5 Unintended Consequences of Growth-Minded Companies

And what it means for compliance departments

 “One of the great mistakes is to judge policies and programs by their intentions rather than their results.”
– Milton Friedman 

The vast majority of workers, managers, and company executives want to work for ethical organizations, and want to grow in responsible and sustainable ways. This is a given, and yet scandals like Volkswagen and Valeant Pharmaceuticals erupt every single year, without fail.

What is it that drives unethical behavior when companies are focused on growth? It turns out that there are some common blind spots that develop inside of all companies, even ones that are full of decent and ethical people who are looking to do the right thing. 

THE BAD SIDE OF GOOD INTENTIONS

Sometimes a bad apple does a bad thing, and a good compliance program can prove it. For instance, in 2012 a Morgan Stanley employee was sentenced to nine months in prison for FCPA violations in China. Yet the U.S. Department of Justice declined to prosecute Morgan Stanley itself. Their compliance chief was able to show that they had trained the employee on FCPA 7 times and reminded him to comply at least 35 times.

This shows that sometimes an employee may be the problem and a company has no responsibility for his or her actions. But in 2014 alone, the DOJ issued $8 billion in fines, the SEC $4 billion, while the FCPA came in at $1.5 billion and EPA $10 billion in fines. The pharmaceutical industry alone paid out almost $4 billion in fines for fraud. Companies like Morgan Stanley are doing a great job of proving they are a good corporate citizen, but we have a long way to go.

THE 5 UNINTENDED CONSEQUENCES OF GROWTH

Pushing for growth is a natural and necessary part of doing business, but it’s helpful to know where research shows things can go wrong.

1. Pressure to Achieve

When companies put pressure on employees to achieve remarkable results, they might achieve those results by breaking the law. For instance, Volkswagen put “titanic” pressure on engineers to make a clean and high-performing diesel. That aggressive push led dozens of people to create and sustain a massive lie.

In sports, we can see a similar phenomena with titans like Lance Armstrong and Mark McGuire, both who tried to cheat the system to achieve phenomenal success. They don’t set out to cheat; they set out to win.

2. Success Doesn’t Invite Introspection

If a company is doing well, it has little incentive to start digging around for possible conflicts between its ethics and its profits. To cite VW again, their “cleaner” diesel and overall marketing had led them to surpass Toyota as the biggest car manufacturer in the world. This kind of success can make it hard to sniff out problematic areas internally, which is why regulatory agencies exist in the first place.

3. Outsourcing Bad Ethics

Third parties can make it easier to consider bad ethics someone else’s problem, such as the rapidly deflating Valeant Pharmaceuticals using subsidiary Philidor Rx Services to run up prices. (They may also be involved in some creative bookkeeping as well, but that data isn’t yet in.) Yet their actions have gotten the attention of Congress, which is something everyone wants to avoid.

This outsourcing of ethical problems may have been part of the rationale for the Supreme Court’s interpretation of Sarbanes Oxley Act (SOX) in Lawson v. FMR LLC in 2014. This extended whistleblower protections to contractors working for publically-held companies, and to any privately-held company that does any work whatsoever for a public one. The implications of this change in the law will be coming soon to court near you.

4. Copycat Effect 

When bad apples act alone, they don’t inspire others to follow them. But when an employee begins to skirt the law, maybe just a little, and get rewarded for it, there can be ripple effects. 

Dozens of highly educated professionals slowly copied their boss, Bernie Madoff, in creating the biggest Ponzi scheme in history. More typically, workers might notice that one of their co-workers is less concerned about how he gives gifts away in China, and his business is exploding. Without clear and continual guidance from a home office, this can spiral out of control.

The “tone from the top” can also create copycats, in the sense that a Board and executive team that largely lip-services ethics and compliance is almost guaranteed to create a company culture that is far more prone to cutting corners or even breaking the law.

5. When the Ends Justify the Means

A questionably ethical decision that leads to profits and market expansion is far less likely to receive the scrutiny of a Board and executive team – in fact, the opposite might just be true. When one looks at major league baseball, for instance (a major and very profitable business), one can see that it wasn’t until Congress became involved in 2005 that the MLB association began getting serious about steroid testing. There was just too much money at stake with hitters like Bonds and McGuire shattering attendance and home run records.

HOW GOOD COMPLIANCE CAN HELP COMPANIES BECOME GREAT

The bottom line for compliance is simple: while it’s known that bad ethics is bad for business, it’s also  true that the most ethical companies are also the most profitable.

According to the Society for Human Resource Management, in 2013 the stock price growth of the 100 most ethical firms (based on the most widely used measure of ethical workplace culture) outperformed stock market and peer indices by almost 300%. In thirteen years leading up to the 2011, the annualized returns of FORTUNE’S 100 Best Companies to Work For, were 11%, while just over 3% for the S&P 500.

HOW THIS IMPACTS YOU AND YOUR BOARD

We will be covering the case for becoming best-of-breed compliance, and a great deal more, in our free webinar on Tuesday, November 17th. To learn more about that and get access our soon-to-be-released white paper, Board Reporting – A Comprehensive Guide to Persuasion, Presentation and Having an Impact, register today.

Convercent offers comprehensive and integrated compliance management, reporting, and defense for compliance departments who want to become best-in-breed.