This article was originally published in Governance Magazine and has been republished here with permission.
As we look towards 2025, the landscape of corporate ethics and compliance (E&C) will shift even more rapidly than we’ve seen this year, driven by the integration of artificial intelligence (AI) and shifting global regulations. The critical trends that will shape the future of E&C range from the risks and opportunities presented by AI, the growing focus on supply chain compliance made only more important with new legislation in the EU like CSDDD and new guidance from the Department of Justice’s (DOJ) Memo to its prosecutors, the role of leadership in fostering ethical cultures, and the complexities of navigating evolving ESG (Environmental, Social, and Governance) requirements in a less tolerant world.
AI integration: Accountability and risks
Although AI is transforming business operations across many industries, offering opportunities for efficiency and innovation, this transformation brings with it significant risks, particularly around accountability. As AI-driven systems take on more decision-making roles, the challenge of assigning responsibility for these decisions has become a critical concern.
In highly regulated sectors like finance, healthcare, and manufacturing, ensuring that AI operates within ethical boundaries is essential. Businesses need to navigate issues related to transparency, data privacy, and bias because we know that AI systems are only as good as the data they are trained on, and without proper oversight, they can perpetuate existing biases or introduce new risks.
The regulatory landscape is also shifting to address these concerns. For instance, the UK’s AI White Paper adopts a pro-innovation approach, but it stresses the need for businesses to be accountable for AI’s outcomes. Companies must implement internal controls and governance frameworks that monitor the impact of AI, ensuring that it aligns with corporate values and compliance requirements. In the US, the DOJ wants to know if organizations are proactively assessing and mitigating the risks posed by these technologies or merely reacting to them. This includes the use of AI within compliance programs themselves, signaling the DOJ’s increasing interest in the intersection of technology and compliance. JPMorgan Chase has established a dedicated AI governance committee responsible for overseeing AI model development and deployment. This committee ensures that AI applications align with ethical standards and regulatory requirements, facilitating auditability and explainability of AI decisions. At HSBC, the bank has developed an AI governance framework that includes clear accountability structures and rigorous validation processes. The framework mandates comprehensive documentation of AI models, enabling effective auditing and ensuring that AI-driven decisions are transparent and justifiable.
AI is also being used to support Diversity, Equity, and Inclusion (DEI) initiatives by monitoring and analyzing equality and diversity metrics. This real-time data collection offers organizations new insights into workplace dynamics, such as pay disparities, promotion rates, and hiring practices.
However, while AI can enhance fairness, it is not without risks. AI systems must be carefully calibrated to avoid reinforcing the very biases they are meant to eliminate. The data out is only as good as the data that is put in, and algorithms trained on historical hiring data may inadvertently favor certain demographics if that data reflects past biases.
To balance these risks, organizations should pair AI-driven insights with human oversight. Ethical cultures are best cultivated when technology and human values work hand-in-hand, ensuring that AI supports, not undermines, efforts to create inclusive workplaces. Whilst many companies are using AI to analyze job descriptions, Google is using AI to ensure those descriptions are free from biased language that might deter diverse candidates. This practice helps in crafting more inclusive job postings. Recognizing the limitations of AI, Google integrates human oversight into its hiring processes. This combination ensures that AI recommendations align with the company's DEI objectives and that any potential biases introduced by AI are identified and addressed. Google's Employee Resource Groups, such as the Black Googler Network, collaborate with recruitment teams to improve hiring, progression, and retention for underrepresented groups.
Supply chain compliance: Growing scrutiny
Global supply chains are under unprecedented scrutiny as regulators sharpen their pencils with new compliance requirements, particularly around ethical sourcing and sustainability. Companies will now need to exercise greater due diligence in managing their supply chains, ensuring that suppliers adhere to human rights standards, environmental sustainability, and fair labor practices.
Regulations like the EU’s Corporate Sustainability Due Diligence Directive (CSDDD) are pushing companies to be more transparent about their supply chain operations. This means conducting thorough audits, monitoring supplier practices, and ensuring compliance across multiple tiers of suppliers.
