In a recent Op-Ed column in the New York Times on proposed Supreme Court Justice Sonia Sotomayor, David Brooks writes about the myth of the objective judge, suggesting that empathy is just as important to an individual on the bench as cold facts and reason, if not more so. I believe a similar argument could be made in the case of corporate compliance, ethics, and culture. It’s important to have codes and rules and laws in place for your employees, but if your employees aren’t able to rely on their own moral compasses, your organizational culture will suffer. And when your culture is sick, it affects morale, productivity, behavior, and pretty much everything else within an organization.

That’s what we try to emphasize at ELG. Yes, you need laws and rules, but to think that that’s all you need is to make a fundamental mistake. You also need a common purpose, a gut-level understanding of the fact that there’s a right and wrong way to do things. You need every employee to understand that no set of rules could possibly cover every eventuality, and that when the rules fail to clearly define the path they must make good decisions based on what they know is right. You also need your employees to understand that occasionally the rules allow behavior that will hurt the organization and its reputation in the long run, as we’ve all seen in the last 12 months, and that they must do the rules one better and behave not only legally, but ethically.

I understand that there’s an element of naiveté in my personal approach to business ethics - my background is in physics and theater, I don’t have an MBA and I haven’t spent 20 years in the corporate world. But the current thinking in neurology is that emotion is an essential part of the decision-making process. When you remove emotion from the picture, you don’t automatically arrive at the best and most logical result. Rather you most often get stuck in an endless loop as no result feels better to you than any other. Emotions help us find the right answer. Antonio Damasio, the prominent neurologist, discovered in his work with patients whose brains’ emotional centers had been damaged that such individuals, while they could logically discuss the decision-making process, were often unable to come to any conclusions when making basic choices, such as what to eat or what pen to write with.

As noted psychiatrist John J. Ratey points out in his book A User’s Guide to the Brain, “emotions tap into areas of our brains that judge situations effectively without our having conscious access to them.” Comply with all the laws. Make your code as good as it can be. Draw your policies clearly and make them thorough. Just don’t forget to make sure your employees know that they’ve got the best fraud- and waste-prevention tool at their disposal at all times - their gut.

Imagine your firm is under fire. Lawsuits threaten your business and profitability. NGOs and other do-gooders criticize your business practices. The media is circling. Employees are confused: “We are a good company. We provide something important for society. Why are we being vilified?”

Our great American story of expansion ever westward tells us what to do when under attack. Circle the wagons. Bring everybody inside. And fire when the attackers get too close.

Smart companies now realize that this is a perilous strategy.

Last night I attended a dinner conversation hosted by the Center for Audit Quality, a nonprofit organization largely sponsored by leading audit firms. Audit firms have been besieged in recent years. But instead of withdrawing inward, they convened a series of off the record meetings with leaders from academia, the press, investor advocates, F500 audit committee members, heads of internal audit, generals counsel and me.

Last night’s topic was what external auditors can do to more effectively prevent fraud—or at least reduce it. Several representatives from leading audit firms were there to listen. They didn’t attempt to pontificate nor to deny responsibility. (Although one made a vigorous case for a legal reform that doesn’t have a chance of passing in this climate where only 12% of Americans in a recent Gallup Poll believe business leaders are honest and ethical.) They engaged.

Will this improve the perception of audit firms? Maybe. Will anything concrete happen as a result? Hard to say. But it might.

Look at Wal-Mart. For years Wal-Mart was under attack. For years they circled the wagons and vigorously defended with a one idea mantra “Lower prices help Americans.” And it didn’t work. So they engaged with their critics. Nothing happened at first. But the Wal-Mart of today is far different from the Wal-Mart of five years ago. They have made significant strides in environmental practices, supplier standards, and even in areas like health care for employees.

Engagement is a good public relations strategy. But more importantly, it is a good corporate responsibility strategy, and a good business strategy. The engagement benefits all sides. Firms can change. An ancient Bedouin saying says “Once the nose of the camel is under the tent, it is hard to keep the camel out.” And either Sun Tzu, Machiavelli or Michael Corleone said “Keep your friends close and your enemies closer.”

