The Ethical Edge—it’s the idea that proactive, data-driven compliance programs can not only ensure an ethics-by-design culture, but also create business process efficiencies that can lead to greater profitability.
We are now at a place where there is sufficient data, academic research, and actual use cases from businesses that demonstrate proactive ethics and compliance programs are not simply good for businesses but, properly used, also lead to greater profitability.
One of the more interesting stories is from an organization that performed a standard fraud risk analysis of business-development personnel spending in a high-risk FCPA country. Because the country was high-risk, there was a relatively low gifts-and-entertainment limit below which the business folks could spend without pre-approval—$75. The fraud risk analysis looked at traditional metrics, such as split receipts and invoices right at, but not over, the limit. The company also looked at the aggregate amount of gifts-and-entertainment spending on individual government officials to see if multiple salespersons were directing their money at one official.
The findings of this analysis were not what was expected, or even what the organization was looking for. The gifts and entertainment spending segregated into two buckets: low spend (Data Point A) and high spend (Data Point Z). The sales team had to spend a minimum of “Data Point A” to make a sale but, if they spent above “Data Point Z,” the data demonstrated the government official was not going to enter into a contract and conclude a sale.
As a result of its analysis, the company decreed the sales team had to spend up to “Data Point A,” but could not spend above “Data Point Z.” It turned out the sales team appreciated the information, as they now had a metric by which they would know when they were not in the running to make a sale. When they got to “Data Point Z” in gifts-and-entertainment spend, they moved on to the next customer.
The effect was twofold: First, the company had an immediate cost savings—business development personnel were not throwing good money after bad (above “Data Point Z”). More interestingly, the company found by moving on from a sales prospect with which there was virtually zero chance of success in making a sale, it reduced its sales cycle time and increased performance and profitability in the business unit.
What started out as a compliance-focused data analysis ended up not only ensuring a more ethical business culture. It also—unexpectedly—created a business process efficiency that directly impacted the organization’s bottom line.
Academic research lends credence to this theory as well. A pair of Harvard professors—George Serafeim and Paul Healy—demonstrated in their paper, “An Analysis of Firm’s Self-Reported Anti-Corruption Efforts,” that companies with robust compliance programs do better financially in countries prone to corruption than companies with less effective programs. Without a robust compliance program, even with high sales in a high-risk country, the sales will drop off and lead to a negative return on equity (ROE) of between 24 to 30 percent.
George Washington University Professor Kyle Welch, in a paper entitled “Evidence on the Use and Efficacy of Internal Whistleblower System” reviewed 15 years of anonymized whistleblower data from NAVEX Global. His key findings were that more robust whistleblower reporting systems led to a material reduction in litigation costs, fines, and penalties. He found there was higher quality corporate governance in companies with more robust reporting cultures and that higher earnings were reported. Overall litigation settlements of non-material litigation matters also dropped 20 percent over three years.
If we are to learn from the abundance of research, businesses would surely benefit from the Ethical Edge.
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Data-driven compliance can create business success