Ethical ecosystem

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Recent corporate scandals have extinguished any doubt about the need for better behavior among business leaders and employees. Embracing ethics and instilling a culture that expects ethical behavior from the top of the organization down are anything but optional business pursuits in 2006. Today, they are baseline requirements of all publicly traded companies. Indeed, a corporate culture that is not deeply committed to ethical comportment is a whistle blow away from peril. Just ask anyone who worked at Enron in its waning days. Sarbanes-Oxley, the legislative response to those scandals, imposed more controls on businesses to ensure greater compliance, accountability, transparency and fair dealing.

The Act was followed by the November 2004 update of U.S. Organizational Sentencing Guidelines. Among other things, the revised guidelines take a more holistic approach to corporate governance, broadening the focus from compliance to an organization’s values and culture.

A new governance mindset

To be sure, when it comes to governance and compliance, it’s not enough to have a powerfully worded code of conduct. Today, everyone in a company—in the boardroom, the back rooms, the front lines and everywhere else—is expected to internalize the ethics code and live by its principles. Further, senior executives, middle managers and supervisors have to ensure, actively and consistently, that a climate of right behavior flourishes in every corner of their organization.

Toward that end, the chief ethics and compliance officer for a multinational chemical company appeals to employees’ moral and pragmatic sides. “One thing I’ve been saying is that we should act ethically, just because it is the right thing to do,” the executive says. “But, by the way, ethics and compliance do affect our bottom line. Doing the right thing is a real competitive advantage.” The executive adds that vendors, customers, employees and other stakeholders want to be associated with a company that will remain a going concern. They want to be affiliated with a respected institution.

Keeping one’s house in order isn’t enough

Although the need for a strong culture of ethics is obvious, the way to develop and sustain such a culture is less clear. Businesses are complex entities, with a myriad of competing influences operating within and outside their bounds. How do you get everyone in a company to embrace good values? How do you help them stay the course in the face of vendors, partners, customers and competitors who may not share your company’s zeal to act ethically? Even a company that’s punctilious about meeting high standards has to deal with outside influences that often run counter to those standards. In short, the most ethical of corporations can run into serious trouble if they ignore the culture of those they interact with.

As supply chains expand, and as outsourcing and offshoring increase, it’s harder to know where the risks and vulnerabilities are. Put another way, a company is only as strong as its weakest link, whether that link is an employee, an affiliate, a vendor, a joint-venture partner, a customer, or a competitor … anywhere in the world.

Interestingly, the new Sentencing Guidelines hold larger organizations responsible for encouraging smaller organizations in the supply chain “to implement effective compliance and ethics programs.” It no longer is sufficient to look after our own ethical environment. Today, we have to be aware of, and sometimes care for, the entire ethical “ecosystem.” For good or ill, corporate culture has a broad reach. It affects the way employees interact with vendors, affiliates and others outside the organization. And it can affect the ways those outside parties behave on their own.

In the words of former Baltimore Orioles manager Earl Weaver, “Everything affects everything.”

A closer look at ecosystems

The environment in which business operates can be compared to a rainforest. The tallest trees form a canopy, providing shade and shelter and affecting the behavior of all animal and plant life below. In such a system, smaller plants thrive. They rely on the taller trees for support and sustenance. And they provide food for animals and insects. The insects, in turn, distribute seeds to keep the forest growing and diverse. And on the forest’s floor, bacteria convert fallen leaves and branches into nutrients that, in turn, keep the tallest trees alive. It’s a fragile balance. It’s a dynamic system. And it works. Yet if one were to tamper with any part of it—even the tiniest bacterium—the entire system would be affected.

The principle applies to ethical ecosystems, as well. Just as a rogue or dysfunctional element can damage a company, so can a rogue or dysfunctional company hurt an entire industry. Yet when ethically run companies—the tall trees of the rainforest—exert their influence, they help other members of the ecosystem fortify their own ethical core. In concert, they can squeeze out the rogues … and maintain the industry’s health. A defense industry official uses a different analogy to make the same point. He talks about tossing a pebble into a pond and seeing the ripples extend well beyond the point of impact. “The actions of individual employees create similar ripple effects,” he says. “If the employees individually take responsibility— if they believe they’re accountable, if they’re held accountable, if their actions are ethical—they can positively affect their industry, the community, and the culture as a whole.”

Forging the ethical core

The best way to ensure a robust ethical ecosystem is to promote a vibrant ethical culture in one’s own organization. Simply put, good values begin at home. Smart companies make a serious effort to hire people with a strong moral compass. What’s more, managers at all levels encourage open communication among employees, especially about company values, expectations and behaviors. Ethical behavior and responsible conduct are rewarded.

