The Trouble With Corporate Compliance Programs

Magazine: Fall 2017 IssueResearch Feature Reading Time: 19 min 
Todd Haugh

Companies with rigorous compliance programs hope such programs will curtail employee wrongdoing. But to prevent employee misconduct, companies also have to understand how employees reach unethical decisions — and what affects their decision-making processes.

Trouble Corporate COmpliance Programs Business Management Leadership

Multinational corporations spend millions of dollars per year on compliance. In highly regulated industries such as health care and finance, large companies spend much more, sometimes hiring hundreds or even thousands of compliance officers at a time.1 Siemens AG reportedly spent more than $1 billion on an internal investigation related to a government inquiry into the company’s payment of foreign bribes.2 But the costs are not just financial. Compliance programs are aimed at eliminating the time-consuming and distracting regulatory and legal processes that accompany ethical failures.

There is a belief on the part of corporate leaders that when rigorous compliance programs are in place, employee wrongdoing will largely disappear. If something does go wrong, the hope is that having a comprehensive program will help convince regulators that the company’s compliance and ethics initiatives were “effective” (the standard set by U.S sentencing guidelines).3

Companies strive to make their programs as “bulletproof” as possible. Unfortunately, even the most comprehensive programs won’t curtail corporate wrongdoing or the government intervention that follows. For instance, Volkswagen AG’s compliance program didn’t stop employees from installing “defeat device” software to cheat emissions tests, nor did Wells Fargo & Co.’s policies prevent its employees from opening new customer accounts without customers’ authorization. More than 15 years after the Enron scandal, most companies know very little about how employees make ethical decisions or the psychological mechanisms that cause them to perform unethical and illegal acts. Even fewer companies have compliance strategies aimed at curbing such behaviors.

The goal of this article is to pull together the burgeoning field of behavioral ethics, which provides insight into how individuals make ethical decisions, with the work of criminologists who study individual and corporate criminality. My aim is to help business leaders see why their corporate compliance efforts are falling short and how those efforts can be improved. In addition, I will offer some practical and cost-effective steps for improving compliance programs that focus on employee behavior — the best way to make compliance truly effective.

Dual Systems of Thinking

Corporate compliance depends on the behavior of individual employees. If employees, officers, and managers always acted in a law-abiding and ethical manner, compliance failures would rarely occur. Of course, that is not realistic.

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References

1. S.J. Griffith, “Corporate Governance in an Era of Compliance,” William & Mary Law Review 57, no. 6 (May 2016): 2102-2103; and R.M. Steinberg, “The High Cost of Non-Compliance: Reaping the Rewards of an Effective Compliance Program” (February 2010), www.securityexecutivecouncil.com.

2. P.J. Henning, “The Mounting Costs of Internal Investigations,” The New York Times, March 5, 2012, http://dealbook.nytimes.com.

3. United States Sentencing Guidelines Manual, chapter 8 (2016), www.ussc.gov.

4. Kahneman and Tversky’s work was popularized with the publication of Kahenman’s 2011 book; see D. Kahneman, “Thinking, Fast and Slow” (New York: Farrar, Straus and Giroux, 2011), 20-24. However, their work spanned decades. See, for example, D. Kahneman, “Maps of Bounded Rationality: Psychology for Behavioral Economics,” American Economics Review 93, no. 5 (December 2003): 1449-1450.

5. Kahneman, “Maps of Bounded Rationality,” 1451.

6. Kahneman, “Thinking, Fast and Slow,” 52.

7. P.G. Hansen and A.M. Jespersen, “Nudge and the Manipulation of Choice: A Framework for the Responsible Use of the Nudge Approach to Behaviour Change in Public Policy,” European Journal of Risk Regulation 4, no. 1 (March 2013): 13.

8. Kahneman, “Maps of Bounded Rationality,” 1467.

9. R.A. Prentice, “Behavioral Ethics: Can It Help Lawyers (and Others) Be Their Best Selves?” Notre Dame Journal of Law, Ethics & Public Policy 29, no. 1 (2015): 36.

10. Y. Feldman, “Behavioral Ethics Meets Behavioral Law and Economics,” in “The Oxford Handbook of Behavioral Economics and the Law,” eds. E. Zamir and D. Teichman (New York: Oxford University Press, 2014), 8. See also D.A. Moore and G. Loewenstein, “Self-Interest, Automaticity, and the Psychology of Conflict of Interest,” Social Justice Research 17, no. 2 (2004): 190.

11. Kahneman, “Maps of Bounded Rationality,” 1467.

12. E.H. Sutherland, “White Collar Crime: The Uncut Version” (New Haven, Connecticut: Yale University Press, 1983), 240. For a succinct discussion of Sutherland’s groundbreaking theories on white-collar crime, see E.H. Sutherland and D.R. Cressey, “A Sociological Theory of Criminal Behavior,” in “Delinquency, Crime, and Social Process,” eds. D.R. Cressey and D.A. Ward (New York: Harper & Row, 1969), 429-443.

13. D.R. Cressey, “The Respectable Criminal: Why Some of Our Best Friends Are Crooks,” Criminologica 3, no. 1 (May 1965): 14-15.

14. Ibid.

15. D.R. Cressey, “Other People’s Money: A Study in the Social Psychology of Embezzlement” (New York: Free Press, 1953), 95.

