Compliance While Cutting Middle Management

Compliance officers deal with corporate restructurings all the time, including the occasional craze of cutting middle management — “flattening the structure to allow better decision-making” or some CEO-speak like that, when really the company wants to cut spending by cutting heads.

As short-sighted moves to cover up bad strategic leadership go, culling middle managers is a good one. But what are the implications of a middle management cull for compliance officers?

That’s been on my mind lately since we’ve seen a few examples of middle management layoffs in the headlines lately. Tesla announced last week that it would cull an unspecified number of middle managers, although that looks more like CEO Elon Musk trying to cover up other key managers quitting of their own volition. BT is cutting 13,000 administrative and managerial jobs — er, “delayering management structures,” I mean, because that sounds so much nicer than getting fired.

How prevalent are middle manager culls right now? That’s hard to say. Corporate America spent $33.4 billion on restructuring costs last year, down sharply from $48.8 billion spent in 2016 but still above 2013 spending levels. (See chart, below.) And restructuring costs capture a lot more than middle management culls (M&A integrations, for example) so it’s a crude barometer at best.

 

 

Still, compliance officers talk constantly about “the mood at the middle,” and so we should. As one analyst at the Financial Times phrased it, “middle managers are the connecting tissue of large organizations.” So how do we build strong compliance programs that reach from top to bottom of the organization, when the middle is ripped out and we have nothing but brains at the top and muscle at the bottom?

Clear Values and Priorities: More Important

The fewer middle managers you have, the more their work is done by lower-level employees. Employees will be exercising more judgment about how to interpret senior executives’ objectives. So their understanding of core corporate values and priorities will be crucial, since those things provide the context within which judgments are made.

Put more simply: employees wonder all the time, “What should I do here?” Typically that’s a question they ask their managers. When those managers are gone, and the CEO isn’t answering them, they will need to answer that question themselves.

Sure, training helps — but I’ll take a wild guess here that if the company decimating the middle layer, you probably have cuts or a freeze on your training budget, too. That means employees will need a clear sense of how the CEO wants them to behave (ethical values), and which objectives it wants them to pursue first (corporate priorities).

A cynic would say the CEO rarely considers that if he guts middle management, he must then spend more time talking about values, culture, and priorities. So if you survive the cuts, you will need to put that point in the CEO’s head.

Employees will be exercising more judgment about how to interpret senior executives’ objectives. So their understanding of core corporate values and priorities will be crucial.

Speaking Up Becomes More Difficult

When misconduct does occur, the employee speaks up to… whom, exactly? The single most common method for employees to report a concern is to tell a manager: 39 percent in 2017, according to the most recent Navex Global Hotline & Incident Management Benchmark Report. Without a middle manager there, compliance officers face several implications.

First, your misconduct reports via other channels (whistleblower hotline, online submissions) may increase as a portion of the overall total. Overall, some risk management function — compliance, HR, legal, internal audit — is likely to be more busy. Either you’ll be getting more employee complaints directly, or you’ll be doing more investigation legwork. Regardless, it’s more work that you’ll do, because the middle managers aren’t there to do it.

That could have consequences for important metrics like case closure time, or in your responsiveness to whistleblowers. (Average case closure time has risen from 32 days in 2011 to 44 days in 2017, Navex says.) I’ve heard over the years that whistleblowers will generally try to contact management twice before they decide you’re not hearing them and go elsewhere.

Policy and Controls Go on Autopilot

This is another consequence of employees using their own judgment more often about how to interpret corporate priorities and objectives: more policies and procedures, to reduce the room for error in those judgments. Controls are the guardrails and policies are the roadmaps to lead employees to the right conclusions. That’s a nice theory, but too much in practice can lead to a listless corporate culture where employees go through the motions dictated by some far-removed senior executive.

Worse, if you work in a sector with rapidly changing risks or regulatory requirements — either you automate change management (“Fred, why are we doing it differently now?” “I dunno, but that’s what the boss says.”) or your compliance regime starts to drift away from the actual risks you face. That’s a difficult needle to thread.

Your whole risk assessment can change, really. Compliance officers will need to think more about the tone from the top (the control environment), and what it tells employees to do; plus policies, procedures, and controls (control activities) that need to wring more compliance behavior from employees just as they’re being left to themselves.

‘I Don’t Care’ Risk Goes Up

We might as well say it: working at an organization that guts middle management has gotta suck. Most employees end up doing more work for the same amount of pay, and opportunities to advance into middle management are fewer.

Well, if employees don’t feel invested in their work and the health of the organization, it’s hard to make the argument that they should follow ethics policies and speak up about potential misconduct. Compliance officers may need to sit with HR and other senior executives to ask whether you’re offering the right incentives to drive ethics and compliance.

You — the collective you; however many middle to senior executives are left after the culling — somehow need to ensure that the organization is still a business that employees want to work at; rather than a business they work for until their next opportunity comes along. And all of this assumes that you haven’t been culled too.

No wonder everyone rolls their eyes at those CEO messages flatter structures.