One of the most important lessons business leaders should learn from the recent financial crisis is that the best time to fix a small problem is before it explodes and becomes a crisis. The philosophy of “fix it when it breaks” does not work when the breakage can destroy major corporations, shut down national markets, cost the Department of the Treasury billions of dollars, and cause substantial disruptions around the world.
From a compliance standpoint, the best way to fix something before it breaks is to create a more ethical culture within a business—especially when one considers the growing body of knowledge documenting that highly ethical organizations are also high performing.
Companies that build a solid cadre of long-term employees who are committed to the firm, who believe in its mission and business model, who work together with high levels of trust and partnership, and who willingly police themselves are formidable competitors. Some private investment funds even search out and invest in such companies because they see an ethical culture as a meaningful indication of long-term success.
For a business to create a more ethical culture, however, its compliance professionals must master the tools associated with “soft” and “hard” compliance.
Soft Compliance
Soft compliance represents organizational efforts to induce people to willingly participate in the firm’s ethical culture. At a certain level compliance professionals do this when they help write the company’s code of ethics and then manage the training programs that support it.
This is good work, but it’s really just a start.
In recent years a whole new body of learning has arisen, called “behavioral ethics.” This is a rigorous academic field, drawing on social scientific methodologies, that examines why some people act ethically while others do not. It’s important to distinguish it from classical ethics, which establishes and then reinforces the professional standards by which a company’s employees should behave. Behavioral ethics focuses on why some employees do, while others do not, adhere to those standards.
This is a new and emerging field. Nonetheless, the behavioral ethicists have already taught a number of important lessons. For example, framing an issue as an ethical question generally leads to more ethical responses. Studies have shown that a zero tolerance approach to cheating is critical, because most employees start small and only slowly grow into major cheaters. Research also shows that predictable penalties should be avoided, because they encourage employees to view the issue as a cost-benefit calculation—and that can lead to more rather than fewer violations.
The ultimate promise of behavioral ethics is that it provides pragmatic tools that have been demonstrated to work. For example, if certain kinds of penalties lead to more violations, stop imposing them. Behavioral ethics, therefore, represents a tremendous opportunity. In the near term, soft compliance based on behavioral ethics will play an increasingly important role and will experience the most growth and development as ethics and compliance converge.
Admittedly though, behavioral ethics sometimes can seem, well, soft—especially to seasoned professionals who have spent years in a regulatory environment in which names were taken and enforcement referrals were made. As a result, compliance still has a lot to learn here. But with the promise of pragmatic tools that really work, soft compliance is the future.
