Rapid innovation in the business world and an inability for regulation and law to keep pace means that companies need more than ever to place a higher premium on ethical behavior, Emmanuel Lulin, chief ethics officer for L’Oreal, the French cosmetics giant, told Regulatory Intelligence in a recent interview.
L’Oreal, a 110-year old company whose operations span the globe, sees ethical behavioral among its executive leadership, employees and suppliers as a necessary component for the company’s long-term business success, said Lulin. In his chief ethics role, which he has held for the past 11 years, Lulin reports directly to CEO Jean-Paul Agon.
Technology is central to this cultural change. In Lulin’s view, the world in which companies now operate has changed to such a degree that no company can afford to ignore ethics as a core part of its principles and management oversight. Technological innovation has created a gap between new and emerging issues that companies face and the regulations to deal with them.
“Traditionally, every time there was an innovation or discovery, the law would come in to give a framework. Today, on a number of subjects the law is insufficient or too late or nonexistent,” said Lulin.
“I think the key criteria to distinguish a slightly more ethical organization from a slightly less ethical organization is sincerity.”
“When the speed of technological and scientific discovery is faster than the speed of legal production, it has two consequences: the relative importance of law decreases and the relative importance of ethics increases… because we have to make a decision. And how do we make decisions? According to our ethical values,” he said.
Ethical failures trigger rising number of CEO departures
The importance of ethical behavior has been amplified for those at the top of the management pyramid. Strategy&, the consulting arm of PwC, recently released its latest survey on CEOs, with the results showing that the turnover rate at the top of the world’s largest 2,500 companies reached 17.5% in 2018, the highest since the survey started in 2000.
While about 75% of these departures were internally planned, and only about 20% were “involuntary”, like firings, the reason for the dismissals has changed. A decade ago, half of all exits were triggered by poor financial performance, and less than 10% by “ethical lapses”, PwC said. In 2018, however, 39% of departures were due to ethical issues, such as “fraud, bribery, insider trading, environmental disasters, inflated resumes, and sexual indiscretions”, while bad financial performance only accounted for 35%.
In Lulin’s view, these new challenges go beyond the abilities of traditional human resource and compliance functions and require firms to focus on the integrity and the sincerity of their dealings with customers and employees. “I think the key criteria to distinguish a slightly more ethical organization from a slightly less ethical organization is sincerity,” Lulin said. “It is the sincerity with which we walk the talk. It’s not compliance, because compliance just asks us to obey what the law asks us to do. Ethics is not about obeying — it’s about agreeing.”
Ethics becomes differentiating factor for companies
In the tech world, companies such as Facebook and Google have spawned ethical issues that were unthought of ten years ago. All of this is new terrain — often well beyond the scope of current legislation and regulation — leaves many countries trying to catch up quickly.
But until the technology gap is closed — and Lulin believes the pace of innovation will always be a step ahead of rules — the ethics and culture of large organizations, and whether they are acting in the interests of their customers, has become more of a deciding factor in long-term viability and success. “When you want to measure the performance of an organization you traditionally look at their accounts. But the accounts have nothing to say about what I see as the most valuable asset, which is a company’s culture of integrity, its ethics. The value of the culture of integrity is nowhere found in the accounts. And it is probably one of the best indicators of a company’s sustainability,” said Lulin.
Annual “Ethics Day”
Integrity, respect, courage and transparency are the four guiding principles of how L’Oreal operates. A key element running through the four principles is trust.
“Every time there was an innovation or discovery, the law would come in to give a framework. Today, on a number of subjects the law is insufficient or too late or nonexistent.”
“When you take an ethical approach the first message is a message of trust — trust in the intelligence of the people you are working with,” said Lulin. He took a dim view of a rules-based corporate environment, where employees are under constant surveillance. He also showed little enthusiasm for executive performance reviews which might hold back bonuses or compensation if a manager was found not to have displayed the type of behavior in line with a firm’s values. In Lulin’s view, one can’t be “75% percent ethical.”
As an example of the importance placed on ethics at L’Oreal, the company holds an annual “Ethics Day,” when employees worldwide can ask questions online to CEO Agon, who responds in real-time, without any censorship, according to Lulin. The company has been holding the company-wide conversation for the past 11 years, and it has worked so well that it has been rolled out to regional managers.
In addition to “Ethics Day,” there is a robust, mandatory training program for all 86,000 employees, not only managers. The content includes interactive e-learning modules, presentations, and in-person training. The training focuses on practical real-life examples of ethical dilemmas designed to engage employees to make choices about how they would respond in certain situations. If their course of action is not properly aligned with the company’s core principles, the employee is guided to a better solution, said Lulin.
L’Oreal also has a rigorous corruption prevention program with similar training content that gives employees the tools to make the right decisions if they encounter a situation where someone tries to persuade them to engage in corruption.