The GRC Pundit

Below is Michael Rasmussen’s article found in the Summer 2021 issue of Enterprise Risk, published by the Institute of Risk Management (The IRM).

Before last year, risk managers knew they were living in an interconnected world. The pandemic showed them what disruption to that web of connections really meant. It is time to learn the lessons.

Martin Luther King Jr stated: “Whatever affects one directly, affects all indirectly. I can never be what I ought to be until you are what you ought to be. This is the interrelated structure of reality.” This statement is true in our individual relationships, and it is true in an organisation’s relationships in the extended enterprise.

That is because the structure and reality of business today has changed. It is not the same as it was a few decades back. Bricks-and-mortar walls do not define today’s business, nor is it defined by traditional employees. The modern organisation is supported by an interrelated structure of business relationships. It is an interconnected and interdependent web of suppliers, vendors, outsourcers, service providers, contractors, consultants, temporary workers, brokers, agents, dealers, intermediaries, partners and others. Business today relies and thrives on third-party relationships; this is the extended enterprise.

Governance

The business’s ability to reliably achieve corporate objectives directly depends on the governance of third-party relationships and whether the organisation can reliably achieve objectives in each relationship. The organisation’s ability to manage uncertainty, risk and resiliency requires that risk be managed in third-party relationships. The integrity and ability of the organisation to comply with regulations, commitments and values are measured by the integrity of its relationships as well.

The saying “Show me who your friends are, and I will tell you who you are” translates to business: show me who your third-party relationships are, and I will tell you who you are as an organisation. The modern business depends on, and is defined by, the governance, risk management and compliance of third-party relationships (third-party GRC) to ensure the organisation can reliably achieve objectives, manage uncertainty and act with integrity.

Third-party GRC is in a state of growing maturity and evolution. The year 2020 has brought many third-party management lessons through the trials and tribulations worldwide, and as a result, 2021 is aiming for greater resiliency and integrity in risk management, resiliency and integrity in the extended enterprise.

What we learnt in 2020

We cannot understand the 2021 trends in third-party GRC without understanding what transpired in 2020. The last year has taught organisations many lessons in third-party management which provides the foundation for the 2021 trends . . .

[THE REST OF THIS ARTICLE CAN BE DOWNLOADED IN ITS PUBLISHED FORM AT NO CHARGE]

In my previous post, The Board’s Role in Leading and Enabling GRC, I emphasized the board’s critical role in delivering on the G in GRC, governance. This post discusses how to bring together a top-down board view of GRC and a bottom-up operational view of GRC.

I find civil engineering amazing, particularly with tunnels. Consider the Tunnel of Eupalinos. This is a tunnel over one kilometer in length that goes through Mount Kastro in Samos, Greece. It was built in the 6th century BCE to be an aqueduct. Amazingly, it was dug simultaneously from both sides of the mountain to have the two separate tunneling digs meet in the middle. That is an incredible feat of engineering 2,700 years ago!

If the ancient Greeks can build a tunnel coming together to meet in the middle, then organizations should be able to deliver an integrated GRC strategy that delivers a top-down view of GRC from the board to meet up with a bottom-up view of GRC in operations . . .

[THE REST OF THIS ARTICLE CAN BE FOUND ON THE DILIGENT BLOG WHERE GRC 20/20’S MICHAEL RASMUSSEN IS A GUEST AUTHOR]

COVID-19 is not the only pandemic; it has sprung a chain of pandemics and increased risk exposure in areas. One such pandemic plaguing organizations in response to COVID-19 is the abysmal state of policy management in many organizations. The pandemic of poor policy management related to COVID-19 is now entering its second wave impacting organizations,

The first wave of the policy management pandemic coincided with the beginning of lockdowns back in March 2020 in response to COVID-19. As organizations addressed the COVID-19 virus, they found out they had serious issues with policy management at a critical time. Policies were changing (e.g., work from home policies, home office expense policies). Staff was being laid off, so those who remained had more responsibilities and had to be aware of more policies that impact processes they were not responsible for before. There were increased risks that required reminding employees of policies (e.g., fraud, bribery, corruption, information security, privacy). It was then that organizations found that they had policies scattered on different systems, templates, and with varying writing styles. One organization told me they found out they had over 20 different policy portals. At a time of crisis, it was essential to maintain a strong culture of control and engage employees on policies . . . organizations needed one singular policy portal. As a result, there was a boom in enterprise policy management projects.

Now we are facing a second wave of a policy management pandemic tied to COVID-19 that is driving even more organizations to formalize enterprise policy management processes and provide a singular portal for employees to access policies. This is the pandemic of rogue policies.

