Tag Archives: risk management

Predicting the Failure – or Success – of Sustainability Leadership

Ed. Note: Elm Sustainability Partners is exceedingly grateful to Commander Kerry F. Gentry, USN (Ret.) who has granted Elm the use of his leadership assessment framework, data and tools developed over more than forty years as a Commander in the US Navy Submarine service and numerous positions within Computer Sciences Corporation.

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“Let’s make sure our sustainability program and initiatives fail.”

It is doubtful any company thinks like that. Some companies use sustainability as a fundamental business tool and competitive advantage. Internal organizations are created to support the strategy and people are promoted from within or hired from outside to be Directors/Vice Presidents.

But are those individuals leaders or simply managers? Are they suited to moving all the necessary parts of the organization? Or are they predisposed to mediocrity and be ineffectual? No company intends for their sustainability initiatives to disappoint but by not ensuring the needs of the position match the individual, failure is all too often an option.

Two recent business cataclysms – Wells Fargo and Equifax – perfectly illustrate mismatches between leadership needs and their respective CEO’s capabilities. Both resulted in the CEOs losing their jobs, being grilled at Senate hearings, major loss of customers and of course meaningful drops in stock price and investor confidence.

Even more bad news: these CEOs’ inadequacies were predictable. This article presents Elm’s method for assessing leadership capabilities that can help prevent self-destruction of corporate sustainability success due to inadequately matching the correct person to the unique attributes of sustainability.

Leadership is …?

Leadership is often seen as an intangible characteristic few people innately possess. In the corporate world, managers routinely rise through higher levels of management and increased responsibility, yet few become true leaders. There are examples too numerous to count of managers initiated into internal leadership development or mentoring programs, only to stagnate. Enterprises, law firms and management consultants reward situational success (to be explained later) with promotions up to a point, until an individual’s star fades while another individual rises who demonstrates true leadership, or disappoints.

But these failures are often less the fault of the individual than their assignment to a position inappropriate to their personal aptitude. They are the result of how a company assesses and selects individuals for leadership positions.

Leadership itself should be clarified and defined. Most requirements of leadership are universal, but each situation is unique due to the environment in which the individual must perform. There are four primary components:

  • Setting or accepting objectives and goals
  • Aligning objectives and goals of individuals with those of the leader/organization.
  • Influencing those individuals to achieve those objectives of their own volition.
  • Managing risks to those objectives and goals

Situational success is frequently misinterpreted as leadership. A manager’s success is based on the entire team/organizational ecosystem in which the manager is embedded. Changing the team structure/dynamics, or placing that manager in a different setting frequently produces dramatically different results. In other words, managers perceived as leaders may only be successful in a specific situation; if their situation changes, their ability to succeed may falter. In 1969, Laurence J. Peter published The Peter Principle – a theory that promotions are based on a candidate’s performance in their current role, rather than on abilities relevant to the intended role. Or as commonly summarized – “an employee will be promoted to their level of incompetence.” This is situational success.

Why is situational success not equivalent to leadership? Because each leadership need/position is its own unique situation, with its own unique team/organizational ecosystem.   In assessing leadership, the company must clearly define what is important to be successful in the new role, not how well an individual has performed in their current one.

Leadership is generally confused with management, but they are not the same. Management is characterized by defined processes and learned skills. Because these are conflated, managers are promoted primarily for their management abilities (a technical skill) to the exclusion of other – more important and less teachable – attributes. And, as noted by Laurence J. Peter five decades ago, managerial assessments focus on past performance, not needs of the new position. Managers rise beyond their abilities; leaders rise to their abilities.

The Leadership Wheel

The Leadership Wheel was developed by Commander Gentry as director of the US Navy’s Atlantic Fleet FBM Submarine Training Center. As shown below, it illustrates the relationship between leadership factors. Every position/opportunity requires its own distinctive mix and weighting of leadership characteristics, so there is no “standard.” However, an inventory of frequently identified factors was developed by Commander Gentry and is being adapted by Elm.

At the hub of the wheel are core personality attributes that are necessary for an individual to be a leader in a specific position. These are hard-wired into our brains by the time we are a few years of age. They are essentially not changeable through training, incentives or punishment. Certain abilities and personality attributes – good and bad – exist at different levels within different individuals.

The spokes represent habituated behaviors that characterize an individual’s interaction with others, and are those necessary to the position. Behaviors can be learned to varying extents, depending in large part on an individual’s core personality attributes. Generally, modifying behaviors is effective only when training and intervention is sustained over a long period of time.

