George Serafeim recently explored multiple issues relating to environmental, social and governance (ESG) in a Harvard Business Review (HBR) article, entitled “Social-Impact Efforts That Create Real Value”. Yesterday, I considered why ESG is something that every Chief Compliance Officer (CCO) and compliance professional needs to be aware of and move towards. Today, I want to lay out an action plan for ESG and one that compliance professionals should consider for their compliance regimes as well.

Companies need to understand that ESG, like compliance, is not a tick-the-box exercise but one that requires active monitoring and improvement. Indeed, that was one of the key themes from the 2020 Update to the Evaluation of Corporate Compliance Programs. The same is true for ESG. Serafeim believes that most corporations have treated ESG programs “like a cell phone case—something added for protection (in this case, protection of the firm’s reputation). Corporate leaders need to replace this mentality with an ambitious and differentiated ESG strategy if they want to see real financial dividends.”

He goes on to intone that “an ESG program may deliver efficiencies and other operational improvements—maybe even some that are necessary for corporate survival—but it will boost long-term financial performance only if it provides strategic differentiation from competitors.” Finally, just as his research into anti-corruption compliance demonstrated how companies with robust compliance programs outperformed on an ROI basis; (see his paper, of An Analysis of Firm’s Self-Reported Anti-Corruption Efforts, co-authored, with Paul M. Healy which demonstrated that companies with robust compliance programs do better financially in countries prone to corruption than companies with less effective compliance programs), “our research confirms that the adoption of strategic ESG practices is significantly and positively associated with both return on capital and market valuation multiples, even after accounting for a firm’s past financial performance.”

The implementation of an ESG strategy in a company involves large operational and strategic changes. As with compliance, ESG must start at the top with the Board and be diffused through the entire organization. Unfortunately, Serafeim has found that for “most companies the board of directors is far removed from the firm’s ESG efforts. This is a mistake. The board should be the entity that ensures that ESG metrics are properly considered in executive compensation and are adequately measured and disclosed as part of the audit committee’s work.” Moreover, there should be a systematic approach to sustainability governance.

As with compliance, a “top-down approach to sustainability and good governance is not effective if it is not supported from the bottom up by a culture that rallies around ESG initiatives.” Once again, Serafeim has found that “many strategic efforts fail because people further down in the organizational hierarchy don’t believe there is a true commitment to ESG goals or they lack clear direction for achieving them.” Similar to compliance, “Skepticism, even cynicism, leads such efforts to be sidelined or inconsistently implemented across functions, divisions, and business lines.”

But it is more than acceptance, there must be buy-in and participation within all the levels of an organization and indeed the stakeholders of a company. When you can link the purpose of ESG to your corporate strategy, you have a very powerful tool. (Think about that from the compliance perspective as well.) By telling your story around an ESG purpose to and with all stakeholders, Serafeim is seeing “more examples proving that a long-term trade-off between profits and sustainability is not necessary, given that companies can redesign how they generate revenue.” That sort of engagement can go a long way towards having everyone rowing in the same direction. The bottom line is that “Investors find value in information about [an ESG] purpose.”

However, having such a strategic view for ESG purpose, it can present new and different business opportunities. Serafeim pointed “to three key conditions: an intentional strategy to grow leaders within the organization, resulting in the promotion of internal candidates to the CEO role; fair compensation structures (in which the ratio of CEO pay to median worker pay is not extreme for the industry); and careful execution of mergers and acquisitions to avoid culture clashes. Though the reasons aren’t fully understood, the research suggests that externally hired CEOs and companies with more acquisitions need to work harder to create a sense of purpose.”

In his next section, Serafeim related what his research on firms that have successfully implemented an ESG strategy had yielded. He noted there were “three phases: efforts to reduce risk and ensure compliance with environmental regulations and other laws; efforts to improve operating efficiency; and efforts to innovate and grow.” Every CCO and compliance professional should study that progression and assess where their organization’s compliance, ethics and culture are based on that formulation.

Serafeim fleshed this out further by noting, “exemplary firms usually start by centralizing ESG activities, which is helpful for moving from a focus on risk and compliance to a focus on operating efficiency.” Yet to move to the “innovation and growth stage, companies need to decentralize ESG activities and empower corporate functions to take responsibility for them. This is true in terms of distributing power from the C-suite to middle management, but it’s also true at the board level. Initially a board needs to set up a separate sustainability committee. But at the third stage it will typically reallocate responsibilities to preexisting board committees.”Just as with compliance “many companies have failed to recognize that the functional role of ESG data has changed over time. Initially such data was used to judge a company’s willingness to avoid harm and do good. As a result, it was primarily an input to help form policies that signaled a firm’s commitment to achieving positive outcomes for the environment and society.” Yet now, as with compliance, the question has morphed into “whether it has the strategic vision and capabilities to achieve and maintain strong ESG performance.” This “means companies need to start measuring and reporting the results of their initiatives. Instead of communicating their policies for improving data privacy, water management, climate change mitigation, diversity, and other issues, they must communicate outcome metrics such as the number of customer accounts hacked, liters of water consumed per unit of product produced, carbon emissions saved, and percentage of women and people of color promoted internally to management positions.” Once again this sounds like something the Department of Justice (DOJ) would say about compliance programs.