The issue is addressing the significant legal liability and exposure that rogue policies bring to the organization and their negative impact on culture, consistency, and integrity; as organizations come out of a crisis, they are thoughtfully addressing back to work policies, policies on the use of personal protective equipment, and even vaccine policies. However, various levels of management think they are a little smarter than the rest of the organization. Some might believe the virus is a hoax and scrapping the corporate policies that have been developed for their teams. Others might think the organization is too relaxed and writing policies that require vaccines of their staff and could be crossing lines of employment labor law issues in some jurisdictions.

In an era where everyone has access to a word processor, the organization must control policies. They do this by providing a singular portal into all policies where official policies are found in a company-defined and branded template, indexed and numbered, and written in a consistent writing style. All official policies should be available on a singular policy portal. To combat rogue policies requires that employees know how to decipher what is an officially approved policy and report anything they are communicated as a policy that is not.

Like 14 months back, I see many organizations define and structure their enterprise policy management programs to address rogue policies and again renew effort to provide a singular portal into all company policies across Human Resources, finance/accounting, legal, corporate compliance security, and more. Where are you at with your enterprise policy management strategy?

Looking for training and certification on enterprise policy management?
Check out www.PolicyManagementPro.com . . .

In my first post, A Quick Guide to ESG and Risk Management in the Extended Enterprise, I outlined what ESG (environmental, social and governance) is and how it impacts third-party risk management. Next, we looked deeper into a specific aspect of Governance in ESG: anti-bribery and corruption (ABAC). This post discusses a social aspect: how modern slavery can impact your extended enterprise.

What Is Modern Slavery and How Does It Apply to Modern Supply Chains?

Modern slavery exists when people are subjugated by companies and controlled by threats of harm or debts they cannot repay. Human trafficking is a related term used to describe when people are moved between countries (e.g., the slave trade). Slavery is found in the supply chains of corporations producing materials and products, as well as in the forced compulsion of children to make products in factories. In fact, 40 million people are estimated to be enslaved around the world today, resulting in $150 billion in ill-gained profits every year.

The good news is the world has been taking action. Governments in several countries have passed legislation requiring organizations to report on modern slavery in their supply chains. A few examples of legislation include . . .

[THE REST OF THIS ARTICLE CAN BE FOUND ON THE PREVALENT BLOG WHERE GRC 20/20’S MICHAEL RASMUSSEN IS A GUEST AUTHOR]

Gone are the years of simplicity in business operations. Exponential growth and changes in risks, regulations, globalization, distributed operations, competitive velocity, technology, and business data encumber organizations of all sizes. Keeping business strategy, performance, uncertainty, complexity, and change in sync is a significant challenge for boards and executives, as well as management professionals throughout all levels of the business.

GRC (governance, risk management, and compliance) by definition starts with the G for governance. Because of the board’s role in corporate governance, one would think that GRC is a board-driven strategy and initiative. However, the opposite is most often the case. It is the R for risk management and C for compliance that drive most GRC initiatives – and fail to engage senior executives and the board who ultimately have fiduciary obligations for all aspects of GRC.

Understanding GRC in Context

Let’s unpack GRC to provide context to what it truly is. GRC as detailed in the OCEG GRC Capability Model drives Principled Performance. It is a capability to reliably achieve objectives [GOVERNANCE], while addressing uncertainty [RISK MANAGEMENT], and act with integrity [COMPLIANCE].¹ The flow starts with governance which provides context for risk management and compliance:

• Governance – reliably achieve objectives. This is the governance function of . . .

[THE REST OF THIS ARTICLE CAN BE FOUND ON THE DILIGENT BLOG WHERE GRC 20/20’S MICHAEL RASMUSSEN IS A GUEST AUTHOR]

There is a new CIO in town . . . the Chief Ethics and Compliance Officer (CECO). This is not to replace the Chief Information Officer, but the CECO is an executive focused on the organization’s integrity being the Chief Integrity Officer.

Back in 1992, I remember being in the backcountry of Montana hiking with some friends. I was carrying with me my longbow (yes, I love all things medieval, and the English longbow has long been an interest to me). We were on top of this rock overlooking a small mountain lake. Across the lake, there was an old tree that had fallen into the water. I looked over at my friends and stated I would shoot an arrow across the lake and hit that log in the water. They laughed at me; it was a long shot, not one of those point the arrow at the target shots, but one of those shoot the arrow up into the air with an arch to get the distance needed to hit the target shots. I pulled my bow back and let the arrow fly. It flew gracefully in an arch and landed to embed itself in the log in the water across the lake.

Back in 2004, I made another shot. I stated that the CECO is mislabeled, that the role of compliance and ethics is beyond checkboxes and compliance but is the bastion of the organization’s integrity. I stated back then that the CECO should be renamed the CIO, the Chief Integrity Officer. The shot was fired high, and it arched over the years to land solidly in 2021.

The role of the CECO is changing, and it is for good. This role continues to move out of legal to become its own executive function focused on compliance and ethics. As it grows and establishes itself, it is focused more and more on the organization’s integrity, particularly as it is this role that is leading ESG – environmental, social, and governance – strategies for the organization.

