The Compliance Index: a behavioral approach to compliance risk management in the (post-) Covid-19 era

Sebastian Rick and Ralf Jasny

Journal of Operational Risk

Abstract: The Covid-19 pandemic, with its new hybrid work models, has meant that conventional control systems set up for controlling and monitoring the effectiveness of compliance programs quickly reached their natural limits. In particular, when employees work from home, formal controls (such as auditing and monitoring procedures) to mitigate compliance risk are difficult or impossible to implement for legal and technical reasons. Thus, a paradigm shift away from such controls to a behavioral approach is required. To address the changes in the workplace triggered by the Covid-19 pandemic, we present the Compliance Index, which places the legitimacy of compliance programs in organizations at the center of these considerations. The Compliance Index is an empirically based behavioral measurement system for controlling and monitoring the effectiveness of compliance programs to mitigate compliance risk. We discuss the nature and purpose of the Compliance Index and explain the theory underlying the model and the quantitative approach employed to estimate the model parameters. We find that ethical leadership and compliance programs that focus, for example, on detecting misconduct, pursuing complaints or penalizing rule violations have a positive effect on the legitimacy of compliance programs; the legitimacy of compliance programs has a positive effect on employees’ willingness to report violations; and the legitimacy of compliance programs has a negative effect on compliance risk. Finally, we discuss the impact of the Compliance Index on the work of practitioners and highlight approaches for further research.

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