Ethics and Compliance: What’s Trust Got to Do With It?

I believe words matter.  They affect the way we think, therefore the way we perceive, therefore the way we act.  Words are not passive things, acted upon by our blind behaviors; they are cultural repositories of memory.  Ontogeny recapitulates phylogeny in language as well as in biology.

So it has always bothered me to hear “ethics” and “compliance” in the same phrase.

I’m aware I’m in the minority; it is casual usage to combine the two. 

  • There is the Society of Corporate Compliance and Ethics and their Institute
  • Back in 2005, a speech by the SEC talked about the decline in ethics and compliance.
  • Corpedia Corporation “offers a wide variety of innovative and user-friendly compliance and ethics solutions.” 

So, it’s commonly used.  Then again, we also live in a world that obsesses over Britney Spears.

Defining "Ethics" and "Compliance"

Let’s try the dictionary.  First, ethics:

1. (used with a singular or plural verb) a system of moral principles: the ethics of a culture.
2. the rules of conduct recognized in respect to a particular class of human actions or a particular group, culture, etc.: medical ethics; Christian ethics.

Now, compliance:

1. the act of conforming, acquiescing, or yielding.
2. a tendency to yield readily to others, esp. in a weak and subservient way.

These two words don’t live together easily.  In fact, if we try to substitute “Wall Street” for “medical” or “Christian” in the ethics definition, we get what most people would call an oxymoron: Wall Street ethics. 

I would argue this is a serious issue.  Entire industries—financial and pharmaceutical come to mind—have come to conflate the two words, and we are all the worse for it. 

When “ethics” becomes a soul-less matter of ticking the boxes, when we substitute acquiescence for a conscience and subservience for principles, we have lost a great deal.  In particular, any meaningful sense of the word “trust.”

How can a financial planner aspire to being a fiduciary through procedures alone?  How can a company achieve client focus through quarterly behavioral competencies alone?  How can we create trusted regulatory agencies if all they do is enforce processes and paperwork?  How can you give multiple choice ‘tests’ that ‘certify’ people as being ‘ethical?’  But that is generally how "compliance" programs are executed. 

That way lies Bernie Madoff, and a thousand other example of people who have lost track of simple guidelines like be transparent, tell the truth, serve your clients, and work for the long run. 

You Can’t Comply Your Way into Ethical, or Trustworthy, Behavior

A focus on compliance alone can never create ethical behavior.  Perversely, all it does is incent slightly bent people to become more bent by focusing on exploiting the inevitable gray areas that crop up in any set of behavioral rules.   There are plenty of professionals who are 100% compliant with their industries’ lax standards, and are, by many customers’ judgment, highly untrustworthy, selfish sleazeballs.

Law schools can take some blame here; law is the only profession in which the notion of ‘truth’ is non-existent, replaced by ‘evidence.’ 

MBAs are hardly blameless; their mindless pursuit of markets, transactions, and micro-measurements have fueled the replacement of “character” with “observable behaviors that achieve sustainable competitive advantage.”

But that’s too easy.  We’ve all gone along with it.  We’re all infatuated with “science,” neuro-proof, lawsuits and fix-it drugs. Ethics?  Get with it, dude.  

I know this sounds like an old-fart rant, and in part it is.  But there are plenty of businesspeople who behave well, and even prosper because of it.  And they’re also to blame for tolerating the shades of gray. 

We don’t have a crisis of trust and ethics so much as we have moral sloppiness–a willingness to tolerate mediocrity.  Most of us have remarkably similar instincts about what’s right and what isn’t.

What we’ve all got to do is get mad about how far we’ve strayed.

And compliance is not an excuse.
 

5 replies
  1. kathleen
    kathleen says:

    A wonderful column!  It is so important to point out the difference between ethics and compliance.  I know companies that put a great deal of emphasis on compliance but never talk about honesty and principles.  If you don’t do that, it turns into a cynical, box-ticking exercise that has nothing to do with making thoughtful, moral decisions when faced with gray areas.  Let’s start talking about morality as well.  There’s a good word that seems to somehow have disappeared from everyday parlance.

    Reply
  2. Doug Cornelius
    Doug Cornelius says:

    Charlie –

    I take a bit of the opposite view. I say "compliance and ethics" because they are two separate things. I think it is important to recognize that ethics is not a subset of compliance.

    I think some of your concern comes from the application of compliance techniques to ethics. You are right that ethics can not be taught and monitored through "ticking the boxes."