Integrity is a mirror revealing the truth about an individual or a corporation. It involves walking the talk — not just talking it.

On a personal level, integrity is measured by what an individual does and does not do when no one is looking. Do they hold to their values, beliefs, and ethics? Or do they compromise and do the opposite of what they believe is right?

Integrity is the same at the corporate level. Does the organization’s reality reflect what is stated in corporate reports, filings, ESG statements, regulatory compliance, and stakeholder communications? Does the organization walk its talk or just talk a talk?

Integrity is violated when corporate policies and procedures are thrown out the window in the quest for personal or corporate gain. From an organization’s perspective, personal and corporate integrity are two sides of the same coin. In order for a corporation to have integrity, it must have an ethical environment with employees and business partners willing to follow and enforce corporate culture, policies, and procedures. From an individual’s perspective, an employee or partner wants to make sure they are working with a corporation aimed at doing the right thing and is in sync with their values and beliefs.

Consider the words of Aristotle . . .

We are what we repeatedly do. Excellence then is not an act but a habit.

Aristotle

Integrity itself is not something that is written on paper, but something that is lived and breathed in the organization. Integrity is a mirror reflecting what the organization truly is. Or does it communicate and portray to the world something that really does not exist?

The role of the CECO is becoming firmly rooted in establishing, maintaining, and monitoring the integrity of the organization. What it commits to in values, ethics, code of conduct, policies, regulatory obligations, contractual commitments . . . is it a reality that the organization lives and operates by. It is the role of the CECO to monitor and ensure corporate/organization integrity. In the 2021 era of ESG, this role of being the Chief Integrity Officer is more critical than ever and is fundamentally evolving and changing the role of the CECO.

I have mentioned in previous posts that it is a good thing that the CECO comes out of legal to be an operationally functional department that has a direct line of communication to the board of directors and senior executives. In my idealistic view of the world, it is also critical that this role also not get buried in risk management. Integrity is critical to today’s modern organization. This role and function provide a balance to the forces of risk management that keep the organization on the track of integrity.

Here are some of the resources I have published on compliance and ethics management that can assist readers in developing an organization of integrity and the role of a Chief Integrity Officer . . .

• ESG is about to ROCK the Third-Party Risk World
• Where Should Compliance & Ethics Report?
• Improving Your Organizations Policy Management Capability
• Is Your Organization Lawful Good or Chaotic Evil?
• Delivering ESG in GRC
• The Principles of Effective Policy Management
• Why Policies Matter
• 2021: An Integrated Focus on Business Integrity & Resiliency
• Lessons Learned in Compliance Management in 2020
• Next-Generation Policy Management: Collaborative Accountability
• How to Tie a Compliance & Ethics Bow Tie
• Agile and Integrated Compliance: Managing Compliance in Dynamic Business
• Next Generation Corporate Compliance & Ethics Architecture
• Compliance & Ethics is Rapidly Evolving

In my previous post, A Quick Guide to ESG and Risk Management in the Extended Enterprise, I outlined what environmental, social and governance (ESG) is and how it impacts third-party risk management. This post expands on a specific aspect of governance in ESG: anti-bribery and corruption (ABAC).

ABAC Risk and Compliance 

Organizations today face a tremendous amount of anti-bribery and corruption risk – especially as they conduct business globally. Anti-bribery and corruption laws govern business transactions and prohibit exchanges of value that illegally influence the actions of either party in a transaction. There is a range of laws meant to enforce ABAC measures – from the U.S. Foreign Corrupt Practices Act (FCPA, passed in 1977), to more recent legislation such as the U.K. Bribery Act (2010) and France’s Sapin II (2016). In fact, 46 different countries have bribery and corruption laws. These laws address bribery in business transactions, often focusing on the actions of foreign government officials.

Enforcement of ABAC laws is expanding . . .

[THE REST OF THIS ARTICLE CAN BE FOUND ON THE PREVALENT BLOG WHERE GRC 20/20’S MICHAEL RASMUSSEN IS A GUEST AUTHOR]

The extended enterprise defines business today. An organization is not defined by brick and mortar walls and traditional employees. The organization is a web of third-party relationships of suppliers, vendors, outsourcers, service providers, distributors, contractors, consultants, brokers, dealers, agents, and more. The actions and behavior of these third parties impact and shape the reputation and brand of the organization. Their risk issues are the organization’s risk issues.

Third-party risk programs are about to change significantly. In the past, there was a dominant focus on information security and privacy risk in these relationships. They also were fragmented where different departments monitored and managed their silos of risk without seeing the big picture of risk across a third-party relationship. This is changing. There is a growing array of regulations that will restructure how organizations define and manage risk in the extended enterprise.