In this world when regulations and expectations are evolving at lightning speed, engaging with critics is better than circling the wagons.

A debate has emerged in the news around the behavior of banking regulators and Bank of America (BofA) officials over the recent BofA/Merrill Lynch merger. Between the time of the merger announcement last September and the actual BofA shareholder vote to ratify the merger late last year, Merrill’s financial condition deteriorated substantially. Several BofA shareholders are now alleging that BofA chairman Ken Lewis, by failing to disclose the worsening condition of Merrill Lynch, violated his fiduciary duty and thus broke securities laws.

Lewis, in testimony to the New York Attorney General’s office, defended his actions by saying that Federal regulators told him completion of the deal was essential to preserving the stability of the financial system. Importantly, he says he was threatened with the loss of his job if he disclosed Merrill’s poor results, as this would jeopardize approval of the merger. Effectively, he implies that regulators told him to break the law.

This is troubling for several reasons. Is it acceptable to break a law or fiduciary duty if the government is pressuring one to do so in the name of “national interest” or “economic stability?” Is fear of losing one’s job an acceptable reason to violate the law?

Clearly this was a high stress, high stakes time. But a great deal of ink has been expended since the Enron and WorldCom scandals about the importance of having moral courage in ethically difficult environments, of being willing to stand up and risk one’s career to “do the right thing.” While I applaud this line of thinking, employees find it a difficult standard when faced with loved ones to support, mortgages and college bills to pay and healthcare needs to be met.

This is all the more reason why someone of Ken Lewis’ stature and resources needs to send the message that doing the right thing (for the nation’s economy) was the reason he acted as he did. Bank of America employees and stakeholders need to know that it is not expedience of job security that guides BoA’s leaders, but strong, sound principles.

I have been trying to make sense of the financial meltdown for the past six months. Last week the long time head of audit for a TARP receiving bank crystallized my thoughts. “We lost our ethical compass” he moaned, trying to make sense of the chaos he faces.

Unfortunately, this auditor’s perspective is not yet widely shared by bank executives, by Wall Street, or by Washington DC. He described a recent risk management meeting in which executives discussed what they perceived to be the bank’s major risks. When his turn came, he told his colleagues “Our culture is our greatest risk.” They looked at him as if he were a bearded sociology professor rather than a hard nosed auditor. “We are not the bank we used to be. We care less about the institution and more about ourselves. And we are all about the short term.”

Just about every government with a major economy is about to implement a tsunami of new regulations intended to wipe out any chance of an economic crisis like we are now in from reoccurring. The problem is that these regulations will be designed by lawyers and policy makers who believe that laws and policies will fix what ails us. They won’t.

Our audit leader is right. We didn’t lose our compliance compass. (Well, ok, Bernie Madoff and Allen Stanford did.) But the mortgage brokers, bankers, credit analysts, derivatives merchants, home buyers, etc., etc., did not, for the most part, violate laws or regulations.

They lost their ethical compass. And until all of us—corporations, government officials, citizens—recognize this, the regulatory medicine we are about to receive will not cure the disease, and may make it worse.

We have been bludgeoned with bad news over the last few months. I’m betting you know all about it. You probably have the bruises to prove it. I felt compelled to contemplate the obvious after I heard an interesting news story yesterday. The owner of a local music shop was interviewed on the air. He said that his business had dropped off severely over the last few months — until the US Airways plane landed safely in the Hudson and President Obama took office. This field sociologist, this observer of real life, attributed a subsequent, sustained uptick in his business to nothing other than people’s reaction to hearing good news after so much bad. They felt normal and positive enough to start spending money. Imagine that.

And then it hit me. His music shop experience is a microcosm for our country in general and for corporate America specifically. We in the ethics field talk constantly about the importance of open communication, respect for others, non-retaliation, consequences of non-compliance and on and on. But what about the power of positive news? I believe we have a role here. What would our workplaces be like if we, in the ethics office, used some of our communication time and tools to talk about the good things our companies have done and are doing - and link it to ethics? Chances are that you don’t know all the good things that are going on in your organization. What if you did some research and told some of those stories?

