From the 2018 Global GC Summit: Greg Medcraft Speaks to General Counsel on Achieving Trust and a Positive Work Culture

Good afternoon ladies and gentlemen. It's been a privilege to join the discussions of the Global General Counsel Summit over the past couple of days. As the former head of the Australian Securities and Investments Commission, I have long appreciated the central role corporate counsel play in ensuring legal and ethical integrity in business operations.

Now as head of the OECD's Directorate for Financial and Enterprise Affairs, I oversee the Organisation's work on corporate governance, responsible business conduct, competition and anti-corruption, among others.

Over the past few days we have heard of the general counsel's growing importance in managing emerging risks and helping businesses adapt to a fast-changing business environment. One of the major factors I see having a profound impact on markets and business over the coming years is trust – particularly the trust public has in business. Trust's impact on business directly affects the role and objectives of the general counsel; and will be my focus for today.

To that end I'll discuss three things:

  1. The growing importance of trust and good conduct.
  2. The role culture plays in achieving trust.
  3. The issues around managing these in an interconnected, globalised world.
And I will tell you about some of the legal instruments and guidelines we have at the OECD to help adapt to all three.

1. The importance of trust

Today's conference comes roughly 10 years after the start of the global financial crisis. Measures such as the Edelman Trust Barometer have showed how the public's trust in public and private institutions collapsed in the aftermath of the crisis. These levels of trust have since improved, but they are still low — and momentum has stalled over the past couple of years. This is particularly the case for public trust in business.

Edelman's measures for 2018 showed that trust in business worldwide remain unchanged between 2017 and 2018.

At a high level, trust is essential to support economic activities — to secure the confidence of consumers and investors in markets. Trust in institutions is important for the success of government policies, programmes and regulations that depend on cooperation and compliance of citizens.

Just 52 percent of the general population trust business to "do the right thing." In the United States this number is 48 percent — 10 percent less than last year. We have seen major scandals engulf a number of major businesses in the past few years – businesses which previously enjoyed high levels of trust, like Volkswagen, Wells Fargo and Facebook.

So why is trust important?

At a high level, trust is essential to support economic activities — to secure the confidence of consumers and investors in markets. Trust in institutions is important for the success of government policies, programmes and regulations that depend on cooperation and compliance of citizens.

For a business, trust is important because it measures the extent to which business conduct and values are aligned with customer outcomes. Businesses must put their customers unequivocally first, because not doing so could be costly, including:

  • Immediate direct costs – like fines and repayments arising from misconduct. Boston Consulting Group estimates that banks paid USD $345 billion in fines between 2008 and 2017 – including USD $22 billion last year alone.
  • Longer term, indirect costs – that come from damage to reputation and lack of trust from the crowd: the community of customers, investors, employees and other stakeholders who are increasingly empowered to hold business to account for its conduct.

Social media and the 24–hour news cycle have harnessed and amplified the power of the crowd. The crowd sets the conditions for the social license — the overall community expectations for conduct that businesses must meet if they are to be successful over the long term.

This social license is constantly evolving. Businesses need to monitor community expectations closely and make sure they don't fall too short of them, otherwise they may find themselves adversely impacted by the law, or their reputation damaged.

Reputation flows through to a business's ability to attract and retain capital, talent, and customers, and contributes to its long-term sustainability. And the bigger the gap in trust between customers and business, the more likely business models will be disrupted by innovative entrants offering better services and prices — and values.

This is supported by empirical analysis from the OECD. A study in last year's OECD Business and Financial Outlook found that a business's social score — its capacity to generate trust and loyalty with its workforce, customers and society — was an overwhelming predictor of strong returns on equity and return on assets.

As general counsel, conduct is a fundamental concern for two reasons:

  1. To ensure behaviour by your company's management and employees is lawful – to manage the risk of fines, compensation and remediation, as well as the reputational risks I have just mentioned.
  2. To ensure behaviour is ethical and appropriate — which goes beyond the law to community expectations and the social license — and requires constant monitoring and stakeholder engagement.
Clearly, conduct is not just about compliance and the law. It is a driver of long-term value and sustainability. Quite simply, good conduct is good for business.

