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Masterclass 4: Current and Emerging Regulatory Hot Topics
Preamble
Generali Group is interested in minimizing the regulatory risk that can substantially reduce the companys value. Therefore, the insurance companys governance, risk management, and compliance (GRC) practitioners have to fully understand all regulatory framework components to effectively conduct regulatory risk management (RRM) procedures. To this end, GRC support specialists take a holistic view of all regulatory developments to detect and fill compliance gaps. However, effective GRC practitioners recognize that such a proactive approach to RRM is not always conducive to furthering operational efficiencies; therefore, they aim to ensure that a companys vision, mission, and objectives are aligned with its GRC principles. Generali Groups GRC support specialists know that one of the best methods for minimizing the regulatory risk is to embed the right culture. This reflective journal aims to explicate the process of risk management through the development of cultural ethics in the insurance company. The topic is of high relevance to me because by understanding diverse elements of organizational integrity it is possible to ensure that the avoidance of deviant organizational behavior, which can be achieved with the help of effective GRC practices, translates into excellent financial performance
Key principles and issues raised within the Master class
Too Big to Fail
The first learning point from the Masterclass is that even big companies, which have proper controls, policies, procedures, and sufficient resources to conduct their GRC activities, are open to certain regulatory risks that stem from unexpected changes in the regulatory environment.
Regulatory environments can be substantially transformed by:
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industry scandals,
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economic developments,
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political changes,
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Black Swan events,
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the media,
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globalization, and
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technical breakthroughs.
The election of Donald Trump and Brexit are examples of Black Swan/ political events that are capable of reshaping the regulatory environment to a significant degree. Brexit alone can produce a substantial regulatory impact undermining the normal functioning of the Generali Group, which has branches located in different countries.
According, to a recent report issued by the Centre for Economic Performance, Brexits main promise is to introduce better and less regulation without significantly weakening social protection (2016). In terms of producing meaningful economic benefits for the UK, the report notes that there are 56 regulations derived from EU legislations where the UK governments Impact Assessment finds that the costs outweigh the benefits (Centre for Economic Performance 2016, p. 20). If these regulations are scrapped, the country can save up to 0.9 percent of its GDP (Centre for Economic Performance 2016). However, it should be mentioned that the net cost of Brexit exceeds savings introduced by deregulation by far. Centre for Economic Performance (2016) estimates that the economic costs of losing EU membership can reach from 6.3 percent to 9.5 percent of the total GDP of the UK.
Compliance Culture
The second learning point from the Masterclass is that compliance culture is one of the driving engines of a companys success.
In light of numerous factors that can initiate regulatory change, Generali Group has to consider how it can embed cultural ethics and code of conduct to ensure that it is ready to face numerous changes in the regulatory landscape. The best way to ensure that the company has a flexible approach to complying with all regulations is to embed compliance culture into all of its processes and protocols (EY 2016). By doing so the companys management will be able to easily identify dysfunctional elements in their organizational system as well as employees who are willing to take shortcuts (Kedia, Luo & Rajgopal 2016).
Generali Groups code of conduct requires the firms employees to report behaviors that might be considered a breach of law or international regulations, thereby promoting transparency and compliance. The duty to comply is especially important since the company has numerous branches around the world. According to an article on cultures of weak compliance, there is a positive association between non-compliance culture and risk of financial misreporting (Kedia, Luo & Rajgopal 2016). The article reveals that a one standard deviation increase in our measure of firm-level non-compliance culture over its mean is associated with a 12.5 percent increase in the likelihood of a restatement, a 25 percent increase in the likelihood of an SEC enforcement and an 11 percent increase in the likelihood of a private class-action lawsuit (Kedia, Luo & Rajgopal 2016, p. 376).
The most important implication of these findings is that non-compliance on company level can bread industry-wide non-compliance practices (Kedia, Luo & Rajgopal 2016). There is ample evidence confirming that non-compliance culture is not subsumed by industry non-compliance culture (Kedia, Luo & Rajgopal 2016, p. 376). Therefore, GRC professionals at Generali Group rely on GRC practices derived with the help of the most current cognitive, organizational, and behavioral studies.