A good ethics and compliance communications plan is very similar to a good marketing campaign. It taps the minds and hearts of the audience through repetition. Case in point - didn’t you enjoy the ongoing Budweiser horse commercials during the SuperBowl? I bet you just smiled. The flood of negative national news is itself a marketing campaign - one that has wrapped the minds and hearts of our citizens with fear and paralysis. And we are sitting here feeling worse and worse.

I’m not so naïve to think that positive and uplifting messages from the ethics office will cure our economy, but what if those messages nudge your employees, just a little, away from the doom and gloom. The reason the SuperBowl commercials work is because they contain the unexpected and that’s what sticks with people. Now apply that to your communications. Do your employees expect your ethics messages to be all about “Don’t Do This or That”? Try something unexpected - say something positive. Who knows. The GNP may actually go up.

Many may remember the character Rosanne Roseannadanna from Saturday Night Live. The late Gilda Radner played the confused news reporter who always mixed up the wording of an issue. She ranted on about her confused issue until someone finally corrected her. At that point, she always ended her remarks with a quiet “Nevermind…”

Well, that is what I felt like today listening to the press conference given by the new Secretary of the Interior, Ken Salazar, at the White House daily briefing. He gave a lengthy statement about the ethics scandals that rocked his organization, the investigations he was planning to conduct, and the corrective actions that would be implemented. He stated his commitment to ethics and accountability and related these efforts to President Obama’s focus on issues of integrity and accountability in government. Then he opened the floor to questions from the media.

The first question, the second question, and then the third question were about things like the agency’s plans for offshore drilling. Huh? Even the Secretary looked confused. He was prepared to answer questions about ethics and doing the right thing. After all, he had just discussed the juicy issues the media loves to cover – sex, drugs, and inappropriate relationships with the companies the government is supposed to regulate. It wasn’t until the very last question that a member of the media finally asked him about his actual remarks.

Why is this? I was already amazed this week at how Illinois Governor Blagojevich became a rock star on the major networks that helped him spin his story. Good Morning America, The View, and Larry King Live gave him plenty of air time. Joy Behar even played with his hair!! Has everyone, including the media, given up any hope of ethics and accountability really happening in government or the private sector? Is it just becoming a big joke? Is the media accepting this stuff as status quo? Is it just how business is done??? Or is it, as Rosanne Roseannadanna would say, always something?

What’s all this talk about ethics? I must be mixed up. Nevermind.

This is a terrific day for America. E pluribus unum indeed.

That’s enough basking. True to the spirit of President Obama’s speech, let’s get to work. No work in America—or the world—is more important right now than business ethics. We face a financial crisis in large part because of a failure by many—lenders and borrowers and those who aided and advised them—to take responsibility for making prudent choices.

And our crisis continues because now we have a lack of trust. Lenders and investors and suppliers don’t know if they can trust the person or company on the other side of the transaction. And without trust, the economy grinds to a halt.

As ethics and compliance professionals, our ultimate job is to build trust. President Obama gave us at least two lessons today on how to do so.

First—deliver the bad news. It was striking how direct our new President was about the difficult conditions we face. Many business leaders choose to give only positive messages, and when they deliver bad news, others are to blame. President Obama didn’t blame solely the greedy and irresponsible for our economic state—he assigned responsibility to all of us.

Second, he focused on the values we share as a way to bind us in pursuit of a common objective. Consider these words from the Inaugural Address. Substitute “company” or “organization” for “government.” Think about how messaging consistent with this might serve your organization—and your ethics and compliance program—in the weeks and months ahead.

For as much as government can do and must do, it is ultimately the faith and determination of the American people upon which this nation relies. . . . Our challenges may be new. The instruments with which we meet them may be new. But those values upon which our success depends - hard work and honesty, courage and fair play, tolerance and curiosity, loyalty and patriotism - these things are old. These things are true. They have been the quiet force of progress throughout our history. What is demanded then is a return to these truths. What is required of us now is a new era of responsibility - a recognition, on the part of every American, that we have duties to ourselves, our nation, and the world, duties that we do not grudgingly accept but rather seize gladly, firm in the knowledge that there is nothing so satisfying to the spirit, so defining of our character, than giving our all to a difficult task.