Investing in an ethical corporate culture

Companies are starting to distinguish between non-financial and financial risks in order to continue improving their overall governance and business structures. But non-financial risks, such as ethics, still don’t get the attention they deserve from industry experts.

And this could have real – and financial – implications for your company.

‘No company has found an effective way of evaluating and measuring non-financial risks,’ says Kirk Hanson, executive director of the Markkula Center for Applied Ethics at Santa Clara University. ‘And ethics risk is one of the many forms of non-financial risk that has always been a concern.’

Remember that ethical shortfalls are what triggered a string of financial misdeeds, which led to insider trading probes, investigations and regulatory action. Several high-profile companies collapsed as a result, and some prominent executives remain in prison today.  

Many businesses have relied on the same governance structures for decades but in response to the recent economic downfall followed by the passage of Dodd-Frank, some have started considering newer and more cutting-edge techniques to help better align their existing business model.

‘Dodd-Frank deals a lot with ethics,’ notes Hanson, who also taught at Stanford Graduate School of Business for 23 years. ‘Companies should have a state-of-the-art ethics program in place, with risk management strategies to help achieve better business performance.’

As Dodd-Frank attempts to reinforce ethical practices at corporations and institutions, Hanson says companies should start to analyze ethical risks that previously eroded investor confidence.

Examples include the theft of intellectual property and proprietary information, especially in a highly competitive market. Additionally, in a geographically dispersed sales organization, ‘there can be sales people who engage in bribery or some other kind of improper inducement to make sales,’ Hanson confirms. ‘This is one of the most ethically problematic areas companies face.’

With these cases in mind, Hanson suggests that firms should:

(i) Start designing training programs that not only address the company’s code of conduct but also provide employees with guidance on specific issues the organization’s risk management techniques identify. ‘Typical ethical training has been quite poor over the years. Too often it says,  ‘We want you to obey our conduct rules or else you are fired,’ Hanson explains. ‘Risk committees need to focus on the real ethics risk an organization can incur and move its employees in that direction.’

(ii) Having more frequent audits and risk assessments can help companies identify a weak ethical environment ahead of time. ‘Using this approach, employees can understand the standards of the firm and how they apply to their specific job,’ Hanson says.

(iii) Frequent communication of the company’s ethical expectations of employees is crucial. Hanson believes that, ‘in the case of protecting intellectual property, on a more regular basis teaching employees and co-workers how to respect your competitor’s intellectual property and protect your own’ will promote an ethical corporate culture.    
                                       
‘There seems to be a pattern where there are ethical crises in businesses that recur in an eight or nine-year cycle,’ Hanson adds. ‘How a company practices its non-financial risk management strategies remains a crucial responsibility for boards.’