Michael A. Santoro

I firmly believe that the link between good ethics and good business is ever tightening in the modern business environment. Companies have two mechanisms for successfully managing ethics that are akin to the way your computer works.  There’s the hardware – the policies and processes that a company institutionalizes, e.g., its corporate governance documents, code of ethics, and board committees and charges to those committees. Then there’s the software – the company culture, the leadership and “tone at the top”.  Either or both can fail and cause a company to fall below the ethical and legal standards society expects business to maintain.

Both hardware and software need to work well for a company to succeed.  However, the focus of many ethics programs is excessively focused on culture – software.

Without the right hardware in place, companies are not prepared to meet complex ethical challenges. It’s crucial that companies design their hardware to be effective within their industry, and it’s equally crucial that they regularly update their hardware.

Failing to address hardware problems in a timely fashion creates a governance gap that potentially exposes the company and in some cases individual Board members to large financial liabilities. Regrettably, many companies don’t appreciate the importance of good governance until after they have been sued and suffer financial liabilities.

Setting up appropriate hardware governance structure avoids damage to reputation and profitability. Not only does well designed hardware protect companies by helping to assure the company meets its legal and ethical obligations, but the right hardware also guides people to make choices that are both principled and profitable.

In some instances, corporate governance failures consist of “software” problems. A company may fail to properly monitor, prevent, and manage corporate risk of ethical behavior because of a general “corporate culture” pervasive in an organization , referring to the seriousness (or lack thereof) with which the top executives of a company communicate about ethical and compliance issues.

For a case study on hardware/software failures, read my assessment of the rationale and impact behind the reforms at Merck as part of the settlement of the Fagin case: Corporate Governance Reform At Merck: A Pharmaceutical Industry Standard for the 21st Century.

Another example of the hardware/software issue happening today is the Wells Fargo settlement with shareholders as a result of their fake-account scandal. For an in-depth look at the impact of corporate governance failure, read my Declaration of Approval for the Derivative Settlement.