Industries that are experiencing disruption with incumbents are typically those that engage in dishonest behavior, according to Ron Carucci, CEO of Navalent, a leadership and organizational consulting firm.
Indeed, a Navalent study conducted over 15 years and comprised of 3,200 interviews in 210 organizations, revealed that a lack of strategic clarity, just accountability systems, transparent governance, and cross functional collaboration all lead to widespread dishonesty.
Before solutions to these issues are discussed, however, it is important to make sure there is clarity on what ethics and culture mean for organizations.
Defining a culture of ethics
Ethics is often defined as a “system of moral principles,” and when applied to businesses, the simplest form of business ethics was defined as “Doing the right thing in everything,” according to a recent panel of compliance leaders from private enterprises, corporations, and academia.
In addition, culture is defined as “a way of thinking, behaving, or working that exists in a place or organization.” Combining these two definitions to determine what a culture of business ethics means for the modern corporation leads you to a good working definition of “the design of systematizing ‘doing the right thing in everything’ vertically and horizontally within an organization.”
The ethical context has many faces
Working with the aforementioned definition means that an organization’s ethical systems and structures — i.e., ethics and compliance teams — will need to analyze the levers of culture and behavior within the HR, finance, and strategy functions of an organization and create processes, governance, compliance, and accountability structures through an ethical lens.
Often, a cross-functional approach to addressing ethics is the best route, because when there is a gap in one area, it can spill over into other areas, leading to reputational damage, under-reporting of questionable conduct, and a less-than-productive employee experience.
For example, the ethics dilemma comes up in reputational risk when the organization is more focused on managing inputs than it is on eradicating the root causes of bad behavior. From the employee perspective, focusing strictly on compliance increases cynicism, because this sole focus on risk can reduce an altruistic program into a company protection program. Indeed, making examples of people just reinforces the cynical nature and discourages them from speaking up because of the fear of backlash. Not surprisingly, incentives which led to the bad behavior are missed as a result.
The panel of compliance leaders discussed what a successful system of business ethics needed, identifying these key components of a well-rounded program:
- Enforcement — According to one leader, enforcement of the compliance program is key. Unless there is no fear of getting caught, risk of ongoing bad behavior is higher.
- Tone at the top — Ethical behavior starts at the top, and leaders set the tone of the organization as to what is acceptable and unacceptable behavior in its culture. Unfortunately, most C-level discussions focus on strategy, cost structures, revenue, and performance. Rarely is much time spent on ethics and compliance.
- Access to the CEO and the Board — Compliance officers need regular access to the CEO and the board. Many heads of compliance programs lack a seat at the table because compliance is a cost center, where “profit” derives from costs that did not happen. Ethics leaders must spend time with the CEO and forge relationships with allies to “have their back when making non-legal recommendations.”
- Input on compensation and promotion — Enabling chief compliance leaders to provide their perspective on other business leaders’ compensation and promotion recommendations is an important lever in weeding out poor ethical behavior. One manufacturing company which was used to robust quality assurance programs, gave the chief compliance, accounting, and risk officers the last say on compensation recommendations.
‘Data is the new oil’
A necessity of a balanced program, according to industry leaders, was a cross-functional data program. Ernst & Young is producing “integrity analytics,” which combines social science and data science to analyze culture. Analyzing integrity is critical for organizations because “behavior is a function of the person employed and the individual’s interaction with the environment,” according to Katharina Weghmann, Associate Partner and Integrity Lead at EY. As investors push for long-term value reporting and regulators add pressure on cultural issues, “EY saw an opportunity to ‘operationalize integrity,’” Weghmann said.
Some important data sources mentioned by the panel include:
- Customer feedback — One person indicated that integrating customer complaints is really important to spotlight bad behavior and be an influencing factor in compensation and incentives.
- Harassment reporting — Another importance source of information is harassment statistics. Indeed, harassment and ethical behavior are correlated, the panel said. “Bad harassment equals bad ethics,” one leader stated.
- Employee engagement — Feedback from employees is also a critical data component. If employees believe they work for ethical company, they are more loyal, more inspired, and more highly engaged.
The role of the lawyer in blending ethics & compliance
In the modern corporation’s compliance system, the question of ethics is distorted when the system involves lawyers setting rules and compliance officers enforcing them, according to the panel.
For an effective compliance program, the role of lawyers is to advise on systems that include a legal/illegal component and an ethical lens. Without the ethical consideration, the lawyer may over-emphasize the “is-the-behavior-legal-or-illegal” dynamic. When combined with an ethics context, however, it establishes a higher threshold and greater expectation of proper behavior.
It does this by incorporating the values and culture of the organization and simply measuring bad behavior through the of a lens of “Is this who we are?”