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Ethics and Mitigating Reputation Risks

A basic truism is – ethics and compliance reinforce each other. An ethical culture is an effective control against violations of law and a company’s code of conduct. Conversely, legal compliance promotes a company’s commitment to an ethical culture.

Larger global companies are more likely to identify reputational risks as its greatest threat. (See Here NAVEX Global Third Party Benchmark Report).

My favorite Warren Buffet quote on the value of a company’s reputation makes the point:

It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.

A company faces a myriad of risks, some within its control and some outside of its control. Assuming a company’s reputation is a very valuable intangible asset, everyone should understand the importance of protecting and promoting the company’s reputation.

A company’s commitment to an ethical culture is the most effective way to embed and promote its reputational value. Maintaining an effective legal compliance program is not as effective as an ethical culture in protecting a company’s reputation. What do I mean by that?

We all encounter situations in which a legal solution may differ from the ethical solution to a business decision. In some cases, even though the company can choose a course of action because the legal risks are relatively low, the ethical principles applicable to the situation may be more appropriate, especially when the company considers its reputational risks.

For example, assume that a company is considering whether to pay its vendors in 60 days after invoice in accordance with its contracts or change its policy unilaterally to make all payments 75 days after invoice. The legal analysis of such a change in policy, assuming there is no change in written contracts, may conclude that the risk of litigation from its vendors for the 15-day extension of payments is very low.

On the other hand, if the same issue is analyzed in accordance with the company’s ethical principles, such as fair dealing and honesty, the company is likely to reach a different conclusion and retain the 60-day policy. Why?

The company could easily conclude that a unilateral change in payment policy from 60 to 75 days, while raising low legal risks, would send the wrong message to its vendors, and threaten the value of the company’s word, or its commitment to negotiated business deals. While the legal risk is low, the damage to the company’s relationships with its vendors, and even other stakeholders, including its customers, may suffer real and significant harm.

This is a perfect example of the value of a company’s ethical culture, which is tied to protecting and promoting its reputational. It is too “easy” to restrict corporate decision-making to legal principles – decisions that may have negative consequences on a company are not co-extensive with the legal v. illegal dichotomy, much less considering only litigation risks.

A company’s reputation is its bond with key stakeholders – vendors/suppliers, shareholders, customers, government and community interests. Once a company’s reputation is broken, as Warren Buffet so eloquently stated, the company has lost an intangible asset of considerable value. A company’s commitment to ethics is the most effective means to preserve and protect the company’s reputation. Frankly, they go hand in hand and mutually reinforce each other.

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