Ethics & Compliance in Firms: Why it happens and what makes it effective

Prof. Qinqin Zheng, School of Management Fudan University, with co-researchers Profs. Ajai Gaur, Rutgers Business School, and Koustab Ghosh, Indian Institute of Management, explore why Asian organisations adopt ethics & compliance management within their CSR and, more importantly, if and how they implement it.  By Tom Gamble.

Professor Qinqin Zheng, School of Management Fudan University, with co-researchers Ajai Gaur, Rutgers Business School, and Koustab Ghosh, Indian Institute of Management, explore why Asian organisations adopt ethics & compliance management within their CSR and, more importantly, if and how they implement it. 

Ethics & Compliance in Firms: Why it happens and what makes it effective. By Tom Gamble. Related research: Corporate social responsibility in Asian firms: a strategic choice perspective of ethics and compliance management, Ajai Gaur, Koustab Ghosh and Qinqin Zheng. Journal of Asia Business Studies, Volume 13, number 4 2019.  

In 2015, the Volkswagen emissions scandal drove straight into the headlines. The car manufacturing giant integrated microchips into their cars to activate emissions controls only during regulatory testing to meet the official standard. But at that time, in reality, the engines emitted over 40 times the permitted level of nitrogen oxides during real-world driving. The company has no doubt come a long way since 2015 and cleaned up their practices. But the scandal was a telling example of how firms can hastily adopt and create ethics & compliance programme to shield their top management from blame.  

Of course, Volkswagen has not been alone in dabbling in dodgy business dealings and greenwashing with many big names – Petrobas, Tesco, Kingfisher and Enro among them – having traversed the stormy seas of investigation prior to returning to the right path. Such regular occurrences over the last few decades have spurred Profs. Qinqin Zheng of School of Management Fudan University, Ajai Gaur, Rutgers University, and Koustab Ghosh, Indian Institute of Management, to lead research into what makes the difference between effective ethics & compliance management (ECM) in firms and those which use ethics & compliance as a veneer – only to feel the backlash when things do go wrong.

CSR, ethics, and compliance

Ethics & Compliance Management has gained importance in the last few decades, encouraged by governments, national and international guidelines, stakeholders including customers and communities, and also professional organisations such as the ECOA. But despite this, like many other activities under the CSR umbrella, ECM is largely undertaken on a voluntary basis – something that is seen to enhance social good beyond the usual interests of the firm and the requirements of law. This is all very good, though the voluntary dimension naturally brings with it the question of choice and interpretation. 

Interviewing the Chief Ethics & Compliance Officers from 5 major firms participating in the Asia Ethics Summit, and gleaning data from questionnaires sent to 152 companies members of Globethics.net, a good number of which had secured their place on The Forbes-Ethisphere most ethical companies list, the researchers tackle the issue through two dimensions – ECM adoption and ECM implementation.

On the one hand, adopting Ethics & Compliance Management in a firm corresponds to initial compliance to external pressures and crises but with little strategic intention inside the organisation. Implementation, on the other hand, is when ECM caters for a need for large-scale ethical improvement and moral awareness and behaviours within the firm. In a nutshell, adoption amounts to a ceremonial taking on of ECM, while implementation is actual adoption and a conscious strategic choice to make it part and parcel of the organisation’s operations. Why do firms do this? And what are the implications?

Of the law and the mirror

Ethics & Compliance in Firms: Why it happens and what makes it effective
Effective Ethics & Compliance in Firms

The law is also a major factor influencing the taking on of ethics and compliance management in firms. This is also more salient for Asian companies, not least because they face huge hurdles when wishing to compete in US or European markets. The compliance requirements in those areas are especially stringent for Asian industries dealing in sensitive products such as processed food, pharma and child care products. And although firms in such sectors may not have a dedicated ECM department, certain quality and standards mechanisms already in place, as well as external levers such as the Sarbanes-Oxley Act in the USA, may well help firms to take things up a notch and consider full implementation.

Mirroring exists too, or as the researchers put it – mimesis. We do this as children, we do this as adults, sports teams do it and firms do it too. When the country’s institutional framework is weak and volatile, and uncertainty reigns over market conditions and playing rules, firms tend to imitate their peers, choosing companies that are perceived as successful and influential in managing the pressure from such an environment. It’s a little like choosing a role model, except that size and financial punch count. Research has shown that when firms imitate their bigger cousins and adopt ethics and compliance, they are more readily accepted by regulatory agencies and the general public. In short, it is the risk reduction factor – and risk-assessing behaviours – that can offer an insight into how much incentive a firm has to adopt ethics & compliance management.  

