The Alchemy of Compliance and Ethics?

 

 

Last year at the ECOA annual meeting, Lori Tansey Martens and Megan Barry¹ posed a most provocative question to our members: "Has compliance killed ethics?" Following the extraordinary scandals of the past several years, legislators, regulators and prosecutors have actively sought to punish wrong-doers while demanding new control requirements for investor protection. Some have argued that these burdens of compliance have rendered the United States less competitive in the global markets. And the impact on ethics is debatable.

 

As 2006 ended, there was a flurry of activity in the "Beltway" addressing these concerns:

 

• On November 30, the Committee on Capital Market Regulation, an ad hoc group formed with the endorsement of the U.S. Treasury Department, recommended a relaxation of the regulatory burdens promulgated on business over the past few years.
  
  
• Shortly thereafter, on December 12, the SEC announced it will consider focusing on "risk-based" and "material impact" items regarding SOX 404, while providing some relief for smaller companies, IPO's and foreign corporations listed on U.S. exchanges.
  
  
• The next day the PCAOB followed suit when it relaxed certain auditor requirements regarding SOX 404.
  
  
• Also on December 12, U.S. Deputy Attorney General McNulty issued the "McNulty Memo," an update to the Thompson Memo of 2003, requiring a strict process of approval at DOJ regarding waiver of attorney-client privilege.
  
  
• Finally, on Christmas Eve, the SEC announced a relaxation in executive compensation disclosures scheduled to go into effect January 1, 2007.

 

Clearly, this was a mad rush to the door by the Republicans before the Democrats took control of Congress at the beginning of the year.

 

Following all this, on March 13, Treasury Secretary Paulson convened a one-day conference at Georgetown University that included members of the Committee on Capital Market Regulation as well as several leading business executives (among them Warren Buffet). Secretary Paulson posed the question: "How do we balance shareholder protection with the need for the U.S. to remain competitive?" Herein, he proposed that we consider moving from a "rules-based" to a "principles-based" environment for accounting, governance and compliance. A glimmer of promise for ethics.

 

Just as accounting has moved from principles-based to rules-based – 13 FASBs to 133 in the past 30 years with everyone looking for ways to interpret them to their advantage, so has regulatory compliance, it seems. There are so many rules it's easy to trip over them – and many do, as we read regularly in the press. Recognizing the unintended consequences of this proliferation of rules alone, in November 2004, Congress approved U.S. Sentencing Commission's revisions to the Organizational Sentencing Guidelines which called for not only law compliance but for ethics standards and a culture that embraces them. Clearly, this was recognition that mere rules are insufficient and inadequate to determine desired human behavior within organizational systems. Reinforcing this notion, the 2006 National Business Ethics Survey by the Ethics Resource Center further indicates that some compliance programs begin to lose their effectiveness in the second year of implementation as they morph into a "check-the-box" system.

 

While an effective compliance program is a necessary element for organizations in meeting their responsibilities to society, the overwhelming contributor to organizational success, however, is corporate culture. Jim Collins and Jerry Porras, in their ground-breaking book, Built To Last, found that enduring great company's achieved long-term success built on a foundation of ethics, values and culture. Here then, the US Sentencing Commission and best business practice are in complete alignment. What can be done to transform culture to embrace ethics is what many of the ECOA member companies have recently done: complete comprehensive culture assessments, identify the gaps, the disconnects, and the opportunities at the top, the middle and the bottom, and get to work on aligning the culture with ethics and values throughout the organization. Culture is what drives behavior in organizations, and compliance is the backbone that supports it. It's what's recognized and rewarded. Organizational cultures, we find, are historical, emotional, symbolic and dynamic. Culture is also often contradictory, paradoxical and vague. Understanding and reinforcing the positive elements of corporate culture–especially tone at the top-is the starting point for developing our organizations as a great place to work, buy and invest. And it is ultimately the best way to strengthen US companies global competitiveness-creating the space for the healthy coexistence of ethics and compliance.

 

¹ Lori Tansey Martens is president of the International Business Ethics Institute and Megan Barry is the ethics and compliance officer for Premier, Inc.

 

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