The rim represents technical skills necessary for the position and is perhaps the most frustrating paradox in leadership decisions. Individuals tend to be selected for leadership positions based mainly on their technical capabilities. Yet of the three leadership elements, technical skills are the most teachable and easiest to attain/modify. Underlying personality attributes and behaviors are less teachable and therefore tend to be more important in leaders.

 Using information from reports about the recent disasters by Wells Fargo and Equifax CEOs, we can build the following example table with some interesting contrasts – but with similar calamitous results. 

Leadership Element Wells Fargo CEO Equifax CEO
Hub
Morality No Uncertain
Empathy No No
Courage No No
Spoke
Confidence Yes No
Decisiveness Yes No
Rim
Communication No No
Disclosure Knowledge Uncertain No

 

The individual traits are obviously notable, but the dynamics between them are also highly relevant. In the case of Wells Fargo, early assessment of the CEO’s deficient moral compass with high decisiveness would have foreshadowed a propensity to make independent decisions that place the CEO’s own interests ahead of the company’s. And had Equifax identified an apparent lack of courage, decisiveness and confidence as attributes of their CEO, they may have prevented catastrophic hesitation in timely public disclosure of their massive data breach, along with his singling out of one employee as the scapegoat. Recall that hub traits are not teachable and spoke behaviors are minimally learnable; therefore, training and education on those topics would be ineffective at altering the actions of those two individuals.

Characterizing Sustainability for the Company

Having defined principles of leadership, the same must be done for sustainability. Sadly, corporate sustainability still is a victim of ambiguity and inconsistency. It is couched in terms of environmental impact, social issues, human rights, employee satisfaction, safety, chemical content of products, supplier behaviors, corporate transparency, talent retention, climate change, governmental lobbying, governance, community involvement and/or philanthropy. The 2017 United National Sustainable Development Goals encompass 17 different topics.

The breadth of sustainability’s potential scope frustrates corporate efforts to describe the concept internally, let alone outside of the organization. There are also diverse views on where a sustainability function should be placed within an organization – does it fit it the EHS department, Investor Relations, Quality, Finance/Reporting or HR?

Setting criteria for performance, success and leadership is problematic without basic scope/definition of a sustainability function and understanding where it fits organizationally. Successful sustainability leaders have necessary defined characteristics in an appropriate mix to influence others in achieving the company’s sustainability objectives. Obviously, without clarity on what sustainability means and where it fits in the corporate structure, a company will be unable to attain effective leadership, and the individual and program are unlikely to last long or prosper.

Connecting the Dots

The common thread between leadership and sustainability is the need for clarity. Clearly defining sustainability helps establish appropriate leadership characteristics, relative importance of skills and expectations of performance. That is used to establish clear criteria with which the company can appropriately assess individuals and create performance goals.

  • What are the core personality attributes necessary to achieving the objectives that are aligned with the scope/definition of sustainability? Critically, the organization must understand that personality attributes are fundamental to an individual’s personality and difficult to modify. Therefore the individual’s inherent character must be well-suited to the particular position to begin with.
  • What behaviors related to interacting with others are required? Does an individual need to change or adapt to the new position/ecosystem and to what extent can the individual do so?
  • What technical skills are necessary and what is their relative importance? What knowledge does the individual currently possess, are there gaps compared to the requirements of the new position and how important are they?

Spinning the Wheel

Elm is adapting the Leadership Wheel by identifying position requirements and developing dynamic interactive versions in Excel to quantitatively assess individuals against those requirements. In order to create requirements for a successful sustainability leader, an inventory of hub, spoke and wheel competencies is developed using internally identified criteria in conjunction with Commander Gentry’s inventory of frequently identified factors. Once the position-specific inventory is ranked and completed, candidates complete a self-assessment, with the same assessment performed by subordinates, peers, managers, mentors, internal sponsors and others. In some instances, third parties such as customers may also provide valuable input. The assessment process can consist of written questionnaires, tests, interviews and role playing exercises. The results are entered into Excel individually and charted/graphed, allowing the data to be analyzed in different ways and manipulated to reflect changes in position requirements, actual assessment results or what-if scenarios.

Applying the Leadership Wheel in practice for both the enterprise and the individual helps avoid placing individuals in highly stressed positions for which they are ill-suited rather using them where they are most valuable and comfortable – benefitting the company and the individual.

Obvious comparisons arise to what HR departments and recruiters do, but leadership assessments are different in several critical ways.

