Explaining how a strong culture of ethics and compliance can help your enterprise to succeed is tricky business. So imagine my delight when I came across a recent speech from a banking regulator who did exactly that.
The regulator in question is Michael Hsu, acting director of the Office of the Comptroller of the Currency. OCC is the primary U.S. regulator for retail banks – that is, banks in direct contact with consumers, which means the banks face high regulatory compliance obligations and are under fierce pressure to innovate and stay competitive.
So how can banks do that? How can they keep the innovative spirit that management wants, while also maintaining an ability to navigate a complex regulatory landscape?
By grounding their operations in a sense of fairness, Hsu said. Or, in his own words:
The traditional zero-sum game approach is to trade off compliance with innovation and growth, meaning more of one means less of the other and vice versa. This is shortsighted. Strong and effective compliance risk management should lead to greater freedom and more certainty to innovate and grow. A well-developed sense of fairness can help ensure that compliance risk management practices are effective, especially in areas that are evolving.
That is an excellent point. It’s also one that applies equally well to any other business sector; just swap in the word “ethics” for “fairness” in his above paragraph, and every compliance officer in the land would be nodding their heads in agreement.
Let’s take a close look at Hsu’s arguments, so you can use them yourself when arguing for a strong culture of ethics and compliance at your own organization.
How ethics can help to anticipate trouble
Hsu’s broad point was that innovation, while good, can take a company in unplanned directions over time. Then the company might find itself in a difficult place, with business practices and operating models that are legal, but perhaps not aligned with stakeholders’ ethical priorities. That is never where a company wants to be.
True to his banking roots, Hsu gave the example of overdraft fees. In the 1990s, banks imposed those fees infrequently, since so many people still used cash in daily transactions and had less opportunity to overdraw their accounts. By the late 2010s, however, we evolved into a nearly cash-free society, overdraft fees had risen to an average of $35 per infraction, and the fees themselves became a multi-billion dollar revenue stream for banks.
Except, Hsu noted, those fees mostly fall on the backs of low-income consumers, since they don’t have much money and therefore are more likely to overdraw their account. Then Hsu asked: is that fair?
Well, yes and no. Overdraft fees can be imposed uniformly against all customers who overdraw accounts, but end up hurting one demographic more than others. There are multiple perceptions of fairness in conflict, Hsu said, which leads to friction among regulators, business interests, consumers, and other stakeholders.
Now the Biden Administration is now trying to impose a cap on overdraft fees, and the banking industry is fighting those proposals. It is an enormously difficult situation for compliance officers.
We needn’t debate the merits of regulatory policy for overdraft policy here and now. We should, however, appreciate Hus’s larger point: that a more ethically aware approach to evolving business practices will help you anticipate – and ideally avoid – potential compliance battles down the road.
Or, as Hsu said, “What may seem manageable at first from a compliance risk perspective, can become much more complicated over time. A well-developed internal sense of fairness can help a bank navigate these waters.”
First, push your company to define its ethical priorities clearly, and then assess how those priorities do or don’t align with the ethical priorities of other stakeholder groups: consumers, employees, business partners, activist groups, and the like.
How ethics can help to avoid trouble
OK, enough with the overdraft fees. How can compliance officers in the rest of the world put Hsu’s words to practical use?
First, push your company to define its ethical priorities clearly, and then assess how those priorities do or don’t align with the ethical priorities of other stakeholder groups: consumers, employees, business partners, activist groups, and the like.
That exercise drives at one of Hsu’s most important points: that we can have multiple perceptions of fairness in conflict with each other. Those conflicts give rise to more regulation and more challenges for compliance programs. The better your company is at sensing where those ethical landmines are, the more skillfully you can move to avoid them.
Second, try to inject those concerns about ethics into the conversations your business has about innovation and product development.
We’ve seen this tension for many years as companies plot growth strategies and business expansions: they want to enter high-risk markets or overhaul compensation structures, without ever first considering how those changes might elevate the risks of fraud and corruption.
Second, try to inject those concerns about ethics into the conversations your business has about innovation and product development.
That same dynamic also exists as companies contemplate other innovations, too. They might want to develop AI systems to set dynamic pricing for products or to recruit job candidates, without first considering how to avoid discrimination in the AI system’s results. Well, what would a “fair” set of results from that AI system look like? The better your company can describe that vision in advance, the better you’ll be able to identify potential compliance risks and move to avoid them.
That brings us to a third point: once the company has defined the “ethically aware innovation” it wants to develop, consider the policies and procedures you’d need in place to document that effort.
For example, if you’re developing new uses for artificial intelligence, develop policies for the training data it consumes and the testing you perform on the AI’s results. If you’re developing new fintech applications for consumers, think about what data you’d need to collect to demonstrate compliance with fair lending or consumer protection laws.
That brings us to a third point: once the company has defined the “ethically aware innovation” it wants to develop, consider the policies and procedures you’d need in place to document that effort.
In the final analysis, companies are always going to innovate; it’s how they survive. What they shouldn’t do, however, is innovate without a sense of what’s ethical and fair – including differences between what the company might consider fair, versus what others might believe. The more your organization can innovate in an ethically aware manner, the more you’ll be able to navigate whatever compliance duties might emerge in the future.
So, to sum it all up: strong ethics and compliance aren’t roadblocks to innovation, they’re guideposts. And a well-defined sense of fairness can help businesses anticipate and avoid future compliance issues.
NAVEX can help your organization embrace a culture of ethics and compliance that fosters innovation. And a great place to start is to benchmark your hotline and incident management program against your peers to examine cultural trends in your organization.
The Whistleblowing & Incident Management Benchmark Report is out now to do just that, download here or check out our first ever web-first Benchmark Report:
Take me to the interactive report
