perceived to be a collaborative effort between supervisors and subordinates. Such a work culture needs what I call an element of “forgiveness”. Forgiveness in this context is the motivation of the organisation to respond in constructive and prosocial ways towards a transgressor (e.g. an employee showing unethical behaviour) combined with the willingness to overcome together the transgressing event. Important is that a forgiving act is perceived by the employee as not including a punishing and vengeful desire but rather a desire to show benevolent behaviour (McCullough, Bellah, Kilpatrick, & Johnson 2001). One of the biggest pros of a forgiving attitude is that it will help your business in significant ways. First, it helps implementing a culture where employees feel motivated to voice their concerns. If employees voice ethical challenges and wrongdoing your organisation will become a learning one. A learning culture is better equipped to increase knowledge and be more effective in promoting loyalty and performance. Second, as failure in the ethical domain is inevitable, it is needed that trust is present to encourage voice behaviour but also a sense of calling or duty among employees to do the right thing and help the organisation to achieve its own value-driven purpose. Being forgiving helps in the process of establishing trust on the long term as employees will be ensured that unethical behaviour will not simply be condemned but that efforts will be devoted to understanding the reasons behind the behaviour to help both the employee and organisation. Unfortunately, so far, organisations have not treated the concept of forgiveness as part of their compliance work in a serious way. And, if a willingness exists to consider forgiveness as an effective work tool, managers and survivors turn out to be too busy to make it part of their own behavioural repertoire.

 

Huawei as a case study

In the present article, I aim to understand more carefully what kind of leadership and communication is needed to facilitate the implementation of forgiveness in the company’s compliance approach. One company that I have studied which puts forgiveness as a compliance strategy more at the forefront is the Chinese company Huawei. At first sight, it may be surprising that a Chinese company is seen as an example of defining compliance as a shared responsibility activity in which the act of forgiveness stands central. Indeed, Chinese companies are not known for being compliant with ever changing international regulatory frameworks. Many of these companies stick to their local culture in which the default thinking is one of being willing to bypass compliance to win business.  As a result, Chinese companies have less experience of dealing with international legal requirements, and therefore regularly fall foul of overseas regulations. Huawei, however, differs from the traditional Chinese company in important ways when it comes down to operating overseas. Although this telecom giant was founded in 1987 in Shenzhen by Ren Zhengfei it currently employs around 180,000 employees and serves more than 3 billion customers worldwide. These numbers indicate that the company, although being Chinese in its foundation, has adopted quickly an international mindset in managing business the global way (De Cremer & Tian, 2015). This makes that Huawei’s identity, since its inception, has shifted towards an integrative work culture where Chinese and Western philosophies and traditions meet. Along with this global mindset came a strong sense of awareness that what may suffice in China when it comes down to compliance will not be adequate for their overseas operations.

Huawei’s current strength in the compliance area lies in the fact that they used own compliance failures very well to distribute the idea well among their employees that operating globally implies that one cannot think of the company as being one that is only subject to Chinese rules. Indeed, in 2015, Ren Zhengfei, admitted that there were many challenges for the company in dealing with corruption and fraud. Several employees were identified as coming up with fake numbers and engaging win acts of corruption; events that motivated Huawei to focus on implementing better internal regulation and compliance. According to Ren Zhengfei, Huawei as a private company had to be responsive to create a work culture where no fear exists to discuss moral and compliance issues and where responsibility is taken to achieve a healthy relationship between growth and doing business the right way.

 

When forgiveness and leadership responsibility are part of compliance

“Do not discriminate against those who have made mistakes and lagged behind. We need to help managers who have been disciplined, because the purpose of our discipline is to help them rise again.” Ren Zhengfei

In the last few years, Huawei’s approach to enhance compliance has not been in simply hiring more compliance officers because the company considered such an approach as one that would heavily step on people who get caught up in mistakes. Rather, their founder stressed the need for inspiring those employees who committed wrong behaviour to focus them on the right things again. This approach would allow them to reflect on their mistakes and motivate not only the individual but their whole team as well to be more self-disciplined and responsible towards the future.