Leadership Assessment Performance Reviews
Leverages specific data from hundreds of previous structured assessments, with consistent themes Inconsistent data over time due to constantly changing corporate performance management systems, review methods and criteria
Specifically focuses on the individual’s attributes and capabilities by eliminating ecosystem influences on situation success Do not differentiate between the “masking effects” of the ecosystem and the individual’s past performance.   Many times performance is specifically assessed in terms of team – rather than individual – performance
Structured and quantified process of assessing an individual’s attributes and suitability prospectively Use a position requirement statement to compare individuals against each other on past performance. Annual performance reviews are frequently seen as a perfunctory administrative task that is not used after completion

Give us a call to learn more about ensuring the success of your sustainability program by selecting the appropriate leader.

Hui Chen: Applying DOJ’s Compliance Questions to Supplier/Social Responsibility Auditing

By: Hui Chen, former Compliance Counsel Expert, Fraud Section, Department of Justice

Ed. Note:  Hui Chen gained national attention when she made a “noisy withdrawal” from the Department of Justice this past June.  Afterwards, she graciously agreed to write the following for us.  We applaud her deep commitment to integrity and greatly appreciate her making time to pen this article.

In February 2017, the Fraud Section of the Criminal Division of the Department of Justice (“DOJ”) released a document entitled “Evaluation of Corporate Compliance Programs” (“Evaluation Questions”) which makes public the types of questions the Fraud Sections asks in its evaluation of corporate compliance programs in the context of its criminal investigations. The Evaluation Questions immediately gained the attention and interest of anti-fraud compliance professionals as well as global regulators and law enforcement interested in corporate accountability. The Fraud Section, which prosecutes cases involving foreign corruption, financial,  securities  and healthcare fraud, has brought corporate prosecutions with historic fines and penalties and exerts enormous influence in the those areas of compliance. What is often missed in the narrative, however, is the Fraud Section’s leading role in two of the largest environmental criminal prosecutions in history: the Deepwater Horizon and the VW emission scandal. As the Fraud Section’s Compliance Counsel Expert, I had the privilege of being involved in these cases, and they were very much on my mind as I drafted the Evaluation Questions.

Although the Evaluation Questions are set in the context of criminal investigations, one of the intents of the document is to also provide a framework for companies and compliance professionals to design, implement, and test their compliance programs for effectiveness. That framework is every bit as applicable to EHS and sustainability programs as it is for anti-fraud compliance programs.

At its core, the Evaluation Questions center around the following tenets of effectiveness: credibility, measurements, accountability, and continuous improvement. Let’s briefly explore these principles and see how they apply in the context of supplier/social responsibility auditing.

Credibility

The Evaluation Questions probe the credibility of companies’ boards, senior leadership, and compliance and control functions. It specifically names “audit” as one of the “relevant control functions”. It asks whether “compliance and control personnel ha[ve] the appropriate experience and qualifications for their roles and responsibilities.” How companies define that appropriateness tells a lot about the company. For example, companies that define appropriate experience largely in terms of certifications tend to be less sophisticated: they rely on commercial certification bodies to exercise the judgment and evaluation on their behalf. These types of personnel often do not perform impressively when specific questions involving real experience and expertise are posed to them: i.e. “Explain your sample selection methodology”, “How would you handle specific situations”, “What specific red flags do you look for when you are auditing for X”, etc. In this regard, I find Elm’s Auditor QuickQuiz an intriguing and useful concept and tool. My instinct tells me that this quiz may reveal more about auditors’ competency and judgment than most certifications do.

It is important to note that the notion of credibility, as explored by the Evaluation Questions, goes far beyond experience and qualifications. Corporate and professional credibility comes also in the form of visible commitment, demonstrated conduct, soundness of processes, levels of autonomy, strength of empowerment, and responses to risks, all of which are explored throughout the Evaluation Questions.

Applying these questions to supplier/social responsibility auditing, it means companies need to seriously consider factors more than subject matter expertise and cost of the auditors. Companies need to define auditor competency in terms of independence, judgment, field experience, statistical and analytical sophistication, and interpersonal and intercultural skills. Companies should also examine their auditors’ approach closely, asking specific questions about approach, methodology, and plans to identify and prepare for the types of issues that are likely to arise during the audit process.

Measurements

The Evaluation Questions are rooted in various prior guidance issued by the DOJ and other regulatory agencies and international organizations. The document, however, does bring a very significant new element: the demand for evidence of effectiveness in the form of measurements and data.   Evidence of results is, after all, a foundation to credibility. Not only do the Evaluation Questions ask about “information or metrics” the company collects and uses to help detect misconduct, but also “how has the company measured the effectiveness” of activities such as training and policy implementation. There are many “how” questions such as “How has the company assessed whether…policies and procedures have been effectively implemented?” or “How has the company evaluated the usefulness of …policies and procedures.” Companies that are able to answer these how questions in measurable metrics and data are regarded with far more credibility than those who answer with unsubstantiated adjectives.