Management of Regulatory Requirements
The third learning point that has to be taken away from the Masterclass is that to effectively manage regulatory requirements, global organizations such as Generali Group have to develop an adequate structure of moral leadership. Undoubtedly, leadership plays a key role in promoting values in companies. However, great leaders are not those individuals who have certain values, but rather ones that can translate their values into action and actions into enduring organizational values (Zimmerli, Richter & Holzinger 2007, p. 67).
Leadership scholars believe that for a leader to effectively communicate change in their organizations, they have to hold values and beliefs that are not contradictory in practice (Zimmerli, Richter & Holzinger 2007).
To achieve consistency in values, Generali Group has a code of conduct that helps it to remain in a leading position in the market by reflecting the diversity of its customer base. Also, the code is aligned with the highest international standards of sustainability, human and labor rights, and fair competition among others. Therefore, the insurance company can exercise corporate social responsibility and uphold its excellent reputation. By having expressed the firms values to employees, Generali Groups leadership hopes to shape their behavior and to provide them with corporate identities that would be conducive to the creation of compliance culture. The company recognizes that leaders values can be influenced by organizational history; therefore, the story of the company is presented in such a manner as to narrow the gap between organizational and personal values of its management.
Utilization and recommendations
In terms of the practical application of the key learning points described above, Generali Groups GRC practitioners have to ensure that both management and employees of the company understand the benefits of instilling a culture of compliance. These benefits include, but are not limited to, cost savings, revenue growth, and reduction of risk of adverse consequences.
To this end, the company has to revise its code of conduct to effectively communicate to its professionals that they are personally responsible for breaches of regulations as well as all their actions. Generali Group has to unequivocally state in its code of conduct that it has zero-tolerance for corruption in all its forms (Fox 2013).
Furthermore, the companys GRC practitioners have to develop and implement comprehensive processes and procedures aimed at strengthening proactive trustworthy behavior. The creation of a compliance committee, which governs and oversees the compliance functions of the firm, is an important step to make sure that, each business unit has a high level of integrity and accountability. Also, the company must have a Risk Management and Compliance Policy that serves as a framework for developing effective internal controls. These controls will help to quickly recognize the companys risks and compliance incidents and ensure that corrective actions are taken by appropriate levels of management (Fox 2013).
Generali Groups code of ethics should mention that its active system of compliance controls is aligned with its attitude of zero tolerance towards corruption.
Moreover, the company has to ensure that its hiring process attracts leaders whose values are aligned with Generali Groups mission and strategic objectives. To accomplish this, it is necessary to use behavior-specific questions for soliciting information about past actions of potential candidates (Adler 2012). A review team consisting of department leaders from all companys units that will evaluate feedback about job candidates that is captured by each interviewer (Smith 2014, para. 4) must also be created. It will make easier the assessment of the strengths and weaknesses of each candidate and guarantee that they measure up to the companys core values. GRC practitioners will help to ensure that leaders are not drifting away from both regulatory requirements and strategic objectives of Generali Group after they have been hired.
Conclusion
The research conducted on the Masterclass topic has helped me to better understand the importance of cultural ethics in managing regulation risks. The most important actions that have to be taken to achieve compliance culture are behavioral and cultural education, the development of effective RRM practices, and monitoring of compliance activities.
Reference List
Adler, L 2012, Hire with your head: using performance-based hiring to build great teams, John Wiley & Sons, Hoboken.
Centre for Economic Performance 2016, Brexit 2016: Policy analysis from the Centre for Economic Performance,
EY 2016, Rising to the challenge: A review of risk and viability disclosures in September 2015 annual reports, Web.
Fox, T 2013, How to build a culture of ethics and compliance, Web.
Kedia, S, Luo, S & Rajgopal, S 2016, Culture of weak compliance and financial reporting risk, The Journal of Law and Economics, vol. 48, no. 1, pp. 371-407.
Smith, R 2014, How to hire someone aligned with the companys mission,
Zimmerli, W, Richter, K & Holzinger, M 2007, Corporate ethics and corporate governance, Springer, New York.
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