In an era of reduced regulation, let’s not forget corporate integrity

Can contemporary global businesses be counted on to do the right thing? It’s a question I’ve been asking myself with increasing frequency as the layers of corporate regulation that have defined the last decade of corporate governance face new scrutiny from the new U.S. presidential administration.

In the likely environment of reduced regulation, will businesses follow Adam Smith’s theory of economics, which held that free enterprise required people of propriety, prudence, and benevolence in order for the system to work? Or will they seize the new era of deregulation as an opportunity to cut corners and exploit new loopholes?

Corporate behavior during the last several years of intense regulation suggests that at least some companies have not been studying Smith’s theories. Volkswagen’s “dieselgate,” Mylan’s Epipen price-gouging, and most recently, a suit filed by the Los Angeles city attorney—which alleges that JC Penney, Kohl’s, Macy’s, and Sears have been inflating original prices only to make their sale prices look more appealing—serve as a handful of recent examples.

Have we reached an epidemic in the world of corporate integrity, in which the relentless pressure to hit short-term earnings and stock price targets have taken precedence over quality of customer engagement and trust? Maybe, and this possibility is not lost on mainstream consumers. 

The 2016 Edelman Trust Barometer, for example, found that the mass population’s level of trust in businesses, the government, non-governmental organizations, and the media is below 50 percent, a level that has not budged since the Great Recession. It also found that people are increasingly more willing to trust their peers than business CEOs or government officials.

It seems that businesses themselves are aware of this issue. The newly released 2017 PwC CEO Survey, which took the pulse of 1,379 CEOs around the world on a wide range of issues found that 58 percent are somewhat (39 percent) or extremely (19 percent) concerned that a lack of trust is harming business growth.

All of this, of course, is set against a backdrop of significant disruption to traditional business models at the hands of digital companies and new breeds of “sharing economy” start-ups that have built their entire businesses on a foundation of referrals, immediate feedback, and democratization of information.  

In a free market environment, where new technologies have the power to disrupt conventional ways of doing business and devalue once-great brands with a single mouse click, integrity becomes a wild card. Those who embrace that will succeed despite the regulatory environment of the moment.  Those who do not, risk fading away.

The retail companies at the center of the alleged price inflation allegations in Los Angeles are not only facing a huge challenge from Amazon.com over supply chain supremacy, they are also losing out to the web retailer when it comes to trust. In fact, just as the news was breaking about the Los Angeles lawsuit, a new study from retail technology and operations provider Radial found that 95 percent of Amazon shoppers describe the company as “trustworthy.” Not too long ago it was Amazon that was the un-tested, un-trusted new kid on the block. How quickly things change when a company delivers on its promise to customers.

To be sure, the country has seen worse: In the early 2000s, massive criminal accounting fraud at WorldCom, Enron, and Computer Associates, to name a few, led to a crisis of corporate confidence and, well, greater regulation in the form of Sarbanes-Oxley. But that doesn’t lessen the current issue, which has become much bigger than any one isolated case of corporate malfeasance. In an era of loud populism (on the right and the left), it suggests a new crisis of confidence in big businesses that should elevate corporate integrity to the top of the priority list for boards of directors and senior management in 2017. If today’s largest institutions want to continue to hold that mantle, they will need to develop (or enhance) cultures of integrity that govern everything from top- and bottom-line growth to forward-looking sales strategy. This includes both setting the right tone from the top and incentivizing ethical behavior among employees. Companies might even consider making integrity their guidepost for all decision making.

It doesn’t take an 18th century economics philosophy to expose how lapses in corporate integrity can lead to a loss of faith in big business. Countless examples attest to the ease with which one-time bedrock institutions can be replaced by nimble up-starts (If you don’t believe me, look it up on your PalmPilot). What businesses with sales-at-all-cost cultures do need is a reality check on the impact such cultures are having on their connections with customers.

This is bigger than regulation. Some companies flouted ethical standards during the most intense period of regulatory reform the world had ever seen; some will continue to do so in an era of deregulation. But, in a free market environment, where new technologies have the power to disrupt conventional ways of doing business and devalue once-great brands with a single mouse click, integrity becomes a wild card. Those who embrace that will succeed despite the regulatory environment of the moment.  Those who do not, risk fading away. 

Daniel R. Alonso is a managing director with Exiger, the global regulatory, financial crime, risk and compliance firm.  A former federal and state corruption prosecutor, Mr. Alonso is also the chair of the Integrity Forum, an ongoing series of breakfast events which address a wide range of integrity-themed topics.