Moving from intention to results is the next evolution for ESG. Serafeim ended his piece by stating, “The only way to outperform in this new era will be for companies to make material ESG issues central to their strategy and operations, to go above and beyond their competitors, and then to measure and communicate their superior performance. Global society faces enormous challenges. But if companies are bold and strategic with their ESG activities, they will be rewarded.”

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2020

What is ethical leadership? Do you base it on something as simple and straight-forward as Don’t Do Evil or is it grounded in one of the more well-known philosophers, such as Jeremy Bentham and utilitarianism, John Stuart Mill and the concept of liberty, or Peter Singer who delineates “practical ethics” which he defines as the application of morality to practical problems based on philosophical thinking rather than religious beliefs? In the Harvard Business Review (HBR), Max H. Bazerman takes a look at this issue for the business leader in a piece entitled “A New Model for Ethical Leadership”.

A key for Bazerman is value creation. He states, “Whereas many experts would define negotiation ethics in terms of not cheating or lying, I define it as putting the focus on creating the most value.” This is certainly a welcomed approach in the corporate world and one that a Chief Compliance Officer (CCO) is well suited to facilitate. This is because “a focus on value creation is still likely to work for you in the long run. Your losses to the occasional opportunistic opponent will be more than compensated for by all the excellent relationships you develop as an ethical negotiator who is making the world a bit better.”

Value creation is obtained through trade-offs in any negotiation. He notes, “Negotiation scholars have offered very specific advice on ways to find more sources of value. These strategies include building trust, sharing information, asking questions, giving away value-creating information, negotiating multiple issues simultaneously, and making multiple offers simultaneously.” This is largely because internal negotiations often “involve a tension between claiming value for yourself (or your organization) and creating value for both parties—enlarging the pie.” He concludes, “All the leading books on managerial negotiations highlight the need to create value while managing the risk of losing out.” The key would seem to be in communications by the CCO during any such negotiations.

Bazerman then goes in a direction little considered by CCOs, compliance professionals or in most corporate compliance functions. He asserts, “People tend not to think of allocating time as an ethical choice, but they should. Time is a scarce resource and squandering it—your own or others’—only compromises value creation. Conversely, using it wisely to increase collective value or utility is the very definition of ethical action.” He goes on to note that allocating tasks among employees offers managers other opportunities to create value, which he calls the notion of comparative advantage.

While many view it as an economic idea; Bazerman sees it as a guide to ethical behavior as it is through the assessing of comparative advantage by determining how to allow each person or organization to use time where it can create the most value. Indeed, if you think about companies which create a comparative advantage when they can produce and sell goods and services at a lower cost than competitors do; you can then see that “individuals have a comparative advantage when they can perform a task at a lower opportunity cost than others can. Everyone has a source of comparative advantage; allocating time accordingly creates the most value.”

I find this to be a key insight for the compliance professional. Time can be an ethical behavior. Now consider the Department of Justice’s (DOJ) Evaluation of Corporate Compliance Programs admonitions around risk assessments. The DOJ continually reminds CCOs to determine, assess and manage their organization’s risks. Now in the era of Coronavirus, this mandate has become even more important. If you have scare monetary and head count resources, you, by definition, have scarce time resources as well. Bazerman certainly provides an ethical analytic framework for this issues.

As you move forward, you may find organizations socially responsible in some ways but less so in others. He stated, “Most organizations get higher ethical marks on some dimensions than on others. I know companies whose products make the world worse, but they have good diversity and inclusion policies. I know others whose products make the world better, but they engage in unfair competition that destroys value in their business ecosystem. Most of us are ethically inconsistent as well. Otherwise honest people may view deception in negotiation with a client or a colleague as completely acceptable. If we care about the value or harm we create, remembering that we’re likely to be ethical in some domains and unethical in others can help us identify where change might be most useful.”

In think this is an excellent prescription for CCOs and compliance professionals to sit back and take stock of their programs from a much more holistic approach. Your compliance programs and company culture may be doing quite well in some areas, less so in others. Now you have the time to consider those areas which are not as robust and you can plan to remediate those areas.

Bazerman believes that leaders can do far more than just make their own behavior more ethical. As “they are responsible for the decisions of others as well as their own, they can dramatically multiply the amount of good they do by encouraging others to be better. As a leader, think about how you can influence your colleagues with the norms you set and the decision-making environment you create.”

Obviously, employees follow the lead in the behavior of others, “particularly those in positions of power and prestige. Employees in organizations with ethical leaders can be expected to behave more ethically themselves.” Tell those stories and make them memorable. Bazerman provided the example of one corporation which secured “rave reviews for its social-responsibility efforts, created an internal video featuring four high-level executives, each telling a story about going above the boss’s head at a time when the boss wasn’t observing the ethical standards espoused by the corporation. The video suggested that questioning authority is the right thing to do when that authority is destroying societal value. By establishing norms for ethical behavior—and clearly empowering employees to help enforce it—leaders can affect hundreds or even thousands of other people, motivating and enabling them to act more ethically themselves.”