2. The role of culture

Business's ability to do the right thing boils down to one key factor: corporate culture. Culture is the set of shared values and assumptions within an organisation. It sets the "unwritten rules" for how things really work in a business — including towards customers and compliance.

Poor culture creates a corporate environment where poor conduct can take root, and may even be rewarded, while good culture can help uncover and inhibit misconduct and reward and encourage good conduct.

Because the general counsel is concerned with conduct, they must also be involved in culture, and I so want to touch on what I see as the four main drivers of culture:

  1. The tone from the top.
  2. Accountability.
  3. Communication and challenge.
  4. Recruitment and rewards.
I will now unpack each of these.

Poor culture creates a corporate environment where poor conduct can take root, and may even be rewarded, while good culture can help uncover and inhibit misconduct and reward and encourage good conduct.

The tone from the top

The board is responsible for setting the values of the business, and management are responsible for ensuring those values flow down and are embedded into the culture of the business. This means:
  • The senior management leading by example by demonstrating conduct that supports the firm's values.
  • Putting the right governance structures in place around the board's and senior management's engagement with culture. For example, the measurement and reporting of cultural indicators, and formal discussions on culture.
  • The level of access and style of interaction between the General Counsel and senior management and the board on legal and reputational matters can also send a message from the top that these things are important.

Accountability of staff

The accountability of staff is important to ensure behaviour reflects the stated values of a business. Staff should understand the firm's core values and understand that they will be rewarded and held to account for their conduct based on those values. As such, the leadership team need to make sure the values are communicated and understood throughout the organisation, and don't get lost between the C–suite and the front line.

We know that culture exists and is propagated at the business unit level. So, while tone from the top is critical, so must middle and frontline managers model the firm's values.

Several measures that support accountability fall firmly within the general counsel's domain. In particular, businesses need effective frameworks, clear procedures and channels in place for internal reporting of misconduct and breaches of the law — something which was discussed at one of yesterday's sessions.

I can tell you as the former head of a regulator the value to law enforcement authorities of information from whistleblowers. These are often employees who want their organisations and their colleagues to do the right thing — they should be an asset to legal departments and businesses more widely. Employees need to trust that internal reporting systems and internal whistleblower programmes will protect them and that concerns will lead to action.

Effective communication and challenge

  • Effective communication and challenge is particularly important on conduct issues, to ensure values set from the top avoid "white noise" in the middle. This means:
  • Encouraging a diversity of views in decision making processes, including from external stakeholders. Encouraging a positive, critical attitude among employees that allows practices to be tested and improved; and
  • Promoting an environment of open and constructive engagement, so people don't succumb to "group think".
General counsel should exemplify these ideas by being an independent voice at the senior levels of an organisation.

Recruitment and rewards

Recruitment and rewards are worth mentioning because:
  1. Recruitment is an important opportunity for businesses to select for behaviours within their workforce that align with the desired corporate culture and values. And this should be emphasized and maintained with training.
  2. Rewards and remuneration provide an incentive structure for behaviour – they guide the priorities of staff and act as a motivator and reinforcer of conduct.
Given the importance of conduct to general counsel's objectives and the major impact culture has on conduct, general counsel need to be involved in strategic planning and have input to business decisions which affect these four areas.

There is no "correct" culture that will be right for every organisation, but there are international standards and guidance, including:

  1. The G20/OECD Principles of Corporate Governance, which provide a globally recognized standard on transparency, accountability and business integrity.
  2. And, for the financial sector specifically, new guidance on Strengthening Governance Frameworks to Mitigate Misconduct Risk from the Financial Stability Board, to which the OECD contributed.
Because there is no one–size fits all approach, culture is not something that can or should be regulated by the letter of the law. And in fact, part of culture's power is to drive behaviour in companies operating internationally across different jurisdictions where laws differ or are weakly enforced. Which brings me to my final point.

3. Trust in an interconnected, globalised world

I want to turn finally to how issues of trust, conduct and culture intersect with the globalised nature of 21st century business — and how these can be managed with a focus on Responsible Business Conduct. Cross–border business is increasing at an exponential rate. The share of trade in global GDP has tripled since 1950, and the level of outward FDI relative to GDP in OECD countries has quadrupled since the early 1970s.