Measurement and data are concepts that are expected to be second nature for auditors. What is important for companies is to make sure they work with their supplier/social responsibility auditors to define what to  measure and how. Whether you are auditing for manufacturing quality, environmental compliance, or safety, it is important that you sit down with your auditors to define what satisfaction looks like, and identify ways to measure it.

Accountability

Compliance programs cannot succeed with accountability. This is why the Evaluation Questions are focused on the accountability of both individual players and the company’s systems and processes. Accountability is about clearly defined roles and responsibilities, and visible consequences for words and actions. In line with this emphasis, the Evaluation Questions elevate the inquiry from the traditional “tone from the top” to “conduct at the top”  and ask about “concrete” and “specific” actions. There are questions about whether supervisors are held accountable for failures in oversight and how the companies train relationship managers on their responsibilities in managing third party risks. More importantly, there are questions about the accountability of the company: what happens when “compliance raise[s] concerns or objections”? “Were there prior opportunities to detect the misconduct in question, such as audit reports identifying relevant control failures…” In other words, when issues and risks are identified, how has the company been accountable in addressing and remediating them?

As both an in-house compliance officer and as the DOJ Compliance Counsel Expert, I have seen numerous instances where companies have failed to address audit-identified issues adequately. In the eyes of prosecutors, regulators, and other stakeholders such as investors, this failure speaks volumes about the company’s commitment to accountability and raises serious questions about the company’s operational competency. It reminds me of the TV commercial where the bank security guard tells customers, in the midst of a robbery, that his job is only to notify people when there is a robbery, not to do anything about it. That is why the Evaluation Questions include questions on how audit findings and remediation progress are reported to the management and the board, and how the management and board follow up on such reports. Finding the problem is not the goal: fixing it is.

Continuous Improvement   

Even the best compliance program would become an obsolete compliance program should it not continuously update itself. Everything from business and operational realities to company culture to regulatory and legal requirements changes constantly, and only a persistently self-critical program regularly seeking improvements can remain top of its game. The Evaluation Questions recognize the necessity for continuous improvement, not only in its questions in Section 9 on audit, testing, and updates, but also in how its focus on root cause analysis and risk assessments. Every instances of breach, whether it resulted in actual harm or not, is an opportunity for learning and improvement.

This same principle applies in the supplier/social responsibility auditing process. It is important for companies to ask how their auditors are keeping up with ongoing trends, regulations, audit practices/standards and realities, as well as themselves how they are learning from the audit findings in not just short-term remediation, but long-term improvements in how they manage suppliers.

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Hui Chen may be contacted at www.HuiChenEthics.com

A 1960s Economic Model for Sustainability Value

Innovation can create “extra-normal profits” – profits higher than the normal expected ROI based on the risk. But these extra-normal profits are short-lived and disappear once the innovation has been adopted by competitors, thereby equalizing the playing field. You may know these by the term “first mover advantage” – something intangible. But there is a 50 year old economic model for this, known by a far more difficult-to-pronounce name – Schumpeterian profits,  after German economist Joseph Schumpeter.

In April 2004, Yale Economics Professor William D. Nordhaus penned what has become a widely referenced Working Paper for the National Bureau of Economic Research (NBER). Then in 2015, Xie Fan School of Economics & Management at South China Normal University followed up with a study more specific to sustainability matters (more on that paper later).

To summarize Nordhaus, innovation generally leads to reduction in the cost of production without a concurrent reduction in the price charged for the product, meaning increased profit for the innovator until such time as others “appropriate” the innovation and create more or less equal competition. An example of this is patents – once a patent expires, other companies can sell essentially the same product, driving prices down, along with the “extra-normal” profits of the original patent holder. Very simply, the longer a company can hold on to its innovation on an exclusive basis, the longer it can maintain those higher profits. Nordhaus presents a formula for calculating specific values. Looking at historical data from 1948 – 2001, he estimated the Schumpeterian profits (i.e., the extra-normal profits only) to range from -1.3% (during the major recession of the 1970s) to a high of 6.3% of total corporate profits.

We reached out to Nordhaus to see if his paper has been updated and the applicability to sustainability. He answered that no update has been issued. His response about sustainability reflected a limited (and perhaps erroneous) concept of sustainability as relating primarily to environmental protection. This is important in one respect that we won’t delve into here (it relates to the social value of innovation), but in our view is less of a factor than the direct production cost reductions achieved from business-focused sustainability initiatives.

