Should ethics and compliance be combined or separated?

The trend to combine ethics and compliance functions into a single function has accelerated in recent years; especially in the USA it has become common practice. The Compliance and Ethics Leadership Council regard it as one function without questioning it (Corporate Executive Board, 2013); the same stance is taken by the Ethics Resource Centre (Ethics Resource Centre, 2010). But is it the right thing to do?

Prof Mias de Klerk
University of Stellenbosch Business School (USB)

The trend to combine ethics and compliance functions into a single function has accelerated in recent years; especially in the USA it has become common practice. The Compliance and Ethics Leadership Council regard it as one function without questioning it (Corporate Executive Board, 2013); the same stance is taken by the Ethics Resource Centre (Ethics Resource Centre, 2010). But is it the right thing to do?

The drive to merge ethics and compliance into one function apparently stems mainly from the following arguments:

  1. The Corporate Executive Board (CEB) reasons that by combining ethics and compliance in a single entity, organisations are better positioned to manage governance challenges, especially that of diversified business units with different legal challenges, complex structures and multi-national regulatory requirements.
  2. The attributes for Chief Compliance Officers and Chief Ethics Officers is viewed to overlap to a large degree.
  3. The directive from the U.S. Federal Sentencing Guidelines (FSG) is probably one of the main reasons for combining ethics and compliance into one function. The implied notion of the FSG is that ethics and compliance is one programme by stating that: “High-level personnel of the organisation shall ensure that the organisation has an effective compliance and ethics program” (United States Sentencing Commission, 2012). Many organisations interpret this directive as that it should be a combined programme, under the leadership of one person (Roberts, 2009; Snell, 2004; Trevino, Weaver, Gibson, & Toffler, 1999). Consequently, compliance programmes have consumed ethics in the USA as the most comprehensive apparatus for controlling corruption and wrongdoing. In contrast, European countries, Australia, New Zealand and also South Africa rely primarily upon a values-based ethics management approach (Roberts, 2009).

Combining compliance and ethics into a singular function may be common practice in at least some parts of the world, but it is not necessarily the right thing to do.

 

Different objectives and approaches creates an uneasy fit between ethics and compliance

Combining ethics and compliance may negatively influence the establishment of an ethical culture. The writers of the King 3 report deliberately did not advise that ethics and compliance should be combined, but rather highlighted that although ethics and compliance should interact, ethics is about action beyond compliance. A combination of the functions is likely to drive a compliance approach also in ethics. This view that ethics and compliance do not fit conceptually was confirmed in the Salz Review (an independent review of Barclays’ business practices after the Libor scandal), stating that “moral intuition disappears by a context which clouds our intuition and encourages compliance behaviour instead of thinking and sound judgment” (Salz Review, 2013, p300). The point is that compliance is rule-based and drives a rule-based culture, whereas ethics is principles-based and drives a value-based culture.

Ethics and compliance represent two distinct disciplines and there are inherent conceptual differences between ethics and compliance that negatively impact on ethics and ethical reasoning if they are combined (Trevino, Weaver, Gibson, & Toffler, 1999). Ethics is a branch of moral philosophy and organisational behaviour, dealing with the beliefs, values and psyche of the organization. Ethics strive to do the right thing, even if not required by legislation. Ethics has an aspirational focus on what should be achieved and what is the right thing to do rather than focusing on what behaviours should be avoided.

In contrast, compliance focus on adherence to legislation, presents a rule following approach and conceptually allows unethical behaviour if it does not breach legislation. Compliance rely upon lawyers to provide “authoritative interpretations”, leaving little room for individual conscience and do not encourage employees to consider the full range of ethical issues. There is growing criticism of the effectiveness of compliance’s so-called low-road approach in maintaining ethical organizations (Roberts, 2009). Some authors view compliance programmes as directed more at public relations than at maintaining high ethical standards (Roberts, 2009). As such it presents a risk to manage and lead ethics from a compliance orientation (Weber & Wasieleski, 2013).

Although there may be some overlap in the attributes of compliance and ethics officers, there is a significant distinction in their respective required skill sets. Most compliance officers are lawyers. Research confirms that legal personnel may not be well suited to developing an ethical approach that is oriented primarily toward shared values and ethical aspirations beyond legislation (Trevino, Weaver, Gibson, & Toffler, 1999). Lawyers are trained to protect the organisation from legal problems and tend to have a legalistic interpretation of problems when broader ethical culture deficits may be causing those problems (Trevino, Weaver, Gibson, & Toffler, 1999). For instance, Enron exploited the rules of compliance to its advantage by legally structuring and moving its debt to SPEs to show facial compliance (Lager, 2010b), but the unethical part of this caught up with them. Lager (2010a) concludes that: “governments demand compliance, ethics demands leadership; a leader who strives for compliance is unlikely to lead an ethical organisation”.

It is difficult to find an individual that can successfully lead both ethics and compliance. It is important to note that the FSG do not expect that one individual should lead the E&C programme (United States Sentencing Commission, 2012). If one individual is ultimately responsible for ethics and compliance management, that individual must have a strong ethics orientation and expertise (Trevino, Weaver, Gibson, & Toffler, 1999), and be familiar with classical moral theories and ethics as a discipline (Ethics Resource Centre, 2010; Joseph, 2001). Equally important is a sincere desire, energy, and willingness to learn about and actively promote ethical conduct, ethical culture and organizational dynamics.

