As organizations continue to develop codes of conduct that promote ethical and responsible decision making, many are also establishing compliance and ethics programs to minimize the risk that the firm steps outside of ethical and legal boundaries.

"Governments around the world strengthen their collaboration to legislate and enforce a stricter set of rules regulating many facets of business conduct at a global level," states a study last month from corporate ethics consultant LRN (free registration required). "Faced with this surge of new regulatory compliance demands, as well as fresh ethical challenges posed by a more complex and global business environment, companies attempted to make necessary adjustments. 2007 brought with it new challenges to the business world and important lessons."

The report points to product safety concerns that emerged last year and this year, as well as the meltdown of the mortgage sub-prime and banking industries, which combined have "pushed businesses across all industries to re-examine their internal decision-making processes for the types of conflicts of interest and long-term ethical and reputational risks."

The LRN survey, conducted between February and May 2008, determined that, in the six years since the Sarbanes-Oxley Act was passed, companies have made improvements in managing both ethics and compliance. Out of 460 companies surveyed, 90 percent now conduct ethics and compliance risk assessments, many of which are integrated into enterprise risk management programs.

LRN found that legal, internal audit, human resources and finance departments most often are involved in the assessments. The use of formal chief executive officer and management development programs has also increased, with close to 75 percent of companies now offering the programs.

"Overall, there are positive signs that ethics and compliance efforts are progressing, with more companies developing confidence in their abilities to manage and mitigate risks," according to the report.

Yet most companies are also recognizing that the challenges for tomorrow's ethical business leaders will be even greater. In the LRN report, companies cited continued concerns.

Electronic data protection, data privacy and conflicts of interest were the top three areas of concern, with intellectual property, foreign anti-bribery regulations and supply chain risks following closely.

Historically, the issue of corporate governance became a matter of interest especially because of globalization and, particularly, the investment by the foreign financial institutions in the emerging markets. LRN points to controversies such as the tainted pet food and toys from China as evidence that international issues need to be addressed.

"As in 2007, companies are still challenged in extending their reach internationally. In fact, multinational firms gave themselves lower ratings for both accuracy and timeliness of their risk management efforts at their regional offices in other countries as compared to their headquarter location," LRN said in an announcement of the report.

"In this same regard," the statement continued, "less than one-third of multinational companies are extending ethics and compliance efforts to parties that work closely with them, even though their violations could directly affect their company."

As such, areas needing improvement are protection activities at a company's international locations. Only about 10 percent of multinationals offer education to resellers, 20 percent to suppliers and 30 percent to business partners.

"This lack of coordination with partners and supply chain should be a red flag as companies increasingly build or utilize overseas manufacturing plants, make deals with foreign governments and companies using agents and partners, and transact financial exchanges with parties whose inner operations they may not know," the LRN report claims.

In terms of preventing risk, respondents pointed to numerous challenges — including "lack of resources, low employee engagement, employee fears of retaliation and lack of relevancy in educational materials" — that invariably suggest organizations are not addressing ethics and compliance sufficiently.

Nearly six in 10 companies cited lack of resources as the top problem, making it the overall leading challenge. Beyond this "perennial problem," though, the second and third of the top challenges reflect crucial factors that "make or break" motivating employees to take risk management personally: relevancy and engagement; more than 40 percent of respondents indicated making education relevant as their next most significant challenge, while 25 percent cited engaging employees.

"The cloud of economic gloom could yet have a silver lining for companies that are serious about being responsible," says a recent Ethical Corporation Magazine editorial. "The credit crunch could separate those companies that can back up their sustainability pledges from those that cannot." According to companies interviewed for the magazine's March 2008 cover story, a recession is an opportunity for those firms that have spent money on doing good to reap the rewards of that investment.

"When times are tough," the publication goes on, "a good reputation — and the trust it engenders in employees, especially — is priceless."

Despite major obstacles remaining, the encouraging news is that many leading businesses no longer debate the legitimacy of the role and importance of ethics, as recent McKinsey Quarterly surveys reveal. Instead, as the LRN report confirms, they are finding new ways to put ethics into practice.

Earlier: Is Goodwill Bad Business?

Resources

The LRN Ethics and Compliance Risk Management Practices Report - 2008
LRN, Sept. 20, 2008

Electronic Data Protection, Data Privacy are Top Business Ethics and Corporate Compliance Risks
LRN, Sept. 20, 2008

Ethics in a Downturn - Will You Survive?
Ethical Corporation Magazine, March 11, 2008