Ethics & Compliance

When things go wrong in an organization, we usually cry out, “How could this happen?” and we look for causes of the disaster.  We get especially upset with the possibility that someone or a group of people caused the disaster by behaving badly, by violating the common norms of correct behavior, frequently through lying, cheating, or stealing.

Ethics and Compliance arises to address how could this calamitous event happen and how this could be prevented in the future.  But are we clear about what problem we are addressing?


Ethics and Compliance arises to address how could this calamitous event happen and how this could be prevented in the future.  But are we clear about what problem we are addressing?

Ethics has a long history, extending from ancient Western philosophy, Confucianism in China, and the Judeo-Christian religious tradition, to name just a few examples.  Ethics [and I use the singular to identify it as a discrete set of ideas] is the set of moral principles that guide and govern behavior.  And “moral” describes what is considered right and wrong.  We can all spend a lifetime debating the source of the norms that determine what is right and wrong: are they natural or external, universal or relative, etc.  For practical purposes, I suspend those arguments and assume that we will examine the generally accepted ethical norms that guide behavior in today’s pluralistic society and research indicates that most societies have had consistent, basic norms throughout history that were applied in their own group (although often not to those outside the group).

A critical distinction between ethics and compliance is that ethics is a set of principles or guides.  Compliance means a specific set of rules – detailed instructions for particular situations.  And American society loves rules.  Look at our sports, where are constantly improving and refining the ability to make accurate judgments about out-of-bounds, strike vs. ball, or goal.  We also have the greatest number of lawyers per capita of any nation in the world.

The Dilemmas

But as essential as rules are, there is a problem with them.  Life is so complex that if we were to establish a precise rule about every variation in behavior, we would spend all our time either writing the rules or reading them.  We simply can’t establish precise rules for every aspect of what we do.  This is what I call the First Dilemma of Ethics & Compliance.

This is why Ethics and Compliance must be complementary.  We need a set of basic principles to guide our behavior, and we need specific rules for those issues that are either the most frequent risks or the most damaging risks (and sometimes a risk can be both frequent and damaging).   If we create too many rules, we will become overwhelmed.

But principles present a dilemma as well, the Second Dilemma of Ethics and Compliance.  When a broad principle becomes an iron law, it can be abused.  We can never forget that totalitarian states have used broad, sweeping laws as a device for tyranny.  Both the Nazis and the Communist states in the 20th Century described behaviors as illegal (“enemy of the state”) that were so elastic in their definition that they could be applied to anyone they simply wanted to eliminate – and they did, in the millions.  And this perversion of the law continues in today’s tyrannies. lease see the plaque, below, from the KGB Museum in Tallinn, Estonia, describing how the Russians used their broad laws to inflict terrible abuse:

So, organizations that desire to maintain a healthy ethical culture should employ both Ethics and Compliance, with basic principles to guide judgment and with rules to guide specific actions, maintaining a healthy balance.  Some tension will always exist between the rules and the principles, and their employment will require constant effort.

The Nuts and Bolts

Organizational leadership must first assess the ethical foundation of the organization: what are the principles that really guide how things are done.  These must be compared to the ideal set of principles that should guide behavior.  The ultimate goal is to establish a set of shared values that will guide the organization.  But the context of the organization is also critical: are there “tribal” divisions that create in-groups and out-groups.  Healthy competition can be a good force, but tribal divisions that create differences in who is worthy of fair treatment are utterly corrosive.  The leadership must identify and support the values, shared not only within the organization, but among all participants (such as customers), that will help guide behavior.

Shared values should not be expressed as a sterile laundry list of virtues, but as statements that express the fundamentals of good conduct.  For example, a clear statement of purpose for a business could be:

The purpose of our endeavor is to create a product and/or service the we can offer at a price that exceeds the cost of production and marketing, that a customer will purchase willingly, without coercion or deception, with mutual benefit to the parties in the transaction.

This statement is nothing new.  It has been expressed over 1,500 years ago by merchants on the Silk Road and expressed by traders in the Mediterranean 500 years ago - such a statement is written in the walls of the silk trading market in Valencia, Spain.  Trading is a human phenomenon that goes back before recorded history, and its prolonged success has always been driven by mutual benefit.

The fundamental statement of purpose should be supplemented by a statement of the key values of the organization, not a mind-numbing long list, but a page of key values that cover the essential workings of the organization.  This is the Code of Conduct.  Its importance does not lie in its posting in the break room, but in its incorporation in every facet of the organization, from hiring to firing, and everything in between.

The values will be worthless if the leaders do not visibly embody the values in their own behavior.  We are all hierarchically oriented by nature; when we look up, we expect to see the same values demanded of us.  [Please see my section on Leadership, for more on Character as a key element in Leadership.]

One of the most important tools in maintaining a healthy culture of Ethics and Compliance is the ability for anyone to raise an issue.  While separate checking by auditors is essential to prevent fraud, the biggest source of uncovering fraud in most organizations is the people within the organization.  Therefore, people in the organization, as well as business partners and customers, need to have multiple channels available to them to raise an ethical issue in good faith, without fear of retaliation.  My observation is that this is best achieved with having several channels for any person to use, with issues raised being reviewed seriously.  As with any human endeavor, some people with abuse such reporting, misusing it to settle scores or to cause mischief. No system of human interaction will run perfectly, but an organization’s Ethics and Compliance program must provide clarity of standards and opportunities to raise issues, and we will never escape the need for reasoned judgment to guide it along.

Topics for a presentation or workshop:

  • Ethics and Compliance – different but vitally complementary
  • Codes of Conduct
  • The sources and risks of unethical behavior