Particularly, there are pending directives and legislation that have an expansive scope that is expected to be passed this summer. This is the EU Directive on Mandatory Human Rights, Environmental, and Good Governance Due Diligence alongside Germany’s corresponding Corporate Due Diligence Act. These are SIGNIFICANT pieces of legislation that are expected to become law in the next few months.

The scale and impact of these laws will be global. Think EU GDRP (global data protection regulation) in scope. Organizations around the world have had to respond to GDPR because they have EU citizen data. These two pieces of legislation have a potentially global impact with significant teeth.

Consider that the governing EU directive, which is to become country law in each EU member country, is projected to impact any organization with operations in Europe (but does not have to be headquartered in Europe) with more than 250 employees and/or more than €50 million in annual revenue. So if an organization has any presence in Europe regardless of where it is headquartered, it will have to address the requirements coming from this directive. Germany’s legislation is the first EU country legislation to support this directive and is expected to become law in the same timeframe that the EU directive gets finalized.

These laws are more than reporting requirements; they will have teeth. They are NOT like the United Kingdom Modern Slavery Act and California’s Transparency in Supply Chains Act. These new laws are expected to have significant enforcement penalties and sanctions and large administrative fines (similar to anti-trust and GDPR fines). They require thorough and continuous due diligence of third-party relationships in the context of environmental practices, social and human rights, and governance to address corruption.

Here are a few excerpts from the published notes on the draft directive:

• For the purposes of this Directive, due diligence should be understood as the obligation of an undertaking to take all proportionate and commensurate measures and make efforts within their means to prevent adverse impacts on human rights, the environment, or good governance from occurring in their value chains, and to address such impacts when they occur.
• In practice, due diligence consists in a process put in place by an undertaking in order to identify, assess, prevent, mitigate, cease, monitor, communicate, account for, address, and remedy the potential and/or actual adverse impacts on human rights, including social, trade union and labour rights, on the environment, including contribution to climate change, and on good governance, it its own operations and its business relationships in the value chain.
• Due diligence should not be a ‘box-ticking’ exercise but should consist of an ongoing process and assessment of risks and impacts, which are dynamic and may change on account of new business relationships or contextual developments.

This is going to fundamentally change and restructure third-party risk management programs. I have advocated that organizations need to move beyond scattered silos of third-party risk oversight to create an integrated third-party GRC (governance, risk management, and compliance) program. This unifies a single approach to govern risk in third-party relationships and delivers a 360° contextual awareness of risk in relationships. It also is more than risk management; it is also about the governance of these relationships to ensure they reliably achieve objectives, address uncertainty, and act with integrity in each relationship in the extended enterprise.

The writing is on the wall, as the EU GDPR changed the world’s understanding and approach to privacy; this new EU directive and Germany’s law will change how organizations manage and monitor risk in the extended enterprise. Organizations should start defining an integrated strategy for third-party GRC to address these forthcoming requirements in a unified and consistent approach.

Having an opinion of where corporate compliance and ethics should report outside of legal is like the opening sequence to Indiana Jones: Raiders of the Lost Ark.

Indiana carefully makes his way through the jungle, while his colleagues are taken out by traps. But Indy is cautious and experienced. He gets deep into the jungle following his map to find the caverns with the ancient artifact. He navigates the traps of the cavern to get the treasure, he works meticulously. He finds the gold idol, and then chaos breaks loose.

The cavern begins collapsing, he is betrayed, traps are sprung as he runs, the huge boulder comes crashing down behind him, the local natives chase him to his plane. He barely escapes with his life.

Having an opinion that compliance and ethics should report outside of legal tends to upset some of the natives of legal. Despite caution, careful crafting of argument, and presentation you find that some natives of legal are upset as you just rocked their domain.

You may have guessed, but I am an advocate that corporate compliance and ethics need to report outside of legal and have direct lines of communication to senior executives and the board.

[THE REST OF THIS ARTICLE CAN BE FOUND ON THE MITRATECH BLOG WHERE GRC 20/20’S MICHAEL RASMUSSEN IS A GUEST AUTHOR]

Environmental, social and governance practices are under increasing regulatory scrutiny. How well is your third-party risk management program structured to assess these risks?

Today, organizations are increasingly challenged to address environmental, social and governance (ESG) practices and reporting. Stakeholders, customers and regulators want to ensure that the companies they interact with and invest in share the same values and commitments that they do. The heart of ESG is about the integrity of the organization. What the organization commits to – the organization’s obligations whether voluntary, regulatory or contractual – is a reality throughout the organization.

What is ESG?

ESG covers a wide spectrum of a company’s conduct:

• E = Environmental: Measures . . .

[THE REST OF THIS ARTICLE CAN BE FOUND ON THE PREVALENT BLOG WHERE GRC 20/20’S MICHAEL RASMUSSEN IS A GUEST AUTHOR]