Xie Fan explored whether innovations related to CO2 emissions regulations in China had an economic development benefit as well as an environmental one. Fan’s summary states that

… first of all, the environmental regulation affects the total factor productivity growth in China’s pollution-intensive industries; in the second place, the environmental regulation does not promote producer’s scientific and technological innovation level in China’s pollution-intensive industries; in the third place, the environmental regulation has reduced Schumpeter profits in China’s pollution-intensive industries.

In the end, we see that both Fan and Nordhaus offer complementary  models for sustainability value. In our view, Fan’s point is that once an environmental issue becomes regulated, compliance innovation may not provide Schumpeterian profits, although this seems to contradict the famous Porter Hypothesis. Yet applying Nordhaus to discretionary sustainability business innovation, short term extra-normal profits are to be expected and can be estimated with his formula.  But doing so may also involve reducing transparency in order to maintain exclusivity of sustainability innovations.

All food for thought.

 

 

 

 

 

Is The Money Moving Away From Sustainability?

Sustainability professionals just got a kick in the gut, or a boost in confidence depending on how you look at it.

Jason Karp of Tourbillon Capital, a $3.7 billion hedge fund, wrote a letter to investors earlier this summer stating “One of today’s greatest market inefficiencies may stem from the scarcity of capital devoted toward long-term, fundamental investing.” He continued, “People are just paying significantly more for assets without any fundamental improvement in those assets… big multiples got bigger while fundamentals remained the same.”

We’ve all known about short-termism for some time, but this got me thinking – just how far has equities valuation moved away from business fundamentals? And if disparities between stock price and the company’s underlying fundamentals continue as Karp cautions, might that call into question whether foundational principles of sustainability value are valid? This could be an existential crisis for the concept of sustainability.

There are differing schools of thought about equities valuation, including the “efficient market” and behavioral economics. The efficient market theory is similar to Adam Smith’s invisible hand – the market analyzes all available information about a company and the stock price quickly adjusts in response. Behavioral economics theorizes that stock prices are a result of imprecise impressions and beliefs – human emotions and gut feelings rather than formal analyses.

On one hand, it could be argued that increased sustainability transparency helps an efficient market and should provide a “feel good” basis for less rational decisions short term (i.e., behavioral economics). Numerous studies over at least a decade have generally shown inconclusive results at best.

Yet sustainability is inherently a long-term view and business fundamentals are also a reflection of a company’s anticipated future. Karp’s comments demonstrate the difficulty sustainability practitioners have had in attracting management attention.

The same thinking is mirrored in recent comments from Tim Koller, a principal in McKinsey & Company’s New York office.  When asked about sustainability, he said

I think we have to separate the mechanics of valuation from what managers should be doing to maximize a company’s value and how investors react to the whole thing. For hundreds of years, the value of a company has ultimately come down to the cash flows it generated. That’s what you can spend as an owner, whether you’re a private owner or whether you’re a shareholder in a large company.

Now, there have been periods of time when people said, “Oh, the rules are changing.” For example, during the dot-com bubble, all of a sudden, people said, “Traditional methods of valuation don’t make sense anymore—look at all these companies with high valuations that have nothing to do with cash flow.” Well, ultimately, it was the lack of cash flow that brought those companies’ valuations back down.

That sums it up pretty well.

But lets be honest here – $3.7B really isn’t that big a fund so its’ sphere of influence is limited. Still…

 

New Advanced Auditor Training Program for HSE/CSR Auditors

Elm Sustainability Partners and Elm Consulting Group International have launched a new training module for senior-level and experienced health, safety, environmental and social auditors seeking to improve their auditing skills and get updates on timely topics related to non-financial auditing and technology.

It is also relevant to those buying HSE/CSR audit services who are looking to improve the quality of audits they receive.  After this course, buyers can identify specific areas of audit practice improvements to request of their providers.  Alternatively, these buyers may wish to require their external HSE/CSR auditor to complete this training themselves.

A partial list of what is covered includes detailed review and practicum concerning:

  • auditor independence standards and managing impairment threats
  • audit criteria requirements
  • audit and evidence limitations
  • evidence hierarchy, weighting and corroboration
  • fraud, forgery and tampering – including new concerns brought about by technology
  • interviewing skills including fraud examination and FBI techniques
  • discussions of US Department of Justice Criminal Division Evaluation of Compliance Program criteria (2017), the June 1, 2017 US Public Company Accounting Oversight Board (“PCAOB”) auditor reporting standard on Critical Audit Matters and EU Non-financial reporting rule
  • audit QA/QC considerations

Each participant will take a pre-test to establish a knowledge baseline and identify specific areas for improvements.  Exercises are administered throughout and a post-test will conclude the session demonstrating the advanced competencies gained.  HSE/CSR regulatory and other technical topics will not be covered as this is not a regulatory update session.

