Essay on key differences between Integrity-based and Compliance-based ethics programs and their implications for global organizations.

DOI: https://doi.org/10.64010/NFXJ9670

Abstract

Compliance-based ethics and Integrity-based ethics are two ethical principles that may guide corporations. There are some limitations associated with these ethical principles and organizations must know the application of these ethical principles. Corporate ethics code and overall organizational commitment respectively are the focus of compliance-based and integrity-based ethics in organizations. The paper synthesizes the findings of research conducted on these two ethical principles and evaluates the implications for global organizations. There is evidence that compliance-based ethics are effective in countries with lower ethical values while integrity-based approach has deep-seated influence on organizations with value-based ethics.


In today’s globalized business environment, it is important to evaluate the key differences between integrity-based and compliance-based ethical principles and their implications on global organizations.

Differences between integrity-based and compliance-based ethics programs

Researchers have defined these ethical approaches in many ways. However, there is a commonality in interpreting the concept of these ethical approaches. The focus of this section is to analyze key differences between these approaches. For this purpose, the ethical approaches are analyzed based on disparities in application, acceptance, consequences, value to employees, employee behavior, and management effectiveness.

Compliance-based ethics and integrity-based ethics: Key differences

Compliance-based ethics program is rule based and individuals are penalized for violating the rules. Organizations with compliance-based approach believe that employees are motivated to act according to rules set forth for fear of punishment. On the other hand integrity based ethics program has well established core principles. Integrity-based ethics incorporates values therefore values-based and integrity-based ethical approaches are used interchangeably. Conceptually both these approaches mean the same.

Employees act on these set of core principles because they have shared values and an understanding of the importance of the principles to the organizations future (Hartman, 2000). According to Halter, Arruda, and Halter (2009), ethics are values that help understand the meaning of right or wrong actions. Hess (2007) states that integrity-based ethical approach focuses on embedding integrity or values in employee decision-making. On the other hand compliance-based ethics program focus on restraining employees by teaching them laws and rules (Hess, 2007). The difference in both these approaches is also in the view that employees take to obeying law. Hess (2007) states that obeying law is viewed positively in integrity-based ethical approach while in compliance-based approach employees view obeying law as constraints imposed by organizations.

Compliance-based ethics programs are based on consequences i.e. if an individual does not comply with ethics codes set forth by organization they are punished (Winrow, Tessema, & Miner, 2012). In a study on ethics in governmental and non-governmental organizations, compliance-based ethics management has gained popularity (Roberts, 2009). Compliance-based ethics programs, according to Roberts (2009), have gained acceptance since the time Federal government began pressurizing private and non-governmental organizations to take greater responsibility for preventing unethical undertakings in their organizations. Moreover, companies have favored compliance-based ethics programs because they can ascertain a level of immunity from any unethical or illegal action by their employees, and they can adopt a lower level of “ethical code of conduct” program (Roberts, 2009).

Roberts (2009) gives an account of the history behind the rise of compliance-based ethics programs in US, particularly in governmental and non-governmental companies. Roberts (2009) states that prior to 1940 the ethical misconduct was limited to bribery. Between 1950 and 1980, the ethical misconduct extended to issues like financial conflict of interest, wasting large sums of money on fraud, Watergate scandal etc. Watergate scandal was the apparent tipping point for enforcing administrative ethics. Moral values transcend time; therefore, integrity-based ethics have not lost their application even today.

Criticism to compliance-based ethics programs is in its inability to exercise conscience-based decision-making. This ethics program is built on a framework of rules. Integrity-based ethics programs are not rule based. The focus of integrity-based ethics is encouraging good behavior and concentrating efforts on the achievement of goal instead of the path taken to achieving it (Roberts, 2009).

Roberts (2009); Shahinpoor and Matt (2007) opine that organizations have embraced compliance-based ethics because this approach usually does not encourage employees to question employers while integrity-based approach encourages employees to question actions by their seniors. Due to this difference, organizations prefer compliance-based ethics to integrity-based ethics. Organizations may prefer compliance-based ethics programs due to its prescriptive nature but not without stressing employees in the process. Hartman (2000) contends that compliance-based programs are limited in scope and efficiency due to the burden put on employees to enforce stringent rules or codes of ethics. Similarly, integrity-based ethics programs have their own set of limitations. Integrity-based ethics, according to Hartman (2000) is not articulate in providing a clear direction to employees.