16. Feldman, “Behavioral Ethics Meets Behavioral Law and Economics,” 17.

17. E. Kolbert, “That’s What You Think: Why Reason and Evidence Won’t Change Our Minds,” The New Yorker, Feb. 27, 2017, 66, citing H. Mercier and D. Sperber, “The Enigma of Reason: A New Theory of Human Understanding” (Cambridge, Massachusetts: Harvard University Press, 2017).

18. Mercier and Sperber, “The Enigma of Reason.”

19. S. Maruna and H. Copes, “What Have We Learned from Five Decades of Neutralization Research?” Crime and Justice 32 (2005): 222. See also B.E. Ashforth and V. Anand, “The Normalization of Corruption in Organizations,” Research in Organizational Behavior 25 (2003): 2-5.

20. This section is adapted from a series of articles the author has written concerning white-collar crime and corporate compliance. See, for example, T. Haugh, “The Criminalization of Compliance,” Notre Dame Law Review 92, no. 3 (April 2016): 1255-58; T. Haugh, “Overcriminalization’s New Harm Paradigm,” Vanderbilt Law Review 68, no. 5 (October 2015): 1218-1222; T. Haugh, “Sentencing the Why of White Collar Crime,” Fordham Law Review 82, no. 6 (2014): 3165-3169.

21. D.B. Yoffie and M. Kwak, “Playing by the Rules: How Intel Avoids Antitrust Litigation,” Harvard Business Review 79, no. 6 (June 2001): 120-121.

22. Ibid., 120.

23. Complaint, New York v. Intel Corp., No. 1:09-cv-00827-UNA (D. Del. Nov. 4, 2009): 19-20.

24. “Independent Directors of the Board of Wells Fargo & Company Sales Practices Investigations Report” (April 10, 2017): 37-38.

25. M. Corkery and S. Cowley, “Wells Fargo Warned Workers Against Sham Accounts, but ‘They Needed a Paycheck,’” The New York Times, Sept. 16, 2016, www.nytimes.com.

26. See, for example, D. De Cremer and A.E. Tenbrunsel, eds., “Behavioral Business Ethics: Shaping an Emerging Field” (New York: Routledge, 2011), 3-10.

27. R.H. Thaler and C.R. Sunstein, “Nudge: Improving Decisions About Health, Wealth, and Happiness” (New Haven: Yale University Press, 2008); D. Ariely, “The Honest Truth About Dishonesty” (New York: HarperCollins, 2012); and Kahneman, “Thinking, Fast and Slow.”

28. L.L. Shu, N. Mazar, F. Gino, D. Ariely, and M.H. Bazerman, “Signing at the Beginning Makes Ethics Salient and Decreases Dishonest Self-Reports in Comparison to Signing at the End,” Psychological and Cognitive Sciences 109, no. 38 (Sept. 18, 2012): 15198.

29. Ibid.

30. Ariely, “The Honest Truth,” 45-48.

31. P. Crowe, “JP Morgan Is Working on a New Employee Surveillance Program,” Business Insider, April 8, 2015, www.businessinsider.com; and K. Scannell and H. Kuchler, “Palantir and Credit Suisse Join Forces to Target Rogue Traders,” Financial Times, March 22, 2016, www.ft.com.

32. J. Heath, “Business Ethics and Moral Motivation: A Criminological Perspective,” Journal of Business Ethics 83, no. 4 (December 2008): 611.

33. R.B. Cialdini, L.J. Demaine, B.J. Sagarin, D.W. Barrett, K. Rhoads, and P.L. Winter, “Managing Social Norms for Persuasive Impact,” Social Influence 1, no.1 (2006): 13; and S. Killingsworth, “Modeling the Message: Communicating Compliance through Organizational Values and Culture,” Georgetown Journal of Legal Ethics 25, no. 4 (fall 2012): 983.

34. Killingsworth, “Modeling the Message,” 983.

35. “Parsons: People. Planet. Progress. 2017 Corporate Social Responsibility Report,” www.parsons.com, 51.

36. R.F. Hurley, N. Gillespie, D.L. Ferrin, and G. Dietz, “Designing Trustworthy Organizations,” MIT Sloan Management Review 54, no. 4 (summer 2013): 75-82.

37. A.M. Grant and F. Gino, “A Little Thanks Goes a Long Way: Explaining Why Gratitude Expressions Motivate Prosocial Behavior,” Journal of Personality and Social Psychology 98, no. 6 (June 2010): 953; Cialdini et al., “Managing Social Norms for Persuasive Impact,” 13.

38. See L.S. Paine, “Managing for Organizational Integrity,” Harvard Business Review 72, no. 2 (March-April 1994): 106-107.

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2 Comments On: The Trouble With Corporate Compliance Programs

  • Roberto Bonilla | October 17, 2017

    Very valuable and interesting article, I got new insights on this global and relevant systemic cancer (unethical behaviors)

  • Gary Busby | November 1, 2017

    I was surprised to see that the three pre-conditions recognised by criminologists do not include the obvious motivation of greed. In several major compliance failures (criminal fraud in large corporations) that I’ve personally investigated, the only motivation was greed for greater wealth than was already possessed, plus (in several cases) a belief that such behaviour was widespread and hence to participate amounted almost to ‘conforming’ rather than rogue behaviour. This is an important point as it means that compliance checks cannot focus on identifying personal financial stress as a precondition for unethical decisions. I see however that the author has captured this motivation as the last of his eight listed perpetrators’ self-justifications.

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