We are now at a place where there is sufficient data, academic research, and actual use cases from corporations and businesses that demonstrate good ethics and compliance programs are not simply good for business but when properly used, they lead to greater profitability.
For 15 years, Ethisphere has been collecting data around its World’s Most Ethical Company awards. Companies which receive this designation have been found to outperform their peers on various stock indices. Ethisphere calls this the “Ethics Premium.” Ethisphere Executive Vice President (EVP) Erica Salmon Byrne has noted, “In tracking how the stock prices of publicly traded honorees compare to the U.S. Large Cap Index, we found that listed World’s Most Ethical Companies outperformed the large cap sector.” In 2010 that number was a delta of 4.5%. Yet by 2020 that number had skyrocketed to 13.5%. Clearly Ethisphere has been on to something.
Academic research has also shown the efficacy of ethics and compliance programs. George Serafeim and Paul M. 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 compliance 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%.
Dr. Kyle Welch, Assistant Professor at George Washington University (GWU), in his paper, co-authored with Stephen Stubben, Associate Professor from The University of Utah, entitled “Evidence on the Use and Efficacy of Internal Whistleblowing Systems” (Report). In this paper, Welch and Stubben reviewed some 15 years of anonymized data from NAVEX Global, Inc. This data was from the company’s hotline reporting systems. Some of the key findings included that companies with a robust whistleblower and reporting system had greater profitability and workforce productivity as measured by Return on Assets (ROA) and there were fewer material lawsuits brought against the company overall and there were lower settlement costs if a lawsuit did occur. Finally, there were fewer external whistleblower reports to regulatory agencies and other authorities.
All of this leads to the key finding of a reduction in material litigation costs and remember this is not simply civil litigation but all reportable proceedings against a company, including regulatory enforcement actions, criminal sanctions sought by the Department of Justice (DOJ) and all other court proceedings. A material proceeding would have to be 5% of a company’s gross margin, so the amount would be quite high. Companies with robust whistleblower reporting systems also had 4% fewer pending lawsuits the year after increased hotline activity, improving to 6.9% fewer material lawsuits over the next three years. Additionally, overall litigation settlements of non-material matters dropped almost 20% over three years as well.
But the story does not end with data, numbers or even academic research. The corporate world is full of tales where a compliance solution was delivered which not only made compliance more effective but improved business process efficiency and greater profitability. Data and information collected which might initially begin as a compliance solution or project can be used to improve business process efficiency. It can also be the case that the delivery of a compliance solution can improve an overall business process. When you start to consider the compliance data points in every organization, from the Quote To Cash (QTC) sales cycle to the Procure To Pay (P2P) procurement cycle you begin to see how compliance can be used to improve business efficiency and lead to greater profitability.
The bottom line is when you create a culture of trust, that generates loyalty, it generates passion, it generates productivity. Your employees are engaged and want to give their all. This means they are looking for opportunities to prove themselves by doing the best they can. If you have a robust culture of speak up as we have discussed throughout this blog post series, you will have motivated employees who can communicate the business efficiencies upgrades and new ideas for greater profitability.
Trust is a vital component of creating a productive and passionate company culture. Disrespect can damage trust and lead to a breakdown in employer-employee relationships. When employees feel trusted, they are empowered and motivated to give their best. This generates loyalty, passion, and productivity, creating a company culture that thrives and excels. Trust is not only morally right but also financially smart, as it reduces worker disengagement and turnover costs. Having a robust ethos of speak up in your organization will only drive better overall corporate culture.