It is evident that corporate are bound by law. However, employees working in an organization may be unaware of the law or may simply ignore law. Under such circumstances compliance-based ethics programs are useful. Organizations provide training and broad based education to employees on compliance-based ethics programs to create awareness among employees (Blodgett, 2012). Corporate behavior and corporate ethics code influence the compliance-based ethics programs in an organization. Thus, compliance-based ethics focus on law and punishment when non-compliance is detected. Value-based or integrity-based ethics program on the other hand focuses on overall organizational commitment (Blodgett, 2012; Hartman, 2000).

Weaver and Trevino (1999) view compliance-based ethics and integrity-based ethics as on the opposite sides of the ethics codes continuum i.e. a continuum from integrity to compliance. According to Weaver and Trevino (1999), whatever the ethics program an organization chooses to implement they bring about “some degree of order and predictability to employee behavior.” Values or integrity-based ethics and compliance-based ethics programs are diametrically opposite in the approach but are not mutually exclusive (Weaver & Trevino, 1999). Organizations may develop their ethics program based on both approaches. Weaver and Trevino (1999) also detect behavioral differences among employees based on an organizations ethics program. Compliance based ethics program in an organization may generate behavioral conformity while integrity-based ethics may generate organizational commitment (Weaver & Trevino, 1999).

Values-based ethics program could gather some support from Social exchange theory (SET). The basis of Social exchange theory is reciprocity. Wilkman and Hall (2012) state that employees have a feeling of obligation to repay when employees treat them well. Wilkman and Hall (2012) state that Blau defined SET as a theory that involved reciprocity in relationship. Benkhoof (1997); Meyer and Allen (2008); Wilkman and Hall (2012) state that strong emotional bond of employees with organization increases pro-organizational activities. A committed employee is an important resource to an organization. Weaver and Trevino (1999) state that researchers like Rousseau and Parks; Graen and Scandura were likeminded in agreeing to a return favor situation when one person benefits from another (organization) in some way. When an organization creates a values-based ethics, it vibrates trust in employees across the organization. Weaver and Trevino (1999) state that integrity-based ethics program creates awareness for ethical behavior among employees and probably may reduce “moral muteness.”

Integrity or values-based ethics has also gained acceptance in business education (Whilty & Koeplin, 2011). Sound ethics based curriculum for business management students may develop ethical managers for the future (Catiglia & Nunez, 2012). The importance of ethics based curriculum in universities may help educational institutions gain more acceptance in the corporate sector. Teaching values and incorporating them in everyday practice may have an impact on developing managers into ethical employees. Extending this to compliance-based ethics, universities may influence students to adhere to codes of conduct while shunning moral muteness.

In a research article on public sector ethics in transitional economies, Stevulak and Brown (2011) state, that transparency international had listed governments in transitional economies as most corrupt. Countries that broke from former Soviet Union had adopted compliance-based governance and were struggling with inefficiencies like corruption. Former Soviet Union (FSU) countries had a broken ethical infrastructure. There was a need for these countries to establish compliance-based ethics in administration. Roberts (2009) argued that for any organization (government or non-governmental) to maintain high ethical standards a compliance-based approach is necessary. However, Stevulah and Brown (2011) state that compliance-based approach have failed to bring any form of ethical order in former Soviet Union countries. An integrity-based approach may therefore fill the gaps. Transitional economies like Georgia, Russia in the FSU have placed priority on the integrity-based ethical approach. Stevulah and Brown (2011) believe that as transitional economies have matured, ethics in governance has gained importance. They state that it seems like there is a natural progression from compliance-based ethics to integrity-based ethics.

Stansbury and Barry (2007) state that control is an indispensable function of an organization. Control is recognized as being either coercive or enabling (Stansbury & Barry, 2007). Stansbury and Barry (2011); Weaver and Trevino (1999) agree that value-based ethics were more successful than compliance-based ethics programs because of shared principles among employees. This approach, unlike compliance-based ethics is not coercive. Stansbury and Barry (2007) consider Johnson and Johnson approach during the “Tylenol crises” as being value-based. Importance of value-based approach in an organization increases perceived organizational support and motivates employees to take up ethical roles. Further, as noted earlier, control is an indispensable function of an organization. Organizational ethics programs are considered control mechanisms that either could coerce employees in the form of compliance-based ethics approach or be enabling in the form of value-based ethics (Stansbury & Barry, 2007). Deconinck (2005) states that control system of an organization comprises of both compliance and values. Eliason (1999); Weaver and Trevino (1999) state that compliance and values are not necessarily mutually exclusive. Their interdependence is based on creating a conducive ethical environment in an organization. Eliason (1999) elucidates the interdependence of compliance-based and virtues based ethics. Compliance-based ethics defines the boundaries within which employees must function (Eliason, 1999). Eliason (1999) argues that without integrity-based approach compliance activities are incomplete. The basis of this argument, as Eliason (1999) states is that compliance-based ethics cannot encompass all issues and an open communication is important for employees to solve issues.