Elm Principals are BEAC Certified Professional Environmental/Health/Safety Auditors (CPEA), have served on the Board of Directors of The Auditing Roundtable (recently merged into the Institute of Internal Auditors (IIA)) and BEAC, and have trained thousands of internal and external HSE auditors over the past three decades.

Contact us to learn how you and your team can take advantage of this unique program.

You Are What Your Suppliers Do: Supplier Actions Make Headlines, Break Business

With companies facing increasing pressure for the actions of every part of their supply chain, demand for – and reliance on – supplier/corporate social responsibility (CSR) audits conducted by third parties has grown rapidly.

Shirts, Phones, Rocks and Shrimp

But there is concern about the quality, reliability and credibility of these audits.

CSR Auditing and Toilet Paper

Is Social Auditing Really Auditing?

Harvard Professor Identifies Factors for Meaningful CSR and Supply Chain Audits

You Don’t Know What Your Suppliers Are Hiding

Companies rely on their CSR audit firm to utilize qualified auditors, employ adequate QA/QC processes and expend adequate time to conduct a reasonable audit. Yet there are no generally-accepted professional CSR audit practitioner standards. Moreover, due to cost pressures, lowest cost audit providers are frequently selected that may not have appropriate auditing skills or training – the largest CSR audit firms conduct tens of thousands of these audits each year. Increasing audit time and costs to improve quality or credibility is typically not realistic – the business model is inherently high-volume, low margin.

Are these audits effective at findings supplier actions that create risks for you? Can a company gain confidence in their CSR audits without adding costs? Is a change in auditors necessary?

Improve Credibility for Disclosures, Media and Customers

Changing audit firms is not necessary, nor is another layer of auditing. Instead, a formalized auditor training program can be a low cost yet effective solution.

The Elm Consulting Group International is expanding our well-proven auditor training program to companies who use CSR/supply chain auditors. The intent of this program is for brands to provide detailed communication and training to their current CSR/supply chain auditors about the company’s requirements for auditor competence, audit quality and processes in order to enhance the credibility of audit information.

Our formalized training for existing CSR auditors builds their client’s confidence in the quality of the work provided. The program is not intended to provide training on specific audit topics such as child labor or worker rights. Instead, the focus is on proven audit techniques such as:

  • Understanding and applying professional skepticism
  • Interviewing and active listening
  • Identifying and responding to non-verbal cues within multi-cultural contexts
  • Evidence sampling methodologies
  • Using information from different sources
  • Verification and recomputation techniques
  • Judging audit evidence quality and limitations
  • Fraud detection
  • Using working papers and audit protocols
  • Writing effective and complete audit findings
  • Audit quality expectations, requirements and processes
  • Maintaining auditor independence, including auditor rotation

Our Qualifications as The Leader in Auditor Training

Our HSE auditor training experience began in the 1980s and we have successfully trained hundreds of external and internal auditors. Elm Principals hold auditor certifications from the US Board of Environmental, Health and Safety Auditor Certification (BEAC, now wholly merged into the Institute of Internal Auditors) and UK Institute of Environmental Management & Assessment, are approved trainers for the IIA EHS auditor certification program and are subject to annual continuing education requirements ourselves. Further, Elm Principals have served in various Board positions in The Auditing Roundtable (merged into the IIA in 2016) and BEAC, including the current BEAC Chair.  More information about our internal audit quality and auditor competence standards is available here.

Give us a call at 678-200-3424 or contact us via email to discuss how we can help you increase confidence in your CSR audits.

CSR Auditing and Toilet Paper

In the 1990s I worked for a large paper company and one of the products we made was a name brand toilet paper. As TP goes, this was nice stuff – 2 ply, thick and soft. We marveled that the product didn’t sell well in markets dominated by products that were thin, had holes and fell apart too easily. It baffled us that so many people didn’t care about what ends up on their hands.

Today there is a surprising demand for third party environmental/safety/social/supply chain audits that are equivalent to cheap TP – thin, single “ply” (i.e., one dimensional) and full of holes.   Yet even in the midst of so much reliance on audits, very few buyers of these audit services seem to be concerned. Its not only us that sees this – a fascinating article published earlier this week called out Amazon, The Children’s Place, Gap, Hanes, J-Crew, JC Penny, Kohl’s, Macy’s, Nike, Pink, Polo, Target, Walmart and Zara for “ineffective … CSR monitoring, corporate codes of conduct and industry ‘social audits’ … in protecting the rights, health and safety of millions of workers in global supply chains.”  This, after a decade of CSR audits, is the author’s conclusion.

