The Case for a Deeply Embedded Ethical Culture.

• Author: Blass, Jacob
• Position: Ethics Corner

* In a highly regulated work environment, leadership rarely makes a distinction between compliance and ethics.

Compliance is typically defined as adhering to a specification, policy and required standards. Ethics identifies right and wrong behavior, and in the work environment reflects the culture, the degree of attention paid to it, and how it is strat-egized, prioritized and enforced.

The government contracting world is a primary example of ethical issues being played out under the public's and the government's microscopic eye. Despite government contractors' immeasurable contributions to the country's safety and security, the sector is consistently targeted for scrutiny by government regulators and agencies around the world for violations related to fraud, waste, financial mismanagement, conflicts of interest and bribery.

Being in compliance and having proper internal controls are critically important, yet many companies who are in compliance do not devote the time, energy and intellectual rigor to a deeply embedded ethical culture. Codes of conduct, ethics policies, compliance measures and articulated values just become boxes to check and words on the wall without efforts to instill an ethical culture in the daily actions of the company.

The government cares. Data from the Interagency Suspension and Debarment Committee's annual reports to Congress on the status of the federal suspension and debarment system reflects thousands of suspensions and debarments in recent years. The financial, reputational and human pain is enormous, even when people of no intentional ill-will make mistakes resulting in suspended contracts, diminished business, extraordinary legal expenses, layoffs and reputations soiled.

There is another distinct motivation, with significant financial implications, for having a deeply embedded ethical culture. According to Association of Certified Fraud Examiner surveys, fraud is as common in business as coffee cups. Forty-five percent of all companies experience fraud at any given time. The median fraud incident loss is $140,000. One-quarter of the incidents result in losses in excess of $1 million. And a typical company loses 5 percent of its revenue annually to fraud.

Various studies indicate 40 to 60 percent of a company's market value is based on its reputation. Employees in organizations with strong ethical cultures and formal programs are 36 percentage points less likely to observe misconduct than employees in...