Must we choose between ethics and compliance?

Ethics and compliance have long been seen by some as representing essentially inconsistent approaches to promoting desirable conduct in companies.  I have never been persuaded by this oddly Manichean worldview. Rather, and as previously argued in Compliance & Ethics Professional (page 2 of  the PDF), I believe that compliance can give ethics “body” and ethics can give compliance “soul.” Or, as the 2004 amendments to the U.S. Sentencing Guidelines for Organizations indicate, companies should have “compliance and ethics” programs.

Moreover, many “middle-aged” programs (discussed more generally in this piece on the CCI web site ) need all the help they can get.  For those struggling to maintain a sense of urgency in their programs, the answer to the question “Ethics or compliance?” is a resounding “Both, please.”

Of course, there are some C&E challenges that companies face that largely require “C” but little or no “E.” (A recent posting here suggests that these include dealing with requirements of anti-corruption, export control and competition law.)  The converse is true as well.

But some risk areas – such as conflicts of interest – clearly need healthy elements of both. More importantly, so does the overall platform for ensuring that companies do the right thing, such as paying due attention to C&E in incentive structures.

The importance of incentives to C&E was addressed in a piece last weekend in the NY Times by Gretchen Morgenson  about a recent proposal by Professors Claire A. Hill and Richard W. Painter of the University of Minnesota Law School “for making financial executives personally liable for a portion of any fines and fraud-based judgments a bank enters into, including legal settlements” regardless of fault.  The proposal, she notes, quoting one of the professors, “would help instill a culture… ‘that discourages bad behavior and its underlying ethos, the competitive pursuit of narrow material gain.’”

Clearly the goal here is to go beyond traditional notions of compliance to promote a more truly ethics-driven approach to banking.  But by using the mechanisms of “carrots and sticks” to achieve that goal, it is also very much in the heartland of compliance.

While the case for this sort of an approach may be strongest in the financial services industry, its logic is applicable more broadly.  For instance, a large company in any industry might adopt a policy that if any of its divisions are prosecuted the leaders of that division will bear some of the costs incurred by the company.  However, and in the spirit of the Sentencing Guidelines themselves, I think that an executive who could show that she made a strong effort to promote C&E in her division – going beyond promoting mere rule abidance, to embrace a truly cultural view of ethics – should be spared some of this punishment.

Of course, few, if any, other industries have had the perverse incentives C&E-wise that financial services (generally speaking) have, which is why I would temper the no-fault aspect of the Hill and Painter proposal as applied to other areas of business.  But any company in which the managers are not the owners faces the potential for at least some “moral hazard” when it comes to mitigating C&E-related risk, as discussed in the prior posts collected here.  That is why  companies of all kinds need to consider how they provide incentives for ethics and compliance.

 

2 Comments
  1. Jason Lunday 1 year ago

    To continue the theme of Jeff Kaplan’s argument that both ethics and compliance should be the objectives, my observation from prior years in financial services compliance is that the industry does compliance extraordinarily well, but fails fairly meaningfully and at critical times with ethics. Financial firms’ compliance regimes and cultures are typically well demonstrated and supported; but when issues arise outside of the prescribed rules and that impact the principle of fiduciary duty, this is when incentives overrule the nascent culture of ethics and integrity. Had a stronger culture of ethics existed, it might prevent the breakdown of principles-based leadership, even while the compliance machinery continues to hum along.

  2. Howard WHITTON 1 year ago

    This strikes me as a false dichotomy. As a certain US Senator put it, so well: “If you have Integrity, nothing else matters: if you do not have Integrity, nothing else matters”.

    If you ‘have Ethics’, compliance will follow’.

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