Popularity Contest: The Importance of Reputation in Modern Compliance
Loyola University Chicago School of Law, JD 2019
Modern business thinking has come to accept that reputation is as important as financials. As investors look for companies that demonstrate this understanding, compliance professionals are in a unique position to make their companies more appealing.
Reputation as an extension of ethical conduct
Historically, corporations have approached ethics and economics as mutually exclusive. For the most part, this approach was economically justified, as businesses were able to thrive despite ethical shortcomings. For example, uranium mining companies could leave Native American populations devastated by toxic spills and still make money, and Nestlé could use slave labor to harvest coca and still remain profitable. Indeed, the history of businesses in the United States is pockmarked with examples of executives and managers adopting the toxic mentality of maximizing shareholder profits at the expense of all else.
Thankfully, this approach to business may no longer be economically viable, because of the modern trend towards socially conscious business practices. Spurred by corporate ambivalence and various scandals like Enron and the global financial crisis of 2008, investors and consumers have begun to demand that businesses become more socially conscious. Signs of this new approach can be seen in academia. The majority of business schools now provide courses in business ethics, at least 16 business-ethics research centers are now in operation, and there are even intercollegiate ethics competitions. Loyola’s own Quinlan School of Business requires the completion of “Business Ethics” for any candidate seeking a Master’s in Business Administration.
Executives, managers and compliance professionals may be tempted to dismiss this growing trend as a quirk of the ivory tower. However, doing so would be short-sighted. Outside academia, investors and customers also find socially conscious companies appealing because they recognize the long-term growth potential of such companies. Furthermore, companies that do ignore this trend have suffered devastating impacts to their balance sheets and reputations. For example, Volkswagen’s market cap lost nearly 23 billion dollars when the public learned that the company intentionally cheated on their emissions tests. To be sure, Volkswagen lost billions in lawsuits and governmental fines, but more than that, the reputational harm Volkswagen has suffered will continue to cost it billions in lost revenue as consumers and investors turn away. Facebook recently lost 3 billion dollars in one day as consumers and investors learned that the company was selling users’ personal information to political consultancy firms without their consent. As investors dump their stake, users have begun to delete their accounts in protest: a move that will undoubtedly harm a company that relies primarily on ad-revenue.
Finally, companies stand to lose more than money. Reputational harm can even lead to corporate death, as the accounting firm Arthur Anderson learned. After being embroiled in the Enron scandal, the famed accounting firm suffered reputational harm that forced the company to cease operations in 2002, after clients refused to associate themselves with the firm.
Role of the compliance officer
A single social media post gone viral can damage corporate and brand reputations, and shareholder value in an instant. Accordingly, modern compliance professionals would benefit from developing a new compliance program with an eye to ethical development. Establishing such a program requires a concerted effort on the part of the compliance officer. It begins with an objective risk assessment. Once a compliance officer accepts the reality that ethics and good business are no longer mutually exclusive, the task then becomes identifying ways their company is susceptible to unethical behavior.
The next step is to develop policies and programs designed to bring a company into the modern ethical business landscape. A good compliance officer will recognize that organizational changes should be implemented at all stages. For example, during the employee onboarding process, when employees are being hired, attention and value should be placed on their character. No matter how skilled an employee is, if their character flaws expose a company to ethical violations, they are likely not worth the trouble. Furthermore, communicating new socially conscious policies and procedures to a company’s own employees is obvious, but less so is the fact that these policies should also be communicated to the public. Investors and consumers find socially conscious companies appealing and real value can be achieved by informing them of a business shift to ethical business practices.
Once policies and programs are in place, companies must evaluate them regularly to identify areas for improvement. By using focus groups, mock presentations, mock trials, tests, peer reviews, audits, self-assessments, exit interviews, screening, deep dives, etc., a compliance professional can properly evaluate their new compliance program to determine how it can be improved.
The final step is to make any improvements identified during the evaluation stage. Compliance programs are not perfect upon first implementation and progress is made through the improvement process. Once weak points in the program are strengthened, a compliance professional can be relatively certain their ethical compliance program will properly bring value to their company in the modern business landscape.
As the modern business world shifts to prioritize corporate responsibility and socially conscious business practices, compliance officers are in a unique position to create policies and procedures that bring substantive value to their companies.