Companies are looking to manage risk by promoting an ethical work culture. By switching from a controls-based to a values-based approach, ethical conduct can be ingrained into the way they do business—and that can have an impact on the bottom line.
According to an annual survey of ethics and compliance leaders, improving the relationship between core values and day-to-day operations ranked as their top program goal with 69 percent. Improving risk management, the top priority last year, fell to 11th place this year with 45 percent.
The "2010-2011 Ethics and Compliance Leadership Survey Report," conducted by LRN, a company that helps businesses develop ethical cultures, surveyed 107 companies (the majority of which are headquartered in North America but have a global presence) with more than 7,500 employees and $1-billion-plus in revenues.
"I think it's now the conversation in the C-suite," says Friso Van der Oord, leader, ethics and compliance solutions at LRN who helped design the survey and analyze the findings. "Ethics in some way is the foundational risk mitigator. Ethics helps organizations to delineate those boundaries between right and wrong. It creates a self-cleansing culture where people are comfortable asking the hard questions, comfortable intervening, comfortable reflecting on the hard decisions that these businesses need to make."
Ethics and compliance leaders reported the top corporate priority for this year is growth, 70 percent, and Van der Oord says an ethical culture is key to fueling that growth. "Risks will go down when ethics in organization are truly lived and truly embedded into the way business is conducted," he says. "If you look at many organizations, the incentive system is still very geared toward outcomes. Certainly, we can create growth in the short term by displaying the wrong behaviors but, at the end of the day, that doesn't lead to sustainable growth or the long-term success of our organization."
Despite anticipated company growth, almost half of ethics and compliance leaders did not foresee a change in their program budgets for this year and 68 percent expected staff size to stay the same. As a result, ethics and compliance leaders will have to get innovative, Van der Oord says. Leaders will have to find ways to weave ethical behavior into existing practices such as hiring decisions, promotions decisions, sales meetings and target setting meetings.
In the past decade, Van der Oord says companies have invested in expensive risk management software and management compliance programs and regulators have implemented tougher reporting requirements and built supposedly better risk management systems.
But the past decade has also been riddled with compliance missteps, breakdowns and fraud in companies like Enron and by people like Bernie Madoff. "There's an entire marketplace built around a risk and control system that governs risk and compliance frameworks, but it doesn't get to the hard question of ‘Are we fundamentally a company that makes ethical decisions that can display proper business conduct at all times?'" Van der Oord says.
The survey found 58 percent of ethics and compliance leaders' thought the primary mandate of the ethics and compliance program was ensuring ethical behaviors and alignment with core values while 42 percent thought it was compliance with rules and regulation. "We saw a shift away from a reliance on compliance programs to a focus on promoting culture, promoting ethical leadership in organizations," Van der Oord says. "You can't just isolate ethics from the way we run our business. It needs to be integrated."
The survey found 63 percent of respondents thought the top challenge with providing ethics and compliance education was relevance to day-to-day work. However, 68 percent of respondents thought the principal benefit of promoting an ethical culture was long-term value of the business. "You can be focused on profit maximization if you place your values and culture at the center of your strategy," Van der Oord says.
Van der Oord expects ethics to dramatically change in the next decade because companies are starting to recognize an ethical culture is no longer a way to do what's right morally but a competitive advantage to the marketplace. While business ethics and compliance may have been a technical function in the back office, it is now front and center as a "key mindset that differentiates an organization."
Some progressive companies like Johnson & Johnson, Google and Whole Foods recognize the relationship between hard and soft qualities of doing business, Van der Oord says. "To them, culture is so central to the way they operate and the way that they succeed in the marketplace," he says. "We call it cultural values or ethics doing double duty."
These corporate environments drive long-term business success by inspiring employees to reach their full potential. Not only does an ethical culture deter misconduct and fraud, it also encourages employees to be creative, take the right risks and suggest new ideas.
"It's not easy," Van der Oord says. "It takes effort, but it doesn't take systems. It takes strong leaders to set the right example. It takes middle management to model the right behaviors and it includes a clear code of conduct and education to drive that awareness moving forward."