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Ethics has a strong business case, but measurement is less certain

Cross-Industry Compliance Leadership Summit explores corporate behavior

Is a “culture of ethics” and a “culture of compliance” the same thing? How does an organization build an ethical culture, and how can it measure the results?

January 19, 2017 | Cross Industry

At the recent Cross-Industry Compliance Leadership Summit hosted by the Deloitte Center for Regulatory Strategy Americas, New York University Professor Jonathan Haidt suggested there is a method corporate leaders can use to tackle these questions—and he compared notes with compliance executives who tackle them in real life every day.

Haidt is a social psychologist and author of the New York Times bestseller “The Righteous Mind.” His view is not only that there is a business case for ethics beyond “ethics for ethics’ sake,” but those large organizations can design ethical systems by working from the individual level on up. And he says the practice of measuring ethical culture is evolving.

If ethics is the innate sense that helps people identify and choose the right thing to do, and compliance is a measure of how closely an organization follows the rules that codify the right thing to do, part of Haidt’s message addressed the relationship between the two. The simplest business case for ethical behavior is that compliance helps organizations avoid penalties. But Haidt said the real answer runs deeper. Illegal conduct carries a cost in reputation, which can be higher in the long run than a fine. Studies indicate that with a solid reputation, a seller commands higher prices, an employer lands better talent, and a borrower pays less for capital. In contrast, he said, companies that are caught in ethical lapses can see their financial performance suffer for years to come.

Even more significant, he said, is the idea that ethical companies are actually more efficient. “It’s more fun to come into work, and you work harder,” he explained. In surveys that asked people about their most rewarding memories of time at work, Haidt said, “the question always resolves to times when ‘we were all in it together.’”

Haidt’s audience of corporate compliance chiefs accepted what he said about the business case for ethics, but some also said ethics doesn’t need a bottom-line justification.

“We don’t tell our employees that they have to work safely because we want to avoid fines and penalties,” one participant said. “We tell them to work safely because we want to send them home safe to their homes and their families. And we mean it. Is there a time when that wasn’t the case?”

Haidt pointed out that the financial advantage to ethical behavior also appears to operate in other countries, but only in environments that have “high labor market flexibility.” In other words, if a company can hire and fire people more easily, employees can reap rewards for ethical behavior—or pay a price for its opposite. In places where regulations tie employers’ hands, the effect is dampened.

In large organizations, Haidt said the basic unit of ethics is the individual, who responds to “nudges” toward honest behavior. For example, tests have found people are less likely to cheat on a test if they first sign a promise that they won’t. At the next level, small, interpersonal groups begin to code ethical behaviors into a “tribal” structure. Eventually, at the macro level, these codes emerge as an ecosystem of laws and mores.

One challenge to this view is that the risks and rewards of the ethical business case may apply to the company more than they apply to the individual. “For people who take short-term gains, their mischief doesn’t catch up with them,” one summit participant said. “They take their rewards and they leave.” Or, as another noted, “The problem with moral hazard is that the senior people seem to have a second life, and the junior people don’t.”

Haidt said that’s the reason it’s so important for organizational leaders to model ethical behavior themselves, hire for ethics, reward and promote based on ethical behavior, and encourage and protect internal reporting. One outcome of this process is an environment in which the company and its employees regard a whistleblower as an asset, not a traitor.

Measuring an ethical culture remains a frontier with no easy answers. “Everyone’s trying to measure culture, but people are grasping at straws,” Haidt said, noting that one company measured the ‘happy-to-grumpy’ ratio of words used in emails. The question, he suggested, is whether hard metrics of any kind can drive people to change behavior.

“This is the path we’re trying to get people off of,” he said. “That if we just get the incentives right, people will behave. It’s a dead end. Pay for performance is a bad idea when it’s specific.”

“You have to get out of the mindset of a compliance culture,” he concluded. “Of course you need compliance—but if you build an ethical culture, you’ll get compliance. What you put on your web page doesn’t matter. Simply saying ‘these are our values’ changes nothing. Talk is cheap.”

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.

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