In emerging markets, integrity standards seem to be improving, but amid disruption, strong corporate governance is needed to prevent wrongdoing
Emerging market economies face a number of challenges as they seek to recover from a global pandemic that has yet to run its course. Supply chain disruptions, geopolitical tensions in Asia, the financial crisis in Sri Lanka and the war in Ukraine are some of the crises that may compel organizations and their people to behave unethically.
Nevertheless, the EY Global Integrity Report 2022 suggests that integrity is improving in emerging markets. Of the 2,756 emerging market board members, senior managers, managers and employees surveyed (from 33 countries and 27 sectors), 92% say that standards of integrity have either improved or remained steady over the last 18 months.
Almost all respondents (97%) say that corporate integrity is important. More than three-quarters of respondents (76%) indicate that the standards of behavior that employees expect from management have risen in recent years.
While this is good news, 62% admit that it’s challenging for organizations to maintain their standards of integrity in periods of rapid change or difficult market conditions. Nearly half (46%) say that the pandemic has made it harder to conduct business with integrity.
EY findings suggest that, although emerging market countries are on a path toward improving integrity, much work remains to close the “say-do” integrity divide that exists between how companies present their performance vs. tangible action. EY teams offer five ways that emerging market executives can maintain or improve integrity standards and good corporate governance in ways that help to minimize external threats and sustain long-term value.
1. Mind the regulatory compliance gap
Thirty-six percent of emerging market respondents indicate that they have had sanctions applied to address behaviors that fail to uphold integrity (a slight increase from 32% in 2020), while 45% say that they conduct regular training on relevant legal, regulatory or professional requirements, up from 39% in 2020. Further, nearly one-third (31%) say that they have incentives in place to encourage behaviors that demonstrate integrity.
Yet, according to the findings, 38% of emerging markets respondents report that regulators have taken action against their organization for breaching integrity standards or regulations. “Often, governments in emerging markets foster a business and investment-friendly environment. Aggressive enforcement action would be seen as counterproductive to attracting sought-after investments for economic growth and benefits,” says Ramesh Moosa, EY ASEAN and Singapore Forensic & Integrity Services Leader. Therefore, the number of times regulators could have taken action could be higher in reality.
- Organizations should implement strong corporate governance throughout and consider integrity as more than a compliance box-ticking or risk management exercise. C-suite executives need to implement strong corporate governance throughout the organization that fosters real protection against regulatory enforcement actions, its assets and its reputation, all of which can drive long-term, sustainable value.
- Shift the focus from prescriptive training to education around the importance of integrity at both the corporate and personal levels. Employees will perform better if they understand why and how the business does things, instead of being expected to just follow the rules and codes of conduct without a second thought. This approach makes integrity more than a matter of legal necessity. It becomes a moral imperative.
2. Create a people-centric culture of integrity
It’s important to recognize that systems and processes don’t commit fraud – humans do. Although our survey highlights that integrity standards are improving, an increasing number of employees are willing to compromise their ethical standards. Forty percent of board members agree that unethical behavior in their organization is often tolerated when the people involved are senior or high performers.
Roughly half of both board members (52%) and senior managers (47%) surveyed agree that there are managers within their organization who would sacrifice integrity for short-term financial gain. Thirteen percent of board members admit that they would offer or accept a bribe, and 14% of board members admit that they would falsify financial records.
The best governance and compliance frameworks can be rendered ineffective if the underlying culture is not one of doing the right thing. This makes building a strong integrity culture just as important as the governance policies and the control environment that underpins it. The need for a strong integrity culture and accountability has been further elevated as work from home policies have come into play as a result of the pandemic.
“Creating a culture of integrity, where ethical behavior is supported and rewarded, and people are empowered to do what is right, offers a number of benefits. It can help reduce regulatory risk, improve employee morale and build stakeholder confidence in a company’s ability to deliver on its promises,” states Arpinder Singh, EY Global Markets and India Forensic & Integrity Leader.
- Establish consistent, tone-from-the-top leadership around integrity. This includes everyone at the board and promoter levels, down through the C-suite. Employees need to see that integrity cascades from the highest levels down through the grassroots of the organization.
- Hire people who will support an integrity culture and empower them to live the organization’s values within their own framework of beliefs, supported through training and education around ethics, and through tools to help them make the right decisions.
- Develop key performance indicators that measure integrity and tie performance to remuneration, promotion and succession.
3. Encourage a speak-up culture
Overall, emerging market respondents believe that the whistleblowing environment has improved over the last three years: 39% say that it has become easier for employees to report their concerns, while 30% indicate that whistleblowers are now offered more protections. Meanwhile, 41% of emerging market respondents say that they have reported issues.
On the flip side, 36% of emerging market respondents in our survey admit that they have had concerns that they have chosen not to report. The biggest reason cited is that respondents don’t feel their concerns will be heard. Nearly one-third (31%) admit they don’t report wrongdoing because they fear for their safety.
“There is an increasing trend in Africa that whistleblowers are reluctant to blow the whistle due to their fear of retaliation, as well as limited or no protection if they do,” says Sharon Van Rooyen, EY Africa Forensic & Integrity Services Leader. “Recently, the plight of the whistleblowers has been in the spotlight as they have put their livelihoods and often their lives at risk. What we have noted is that there is an increased need for enhanced legislation to ensure that whistleblowers are protected.”
Courtesy EY. Click here for full report