All of these actions promote mutual respect, trust and the desire to do the right thing. They form the bedrock on which ethical ecosystems grow. To flourish, though, a tone of probity has to be set at the top of the organization … and core values constantly reinforced by every manager and supervisor. According to a business ethics survey conducted by the Society for Human Resource Management and the Ethics Resource Center, the number-one source of pressure on corporate employees to compromise the company’s standards isn’t naked self-interest. It is the boss himself or herself.

That is why one company holds an annual ethics day for its corporate leadership. It’s not that the company views ethics as a once-a-year concern. Rather, a full day dedicated to the subject gives company leaders the chance to focus intently on the importance of compliance and ethics—and the importance that the corporation be seen as a leader in both. In turn, the company’s compliance committee meets monthly, when each company unit reports on its own ethical performance.

In addition, the company distributes periodic “ethics bulletins” to employees. The bulletins contain actual ethics violations within the company, highlighting the consequences of offenders’ actions. Was the employee fired? Demoted? And what lessons can be extracted from the causes and consequences of the violations? “These bulletins have been extremely popular with employees,” says the firm’s head of ethics and compliance, noting that the names of those involved are removed for legal reasons. “You can talk about Worldcom or Arthur Andersen or Enron or Martha Stewart, and some employees think, ‘That would never happen to us, because we’re good.’ Yet these bulletins are about our employees. This is what happened to them.”

Engaging the supply chain

Recognizing that the ethical ecosystem extends far beyond a corporation’s walls, the company encourages its employees to share ethics bulletins with vendors and customers. More important it incorporates its business values into interactions and agreements with outside entities, including contracts. Standard clauses in all contracts with suppliers, for instance, touch on the company’s child labor policy, its policies regarding export control and anti-boycott laws, and its insistence on compliance with all applicable laws. “The message we get across to all our employees, as well as to our vendors and customers, is that we will do everything to assist you and work with you. But we won’t veer from our ethical standards,” says the ethics and compliance head. This executive’s employer takes the matter a step further. Last year, the company held its first-ever conference with its suppliers and vendors; some 500 of them participated. The host company used the opportunity to make clear its policies on ethics and compliance, telling attendees, “We don’t care how low-priced you are. If you’re not going to agree to our ethics and compliance program and to what we believe in, your prices don’t matter.” This multinational business is one of a growing number of companies that see the wisdom of articulating—and even exporting—their standards of right behavior to parties with whom they interact.

Rallying industry players

Clearly communicating one’s standards to everyone in the supply chain goes a long way to ensure a well-functioning, highly ethical ecosystem.

Another way to strengthen the ethical ecosystem is through trade associations. Working together, the leaders in an industry—or across related industries— can create best practices for operating ethically, along with industry standards for organizational behavior. Challenged in 1986 by the Packard Commission to develop a stronger ethical culture, 32 major U.S. defense contractors formed the Defense Industry Initiative (DII), a consortium born of the concept that “commerce cannot proceed unless you trust the other guy.” A volunteer trade association, DII now includes some five dozen signatories, all of whom meet six basic requirements, most of them mirroring a standard compliance program. For example, members must have a code of conduct. And they must provide an internal mechanism for employees to report compliance-related concerns—anonymously, if need be. DII goes beyond the average internal compliance policy, actively embracing the notion of an ethical ecosystem by requiring members to share best practices with one another. An executive of a member company calls it an “absolute obligation” to make any and all successful compliance practices available to fellow signatories, including direct competitors. They do this formally, in an annual Best Practices Forum, as well as on an ad-hoc basis.

“I don’t know of a single signatory whom I can’t call and say, ‘What are you doing in this area?’ and not get a response,” says one executive. “It’s almost an obligation to evangelize ethics and compliance. We talk about interdependence. The idea is to recognize that as an industry, we’re dependent on one another’s conduct.”

A good ecosystem = good business

Creating an ethical ecosystem is crucial in today’s interconnected, far-flung business arena. With so many outside factors at play, it’s impossible for a company to maintain a healthy ethical culture without stretching that culture beyond the firm’s borders.

Yet the ecosystem model is important for a more basic reason: It’s necessary for industry to function. “I’m a contracts guy,” says one corporate executive. “And every contract carries an implied covenant of good faith and fair dealing. The presumption is that you act in good faith. If, eventually, no one can assume that, commerce is crippled.”

In the words of another business official, principles don’t merely coexist with profits. Principles, in fact, enable profits. “There are always going to be competitors who will mimic your best products and processes,” she observes. “But one thing that can’t be copied is a strong reputation. It gives you a distinct edge in a competitive marketplace.”

It’s an edge that leads to greater customer loyalty, reduced legal costs, enhanced productivity, and better return on investment … all of which stokes healthier shareholder returns. “Certainly, compliance is important,” a defense-industry executive adds. “We have a responsibility to our shareholders to obey the law. Yet ethics goes well beyond compliance. We’re not just talking about the letter of the law here. We’re talking about how we want business to be conducted … how we want other people to deal with us.” Indeed, everything affects everything.

This article was published in the March 2006 issue of Compliance & Ethics.

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