As a CCO you should model ethical behavior. However, to the extent you can, influencing the behavior of others is the mark of true leadership.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2020

On this special bonus episode of The Ethics Experts, we speak with Loren Sanders about how many different Learning and Development buckets there are, how vendors catch CVS’s attention, and how to get their business once their attention is captured.

Check out more episodes, and don’t forget to subscribe on your favorite podcast platform!

What is ethical leadership? Do you base it on something as simple and straight-forward as Don’t Do Evil or is it grounded in one of the more well-known philosophers, such as Jeremy Bentham and utilitarianism, John Stuart Mill and the concept of liberty, or Peter Singer who delineates “practical ethics” which he defines as the application of morality to practical problems based on philosophical thinking rather than religious beliefs? In the Harvard Business Review (HBR), Max H. Bazerman takes a look at this issue for the business leader in a piece entitled “A New Model for Ethical Leadership”.

Bazerman said, “For centuries philosophers have argued over what constitutes moral action, theorizing about what people should do. More recently behavioral ethicists in the social sciences have offered research-based accounts of what people actually do when confronted with ethical dilemmas. These scientists have shown that environment and psychological processes can lead us to engage in ethically questionable behavior even if it violates our own values. If we behave unethically out of self-interest, we’re often unaware that we’re doing so—a phenomenon known as motivated blindness.” I want to spend a couple of blog posts looking at this theory and seeing if it can apply not only for the modern-day compliance professional but whether it might have broader applications in business leadership.

Bazerman’s approach is that “improving ethical decision-making blends philosophical thought with business-school pragmatism.” He believes to the underlying principles of “utilitarianism, a philosophy initially offered by Bentham, which argues that ethical behavior is behavior that maximizes “utility” in the world”. Yet he re-monikers it as value, that includes “maximizing aggregate well-being and minimizing aggregate pain, goals that are helped by pursuing efficiency in decision-making, reaching moral decisions without regard for self-interest, and avoiding tribal behavior (such as nationalism or in-group favoritism).”

He begins with the concept of bounded rationality, “which is core to the field of behavioral economics, sees managers as wanting to be rational but influenced by biases and other cognitive limitations that get in the way.” While most academic researchers do not expect persons to be fully rational in their decision-making, they believe “we should aspire to be so in order to better align our behavior with our goals.”

In the ethics domain we struggle with bounded ethicality—systematic cognitive barriers that prevent us from being as ethical as we wish to be. However, through correcting our personal goals from maximizing benefit for ourselves (and our organizations) to behaving as ethically as possible, we can establish a sort of “North Star to guide us. We’ll never reach it, but it can inspire us to create more good, increasing well-being for everyone. Aiming in that direction can move us toward increasing what I call maximum sustainable goodness: the level of value creation that we can realistically achieve.”

To begin to create value, Bazerman cites to the work of Daniel Kahneman, specifically his book Thinking, Fast and Slow, which posits that persons have two different modes of decision-making. The first, “System 1 is our intuitive system, which is fast, automatic, effortless, and emotional. We make most decisions using System 1”. The second is System 2, which is “our more deliberative thinking, which is slower, conscious, effortful, and logical. We come much closer to rationality when we use System 2.” He further notes, the philosopher and psychologist Joshua Greene has called it a “two-system view of ethical decision-making: an intuitive system and a more deliberative one.” The deliberative system leads to more-ethical behaviors.

What Bazerman found is that “intuition and emotions tend to dominate decision-making is that we typically think about our options one at a time. When evaluating one option (such as a single job offer or a single potential charitable contribution), we lean on System 1 processing. But when we compare multiple options, our decisions are more carefully considered and less biased, and they create more value. We donate on the basis of emotional tugs when we consider charities in isolation; but when we make comparisons across charities, we tend to think more about where our contribution will do the most good.”

What all of this would seem to portend is that the skills of a good Chief Compliance Officer (CCO), listening, marshalling the facts and calm deliberation, are more directly in tune with System 2 thinking. Indeed, much of the work of a CCO is negotiating or mediating positions of others. This means managing trade-offs. He noted, “The easiest trade-offs to analyze involve our own decisions. Once two or more people are engaged in a decision and their preferences differ, it’s a negotiation. Typically, negotiation analysis focuses on what is best for a specific negotiator. But to the extent that you care about others and society at large, your decisions in negotiation should tilt toward trying to create value for all parties.” This would seem to be a direct definition of a CCO.

Further, the strategies for negotiations work towards using strategies to find more sources of value. He states, “These strategies include building trust, sharing information, asking questions, giving away value-creating information, negotiating multiple issues simultaneously, and making multiple offers simultaneously. If you’re familiar with negotiation strategy, you appreciate that most important negotiations involve a tension between claiming value for yourself (or your organization) and creating value for both parties—enlarging the pie.”

Bazerman emphasized that negotiation ethics is not simply not cheating or lying, he defines “it as putting the focus on creating the most value (which is of course helped by being honest). You don’t ignore value claiming but, rather, consciously prevent it from getting in the way of making the biggest pie possible.” All of this drives home the role of the CCO and how these strategies can be used to drive ethical behaviors in an organization.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2020