The article goes on to discuss related failures and inconsistencies in certifications and audit scopes. Our own experiences support this – all too frequently we have seen companies pursuing various certifications solely in order to have a certificate to frame and hang in their lobby. One unfortunately memorable experience came a week after a client had completed their ISO14001 recertification audit. The ISO auditor passed the site with flying colors and was highly complimentary of their program. However, our compliance audit found – with little effort – criminal environmental violations that resulted in the site environmental manager losing his job and one of the few instances where self-disclosure to EPA was warranted without question. This isn’t necessarily a problem with the standards themselves – the problem rests completely with the auditors responsible for assessing the sites.

This criticism shouldn’t be a surprise to anyone who is familiar with current CSR audits and auditors. Certainly there are excellent and conscientious practitioners in the field, but the pricing model of these audits tends to support minimalism all the way around. In a recent article on this topic, we stated our belief that the pricing of CSR audits is directly in response to severe operating cost pressures placed on the manufacturers by the brands. But that circles back to consumer buying preferences as we pointed out six years ago. If attributes other than price and product performance were truly key buying criteria, then the entire economic ecosystem (eco-ecosystem??) would be different.

We do not offer typical CSR/supplier audits because we flatly refuse to compromise our professionalism in order to be cost competitive in this market. Our respect for clients and concern for the risks they face exceeds our desire to compete for revenue from these services in the current market. But, as evidenced by what the article states is an $80B year CSR industry, many people are okay with using cheap toilet paper and don’t seem to care what will end up on their hands.

A few key things you should do to help prevent continuing CSR audit failures:

  • Ensure the audit scope matches the auditor(s)’ backgrounds.  For example, after Raina Plaza, CSR auditors have been increasingly asked to provide information on structural engineering and local electrical code compliance.  These matters require specific technical knowledge beyond that of a typical CSR auditor.
  • Explore the auditor(s) professional qualifications. Do they hold a relevant third-party certification?  How much continuing education do they require on an annual basis?  What fraud detection training have they had?  What are the audit firm process for ensuring independence of the individual auditors, not just the firm as a whole?  Auditors should consider themselves professionals and hold themselves accountable to appropriate standards for qualifications.  If they don’t, that speaks volumes about their attitude toward their work.
  • Test the auditor(s) technical knowledge beyond their checklist.  Does the auditor understand the applicable requirements beyond what is written in the audit checklist or protocol?  There are few times when reality matches the criteria on paper.  You want a professional who is prepared to apply knowledge and expertise objectively and pragmatically, not just check boxes on paper or a screen.
  • Find out how much time the auditor(s) spend onsite, and on each audit activity.  Generally speaking, one day (or less) total on-site is too little for any credible audit scope.  The auditor should reasonably balance their time between document reviews, interviews and visual observations.  If you don’t feel there is adequate time spent or balance in the activities, make your auditor change their practices.
  • Observe – or get feedback on – the auditors’ bedside manner.  An auditor’s attitude and non-verbal cues have a significant impact on the amount and quality of information they are able to gather from the audited entity, and how that entity responds to the audit and corrective actions.  Interviews conducted by the auditor should be non-threatening.  Using active listening techniques without sounding condescending or like a robot is an art form not easily mastered.
  • Look at audit report findings and the cited evidence.  Are findings based solely on interviews?  While this can be acceptable in some settings/situations, information from interviews should be corroborated with another type of audit evidence such as documentation, recomputation or direct visual observations.  If findings are not based on objective and repeatable evidence, make your auditor change their practices.  Issues based on interviews alone should be brought forward in a mechanism outside the audit report as those don’t meet the requirement for a formal finding.
  • Determine how audit reports are peer reviewed – or are they peer reviewed at all?  Does the review require the auditors’ original notes so the reviewer can confirm that the audit evidence supports the findings?  All audit reports should go through a formal internal quality check.
  • Don’t get swayed by broad company or program certifications such as ISO.  While these certifications can be an indicator of internal process formalization, understanding the reality of auditor performance in your specific need is far more important.
  • When considering an auditor, call client references and discuss their experiences, both positive and negative.  Obviously, references are specifically selected to present a positive image.  Expressly ask the reference to offer comments about matters or situations that are not so positive.

DRC Conflict Free Mining – Now on Sale!

It seems we have spent more time than ever before “swimming upstream”.  But not in a negative way.