    Merely being compliant with the law is not the same as being ethical in your approach to business. More and more regulations are put into place to make bad behavior illegal and subject to government intervention. Regulations come from lapses in ethical behavior. We just saw that with the SEC’s insider trading story.

    In part, I think compliance has spawned as a practice because of the increasing amount of regulations and complexity of those regulation. Business certianly does not want to break the law. Compliance with the law sets a minimum standard of behavior. Ethical behavior is something above that minimum.

    Reply
  3. Charlie (Green)
    Charlie (Green) says:

    Doug,

    Thanks for weighing in on this issue; you are in a position of knowledge on this one.

    You say you use "compliance and ethics" because they are two separate things, and I know you know the difference.  But I think the constant juxtaposition of them leads others to confuse them. 

    The very thought that someone would consider ethics to be a subset of compliance I find horrifying.  The reverse is at least arguable, but not that.

    You seem to view increasing levels of compliance as a response to a lack of ethics.  In contrast, I think over-reliance on compliance causes of a lack of ethics. 

    You say "regulations come from lapses in ethical behavior."  True.  Unfortunately, just like antibiotics being over-prescribed results in more resistant strains of bacteria, over-reliance on regulation and compliance results in more and more unethical behavior. 

    If there is nothing ethical in the response to bad ethical behavior, then you’re going to keep getting more unethical behavior.  More regulations in response to unethical behavior just de-ethicizes the issue further.  The only effective response to unethical behavior is an ethics-based response. 

    You are right that as a society we have responded to unethical behavior by more compliance–but that has just fueled the problem.

    The required remedies go beyond the law by itself.  When financial advisers buy E&O insurance, they are buying compliance insurance. They are not buying ethical insurance; but if we keep confusing the two, they never get called on unetical behavior.  If they are in compliance, we have allowed professsions to get off the hook for unethical behavior–because we don’t make the distinction.  When we allow them to say, "I broke no laws" and pretend it means something ethical, we just degraded ethics.

    When professions behave unethically, the law can and should do more than just create more regulations.  In particular, enforcement and sanctions can and should be emphasized.

    But the law is limited.  In addition, somebody needs to start talking the language of ethics.  This means abhorrence, story-telling, condemnation, truth-telling, shunning, public shaming, transparency of policies, the abandonment of the omerta code of silence, professional associations adopting pro consumer policies rather than merely performing trade association functions for the professions, the professional equivalents of town-hall meetings and civilian review boards, transparency in disciplinary processes. 

    (Case in point: a financial planner convicted in court of professional malpractice was not required to disclose the conviction, much less the suit, to anyone, anywhere: not by the SEC, not by FINRA, and most particularly not by the Financial Planning Association.  In that case, "compliance" trumped the law; and ethics was nowhere to be found in either one of them).

    Reply
  4. Doug Cornelius
    Doug Cornelius says:

    Charlie –

    I agree that there is an increasing reliance on regulation and litigation to deal with ethical lapses and bad business practices.

    If we look back to the early days of the SEC, the basis of the ’33 Act was transparency and truthfulness in the offering of securities. I agree that we need more transparency. Not more information, but clearer information and easier access to the information. Truth in the market is the key to the success of the markets.

    But greed can cause us to ignore the information in front of us. You can see that in the recent collapse of the US homes market. There was greed from the home purchaser, buying more than they can afford; greed from the lender, lending more than they knew the borrower could afford; greed from the oan wholesaler, buying loans that they knew were poorly underwritten; greed from the rating agencies, getting paid by the issuers for better ratings.

    I use the term "structural compliance." We need to focus on making sure the rewards are aligned with the risk. The complexity of our economy makes it easy to disintermediate the risk from the reward. As you point out, there needs to be punishment for bad behavior.  That punishment should come from the community first, with more egregious behavior being punished by the government.

    Reply
  5. Ian Brodie
    Ian Brodie says:

    We’ve seen this played out in spades recently in the UK with our MPs expenses scandal. We have a situation where our elected representatives are claiming expenses for all sorts of shocking things, or moving their official residence 3 times to get extra allowances. Their defense in each case is that they didn;t break the rules.

    Well, it certainly hasn’t washed with the British public. We see, to kno wthe difference between ethical behaviour and complying with the rules – even if our parliamentarians don’t.

    I think it was Gandhi who said "men want to have lots of laws so they don’t have to be good".

    Ian

    Reply

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