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How Corporate Compliance Builds Value

There has been a long running effort to establish compliance as a value creating function within the enterprise, but the data for that has been very hard to come by. Todd Haugh and Suneal Bedi—both professors at the Indiana University Kelley School of Business—are changing all of that with their forthcoming Iowa Law Review article, “Valuing Corporate Compliance,” in which they provide groundbreaking empirically sound, direct evidence that corporate compliance can— and does—create positive, revenue-enhancing value for companies. By understanding this truth, companies can gain a more complete and strategically useful understanding and measurement of compliance’s true value for corporate stakeholders, regulators, and legal scholars.

What was your impetus for conducting this study and were there any conclusions that you were setting out to prove from the very beginning or were you testing a method in order to see what results were going to come from it?

Todd Haugh | Indiana University Kelley School of Business

Todd Haugh: This is one of those really fun things that happen in academia every once in a while, which came out of a hallway conversation between Suneal and I. We were talking about corporate compliance and business ethics, and I was lamenting the fact that one of the biggest problems in corporate compliance is identifying its true value. There’s a lot of debate about exactly what that is and how to quantify it, and Suneal has incredible background both in business ethics but also in marketing and branding research. He immediately said, “Oh, wait a minute. I’ve got a method for that. We can do that.” We started talking about that method and that sort of launched the whole project. It was just one of these moments where two ideas came together and launched a study.

For those audience members who are not familiar with choice-based conjoint analysis, can you describe what that is and why is it so important to the study that you’ve authored?

Suneal Bedi: Choice-based conjoint analysis comes from the marketing realm, particularly branding literature. What it tries to do is figure out what are the consumer preferences about a given product or service. The way you do that is you give consumers hypothetical products and you ask them to choose which one they prefer the most. Each of these products vary on different characteristics, so you might have a cell phone that has a really nice camera or a bad camera, or is blue or white, or has this much storage, this kind of GPS navigation, whatever it may be. Through an empirical method of choice-based conjoint and surveying a lot of people, we actually can distill which preferences or which things that customers care about for a given product. It’s really relevant for us because what we sort of internalized was compliance can be viewed as a type of characteristic of a product. Now it’s not about the product itself, but it’s about the company that’s producing the product. So the question was, do consumers care about buying from a company that actually has a robust compliance program? And choice-based conjoint can help us answer that question.

Your study makes a pretty compelling link on that regard between organizations that have a strong compliance program and a greater consumer willingness to engage with that organization in the marketplace. Is this a function of the consumers are noticing the compliance function itself within an organization, or is this part of a broader correlation between companies that tend to value compliance, also tend to value things that are more directly customer facing and might also impact a customer’s decision to do business?

Suneal Bedi | Indiana University Kelley School of Business

Bedi: The answer to your question is “yes”. The idea is both those things are happening. One is what we focus on in the paper. What we focus on in the paper is sort of the former of what you said, which is if someone’s buying a product and they don’t really know much about the company, but they do know that the company engages in robust compliance, are they willing to pay more for that product? Do they want that product more in comparison to the same product, where a company isn’t engaging in compliance? And we answer yes. Now, that’s not to say that companies also don’t have sort of brand equity. We didn’t really study that particular aspect in our study, but it’s very possible that consumers start internalizing the fact that certain companies care more about consumers, care more about employees, and that sort of internalization allows them to express their preferences by buying from that company. So that certainly is a possibility that’s going on in the marketplace. Our study’s focused on the former, though.

There’s a fair bit of commentary around how Gen Z is driving values-based consumer decisions, mainly how Gen Z consumers aren’t really that fond of doing business with companies that they feel don’t align with their own personal values. Do you see any kind of generational difference amongst consumers in the data from your study? Or, do you see that there is a potential for development in your findings over time as Gen Z itself gains more earning power in the marketplace?

Haugh: I think there’s a lot of aspects of the study we could take further. One might be sussing out some of those generational differences. Others might be adding different elements of compliance programs. We only focus on three different ones because we just have only so much space in the particular study. We’d want to think about maybe field studies down the road. So there’s a lot of places to take this, but we did have some indications from comments that participants made that gives a little bit more insight as to what they were thinking, generational or otherwise.

Bedi: In our paper, we don’t really go into any generational differences. I looked back at our data and we saw some differences by generation, not necessarily statistically significant differences, but that’s not to say that those don’t exist. Sort of just in the sample we recruited, we didn’t see that we did see some other sort of interesting differences. We saw some gender differences. We also saw some education differences. The idea here is that various customers are going to care more or less about compliance part of the process. And this is what we’re hoping to do is encouraging managers, marketing, whomever it may be at the company, to start segmenting the market and understanding how consumers care about compliance.

What are some proof points from all this that you think are worthy of further exploration, whether it’s you or the discipline at large?

Haugh: I just want to talk about what we found and the importance of that and then maybe we can think about where we would look in the future. There are three big takeaways from the paper.

The first is that consumers are willing to pay a premium for products that come from companies that have a robust or well-established compliance program. We could identify that consumers will pay more for a product that comes from a company that has a robust compliance program. That’s a really big finding. The reason that’s so important is because until now, compliance has been talked about or thought of as a liability-avoidance mechanism. If that’s the case, what managers have to do then is think about, how much do I want to invest in order to avoid this potential liability down the road? That isn’t the most inspiring way to build a compliance program because it’s always looking externally and it’s trying to judge the prospects of something that is very hard to determine, such as the likelihood that a regulator or a prosecutor or a civil litigant down the road is going to hold you accountable for something that your employees did. That’s really difficult.

