Are ethics and compliance different? And why it matters.

I occasionally come across companies who question the need to consider ethics, on the basis that they’ve got all that covered by their compliance programmes. And clear, comprehensive compliance programmes can achieve a lot of things, but what they cannot do is deliver ethical outcomes in support of the firm’s business. Indeed, I would go so far as to say that a firm will find it difficult to deliver good compliance outcomes without having also attended to the ethical side of how it does business. Here’s why.

Compliance can be summed up as being about rules and regulations: ‘what you have to do’. These could be the rules of your firm and of your profession, and they will be the regulations for your sector and the laws of your country. Ethics on the other hand is about encouraging behaviour that is more than just complying with regulations and the law. It involves people acting on the values of their firm, on the values of their profession and respecting societal concerns like fairness. Ethics is ‘what you should do’.

Is more than the law necessary?

Some may question whether firms need to do more than just comply with the law. Doesn’t that conflict with their duty to shareholders? Perhaps the best way of illustrating why firms need to do more than just comply with the law is the recent financial crisis. It was precipitated by firms doing business in ways that broke few if any laws, but which are now seen as having been unethical. Very few people have been charged or convicted of wrongdoing, yet many have been widely condemned as lacking in honesty, let alone integrity. And the interests of shareholders can hardly be said to have been well looked after by the executives of many banking firms.

Let’s look at another example closer to the insurance market. Twelve years ago,  many people in insurance broking saw the way in which conflicts of interest were being handled as more of an ethical issue (which they largely dismissed) and less of a legal one (which some turned a blind eye to). Market practices around commissions inured insurance broking firms to the contradictions in their thinking, and this allowed Eliot Spitzer, the New York Attorney General, to point out the errors of their ways in quite stark legal and financial terms. The clear lesson from this was that an ethical viewpoint can act as a ‘leading indicator’ of business risk.

The gap that good people stray into

Now, I’m sure that many of the people involved in that broking scandal would undoubtedly have been thought of as ‘good people’. So why did they make such bad choices? This could have been down to a gap that commonly opens up between a corporate culture that downplays ethics and the inability of many executives to apply legalistic thinking to everyday business decisions. Into that gap come rationalisations such as ‘everyone else does this’ and ‘the company needs this from me’.

So I would go so far as to say that a firm’s compliance programme will never turn out to be fully effective unless the firm is also attending to the ethics of its business at the same time, for two reasons:

  1. employees can more easily distinguish between right and wrong, than between compliant and non-compliant. A compliance programme can go some way towards teaching the latter, but an ethics programme can help employees to put their sense of fairness and respect to use at work, which is what an individual really needs when having to weigh up difficult choices;
  2. compliance on its own tends to orientate a corporate culture towards a rule based mindset, causing it to downplay or steer away from more challenging questions of what may be right or wrong. Yet many business decisions are far from simple, far from easy. Helping your people get better at ethics equip them for tackling those more challenging questions.

So firms shouldn’t get into the habit of seeing compliance as the necessity and ethics as the luxury. Insurance firms certainly can’t afford to, with the sector’s track record of misconduct. Both compliance and ethics have a role to play in helping insurance firms rebuild the public’s trust.

In my next post, I’ll be looking at the difference between conduct and ethics.



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