When we talk about ethics, what do we mean? And how does it differ – or relate – to compliance?
Often we’re simply talking about good decision making when we talk about ethics. It’s hard to come up with a business decision that doesn’t involve deciding what would be a morally good path forward and what would not.
One fundamental issue is to understand that ethics and complying with the law are different. For any business, compliance is important, but we can’t just have a compliance mindset. A recent example helps parse this out.
The Federal Reserve Bank and its Chairman Jerome Powell and Vice Chairman Richard Clarida – along with Robert Kaplan of Dallas and Boston Fed chief Eric Rosengren – came under heavy scrutiny recently amid questions about their personal investing activity during periods when they were setting monetary policy for the country. Although legal, as Powell noted, it was not ethical. Powell himself explained why the ethics question over road the legal question: “We understand very well that the trust of the American people is essential for us to effectively carry out our mission. And that’s why I directed the Fed to begin a comprehensive review of the ethics rules around permissible financial holdings and activity by Fed officials.” Dallas and Boston Fed bank execs retired last fall amid questions about their investing activity, and this year Fed Vice Chairman Richard Clarida resigned.
Another issue is that the law often lags behind changing public opinion – the law is slow to catch up to new quandaries. That’s also illustrated by the Federal Reserve trading issue. In mid-February of 2022, a full year and a half after the incident first came to light, the Fed formally adopted new ethics rules aimed at limiting financial-market trading by its top officials, senior staff and close family members. These officials have an additional year to get their portfolios in line with the new policy. While there is an important connection here between the law and ethics working hand in hand, it’s clear the law is slow to take full effect. In this example, it’s 2 and half years later.
This example also illustrates the third issue – the law is not always right. While it may be legal to trade, invest or otherwise manage the family finances while also directing federal monetary policies during a pandemic, is it right? Here, it’s useful to consider not can I do it, but should I do it?
For these reasons, managers need to acknowledge their role in shaping organizational ethics and as an opportunity to create a climate that can strengthen the company’s reputation and relationships. Ideally, businesses will move past a compliance-based approach where the goal is to protect and punish legal violations to one where exemplary behavior is fostered to create an ethical climate. An integrity-based approach to organizational ethics combines the concern for the law with an emphasis on managerial responsibility for ethical behavior.
Creating this type of culture extends to the board. In 2019, for the first time, boards dismissed more CEOs for ethical lapses than for financial performance or conflicts with directors, according to PwC’s CEO Success study. Most boards have a risk oversight and compliance function but fall prey to the same challenges as other executives in thinking this compliance mindset will be sufficient to create an integrity-based culture. Given the essential link between a high integrity organizational and high integrity individuals, the board is always a good place to start.