Adopt me

Simply adopting ethics and compliance isn’t all negative as such. It can even serve as a positive signal to a firm’s stakeholders – shareholders, suppliers, customers and communities – and can also be subject to scrutiny through the increased visibility it offers. Whether through it is the firm’s attempt to gain in legitimacy or through pressure from its ecosystem, adopting ethics & compliance management can still protect and lessen the penalty if straying from the ethical path occurs. It can also, through gaining the approval of its stakeholders, contribute to the long-term survival and sustainability of the organisation and lower the risk of a breach of ethics happening. But simply adopting – and perhaps purchasing off-the-shelf ethics & compliance packages from consulting firms along the way to create a framework – carries its shortfalls. Not least is the danger of adopting ECM in an environment where pressures are many and conflicting, leading the firm to adopt only a few practices included in the ECM gamut to avoid making too many waves. In turn, this can easily lead to managers and employees within the firm to lose commitment and faith in the ECM initiative: after all, who wants to put their energy and values into a half-hearted policy that makes exception the rule? And it also may well drive away some of those very external stakeholders the firm was trying to convince too. All in all, adopting ethics & compliance does not represent the real responsible ethical intent of the firm. Like those companies involved in scandals mentioned at the beginning of this article, adoption is usually sparked by crisis, public scrutiny, external pressure and when top management is threatened. In essence it is reactive in nature, a hastily erected screen to cover up the warts.  

CSR: Ethics & Compliance in Firms -  Why it happens and what makes it effective
Effective Ethics & Compliance in Firms

Employ me

Implementing ECM is a different matter. If treated as a prime function in the firm like others – sales and marketing, quality, production, for example – it gains in legitimacy within the firm and necessarily packs punch as dedicated E&C Officers are created who sit in on meetings and on boards. If a firm makes the decision to adopt and implement ethics and compliance, it amounts to an integrity-based approach. Much more effective in creating commitment and motivation among employees and a clear message from the firm to promote managerial responsibility and ethical behaviour. Putting value on ethical conduct also strengthens the firm’s emphasis on its cultural values with employees becoming more likely to report on transgressions.

As such, by implementing an ethics and compliance policy, structure and processes, ECM becomes a strategic choice in line with achieving the organisation’s goals over the long term. In essence it is active – and proactive. But the benefits do not stop there. Research has shown that top-down support and implementation of ECM adds to the learning and knowledge creation of a company, generating a range of associated initiatives such as developing a code of conduct, organisation-wide ethics training, audit programmes, speak up policies and whistleblowing procedures and help lines.

Legitimacy is of specific importance for firms in emerging areas of the world – S.E. Asia, Africa and South America – given the general perception of weak government institutions and lack of appropriate law which may encourage unethical behaviour such as bribery and corruption, abuse of power and opaqueness regarding business practices or sustainability footprint. And while it might be external factors that determine the risks and benefits to a firm of adopting ECM, it is internal factors and moral orientation of a firm’s managers that determine the effective strategic implementation of ECM.

Don’t just talk, walk

Ethics & Compliance in Firms: Why it happens and what makes it effective. 
Prof. Qinqin Zheng, School of Management Fudan University, with co-researchers Profs. Ajai Gaur, Rutgers Business School, and Koustab Ghosh, Indian Institute of Management, explore why Asian organisations adopt ethics & compliance management within their CSR and, more importantly, if and how they implement it. By Tom Gamble. Related research: Corporate social responsibility (CSR) in Asian firms: a strategic choice perspective of ethics and compliance management, Ajai Gaur, Koustab Ghosh and Qinqin Zheng. Journal of Asia Business Studies, DOI 10.1108/JABS-03-2019-0094 VOL. 13 NO. 4 2019.

Of course, not all firms are created equal. It may be that in a large number of cases firms are spurred to adopt ECM through external pressures and critical incidents, but it is also the differences in size and finances that shape a firm’s intention, capability and commitment of resources to adopt – or to adopt and implement. Nonetheless, the impact and effectiveness of ECM are boosted when internal factors play a significant part – through top-down endorsement or tying in ECM to the firm’s strategic and long-term goals. 

To make the link between adopt and implement, Profs. Zheng, Gaur and Ghosh assert that a firm requires a thorough understanding of both their external environment – law, regulations, institutional strengths and weakness, stakeholders impacted by their firm’s activities – and their internal features. What is the strategic and moral intention of top management? What values does the firm promote and build in to its offer to its customers? What is the overall ethical ambience within the firm and is it sufficient to be capable of rolling out a full-blown transition from adoption to implementation? A strong recommendation is for companies to create an Ethics and Compliance Officer position prior to adoption and as an independent function, thereby gaining legitimacy within the organisation. ECM has to be operational and tied in to results too. And lastly, the support of senior management is primordial – a positive message of commitment to both internal and external stakeholders that the firm is prepared not just to talk, but to walk the talk.

By doing so, proactively, you will alleviate risk, gain in legitimacy and earn brownie points among the auditors and public alike. Your firm may not completely avoid a major crisis like those born of Volkswagen, Petrobas and Tesco’s erring and errance of the past. But it won’t feel the backlash when things do go wrong.

Prof. Qinqin Zheng, School of Management Fudan University, with co-researchers Profs. Ajai Gaur, Rutgers Business School, and Koustab Ghosh, Indian Institute of Management, explore why Asian organisations adopt ethics & compliance management within their CSR and, more importantly, if and how they implement it.
Prof. Qinqin Zheng

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The Council on Business & Society (The CoBS), visionary in its conception and purpose, was created in 2011, and is dedicated to promoting responsible leadership and tackling issues at the crossroads of business and society including sustainability, diversity, ethical leadership and the place responsible business has to play in contributing to the common good.  

2 responses to “Ethics & Compliance in Firms: Why it happens and what makes it effective

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