Compliance and Ethics – Failure or Success?


We know that public companies spend millions of dollars on the design and implementation of their compliance and ethics programs.

Even after all that spending, the news never ends about illegal and unethical conduct by too many businesses and the attendant lawsuits, state attorney general and federal government investigations, congressional hearings, monetary fines, and in very rare cases, criminal penalties for the individuals involved.

In the wake of a scandal or prosecution, companies often make the mistake of hiring an army of compliance officers, auditors and lawyers to act as internal police checking up on what the marketing or procurement departments are doing. This army will catch some bad actors, perhaps prevent a few illegal actions but will likely miss many others. Just like real police forces which cannot prevent all crimes or apprehend all criminals. The policing approach is not the way to go!

Furthermore, many private companies and small businesses do not have the resources to even create and maintain an internal police force.

Compliance and ethics are not add-ons to business operations to be added to a checklist – they have to become embedded in the DNA of the business.

What about companies which are compliant and ethical in some areas of their business but not in others? Their reputation and sales will still take a hit.

Compliance First

Compliance is more basic than ethics. It means adhering to the laws governing the business and its operations. Many laws are not difficult for business people to understand. Employees do not need a law degree to understand that labeling horsemeat as beef or turning back vehicle odometers is illegal.

Of course, there are other areas where the law is complex or nuanced like securities and antitrust law. This is where businesses need to provide legal training for their employees tailored to their role in the organization. Relevant training using adult learning principles enables employees to know when to consult with the legal department or outside legal counsel before acting.

What is the Critical Difference between Compliant and Non-Compliant Companies?

Sometimes it is a lack of training and resources, especially in the case of small businesses. The owners and employees simply do not know they are violating the laws.

The cause can be more nefarious – the leaders of the enterprise do not care about respecting the rule of law. They decide it is more profitable to proceed with an illegal transaction or business strategy because (a) they may never get caught and/or (b) the revenue will far outweigh the potential fines. Penalties for breaking the law are viewed as the “cost of doing business.” Very few individuals in these situations are ever held personally accountable.

Ethics is Harder

Ethics is harder because there is no universally accepted definition or source for ethics in general or business ethics in particular. This is particularly true in the global context. American companies widely prohibit their employees from accepting gifts from suppliers. In the Asian world, the giving and accepting gifts in business is a venerable tradition.
Furthermore, in the U.S. business world, ethics is often entangled with corporate social responsibility and sustainability programs. This entanglement can confuse people because the three concepts are not the same.

The Nobel Prize winning economist Milton Friedman was a famous critic of the concept of corporate social responsibility – arguing that corporations exist only to return profits for the investors not to improve society. I believe his vision was too narrow – many studies show that corporations which practice social responsibility attract and retain more qualified and enthusiastic employees.

A major challenge for companies wishing to integrate a successful ethics culture in their business is the challenge of defining the specific business ethics the company wants to adhere to. Some of these ethics may arise from legal prohibitions like bans on insider trading in the stock market or the Foreign Corrupt Practices Act’s prohibition on bribing foreign government officials to assist in obtaining or retaining business.

But many other ethical standards are not legally based and derive from sometimes vague concepts like integrity. Clearly, always telling the truth is acting with integrity. But what about common business practices like hard ball negotiations with customers or suppliers with far less bargaining power?

Then there are business ethics buzz words like “tone at the top” and “values.” Some cynical commentators even complain that the word “ethics” itself has become a buzzword and that “business ethics” is an oxymoron. There are professional societies and conferences dedicated to promoting ethics and compliance in Corporate America. This is very good but how much of it really works when business managers are forced to choose between protecting their job or increasing their compensation and acting ethically?

The Right Foundation

In my view, the essential question for every business is this:
Do you put profits (or personal compensation) ahead of your reputation for honesty and fair dealing?
If the answer is yes, then your ethics program is essentially a sham. At a critical juncture you will fail.
If your answer is no, then you have established the right foundation.

Define Your Ethical Standards

Now the challenge is defining your specific ethical standards and communicating them to everyone – not just to your employees but your directors, executives, customers, suppliers and other stakeholders. Some of these standards will apply to every company – for example, honesty in all dealings but others may be industry specific, like ethical standards for overseas factories. A description of specific standards is outside the scope of this article.

The selected standards need to be incorporated into job descriptions and relevant contracts. These standards are for everyone to understand, believe in and follow. This approach is far more effective than merely deploying the army of internal police referred to above.

It is absolutely critical that there not be one set of ethical standards for middle management and line workers and another one for the C-Suite.

Similarly, enforcement of the ethical standards needs to be uniform and consistent across the organization. No free passes for the top saleswoman or the highest billing attorney.

Best Practices

  • Create an Ethics Handbook and distribute a copy to every employee on their first day of work (and to other stakeholders at the onset of the relationship) – update it as needed.
  • Make it clear that ethics and compliance are part of everyone’s job description.
  • Establish an ethics function (either inside your company or using an outside resource) where employees can seek guidance and report concerns without fear of retaliation. Make sure the ethics function is not compromised by only reporting to an executive manager and not having a line of communication to an Ethics Committee of the Board of Directors. Empower the function with the authority to enforce the ethical standards against all violators no matter their position in the organization.
  • Conduct regular ethics training using real life scenarios (sanitized as appropriate).
  • Communicate by words and deeds that ethical violations are never justified-never!
  • Make sure that compensation incentives are not designed at cross-purposes with your ethical standards (e.g., don’t automatically reduce a retail buyer’s
  • compensation when his total sales are reduced because of a product recall outside of his control).
  • Recognize and reward ethical behavior and make it part of every employee’s annual performance review.


Corporate scandals hit the media when internal whistleblowers contact reporters after their concerns about wrongful conduct were ignored or suppressed at their employers.

The evidence from whistleblower cases reveals that many organizations create an internal "culture of fear" where the individual seeking to follow the organization’s purported ethical standards and do the right thing is ignored and/or retaliated against if this will increase costs or decrease sales.

In these defective and amoral cultures, internal people who act with ethical courage are not celebrated as they should be – rather they are rejected and falsely accused of not being a team player. Businesses cannot succeed without well functioning teams. But the coveted "team player" label should never be an excuse for individuals to hide behind when actively making unethical decisions or pretending not to know about them.

The commitment by the leadership of the company to put ethics first has to be real, no matter the frequent temptation to do otherwise. It has to be for the long term. Ethics has to always trump the fluctuations of the stock price, the balance sheet and compensation plans.

Without this commitment, compliance and ethics programs will be an ineffective waste of resources.

Successful ethical business cultures create and sustain a spirit of pride – not pride in the sinful sense but pride in the positive sense. Employees are proud to work for a company that is committed to running its business in an ethical manner. This sense of pride increases their personal motivation and drive and the company becomes more successful as a result. Business literature is full of research which documents this result.

Date: December 1, 2014. Attorney Advertising. Copyright ©2014 Susie L. Hoeller. All Rights Reserved. ( or