What the compliance community has done in reaction to that is to think about the business case for compliance. And what folks have tended to say is, “Well, compliance leads to a bunch of positives in the marketplace,” but there hasn’t always been great empirical validation of that point. What our study set out to do is to look for a better way to determine if there actually is a revenue-positive way to look at corporate compliance. That’s the first main takeaway, that consumers are going to pay more. That means you’re going to get a revenue benefit.

We think that’s really, really important because no matter what you say about business, the bottom line is that managers care about revenue that’s going to be their first touchstone. Yes, they want to avoid liability and cut costs, but if you can demonstrate that you are a department, your business department is going to be revenue positive and it’s going to contribute directly to the bottom line, that is a huge thing for a manager. And that is a way to get support for any project within a company, whether it’s compliance or anything else.

The second thing is that consumers are going to value products that come from companies that have compliance more than they value other types of attributes of those products. What we found is in certain instances, consumers will pay more for a product that has a robust compliance program than they would for a feature that companies market to their consumers. Whether that’s the color of a phone or something else, we find that consumers actually care more about compliance than they do some of these other things. Again, that’s a really important finding within a company because it puts compliance on the same footing, possibly, as some other departments in an organization, such as branding or ops or something like that. It raises the status of compliance because now compliance can say, “Hey, wait a minute, we’re just as important as branding because what we do actually drives consumer value as well and will drive revenue.

And then the third thing we found—and this was really interesting, because we weren’t necessarily expecting it—we also found that if you link a compliance program more directly to the product itself, there’s a natural connection there. Consumers will pay more for that product. For example, if you’re selling a cell phone and you can market a consumer privacy program—a compliance program—to that consumer, they will pay more for that cell phone. Another example is when we were looking at a manufactured product, if we looked at employee health and safety, which is more something you would link to manufacturing, we saw that there was a price increase. So by linking those two more directly, we see that also companies can get a price premium for the product.

So those are kind of our three main takeaways, and I think that’s our launching point for future work in this area.

Bedi: It would be really cool to see business scholars and more traditional marketing management scholars come into this debate and start saying, “Okay, how are we actually going to go about effectively communicating these things?” That’s not necessarily a legal question. As legal academics, we can only push this so far. It would be nice if more traditional business-oriented scholars took our findings to the next stage.

As educators, you are both in a privileged position to see tomorrow’s business leaders as they are getting ready to start their own careers. From the perspective of career development in ethics and compliance, what would you say are some of the implications of your paper in terms of how professionals can think of ethics and compliance as a profession to join, or in terms of how current professionals might value their own role and responsibilities within an organization?

Haugh: I teach primarily MBA students these days, and I see increasingly students are interested in making a positive impact in the world. They want to work for companies that are ethical, they want to work for companies that comply with the law, but they also have—at least at the Kelley School— they have incredible skills in the finance, accounting, data, and quantitative realms. So one thing that this paper does is allow to join those two. You can think about, “I want to be a manager in a company and use these skills that are going to help the company’s bottom line while also doing good.” And there’s a way that this paper connects that because you see students who say, “I want to do good, but I want economic value out of that in some way, and I want some proof that that’s going to work,” because they’re data minded generally. The paper allows them to do this.

I’ll also say that as we were working through finding a publisher for this paper, we got a lot of comments from law students who had worked in compliance in one way or the other before they went back to law school, and they were just overwhelmed with this paper. They saw it as that missing piece of the puzzle that, when they were in compliance, they wished they had so they could have shown it to their boss or manager and prove the value proposition of compliance. So it’s been a really fun thing to think about how the paper’s going impact people going forward, but also where its niche or its need is currently.

 

ABOUT THE EXPERTS

Todd Haugh is an Associate Professor of Business Law and Ethics, and an Arthur M Weimer faculty fellow at the Indiana University Kelley School of Business. Todd’s scholarship focuses on white collar and corporate crime, business and behavioral ethics, and federal sentencing policy. His work has appeared in top law and business journals, including the Northwestern University Law Review, Notre Dame Law Review, Vanderbilt Law Review, and the MIT Sloan Management Review. He is often quoted in news outlets such as the New York Times, Wall Street Journal, Forbes, Bloomberg News, and USA Today.

Suneal Bedi is an Assistant Professor of Business Law and Ethics at the Indiana University Kelley School of Business. His areas of expertise include intellectual property, marketing, ethics, and brand strategy. His work has been published or is forthcoming in the Vanderbilt Law Review, Harvard Journal of Law and Technology, Alabama Law Review, Indiana Law Review, the Journal of Business Ethics, and Mind Your Marketing. He has written for the New York Times, San Francisco Chronicle, Forbes, US News and World Report, and the Washington Post. He has assisted with patent and trademark disputes providing theoretical and empirical analysis, and he provides ongoing branding and ethics consulting.

To read Todd and Suneal’s forthcoming Iowa Law Review article, “Valuing Corporate Compliance,” click here.

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