There are a couple trends in our current society that lead many to believe that risks from human capital are on the rise. You might refer to this as the “cultural context of risk.”[i] If indeed human capital risks are on the rise it makes sense that C-suites have a greater obligation to take action to identify, assess, and act to mitigate the risks they face.
One trend is exemplified in the increasing incidence of occupational fraud (see our graphic summary of fraud). The most worrisome aspect of this is that it may reflect a change in our culture toward less personal honesty or restraint – sociologists would refer to this as a decline in “social control” as opposed to the formal control of law enforcement. If this is true, employers face a permanently more difficult challenge in finding employees they can trust to work for the good of the organization.
The second trend may actually be part of a social response to the failure of social control. In place of allowing organizations to control their own behaviors, government has adopted some increasingly stringent regulations ranging from SOX, to the Fair Credit Reporting Act, to the Consumer Finance Protection Bureau. These legal controls create a rigid, maybe brittle, operating environment that exposes organizations to much higher risk for specific kinds of employee-based failures.
Occupational Fraud
One of the most widely cited items in the blogosphere recently was the annual retail theft survey by Jack Hayes International. That research found a disturbing ongoing increase in the incidence of both employee theft and shoplifting, but it was the occupational fraud that jumps out. In case you are wondering, the trend seems to be international, with confirming research on “worldwide shrinkage” by the Centre for Retail Research in the U.K.
The most common explanation analysts offer for this increase in employee theft is the poor economy. Wages have been stagnant or even slightly down over the past decade, and part time work has been on the rise. Stressed workers are helping themselves to employers’ inventory to help close the gap between income and desires.
But is income all that’s really changed? A different and more disturbing interpretation has been given by Mark Doyle, President of Hayes International. He has argued that:
“There are more dishonest people throughout the nation today, and this decline in personal honesty is taking its toll. Almost daily we hear of business, government, law enforcement, celebrities, sports figures and even church leaders being caught in questionable activities. Such events make it easier for borderline employees to steal and to rationalize their acts.”
You don’t have to think past the examples of Bernie Madoff, Enron or A-Rod to find good illustrations of his point that highly visible people model dishonest behavior. While some of these anti-role models are punished, others (like Lance Armstrong) seem to get by and even profit from their actions. There seems to be an attitude that “everyone does it” so it must be OK for me to do it too.
Regulatory Responses to Dishonesty – And Perceived Dishonesty
When enough people take advantage of the system, or do so in spectacular ways, ordinary people begin to demand more scrutiny and regulation. Policy makers respond with tighter regulations to enforce honesty. After the excesses of Enron and Global Crossing, we got SOX. After the Great Recession, with the perception that some businesses took advantage of consumers, we got the Consumer Finance Protection Bureau.
The problem is that these one-size-fits-all regulations impose costs on organizations that are perfectly good citizens. These costs eventually work their way through the economy to increase costs for everyone, with a net loss of economic activity.
Further, it’s not just the regulations themselves that impose costs. These laws enable civil litigation for fraud, discrimination, negligence and other allegations that can result in extremely costly settlements. Our work on human capital risks describes a significant threat to organizations of all kinds, and many of these risks can be traced directly to regulation and the lawsuits they engender.
For better or worse, organizations are on the front lines of these cultural challenges. To avoid the imposition of regulations, they need to take steps to nurture positive social attitudes and honest behavior in employees at every level. Internal controls, background screening, transparency in ethical behavior at the top, and a policy of intolerance toward breaking the rules can all help to support desirable behaviors.
No organization wants to think that the people they hire will cause harm. But the fact is, people do. If your organization has felt the sting of employee dishonesty or damage from other sources of human capital risk, you recognize the importance of a smart and proactive risk management strategy. Now’s a good time to evaluate your risks and the mechanisms you have in place to reduce the chances those risks will result in a loss. We can help. Talk with a Lowers Risk Group consultant.
[i]“Culture” has been used other ways to help describe risk. Some authors refer to “culture risk” meaning the risk to an organization derived from operating in a culture other than the one that is home to the organization. Failure to understand how different customs or laws, e.g., on labor force participation or management, might profoundly disrupt even the best technical business plans can lead quickly to failure. Others talk about the “risk-management culture” referring to the internal business attitude and implementation of risk management, seen as a component of leadership. This is closely related to our conception of Enterprise Risk Management, but it is the internal reflection of external risks. In this article we are concerned about the nature of the external risks that shape organizations’ responses.