[author: Matt Kelly, Radical Compliance]

Corporate ethics and compliance officers have long argued that maintaining an ethical corporate culture is important to a business for all sorts of reasons. Now you might be able to offer one more: failing to maintain an ethical corporate culture might violate federal securities rules.

At least, that’s the logic we’re seeing in several recent high-profile examples of corporate conduct gone wrong. Foremost among them is Facebook. Frances Haugen, more commonly known as the Facebook whistleblower, filed eight complaints with the Securities and Exchange Commission this fall arguing that Facebook’s behavior was nowhere near as ethical as the company portrays to the public — and therefore, Haugen and her lawyers say, the SEC should investigate Facebook for misleading investors.

Facebook isn’t the only example, either. The SEC is investigating accusations that other companies have tolerated cultures of sexual harassment for years.

The whole premise of these complaints is that a strong ethical culture is something investors inherently value — and that misleading statements about corporate culture can, sometimes, be grave enough to merit regulatory enforcement.

What’s interesting here is that the examples don’t involve the usual allegations of fraudulent financial reporting. Whistleblowers aren’t saying, “We were fabricating deals to inflate revenue” or “Executives used false spreadsheets and sham vendors to bribe their way to business contracts” like we see so often in FCPA enforcement cases.

Rather, Haugen is telling the world, “Our corporate culture and operations were nothing like what you thought.” She believes that investors would make different decisions about owning Facebook shares if they saw the organization’s true nature. Which investors would only do if they believe unethical behavior is something to be avoided.

The whole premise of these complaints is that a strong ethical culture is something investors inherently value — and that misleading statements about corporate culture can, sometimes, be grave enough to merit regulatory enforcement.

This Momentum for an Ethical Culture Has Been a Long Time Coming

For years, research has shown that companies scoring highly on benchmarks of ethical performance tend to enjoy better share price appreciation than lower-scoring peers. In other words, the market does place a premium on businesses that conduct themselves ethically. So, it’s only natural that sooner or later someone would claim that failing to adhere to ethical statements is a fraud against investors – and worthy of regulators’ attention.

In fact, other stakeholder groups other stakeholder groups such as consumers, NGOs, and business partners have already been clamoring for more evidence of a company’s ethical culture for years; and then making decisions based upon what they learn.

For example, when a compliance officer sends a questionnaire to a third party asking about its anti-corruption policies, you are, essentially, putting a premium on those companies that can demonstrate a strong ethical culture (in this case, one that rejects bribery). Consumers, NGOs, and employees often do the same. Why would investors be any different?

Consider the Compliance Function Capabilities Necessary in That World

As a company’s ethical culture becomes more important to good relations with its stakeholder groups, that has big implications for a corporate ethics & compliance program.

First, accuracy in what the company discloses about its ethical culture becomes crucial. The compliance function would play a critical role in that, since yours is the one that manages internal reporting hotlines, vets third parties, and trains employees on the importance of good conduct.

That’s not to say companies should outright declare, “Our corporate culture might not be that great.” (The legal department would have a coronary if you did.) But senior leaders will need to have frank discussions about the company’s overall ethical performance — including where the company needs to improve — and what to include in, say, a securities filing.

Second, then, the ethics and compliance function needs to work closely with the company’s disclosure team.

The disclosure team is responsible for controls and procedures that capture material information about the company that should be disclosed to investors. If the company’s ethical culture is becoming more important to investors and other stakeholders (which is Haugen’s contention about Facebook), then the corporate compliance function needs to work closely with that team to assure that the right issues are disclosed.

In one sense this isn’t news; if your company were enduring a major FCPA crisis, of course you, the legal team, and the disclosure team would be conferring to assure that you’re disclosing the right level of detail to the public. FCPA problems, however, are specific violations of law — so in a sense, the disclosure implications are easier to understand. Lapses of ethical culture are more difficult to fit into disclosure controls and procedures.

Ideally you’ll have clear, written guidelines about what should normally be disclosed, since unwritten policies and procedures have a funny way of becoming arbitrary decisions; and down that road lies trouble with regulators.

Third, and perhaps as always, keep striving for a strong, ethical culture. Talk with senior leaders about the importance of setting clear ethical priorities for employees. Design policies to encourage good behavior and to punish the bad — and then follow through on those disciplinary actions. Document your efforts.

This shouldn’t be news to compliance officers either, since demonstrating a culture of compliance is so important to showing regulators you have an effective compliance program. But the more you can show that your leadership is committed to honest, ethical culture, the more you can deflect specific examples of misconduct back to the individuals who insist on doing it.

That ability will become more important in today’s world where investors and others watch ethical conduct closely. Your ability to nurture the culture, preserve it, and document it will deliver a premium.

Encourage Confidence in Your Company Culture

View original article at Risk & Compliance Matters