For some executives from a bygone era the idea of striving to be ethical had no place in their ranks. Business was for tough, rugged individuals, who played a life-or-death game of survival of the fittest. As a zero-sum game, the goal was to take what you could, demolish competitors, and let the buyer beware. For some of these executives, legality was a consideration, sure, but laws could always be bent, and ethics were something to be ignored. Fines, settlements, and judgments were often viewed as an acceptable cost of doing business.

For the most part, these ideas are long gone. Today there's little doubt that executives of major companies, as well as smaller ones, have a very different view—that integrity and ethical values occupy an important place in business and should form the foundation of a company's culture.

For awhile, the idea that ethics was an integral part of business was grounded in the thinking that it was a defense against reputational risk or that it was simply the right thing to do. More recently, though, another notion has come to the fore: that it actually pays to be ethical. That is, there can be a significant positive return on investment for building integrity and ethical values into the fabric of a company.

There's plenty of anecdotal evidence to support the idea that ethics pays. Consultants have long posited that companies considered to have strong integrity and ethical values attract the best employees, as well as more desirable customers, suppliers, financiers, and business partners. People want to do business with companies they can trust and feel comfortable working with. Johnson & Johnson and Arthur Andersen occupy two opposite sides of that coin. When years ago J&J immediately pulled Tylenol off the shelves in the earliest stages of tampering evidence, it gained tremendous applause, enhanced its reputation, and won a stronger market presence. On the other hand, when Arthur Andersen was indicted by the Department of Justice, clients, employees, and partners quickly fled.

Anecdotal evidence is useful, especially when supported by harder evidence. The Edelman Trust in its 2011 Barometer found that 85 percent of global respondents reported buying products or services from a company they trusted, whereas 73 percent said they refused to buy products or services from companies they didn't trust. Another study by Ethisphere Institute, links good behavior with stock performance. It found highly ethical companies outperform competitors in the stock market by seven to eight percent annually.

there's a further argument for ethical companies: “Good companies understand that when you have a culture of transparency and openness, it's not just about letting employees raise their hand with a concern,” says Ethisphere Institute founder Alex Brigham. “It's also about having a culture that fosters innovation, because innovation also allows people to raise ideas without fear of failure or ridicule in front of other employees. It also creates a culture where people want to work, because they feel there's a greater sense of respect, so it's easier to attract good employees and retain them.”

Legal and Regulatory Advantages

Acting with integrity and ethical values requires companies to go beyond what's required by law and regulation, making compliance the minimum baseline. Still, promoting ethics enables legal and regulatory compliance. The U.S. Sentencing Guidelines, for example, have long given credit for effective ethics and compliance programs (although some observers question whether the credit is sufficient). And while gaining such credit is positive, companies and their executives want to avoid getting to the point of standing before a judge, of course.

Regulators also recognize integrity and ethical values drive effective compliance programs. The SEC's Office of Compliance Inspections and Examinations, for example, has emphasized that it views a company's tone-at-the-top as a critical element of compliance program effectiveness. Leadership must promote integrity and ethical values in decision making across the organization and incorporate such values into performance management systems and compensation, so the company encourages and rewards the right behaviors, while inappropriate behavior is subject to corrective action.

Acting with integrity and ethical values requires companies to go beyond what's required by law and regulation, making compliance the minimum baseline.

Certainly the Securities and Exchange Commission and Justice Department have made the point in speeches and writings that effective compliance programs, including the appropriate tone-at-the-top based on integrity and ethical values, are taken into account in determining enforcement actions. While many compliance officers have heard that message, until relatively recently we haven't seen much direct evidence of such claims by regulators.

A recent case involving Morgan Stanley has gained the attention of compliance and ethics officers. Problems arose when Garth Peterson, a managing director at the bank, allegedly succeeded in pushing the firm to sell a real estate interest to a Chinese state-owned company. It turned out, however, to be a shell company in which Peterson had a direct interest, with related cash payments to Chinese officials and himself. Peterson pleaded guilty, and he faces a potential six-figure fine and five years in prison. But what happened to Morgan Stanley, or rather what didn't, is the real story. The SEC and the Justice Department decided not to bring any enforcement action against the company, citing the strength of the bank's existing compliance system. It regularly updated controls to reflect risks of misconduct and provided extensive training to its personnel, compliance reminders, annual confirmations by personnel—including Peterson—and continuous monitoring. And, when evidence of misconduct surfaced, the firm immediately began a thorough investigation.

More recently, compliance officers have another case to support the assertion that a robust compliance program is the best defense against regulatory enforcement actions. While upgrading its worldwide controls, including Foreign Corrupt Practices Act compliance training in Argentina, clothing retailer Ralph Lauren Corp. uncovered bribes to government officials. In addition to promptly reporting the misconduct, it provided extensive cooperation to the SEC and took a number of related actions. The company added new compliance training, fired the individuals involved in the wrongdoing, terminated related business arrangements, strengthened internal controls and procedures for third-party due diligence, conducted a compliance risk assessment of its major operations worldwide, and ceased operations in Argentina.

Although Ralph Lauren didn't get the get-out-of-jail-free card that Morgan Stanley got—the retailer agreed to pay $1.6 million in fines and disgorgement—it did get a non-prosecution agreement, with no charges of FCPA or other violations. It seems clear that the SEC is aware of perceptions that good compliance hasn't always earned credit, and it is making the point that doing the right thing will be rewarded. When the SEC announced the Ralph Lauren settlement, for example, George Canellos, acting director of the enforcement division, said: “The NPA in this matter makes clear that we will confer substantial and tangible benefits on companies that respond appropriately to violations and cooperate fully with the SEC.”

There's no doubt that companies acting with integrity and ethical values indeed do gain considerable benefits in the marketplace and with regulators. So, does being ethical pay? There's no doubt the answer is a resounding “yes.”