The risk of combining ethics and compliance

Although it is arguably possible to design a programme that combines the different orientations of ethics and compliance, a compliance approach to ethics is likely to scale down the ethical effort, and to slowly erode morality and moral thinking. Compliance provides organizations with a level of immunity from illegal acts, but can significantly lower ethical expectations (Roberts, 2009). Research consistently confirms that compliance dominates the values-based approach of ethics when they are combined (Corporate Executive Board, 2013; Trevino, Weaver, Gibson, & Toffler, 1999; Weber & Fortun, 2005). In such instances, the highest priorities are reviewing legal compliance risks and developing and enforcing policies and procedures, with ethical aspects very low on the priority list.

A values-based ethical approach is significantly more effective to lower unethical and even illegal behaviour than a compliance-based approach (Hasnas, 2008; Lager, 2010b; Nelson, 2012). The reason being that ethics, which is rooted in self-regulation, is more likely to motivate employees to accept personal accountability for ethical and legal behaviour (Hasnas, 2008; Lager, 2010a; Trevino, Weaver, Gibson, & Toffler, 1999). When combining ethics and compliance, people tend to define ethics in terms of legal compliance rather than ethical aspirations, and implicitly endorse a "code of moral mediocrity" (Trevino, Weaver, Gibson, & Toffler, 1999). A preoccupation with compliance provides employees with a justification for not considering the broader moral implications of their actions and the actions of their organisations (Roberts, 2009).

Reliance on compliance makes it much more difficult for employees and officials to hold organizations accountable for actions that fall outside the scope of legislation (Roberts, 2009). A strong compliance orientation can dilute ethics if is not supported by structures that strongly promote an ethical culture (Lager, 2010b; Weber & Wasieleski, 2013). Without focused attention to promote an ethical culture, “compliance usually trumps ethics” (Kavanagh, 2008); compliance easily “squeezes out ethics as a matter of available organizational attention span” (Trevino, Weaver, Gibson, & Toffler, 1999).

Conclusion

Effective ethics and compliance programs are not generically similar (Joseph, 2001). One should thus refrain from structuring your programme in a certain way just because others do so. Roberts (2009) concludes that “organizations have little reason to integrate compliance- and integrity-based ethics approaches; they rather have an obligation to place equal emphasis on compliance- and integrity-based approaches and to empower their employees to challenge them to deal with ethics issues”. Little evidence exists that organizations place equal emphasis on improving both compliance and ethics (Roberts, 2009).

Given all these factors I fundamentally concur with Snell (2004) that “it might be best to keep the ethics and compliance programmes separate.” Best practice is that these two programmes should be unique, with members of a compliance office being active participants of ethics programmes and vice versa.

Reference list

Corporate Executive Board. (2013). Structure and Staff the Compliance and Ethics Program. Retrieved 2013, from Compliance and Ethics Leadeship Council: https://www.celc.executiveboard.com/Members/Topics/Abstract.aspx?cid=100249545#1.

Hasnas, J. (2008). Managing the Risks of Legal Compliance: Conflicting Demands of Law and Ethics. Loyola University Chicago Law Journal, 39(3), 507-524.

Joseph, J. (2001). Integrating Ethics and Compliance Programs: Next steps for successful implementation and change. Retrieved from Ethics Resource Centre: http://www.ethics.org/files/u5/Integrating_Ethics___Compliance_Programs.pdf

Kavanagh, S. (2008). Overcoming the Tension that Exists Between Ethics and Compliance. Federal Ethics Report, 15(3), 4-6.

Lager, J. M. (2010a). Governments demand compliance, ethics demands leadership. Journal of Public Affairs, 10(3), 216-224.

Lager, J. M. (2010b). Overcoming Cultures of Compliance to Reduce Corruption and Achieve Ethics in Government. McGeorge Law Review, 41(1), 63-83.

Nelson, W. A. (2012). Comparing Ethics and Compliance Programs. Healthcare Executive, 27(4), 46-49.

Roberts, R. (2009). The Rise of Compliance-Based Ethics Management. Public Integrity, 11(3), 261-277.

Salz Review (2013). Salz review: An independent review of the Barclays' business practices. http://online.wsj.com/public/resources/documents/SalzReview04032013.pdf.

Snell, R. J. (2004). Should We Call It an Ethics Program or a Compliance Program? Journal of Health Care Compliance, 6(2), 1-2.

Society of Corporate Compliance and Ethics. (2013). Discussions. Retrieved from LinkedIn: http://www.linkedin.com/groupItem?view=&gid=61769&type=member&item=247630286&commentID=148087787&report%2Esuccess=8ULbKyXO6NDvmoK7o030UNOYGZKrvdhBhypZ_w8EpQrrQI-BBjkmxwkEOwBjLE28YyDIxcyEO7_TA_giuRN.

Trevino, L. K., Weaver, G. R., Gibson, D. G., & Toffler, B. L. (1999). Managing Ethics and Legal Compliance: What works and what hurts? California Management Review, 41(2), 131-151.

United States Sentencing Commission. (2012). Chapter 8 - Sentencing of Organizations. Retrieved 2013, from 2012 USSC Guidelines Manual: http://www.ussc.gov/Guidelines/2012_Guidelines/index.cfm.

Weber, J., & Fortun, D. (2005). Ethics and Compliance Officer Profile: Survey, Comparison, and Recommendations. Business & Society Review, 110(2), 97-115.

Weber, J., & Wasieleski, D. M. (2013). Corporate ethics and compliance programs: A report, analysis and critique. Journal of Business Ethics, 112(4), 609-626.