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How an Ethical Culture Can Drive Better Business Performance

By Matt Kelly (Updated )

Most corporate executives aren’t opposed to corporate ethics and compliance efforts per se; they simply question whether those efforts truly drive better business performance. They’re not sure that all our talk about the importance of an ethical culture truly helps the bottom line.

That’s a reasonable question to ask, because corporate executives — both in First Line operating units and in senior management — see themselves as paid to deliver results, not to dwell on corporate conduct policies. What’s often less clear to them is how an ethical culture influences their ability to deliver those results over the long term.

Time and again, however, evidence has shown that a strong ethical culture does improve business performance. That’s an important dynamic for compliance officers to understand, so you can have more productive conversations with employees, operating units, and the board about why compliance matters.

So let’s unpack that concept and give compliance officers the arguments they need to build those better relationships.

Research on Culture of Compliance So Far

The most rigorous research on the ties between a culture of compliance and business performance comes from Kyle Welch, a business professor at George Washington University. In the late 2010s, Welch published several papers demonstrating that companies receiving more internal reports from employees about potential misconduct performed better than their peers across numerous business performance metrics.

For example, companies with higher rates of internal reporting suffered fewer significant lawsuits — and when they were hit with such lawsuits, those companies typically ended up settling for smaller amounts. These companies also had fewer regulatory investigations and even fewer bad headlines in the business press. (Yes, there are databases that track such things.)

Most telling, however, was this: companies with relatively high rates of internal reporting also had a higher return on assets. “ROA” is a financial metric that essentially measures how efficiently a company’s employees can put its assets to use. The higher your ROA, the more profit employees are wringing out of the assets you have.

When you think about it, none of these results should be a surprise. Higher rates of internal reporting don’t mean that your organization is a mess with all sorts of problems; higher rates of reporting mean that employees feel more comfortable bringing issues to management so problems can be solved. 

Viewed through that lens, then of course higher rates of internal reporting would correlate with higher return on assets. A workforce that’s ready to speak up about misconduct is also ready to alert management to other issues, too, such as market competitors or product development. A workforce that’s ready to speak up is engaged in the success of the business. That higher level of trust and engagement implies a higher level of efficiency and performance, which is what ROA measures.

Ethical Culture and Employee Retention

It’s also the case that a strong ethical culture helps to improve employee retention.

At first glance that point seems obvious because everyone can so easily grasp the converse: when you hate your workplace, you’re more likely to leave as soon as you can. But compliance officers should step back and appreciate the original point, slightly reframed. Employees are more likely to stay at an organization where they believe its ethical values are in step with their own. 

For example, last year a survey by workforce development firm Tallo, which focuses on Generation Z workers, found that 72 percent said having a fair and ethical boss is important to them in deciding where to work. Many other surveys and academic studies over the years have confirmed the same: people prefer to work at organizations with the same ethical values and priorities as their own.

This is different from the importance of a speak-up culture, which we explored above. Rather, employees want to see and hear clear ethical commitments from their employers — and see those things in the daily routines they encounter on the job.

Incidentally, this is also why misconduct by senior executives can be so corrosive: because it demonstrates that the organization doesn’t have the same ethical values as the employee. A company that talks all the time about the importance of inclusion and respect, only to tolerate a senior vice president accused of harassment, is committing an act of clear hypocrisy. Good luck convincing employees to follow all your other exhortations for policy, procedure, and conduct once that belief takes root.

What Do Compliance Officers Do Here?

The two arguments above only scratch the surface of how an ethical corporate culture supports the bottom line; we could offer plenty more examples. So if we assume that our premise about the importance of an ethical culture is correct, exactly what are chief compliance officers supposed to do with that insight?

Several things, actually.

First, refine your messaging campaigns to the workforce. Don’t simply frame compliance duties as obligations; craft messages that show how your policies and procedures support the company’s ethical priorities and a strong ethical culture.

Indeed, as the modern enterprise becomes more global, involving more third parties, running more quickly on digital business processes — the “ethical enthusiasm” of employees will become more important to success, because it will become more difficult (and expensive) to implement draconian systems of internal control. Success will depend on employees knowing what “the right thing” to do is, and wanting to do it.

Second, reframe your arguments to executives in the First Line of defense, so you can build alliances that will help you develop that strong culture of compliance you want. Once leaders of business operating units understand that a culture of compliance can actually help the organization — making it more agile and responsive to problems, keeping talent happy and content where they are — those executives will be less likely to dismiss compliance as the infamous “Department of No.”

Third, convince senior management and the board to invest in compliance. Recall what we said earlier about higher levels of internal reporting: it means that your workforce wants to bring problems to management’s attention and get them solved. That’s a fantastic natural resource for senior managers. (Far better than the opposite: a workforce that couldn’t be bothered to alert management that misconduct and errors are happening all over the place.)

To harness that enthusiasm for speaking up, however, and channel it to productive ends, the compliance department needs resources and support. So explain the logic of why an ethical culture does indeed drive better performance, and then ask for the resources to deliver it.

Matt Kelly

Matt Kelly is an independent compliance consultant and the founder of Radical Compliance, which offers consulting and commentary on corporate compliance, audit, governance, and risk management. Radical Compliance also hosts Matt’s personal blog, where he discusses compliance and governance issues, and the Compliance Jobs Report, covering industry moves and news. Kelly was formerly the editor of Compliance Week. from 2006 to 2015. He was recognized as a "Rising Star of Corporate Governance" by the Millstein Center in 2008 and was listed among Ethisphere’s "Most Influential in Business Ethics" in 2011 (no. 91) and 2013 (no. 77). He resides in Boston, Mass.

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