The Trouble With Corporate Compliance Programs

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.

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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