Consequences of disconnects of 'tone at the top' at the institutional and operational level.

• Author: Spoehr, William D.
• Position: MEMBERS SPEAK OUT

This past spring and summer it was impossible to pick up a newspaper without reading about allegations of governance, risk and compliance failures across a wide spectrum of organizations. Such venerable institutions as The Pennsylvania State University and its athletic department, Wal-Mart Stores Inc.'s Latin American subsidiary, Walmex, and JPMorgan Chase & Co.'s Chief Investment Office, all inflicted financial and operational losses on their organizations and caused significant damage to generations-old public reputations of trust and respect.

In each of these instances, the headlined actions appear grossly at odds with the organization's established and well-known policies, practices and ethics--what the COSO Internal Control--Integrated Framework describes as the "tone at the top." As investigations into these events progress and are disclosed, it is apparent that disconnects often exist between the institutional tone at the top rhetoric and the operational level.

Closer examination reveals some common themes: certain groups, typically having a long track record of success and significant institutional power, were allowed to function in ways inconsistent with the explicit and implicit norms of organizational governance. These groups, consciously or not, believed aspects of the organization's tone at the top applied only to others, and not to the groups that ultimately caused the scandals.

Additionally, the group's internal leverage caused the people responsible for institutional governance to avoid confrontation, and attempts to investigate early warnings of improper activities were stifled by the group's institutional power network. In short, when considered across the entire organization, the institutional tone at the top at Penn State, Walmex and JPMorgan failed with serious ongoing consequences.

Tone at the Top is More than Words Only

The Committee of Sponsoring Organizations of the Treadway Commission's (COSO) internal Control--Integrated Framework defines an organization's control environment, or tone at the top, as "... the foundation of all other components of internal control, providing [al discipline and structure" that influences the "... integrity, ethical values and competence of the entity's people; management's philosophy and operating style; the way management assigns authority and responsibility; ... and the attention and direction provided by the board of directors."

An organization's tone at the top directly affects...