Compliance and ethics divisions are being forced to justify expenses
In this current market, every corporate division is being asked to justify its activities and to provide specific figures relating to costs and revenue. For some areas, like sales or marketing, this is a relatively easy proposition, and a traditional return-on-investment (ROI) analysis can be performed. For others, it is far more difficult.
Very little information is available on assessment methodologies for determining the cost of, or the ROI on, a compliance and ethics program. The same is arguably true for other departments, such as human resources, audit and legal, although in the case of legal there are some measures that can be applied – like the number of lawsuits avoided, or the overall reduction in legal fees resulting from a change of contract. The department doesn’t generate revenues, but it is fairly easy to identify potential losses that have been avoided. Human resources can point to the number of people employed or retained and what each of those generates for the company – an imperfect science, but partially quantifiable nonetheless. This type of calculation is far more difficult to perform for functions like compliance or ethics, however.
Compliance and ethics, much like audit, is woven into the fabric of the organization. Many people in an organization have to devote some time each year to audit-related matters. Those costs would be almost impossible to accurately identify and separate. The same is true for compliance and ethics. In the face of these difficulties, compliance teams across the country are being asked to justify their existence and are being forced to do more with less.
Awareness of the importance of truly effective compliance and ethics programs and the serious pitfalls that result from failures in this area have led to a dramatic increase in the attention given to the function in recent times, which means the resources dedicated to it are also coming under growing scrutiny. For many companies, compliance and ethics departments are being implemented for the first time, so naturally people want to know what it costs and what the benefits are. They want to know if there is a return on their investment. Audit, legal and HR resources are considered part of doing business. They have been around for a while, so there are fewer requests for them to justify their existence. Compliance and ethics has yet to achieve that status, in large part because there is still a great deal of confusion about what compliance really is and who should be responsible for it. Someday, compliance and ethics will probably be considered not only a part of doing business, but also something we desire to do. Until then, we would benefit from some reliable data.
ROI of an ethical culture
Assessing the cost is not the only difficult part of a thorough ROI assessment. To get a true assessment of the financial impact of compliance and ethics, one should subtract the money a compliance program saves an organization from the cost of running the program. That would involve estimating the savings of ‘never’ events such as ‘the company never received a fine’. The value of this is extremely difficult to calculate, of course.
Building a better ethical culture probably provides some functional savings, but that too is very difficult to measure. Some work has been done in this area, however. Colleen Waring, former deputy city auditor of Austin, Texas, studied the ethical culture of several individual departments. She found large variances among the ethical culture indicators between departments. She then looked at expenses (including sick days, workman’s comp claims, lawsuits and customer complaints) to determine whether there was a correlation between costs and ethical culture.
‘We found that the strong correlations between the ethical climate indicators and the measures of cost that are presented in the audit results served as a convincing argument for management to adopt efforts to improve its ethical climate,’ Waring explains. A link to the full study and an article summarizing it can be found on the website of the Society of Corporate Compliance and Ethics (SCCE), at www.corporatecompliance.org.
SCCE is working with the Ethics Resource Center (ERC) to replicate the Austin ethics ROI study in other industries. The ERC is an 80-year-old non-profit dedicated to the study of ethical cultures. SCCE is a non-profit membership group which, together with its sister organization the Health Care Compliance Association, represents more than 7,500 compliance and ethics professionals. The two organizations are attempting to gather reliable, specific and meaningful information about the ROI of an ethical culture. One healthcare organization has been studied, and the results will be available upon completion of the study. Two other organizations are being sought to participate in the study.
Revenue generation
In some cases, an effective compliance/ethics program could increase revenue. As CEO of SCCE, I make decisions that impact other companies’ revenue. Many of those decisions are based on the integrity of the organization that is trying to become a vendor of ours. I am, of course, in the field of compliance and ethics and might be considered biased, and rightfully so.
I think the truth of the matter, however, is that my father and mother emphasized integrity so often to my siblings and I that it affects many of my decisions. Many business people may not have my penchant for compliance and ethics programs, but I am sure a significant number are biased by the implied integrity, or lack thereof, of companies they choose to do business with. There has to be some revenue impact. Unfortunately, statistically reliable data and specific dollar figures are probably never going to be available. Many CEOs are going to have to use their business judgment, rather than data, when estimating the revenue impact of their investments in compliance and ethics.
I have tried in vain to find meaningful, specific and measurable ethics ROI studies on the internet – in fact, I have been keeping an eye out for this kind of data for 13 years. Alas, there is very little. The internet is full of promises, comments, feelings and other subjective information implying or outright claiming a high ROI for an ethical culture. I am absolutely convinced there is a return on investment for an ethical culture, but I want more data. For those of you who make decisions based on opinions or endorsements, the internet is replete with great information on the financial impact of compliance and ethics programs. The rest of us are going to have to wait for more studies to be completed, or make these decisions like we make many others: using our best business judgment.