It started in May when we participated in the OECD Forum in Paris.  Then, in the last month, we attended the CFSI Conference in California and chaired a conference in Berlin on conflict minerals and responsible sourcing.  The CFSI conference this year focused more on upstream initiatives and developments than in the past, and the Berlin meeting was wide-ranging, including practical information on upstream initiatives.

We typically serve downstream industries and clients, and are not as aware as we should be about the goings-on upstream.  This year has been quite valuable in that regard.  The most obvious theme: in-region initiatives are showing potential, but are significantly constrained by a lack of funding.  But there are also few opportunities for downstream companies to contribute – and most of those opportunities have price tags that are difficult to justify internally.

As a result, Elm is currently evaluating solutions to this need that would allow any company or organization a way of providing direct financial support with contribution levels beginning at US$500.  Our three goals are:

  • Provide a low cost option for companies to directly finance valid and confirmed upstream initiatives in the DRC and Covered Countries.
  • Create a mechanism with no overhead charges/expenses.  Elm will not take any fees out of the contributions except those required for bank charges and if necessary – legal fees.  We hope to be able to send at least 90% of every contribution to the region.
  • Allow another way for SEC filers to expand their due diligence activities and related descriptions in their Conflict Minerals Report.

But in order to better quantify interest, solidify appropriate options and establish the mechanism(s), we are seeking expressions of interest.  At the present time, we expect the contribution range to start at US$500 with no upper limit.

If you are interested, please email us directly or via the “Contact Us” function of our website, and indicate the contribution amount you are willing to provide.  We are not asking for funds now, nor are we step up to receive them – this is simply a request for expressions of interest.  The plan is to have the solution in place no later than the end of January 2017, with the first disbursement made after a critical funding amount has been achieved.

We look forward to hearing from you and will post periodic updates.

What Does Trump and GOP Control Mean for Conflict Minerals, Sustainability?

UPDATE:  Acting SEC Chairman Piwowar issued a statement on January 31, 2017 opening the rule and the 2014 Guidance to public comment.

It has been an unusual campaign and election for the US presidency.  Donald Trump will take office in January and the Republicans will control of both houses of the legislature.

So is the fate of the US conflict minerals disclosure mandate in jeopardy?  Perhaps, but in our opinion the Trump administration will not change anything before the May 31, 2017 filing deadline for the CY2016 disclosure.  We recommend that all companies subject to the conflict minerals filing  continue to move forward as planned.  Looking even further out, we expect that the administration will face other dragons to slay through 2018 as well.  This is expected to be a topic of many conversations at the CFSI workshop we are attending this week.

Trump has made clear his disapproval of the Dodd-Frank Act in toto, so there is a general expectation that change will come, yet he faces other higher priority matters such as healthcare and the Federal budget.  But with the Senate and House now controlled by the Republicans, there likely will not be much opposition to a repeal of, or amendments to, Dodd-Frank.

Emerging regulatory initiatives such as expanding SEC reporting to include sustainability matters is also likely to face far more opposition during the Trump administration.

We occasionally are asked what we would do if the conflict minerals mandate was eliminated.  We would see some business loss, but Elm Sustainability Partners and The Elm Consulting Group International do much more than conflict minerals advisory.

Elm Sustainability provides a range of sustainability, corporate responsibility and supplier auditing services.  We review existing social auditor results and qualifications and are known for calculating economic value of sustainability programs using methods that withstand tough management scrutiny.

The Elm Consulting Group International has been in business for 15 years providing clients with the highest quality environmental, health and safety auditing available and that business continues to grow.

Through our six years in the conflict minerals space, we have made many friends and new clients we hope to continue to serve, whether related to conflict minerals or otherwise.  If you are looking for sustainability, social auditing or EHS auditing support, please give us a call.

Apropos: Dia de los Muertos and the Billable Hour

Today is Halloween in the US and Dia de los Muertos in Mexico.  It is a time based on the idea of reflecting on death.  Now we aren’t being morbid here – instead we grinned at the amusing irony of the timing of this article on LinkedIn which is an obituary to the billable hour.

We absolutely agree with the downsides of billable hours.  All of us at Elm, in prior points in our careers, have had ourselves and clients held hostage by the almighty billable hour.  Over the past several years, we decreased our use of hourly rates and billings – instead working on a daily rate or, increasingly, on a fixed fee basis.

Given all that is right with eliminating hourly billing, a reasonable person might ask why doing so remains ubiquitous for consulting/auditing firms?  Yet another irony for those of us who help client organizations in changing their internal culture – because it’s the way it’s been done in the past. 

Hmmmmm.