Management effectiveness is another important factor that differentiates compliance-based with integrity-based ethics. Compliance- based ethical approach will be ineffective if management is ineffective in enforcing codes of ethics (Deconinck, 2005). Management will also need to be wary about the process of enforcing codes of ethics. Unfairness in enforcing these codes of ethics will create cynicism among employees. An integrity-based approach emphasizes moral thinking by employees. Deconinck (2005) states that for both compliance-based and values-based ethics, management commitment to ethics is important. There is a positive relationship between ethics in organizations and management commitment. In a research study on influences of ethical control on sales managers, Deconinck (2005) concluded that integrity-based ethics strategy influences ethical behavior among sales people. This strategy should emphasize concern for employees who defy ethical codes of conduct and emphasize corporate values guiding this strategy.

In a research study on ethics, Webb (2012) categorically states that in the department of correctional services (public sector organization) compliance-based ethics programs may not be considered remedies for unethical practices like corruption. In fact, the compliance-based ethics program increases oversight and therefore reduces efficiency and service effectiveness. Webb (2012) states that values-based ethics programs focuses on developing integrity among employees (internalization) while compliance-based ethics programs is about external control and complying to rules and regulation. In controlling corruption, Lynch and Lynch (2003) stated that compliance-based ethics might not be effective in the long term. This is because individuals who are motivated by personal gain can interpret rules and regulations in their favor and bend rules without fear of punishment. Lynch and Lynch (2003) therefore state that a values-based approach develops virtuous people and therefore may help curb corruption.

Verhezen (2010) argues that companies will have to move beyond compliance based approach to integrity based approach in order to overcome “moral silence” or “moral muteness.” Verhezen (2010) conveys the importance of rules and regulations in compliance based ethical approach. These reduce incidences of legal liabilities for the company and protect whistle blowers. The limitations of this approach can be seen in moral muteness and the stifling environment in organizations adopting compliance based ethics. On the other hand, integrity based ethical approach is an informal approach that enhances creativity and resourcefulness among employees (Verhezen, 2010).

Evaluating implications for global organization

This section synthesizes the findings of research conducted on compliance and integrity-based ethics programs and evaluates the implications for global organizations. This section discusses the challenges faced by global organizations in adopting compliance or integrity-based approaches. The differences analyzed in the previous section are synthesized into this section. Various issues facing the global organizations such as corruption, ethical relativism, transparency, national culture, child labor, human rights are discussed. The implications of applying these two approaches to the issues are evaluated.

Challenges to global organizations and the ethical approach

Companies in global economy need to be transparent because free markets, according to Halter, Arruda, and Halter (2009), require openness in information flow. Halter, Arruda, and Halter (2009) also hint on standards that should be articulated in international business. This complements the view held by researchers that compliance-based ethics reduces the burden on international managers since ethical decision making will be easier. The adoption of compliance or integrity-based approaches in global business has led to the need of transparency in operations around the globe (Halter, Arruda, and Halter 2009).

Hemphill and Lillevik (2011) stated that the new manifesto for global economic ethics was unveiled on October 6, 2009. This was an important foundation for assisting multinational enterprises in ethical decision-making. Hemphill and Lillevik (2011) state that ethical lapses in enterprises were due to failure in moral virtues. “Casino capitalism, bribery and corruption, lack of truthfulness, trust and responsibility, excessive investor or institutional greed, falsified balance sheets and illegal manipulation of the markets” are all results of failure in moral virtues (Hemphill & Lillevik, 2011). For an organization to have an ethical culture, morality should be deeply embedded into the organization. Rampant corruption in the form of bribery in many countries is an ethical challenge faced by global organizations. The question is how do countries deal with such ethical issues on an organizational level? In US, Foreign corrupt practices act (FCPA) addresses this challenge. This is an example of a compliance-based approach where FCPA defines what constitutes bribery in foreign countries. FCPA considers bribery as a criminal offense. Under FCPA, it is a criminal offense when an organization bribes a foreign government official or agent with knowledge that bribes will ascertain business (McGreal, 2012). The FCPA is a compliance-based approach developed by US government for US businesses abroad. The importance of this approach, as discussed in earlier section is that an organization is protected against employee misconduct. The Department of Justice (DOJ), in one case, did not consider Morgan Stanley (an investment firm) liable even though one of its employees was involved in unethical practices in China. The reason given by DOJ was that Morgan Stanley had effective compliance and that the ethics programs were frequently audited, therefore, the company was not liable for the misconduct of its employee.