Participating in the global economy means navigating a complex legal, social and regulatory environment, where laws, community expectations and enforcement may differ geographically. Reputational risks can flow right through the value chain.

Governments have an obvious role to play in ensuring businesses — and countries — can't compete on weak governance and standards in other jurisdictions. The OECD's motto is better policies for better lives, and we help level the international playing field for business through international instruments like the OECD Anti–Bribery Convention and the OECD Recommendation on Public Integrity. But for individual business, the fact that good conduct is simply good for business extends to multinational operations. Participating in the global economy means navigating a complex legal, social and regulatory environment, where laws, community expectations and enforcement may differ geographically. Reputational risks can flow right through the value chain.

At the OECD we see Responsible Business Conduct as a particularly powerful framework to manage cross-border business risks. Responsible Business Conduct is a catch-all term which encompasses the kinds of corporate culture and practices that ensure multinational enterprises do no harm, and make a positive contribution to economic, environmental and social progress.

The OECD Guidelines for Multinational Enterprises is the international gold–standard for Responsible Business Conduct – and should be of particular interest to general counsel. The guidelines are a way for governments to communicate to business that they are serious about building responsible business conduct in their jurisdictions. Forty–eight countries are signatories to the guidelines But importantly, these are business focused guidelines. Businesses need not depend on governments to sign up in order to use them.

In particular, the guidelines recognise the important role of due diligence in helping drive Responsible Business Conduct by identifying, assessing and mitigating adverse impacts in operations, supply chains and business relationships. We have specific due diligence guidance for:

  • Responsible mineral supply chains;
  • Stakeholder engagement in extractives;
  • Garment and footwear supply chains;
  • Responsible agriculture supply chains;
  • Responsible business conduct by institutional investors in the financial sector;
  • And just last week, the OECD launched General Due Diligence Guidance for Responsible Business Conduct across all sectors of the economy.
Multinational Enterprises are increasingly turning to the OECD standards to establish trust and meet the terms of their social license right through their operations. To give just three examples:
  1. Apple uses the guidelines to ensure its minerals supply chain does not fund conflict or have a negative impact on human rights.
  2. Hugo Boss uses them to address the risk of poor labour practices, including child labour, in the cotton supply chain.
  3. The London Metals Exchange announced in April that it will require all brand-listed producers to comply with the OECD Guidance for all metals traded on the exchange — which covers 75 percent of worldwide trading for those metals.
I want to mention briefly the value of emerging technologies — particularly blockchain — in managing cross-border business risks in the international supply chain. Blockchain is the technology behind bitcoin, but its real value has little to do with these kinds of cryptocurrencies.

Blockchain allows information to be securely validated, stored and transferred in a way that is both transparent and cannot be tampered with. The potential for due diligence in global supply chains is enormous.

  • In the case of Hugo Boss, they are looking at blockchain to capture an auditable trail of information about suppliers from the individual cotton picker to the final product in store — and making this information available to customers through QR codes.
  • De Beers is now using blockchain to track diamonds sourced from artisanal and small–scale mining — which have particular risks — all the way from the miner to the consumer's finger.
  • In China, companies are using blockchain to bridge the trust divide between consumers and food providers, for example by providing proof of the provenance and treatment of organic chickens — again through QR codes.
Blockchain is set to become a powerful tool to build trust and manage reputational risks, and something legal departments should be looking into.

Conclusion

Sustainable business today is not only about the quality of the product or service delivered. It is also about the quality of an organisation's conduct. Because conduct depends so much on culture, general counsel must play a role in guiding culture in their organisations. They also have a role to play in extending good culture and conduct into their businesses' interactions with the global economy.

This can be supported by the principles of Responsible Business Conduct, and the international standards, guidance and technologies available to help implement it.

In these ways, general counsel can make a strong contribution to securing the trust that is necessary in meeting the evolving social license to operate, and the good conduct which is central to business success over the long term.

For additional information, visit www.acc.com/governance.


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