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On the eve of Commissioner Hayne’s final report, we can be sure that in his Royal Commission into Misconduct in Banking, Superannuation and Financial Services, the Commissioner has returned to first principles. The essence of first principles is ethics and integrity. No regulatory or compliance framework, no matter how well designed to enable ethical conduct, can act as a safeguard against a lack of integrity.
With this in mind, we anticipate that Commissioner Hayne will recommend that institutions employ a Principal Integrity Officer, not as a figurehead for ethics, but as a magnifier of whole organisation integrity and individual accountability.
The concept is not new.
In addition to being ubiquitous in many offshore jurisdictions, commonly referred to as a ‘Chief Ethics and Compliance Officer’, a Principal Integrity Officer was recommended by the Productivity Commission in its Competition in the Australian Financial Services Industry report published June 2018.
Regardless of whether Commissioner Hayne recommends mandating a Principal Integrity Officer, our view is that financial institutions would benefit enormously from one.
The simple reason is that in order to promote ethical conduct in large, complex institutions, there needs to be someone whose sole objective is to consider all decisions through the prism of integrity.
This is not to suggest that the Principal Integrity Officer (PIO) becomes the only person within an institution responsible for integrity. No one can outsource their ethical responsibilities, and the CEO and executives will always lead the organisation. However the Royal Commission has demonstrated that in large institutions, wrongdoing is not necessarily caused by people who lack ethical intent. Sometimes, conflicts of interest, deficient systems or poorly designed products cause the best of us to be party to wrongdoing.
A primary goal of a PIO is to elevate and highlight an organisation’s commitment to its ethical dimension, to give it proper consideration. But to do this, the role must be properly instituted.
This requires due consideration as to who is positioned in the role; how the role is structured; and the role’s responsibilities.
Without meaning to state the obvious, the PIO should be an individual with unquestionable integrity. He or she must have demonstrated capacity for principled decision-making, a willingness to stand up for the ‘should’ and not just the ‘could’, and the strength to speak truth to power.
Ethics is not the same thing as law. So a legal background is not a necessary prerequisite. It is more important to possess the ability to reason ethically – to be able to deploy an integrity based decision-making system that allows all aspects of a problem to be considered through an ethical lens.
Coupled with an understanding of human behaviour, and the drivers of conduct within an organisation, these elements will position a PIO to anticipate possible inferior conduct outcomes.
To be successful the PIO must have the requisite platform and governance supports. This will be achieved best through a Board-empowered Integrity Committee. The PIO can then report to the Chair of the Integrity Committee and be a role with similar Board recognition to the Head of Internal Audit.
There are a number of models available to institutions.
One of this article’s authors, Willem Punt, was a Group Ethics Officer at a large South African bank when Integrity Committees were a statutory obligation for all organisations with a certain number of employees and amount of revenue.
Another of our Partners, Dr Deen Sanders OAM, was a Chief Professional Officer in a professional body, with Board independence and responsibility for the integrity of the professional participants.
Among other things, the elements of governance and independence of these ethics roles ensured the Board was engaged, and they had both credibility and the avenue to speak truth to power.
There are numerous models for a PIO. At one extreme, a Principal Integrity Officer can be a ‘statesperson’, using his or her profile to garner the necessary insight into the organisation, and report that to the Board.
At the other extreme, the PIO could be given control of any of a number of key organisational functions – e.g. the whistleblowing program, compliance, culture and/or risk.
There are pros and cons associated with all models. We are not suggesting that a Principal Integrity Officer is the panacea to all an organisation’s governance issues. However having a senior officer, with a properly skilled focus solely on integrity, is crucial to helping overcome the inevitable ethical pitfalls that exist in all large, complex institutions.
This is especially true in the case of the current low trust environment in the financial services. We believe a Principal Integrity Officer will be a clear demonstration of the organisation’s intention to be fair, honest, and genuinely have the customers’ interests at heart.
For more commentary from Deloitte on the Royal Commission click here.
Prof. Deen Sanders OAM is the Ethics and Professionalism leader for the Deloitte Governance, Regulation and Conduct group. Before joining Deloitte he was the inaugural CEO of FASEA, developing the blueprint for the professional standards and ethics regime in financial advice. Prior to that he was the head of Australia’s Professional Standards Authority, responsible for the oversight of Australia's regulated professional communities (Law, Accounting, Engineering etc). As well as CEO roles in corporate and government regulatory environments, he was the Chief Professional Officer at the FPA and in that time led the global standards development process for financial planning. He is recognised as a global expert in the field of professions, regulation, ethics and law, and has been a key policy adviser and negotiator for law reform in the financial services and professional regulatory environments. Deen is also an indigenous leader (a Worimi man) and leads the Indigenous Strategy and Truth and Reconciliation Action Plan for Deloitte. He has a Doctorate in the field of Professions and Consumer trust and was awarded an Order of Australia Medal in 2017 for services to these fields.