Technology is playing a key role in helping companies manage these complex compliance challenges. AI and blockchain technologies, for example, are being used to track the provenance of materials, verify suppliers, and manage risk in real-time. These tools offer greater visibility into supply chains, allowing companies to respond quickly to compliance issues. Adidas has implemented blockchain technology to enhance the traceability of its raw materials, ensuring suppliers adhere to environmental and ethical standards. In collaboration with TrusTrace, a Stockholm-based SaaS company specializing in supply chain transparency, Adidas adopted the TrusTrace Certified Material Compliance solution. This platform enables Adidas to monitor product traceability and supply chain transparency in near real-time, facilitating the documentation of over one million transactions covering 10,000 materials and styles across 8,000 facilities within four months. By leveraging this technology, Adidas can swiftly identify and address any non-compliance issues, thereby protecting its reputation and minimizing regulatory risks.
Companies that also use specialized solutions to deliver their Code of Conduct and E&C training to suppliers, which measure and track engagement, could help to mitigate supply chain risks in the face of changing regulatory standards such as CSDDD, which will come into force in the EU in 2028, or the Economic Crime and Corporate Transparency Act (ECCTA) in the UK, recently enacted. By providing this kind of training, companies will enable organizations to foster a culture of compliance across business operations and stay ahead of rapidly evolving regulations, strengthening organizational commitment to ethical conduct and effective third-party compliance management.
Leadership’s role in fostering a culture of ethics
While technology can and will aid in managing compliance, it is the role of leadership that ultimately defines a company’s ethical culture. In an era of heightened stakeholder scrutiny, senior leadership must actively champion ethical values and ensure they are integrated into the corporate strategy.
Effective leadership sets the “tone from the top,” emphasizing the importance of ethics and compliance not just as a regulatory necessity, but as a core component of long-term value creation. This includes making ethical considerations part of key decision-making processes and ensuring that employees at all levels understand the importance of these values. But this is only truly effective if this messaging gets cascaded via its middle management, so “tone from the middle” becomes equally important. According to recent research, while 90% of senior leaders believe their colleagues adhere to a code of conduct, only 81% of middle managers, and 69% of front-line managers /individual contributors agree. This significant gap underscores the need for better alignment and communication across organizational levels. By empowering these managers to act as ethical culture ambassadors and through personalized training, the leadership message can better resonate with front-line employees. This approach helps close the gap between senior leaders and the rest of the organization, ensuring ethical expectations are clearly communicated and embraced at all levels.
Moreover, as AI becomes more embedded in operations, leaders need to be well-versed in the ethical implications of these technologies. This involves not only understanding the technical aspects of AI but also its broader impact on company culture, stakeholder relationships, and public trust.
Navigating the ESG backlash: Evolving requirements
Despite the global push towards sustainability of 2020, Environmental, Social, and Governance (ESG) is facing resistance in certain jurisdictions. In the US, in his 2024 letter to investors, Blackrock CEO Fink avoided the phrase ESG, following the conservative backlash of 2023 and stated that he will no longer be using the term adding that it had become too political. He instead opted instead to use terms like stakeholder capitalism, sustainable investing, or climate investing. In many parts of the US and in parts of Asia, ESG has come under political attack, with critics arguing that it imposes undue costs on businesses and distracts from core profit-making activities.
This backlash has created uncertainty for global companies, forcing them to navigate conflicting expectations. While some regions are rolling back ESG requirements, others, particularly in Europe, are doubling down on sustainability commitments, creating a complex regulatory environment for multinational corporations.
Organizations that treat ESG as part of their risk management framework, rather than a standalone agenda, are more likely to succeed in balancing these conflicting demands. Royal Dutch Shell has effectively navigated the ESG backlash by embedding sustainability into its comprehensive risk management framework, viewing it as a strategic approach to mitigate long-term risks rather than merely an ethical obligation.
2025 outlook
But as we move towards 2025, global businesses should be proactively addressing the evolving ethics and compliance landscape. AI offers unprecedented opportunities but also presents significant risks, particularly around accountability and bias. At the same time, tightening supply chain regulations and the shifting global ESG environment demand that companies be agile and forward-thinking in their approach to compliance.
Strong leadership throughout organizations, and not just via mission statements and CEO letters, remains the key to navigating these challenges, ensuring that ethical values are not only upheld but also leveraged to drive long-term success. By fostering a culture of ethics, embracing technological innovation responsibly, and staying ahead of regulatory trends, organizations can thrive in this complex and dynamic environment.