In a global economic climate, culture plays a pivotal role in acceptance of a compliance-based approach. Under Dodd-Frank code, employees involved in internal auditing or auditors involved in auditing financial statements of a public company can be financially compensated if they act as whistleblowers (Ver-schoor, 2012). This is true in US where cash bounties are given to whistleblowers while in countries like UK, Australia, Netherland no cash benefits are given but complete legal protection is provided to them (Ver-schoor, 2012). According to Verschoor (2012), this practice is viewed “inconsistent with societal norms of data protection and existing law.”

Global organizations adhere to compliance-based approach by having codes and regulations that are legally permissible (2010). Verhezen doubts the effectiveness of this approach. Verhezen (2010) argues that though compliance-based ethical approach will create accountability among employees, this approach will still lack in creating moral excellence. An alignment between financial and non-financial objectives will create a good reputation for an organization and thereby increase organizational value. A herculean task for a global organization is in creating organizational value by aligning financial and non-financial objectives and building an environment of trust. The biggest challenge faced by multinational organizations is the cultural differences between the home country and local host country. Verhezen (2010) provides an example to explain the importance of cultural differences in compliance-based ethical approach. Ver-hezen (2010) states that in US codes of conduct have a legalistic tone while in Europe the codes of conduct are principle oriented than rule-based. These differences in codes of conduct in the two regions may be considered a cultural phenomenon. Cultural sensitiveness therefore is an important factor to consider while considering ethical approach. Verhezen (2010) feels the need to standardize codes by keeping cultural sensitivity in mind. In a global organization, there may be a dilemma in adopting certain type of ethical approach. Command-control style is more a compliance-based approach while values or integrity-based approach is informal where employees and other stakeholders of the organization are an intrinsic part in developing values for the organization.

The challenge in applying similar ethical approaches in different countries is the influence of national culture. According to Burnaz et al. (2010), national culture plays an important role in influencing ethical perceptions. Patel and Shaefer (2009) state that there are three problems with applying business ethics to culture: national stereotyping, national culture, and ethical relativism. According to Srnka (2004), national culture was found to have a stronger impact on effective decision-making and organizational culture determined the impact on behavioral dimension of ethical decision-making. In recent times, corporate social responsibility and ethical movement in the marketplace is a product of scandals in companies and economically stressed people. Ethical and socially responsible strategies are an insurance against any changes in the marketplace in areas of regulations or economy that may adversely influence the organization.

Talaulicar (2009) states that multinational corporations need to decide the ethical strategy they may apply in foreign countries. The dilemma is also the extent to which managers may use home country ethics in foreign countries. Gupta, Pirsch, and Gi-rard (2010), state that international managers face a huge challenge when the ethics of a foreign country are lower than home country standards. Adopting a compliance-based approach may reduce the burden on international managers when making ethical decisions in foreign countries. Adopting codes of conduct developed by international bodies such as United Nations global compact (UNGC) code or the Global reporting initiatives may reduce the burden on companies upholding their ethical standards in foreign countries.

Gupta, Pirsch, and Girard (2010) quote many researchers to state that due to globalization there is homogeneity of needs among people around the globe. This has led to convergence of ethical norms and values and therefore global ethical codes can transcend national and cultural boundaries (Gupta, Pirsch, & Girard, 2010). Some researchers believe that in global companies compliance-based approach (universalism in code of conduct) is ineffective instead moralistic view is better (Gupta, Pirsch, & Girard, 2010). The moralistic view is analogous to values or integrity based view in the importance given to morals or virtues in ethical decision-making. The problem associated with application of this approach is the inherent differences in ethical standards of countries. Applying host country ethical standards is also a problem since it may come with compromising ethical standards of the home country.

Gupta, Pirsch, and Girard (2010) analyze child labor issues faced by many companies in the developing world. To deal with child labor multinational corporations seem to adopt universal standards that may be considered a compliance-based approach. Compliance-based approach in the issue of child labor may be effective particularly when the organization has little control over vendor and suppliers in foreign countries with lower ethical standards.

