Ethics is Now “Ethical Compliance” – A New Day in Business

Article by Herb Rubenstein

Introduction

The term “ethics” always seemed to be a “nice to have,” a “good thing.” Those days are over thanks to:

• Volkswagen’s massive cheating scandal

• Walmart’s bribes in Mexico

• Whole Foods’ rampant cheating of customers by falsely measuring the weight of their processed foods

• FIFA officials taking bribes to sway their decisions on the location of sports contests

• New Jersey officials closing down lanes of a road in Ft. Lee to punish voters

• United Airlines’ quick firing of its CEO for ethical violations in dealing with the Port Authority of New Jersey and New York

• Energy companies in Colorado bribing government officials

• And on and on…

. In the old days, ethics was expected, but rarely enforced. Over time, businesses and government agencies in the US, and we suspect even more overseas, began to sense an opportunity. VW realized that emissions testing was done only one way and figured out a way to cheat it, only to be caught by a professor a several students at the University of West Virginia who decided to do the radical thing, test their while they were actually being driven on the roads. Who would have ever thought of that radical idea? Thank you West Virginia!

Today, the costs of ethical violations are staggering in terms of real dollars and loss of stock price. Check out Walmart’s and Whole Foods’ stock prices for 2015. Both are disasters, and I predict VW will soon beat them both as one of the worst performing stocks from 2015 – 2020. Ethical lapses now, when identified, take years to work out, stay in the news, turn away customers and investors. And, in a most recent twist, the poor ethical practices of one company no longer actually lowers the ethics of their competitors they way they used to just a few years ago.

Today, ethical violations are different because we are entering the era of new ethical standards and with these new ethical standards comes a new animal – ethical compliance. While ExxonMobil was conducting scientific research that showed that humans were causing climate change, they were funding organizations that sought to cast doubt on that very science. Was this an ethical violation? Years ago the answer would have been no, but today the State of New York has launched a massive ethics violation investigation on exactly this point.

Ethical compliance is a zero tolerance standard that says that here are the ethical standards by which an organization operates, or should operate, and there are no deviations to be tolerated from those standards. When companies do not enforce, or even have ethical standards, outsiders who gain information about the ethical violations of that company will be very, very aggressive in telling the world about their ethical transgressions. Competitors will have a feeding frenzy feeding the fire by sending “news” to the media about their competitor’s ethical violations. This is also a new development where the mentality had been for centuries, “go along, get along.” No more. And, disgruntled employees will instantly become whistleblowers divulging company “secrets” because they were not listened to when they complained about these ethical violations all along the way. This is happening in a big way at Volkswagen, as one would expect.

Today, a rail car explosion with crude oil is a viewed by many as a violation of an ethical standard. And as we dig into some of these derailments and explosions, research has shown that often energy companies and their outsourced transportation providers underrepresented the flammability of the compounds they were shipping. In China, an explosion at a fertilizer plant becomes an ethical violation because houses were built too close to the plant in violation of land use regulations. Even BP’s Deepwater Horizon disaster became an ethical violation because in addition to the technological and scientific disaste the company destroyed records and egregiously underestimated the amount of oil that polluted the Gulf of Mexico.

Times have changed since all of those disasters and noncompliance with standard ethical rules and protocols. Today, we have ten steps every company should employ to insure better ethical compliance.

Ten Steps

There are ten steps that a company, and with some variation, a nonprofit, educational organization or government agency, can employ to becoming more ethically compliant. Ethical compliance will become a source of great competitive advantage. Governments, hungry for money all over the world, will continue to increase the fines dramatically for unethical and willful violations of laws and regulations. One of my clients recently told me the toughest thing their energy company has to deal with in 2014 and 2015 is that the government is now enforcing old regulations that they never enforced before. What a surprise! You would think a company would be prepared for this, and would have actually have predicted this as early as 2012.