Such vision relies on emphasising the need for being willing to forgive to learn towards the future in dealing better with compliance failures. Indeed, as Ren Zhengfei notes: “Do not discriminate against those who have made mistakes and lagged behind. We need to help managers who have been disciplined, because the purpose of our discipline is to help them rise again. As long as they have rectified their mistakes we should give them opportunities to pick themselves up and reach for even greater heights.” This quote implies that Ren wants leadership in Huawei to build a culture in which they provide help and mentorship to young and inexperienced managers who have been disciplined and demoted rather than simply raising the red flag to protect their own management positions. Interestingly, Ren does not only limit the application of such a sense of leadership responsibility to those in individual manager positions but also to the whole company. His speech in 2017 at a regional president’s meeting is telling in this respect. He argued the following: “Shouldn’t Head Quarters (HQ) also be accountable for their mistakes? If HQ just shirks its responsibilities once mistakes are found how can HQ live up to the name of HQ? When can’t HQ just step forward to take a share of the discipline? Only when you step forward you can be called a hero.”

With this last quote, the founder of Huawei stresses clearly that compliance within the company is a shared responsibility, which suggests that a collaborative culture needs to exist in which ethical failures and acts of wrongdoing can be discussed and forgiven to learn and eventually move forward. It is only when leaders can take the responsibility to help others when being on slippery slopes to come forward and to help them put on the right track again that Ren Zhengfei will see them as heroes who contribute to the value of the company. That Huawei is serious about the use of compliance in this way was emphasised when Ren Zhengfei mentioned last year that “Our company is undergoing a transformation: keeping up with the existing pace is not enough; you also need to keep up with the pace of future development. You should be proactive, speak out at the team meetings, and at big conferences to create a vibrant climate for discussion.”

Compliance within the company is a shared responsibility – a collaborative culture needs to exist in which ethical failures and acts of wrongdoing can be discussed and forgiven to learn and eventually move forward.

In conclusion, in the aftermath of their own failures, Huawei has implemented a form of compliance that explicitly includes the importance of leaders being role models for the type of behaviour that needs to be shown but also creating the right type of culture that helps employees speak up and learn from their failures. In the eyes of Ren Zhengfei this kind of compliance idea emphasises that the Huawei leadership is supportive of their employees to ensure that the best situations are created for employees to perform up their best level by acknowledging the irrational nature of humans to account and learn from ethical failures.   

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About the Author

David De Cremer is the KPMG professor of management studies at the Judge Business School, University of Cambridge, UK, a co-founder and co-director of the One Belt One Road center at the University of Cambridge and a visiting professor at Peking University HSBC Business School. He has published more than 205 academic articles and book chapters and is the author of the book Pro-active Leadership: How to overcome procrastination and be a bold decision-maker and co-author of Huawei: Leadership, culture and connectivity.

 

References

1. Ariely, D. (2009). Predictably Irrational: The Hidden Forces That Shape Our Decisions. Harper

2. De Cremer, D. (2014). Why ethics is often grey and not white: Business ethics challenges in a global world. The World Financial Review, January/February, 23-25.

3.De Cremer, D., & Lemmich, B. (2015). Compliance alone won’t make your company safe. Harvard Business Review, May.

4. De Cremer, D., & Tian, T. (2015). Leading Huawei: Seven leadership lessons of Ren Zhengfei. The European Business Review, September/October, 30-35.

5. McCullough, M.E., Bellah, C.G., Kilpatrick, S.D., & Johnson, J.L. (2001) Vengefulness: Relationships with forgiveness, rumination, well-being, and the Big Five. Personality and Social Psychology Bulletin27(5): 601–610.

1 COMMENT

  1. Worked all my career with two rules. Never allow money nor self-interest to drive the agenda, jJst a little common sense, good customer service and one rule never lie to a customer, give them a choice based on your ablity too deliver and if you cnnot due to things beynd your control, do not wait for the customer to complain, tell why you cannot diliver on time. . Then use innovation and collaboration to do what closed mines executive should be doing,But allowing money and self interest . Based on short-term gain, but always long-term expensive problems., Made for an interesting career.

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