Strubler, Park, Agarwal, and Cayo (2012) state that culture influences ethical values in an organization). Open and easy communication in an organization can improve understanding about its ethical culture. An integrity-based approach primarily focuses on open communication between employees. Extending Stubler, Park, Agarwal, and Cayo’s ethical model to global organizations gives a semblance to integrity-based approach. Integrity-based ethics program may be a useful tool in bringing cohesion to a global organization. Werhene (2010) argues that operationalizing global codes of ethics in practice has been a challenge. Many sets of guidelines such as the guidelines for Multinational enterprises or the Global economic ethics code has focused on the values that individuals or organizations must abide by in order to be compliant to ethical guidelines. The value-based approach has been adopted by institutions writing these ethics codes. Werhene (2010) informs that one of the articles in the Global economic ethics code states that an individual’s duty is to promote goodness, avoid evil, and promote good working conditions. This value-based approach from a practitioners perspective translates into a compliance based approach. Gupta, Pirsch, and Girard (2010) use child labor to explicate the determining factors that influence cultural relativism and to elucidate the adoption of values or integrity and compliance-based approach in international business. The poor working conditions in factories owned by Nike suppliers and vendors brought negative publicity for Nike in its home country (Werhene, 2010). Nike responded by developing code of ethics and pressurizing their suppliers to adopt these codes. Violators of Nike’s code of ethics faced serious repercussions. This is exemplary to various other situations that global companies have faced in recent past and the success global companies have had in adopting compliance-based ethics. Ethical issues regarding marginalization of women workers is yet another challenge faced by multinational enterprises in developing and developed nations. The impact of compliance-based ethics programs on women rights so far have been studied by select few non-governmental organizations in African countries. Compliance-based ethics have not addressed human rights violations against women workers (Prieto-Carron, 2008).

Face of global organization has changed in the last few decades. The number of multinational companies from emerging economies has risen in last few years. Doh, Husted, Matten, and Santoro (2010) state that many multinational organizations from emerging economies have not been pressurized by their government to conform to standards. Environmental degradation and bribery are few unethical conducts that receive very little negative press in the host or home country. The issue therefore, is the perspective these companies have about ethics and the influence of national culture on their view about ethics. Few nations have a higher threshold to accept unethical conduct. Organizations with low set of ethics have a competitive advantage over companies that have higher set of ethics in the global marketplace. Doh et al. (2010) illustrate this problem by stating that Chinese oil and gascompanies have grown rapidly in Africa while western companies have avoided operating on this continent due to ethics.

Ethical issues regarding marginalizing of women workers are yet another area that does not have definite answers in terms of adopting ethical approach. The implications of this indeterminate approach are cause for worry for many global companies. Compliance-based ethical approach has been adopted to solve this problem in global companies however; there have not been studies that may answer the effectiveness of this approach to solve the problem (Prieto-Carron, 2008). Integrity-based approaches seem to be very vague in providing the ethical path. An integrity-based approach draws attention when analyzing forms of corruption in BRIC nations (Brazil, Russia, India, and China).

Conclusion

The best practice in improving ethical conduct is incorporating values in the ethical approach. Compliance-based programs are less effective than integrity-based ethical models. According to Tyler et al. (2008), values are more effective in upholding ethics in comparison to compliance-based ethics programs. In a research paper, Blodgett (2012) states that there is a need to integrate law with ethics due to the increase in corporate malpractices in recent times. Integrity-ethics is based on values, compliance-based ethics is based on complying with rules, and regulations set forth by organizations. Blodgett (2012) considers that the polarity of both approaches is enough to have mid-point approach like substantive ethics. There are many limitations and strengths to each approach but both fall short of solving ethical dilemmas. The polarity in both these approaches demands an approach that can encompass compliance-based and integrity-based approach.

In the globalized business environment, the purpose of international ethical guideline is to achieve ethical international responsibility. Due to ethical relativism, it becomes imperative for Multinational companies to recognize the need for universality in ethics approach. Mahdavi (2009) states that the framework of ethical approach in business is not limited to national or regional areas but has now reached a global proportion. This means that applying any of the two approaches (compliance-based or integrity-based) may require a global paradigm. The importance of applying ethical approaches cannot be questioned because of the influence multinational enterprises exert on economies. The extent of power a global firm is able to exert on countries is dependent on the firm’s size and resources. Global companies therefore have vast potential to impact countries positively (Okoro, 2012). When these companies demonstrate ethical responsibility and commitment, they positively influence countries to improve ethical standards.

Integrity-based ethical programs and compliance-based ethical programs have many differences. The differences lie in their conceptual meaning and application. The paper analyzes these differences and concludes that both these approaches have strengths and are limited in scope and application. The concept or framework of both these approaches is applied to ethical issues faced by global organizations. The research is inconclusive but there is definite evidence that compliance-based ethics are effective in countries with lower ethical values. The evidence also supports the use of integrity-based approach that seems to have vast potential in effectiveness. Application of any of these approaches may require a global paradigm to influence ethics programs in global companies.

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