The list below of the ten steps to improve ethical compliance and to reap the rewards from doing so are divided into four categories:

• Governance Structure and Support

• Policies and Guidelines

• Information Flow

• Focus on Results

The Steps

Governance Structure and Support

1. Institutionalize ethical compliance in the organization by:

a. Create or reinforce the position of Chief Ethics Officer, with clear duties, power, budget, direct reports, responsibilities, significant compensation package, clear reporting systems

b. Insure that ethics is on the agenda of most meetings

c. Expand the “ethical compliance” role of the general counsel of your organization.

d. Increase the resources devoted to investigating and policing failures of ethical compliance

2. Get the CEO and all “C” suite officers on board and infuse their speeches, articles, investor calls, and meeting agendas with ethical compliance issues listed early in the agenda. This will help align all departments to increase their ethical compliance score.

Policies and Guidelines

3. Set ethical standards, policies and guidelines for your organization – For example, have a code of conduct, provide ethical compliance training, and revise the code of conduct periodically to expand its reach.

4. Set ethical standards for your sector or industry. Write about, speak about, publish and attend conferences where your organization take a thought and practice leadership role in setting high ethical compliance standards. This may require “outing” your competitors, or supply chain members or others in your industry who refuse to be ethically compliant. Organizations should seek to improve the rate of ethical compliance of their entire ecosystem.

Information Flow

5. Develop an array (current listing) of ethical threats and challenges that your organization is facing and is expected to face. We can predict where our ethical challenges will come from and by being able to predict them, we can successfully deal with them proactively. This listing might be supported by a periodic newsletter distributed internally and to external stakeholders regarding ethical issues surrounding the organization and its sector. This newsletter and the “array” would receive information from the “field” and not just be a top down document.

6. Develop “ethics hotline” where people can report ethical concerns anonymously. There is nothing new here since many organizations have been doing this for years, but most do not have such a tool for promoting ethical compliance. When the information (data) come in on ethical challenges, this information needs to be analyzed, categorized, and this will lead organizations to understand the true drivers of failures to be ethically compliant. This ethics hotline is a key communication and infrastructure platform to encourage people to share their ethical concerns and to allow management to get on top of an issue before it mushrooms into a “threat to the entire organization” type of cancer that ethical violations often become. See the photograph below that shows a company doing exactly what is recommended here.

Focus on Results

7. Develop measures of the level of ethical compliance within the organization. Conduct surveys and other data collection and analysis; report results of the surveys and show trends in ethical compliance in the organization over time; Conduct rigorous analysis of the data.

8. Develop rewards for very ethical behavior, publicize it, and and provide negative reinforcements (penalties) personally to individuals and groups for their failure to be ethically compliant. There must be a zero tolerance policy towards failures to be ethically compliant. There must be a solid adjudication system to make quick and accurate decisions to determine if a person has been ethically compliant or not. And, there must be a clear set of negative reinforcements and penalties for all who are not ethically compliant in an organization.

9. Identify the costs of failing to be ethically compliant in your organization, sector, in your supply chain, etc. Failing to be ethically compliant can result in many different costs including:

a. Reduction in employee engagement

b. Increase in turnover

c. Fines

d. Lost customers

e. Reduced reputation

f. Lower stock price

g. Tougher credit terms (more expensive money)

h. Debarment and prevention from bidding on work and receiving contracts

i. Investigative and legal costs

j. Bigger public relations challenges and therefore more cost

k. Honest, transparent communications

10. Monetize the results of improving your organization’s improvements in ethical compliance. Once you create a “cut above” mentality in the ethical compliance area, your organization can become “bullet proof” in other countries that regularly demand bribes or facilitation payments. You can increase the value of your brand. You can improve your ability to participate in mergers and acquisitions at a more favorable price. You can promote a “growth” mentality, gain excellent “press” in social media (via earned media), and improve your bottom line by reducing the costs of ethical noncompliance.

Conclusion

These ten steps will help you assist your clients become ethically compliant in the future. This will be the new minimum standard for doing business in the US and, as we globalize, the world.