Leadership by Example and Remuneration System
I was a keynote speaker at HKEX’s ESG Academy “CG in Focus” webinar on 21 July 2022. The title of my speech was “Anti-corruption and Ethical Business Culture – The Heart of Good Corporate Governance”. Apart from recommendations on the key components of an Anti-corruption/fraud System, I was asked to share some advice on how to foster ethical corporate culture. I highlighted the importance of leadership by example in building an ethical corporate culture: the way the leaders do business and run the company largely defines the company culture. If the senior management attempt to circumvent the law in doing business and direct employees to do so, or treat their customers and business partners in a dishonest or unethical way, they can expect their employees to do the same to the company.
Another aspect reflecting the corporate culture is the performance management and remuneration system designed by the management. The frequent occurrence of cases of sales commission fraud, sometimes involving also bribery, notably in the insurance and financial investment sectors and to a lesser extent the estate agency and retail sectors, is much more than I would like to see for a world-class financial centre. Companies sometimes devise complicated remuneration systems with the purpose of driving sales, where the commission income of a sales agent in a month could allow him to buy a Mercedes or be not enough for him to feed his kids, with little attention given to ethical business culture, and some arrangements look unfair and unreasonable - the three factors of the fraud triangle is perfectly fulfilled. So, frequently seen are a sales agent falsifying sales information to increase his income or just to meet his sales quota and keep his job, or sales agents and/or their managers colluding together to share sales transactions in a way to maximize the total commission income for all or just to help each other out, or a sales agent offer advantages to another agent or his manager for transferring clients to him.
At the webinar, I opined that such remuneration systems promoted greed rather than performance, and advised companies to avoid remuneration schemes that gave rise to excessive risks of fraud and bribery, or put in place appropriate controls. I had in fact advocated the same and leadership by example as early as 2013.
I was invited to deliver another seminar in the Hong Kong Monetary Authority’s Regulator’s Dialogue on 22 May 2023 on a similar topic. I was glad that the Authority had launched the Bank Culture Reform campaign in 2017 with guidance that gave similar advice on leadership by example and incentive schemes to banks.
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