Co-authored by ISR and Rebecca Masson

Does consistently ethical behavior among your employees, regardless of their level or position, matter to your organization?

Corporate scandals of recent years have made it clear that a serious ethical breach can destroy an organization outright, considerably reducing its financial value, or, at minimum, undermining its hard-earned reputation.

Two studies illustrate (see Figure 1) the relationship between an ethical culture and financial performance. The first study, conducted by ISR for a global consumer goods company, found that employees´ perceptions of their company upholding high ethical standards were highly correlated with the company´s operating profit. Another study by DePaul University found that companies with an explicit and public commitment to an ethics code were reported as having an added market value more than three times the rate of other companies.

Additional research conducted by ISR further supports this notion.

As indicated in Figure 2, a higher percentage of employees from ISR´s U.S. High-Performance Companies Norm feel that their company is ethical in its external dealings and internal dealings, as compared with employees in ISR´s U.S. National Norm (a nationally representative sample of companies across industry within the U.S.), and employees in ISR´s U.S. Transformational Companies Norm.

ISR´s National Norm database contains more than 600 normalized questions that are updated annually. ISR surveys more than 1,500,000 employees per year from more than 3,000 companies.

What Kind of Culture Gives Rise to Unethical Behavior?

The answer to this question depends on the exact nature of the organization and the behavior in question. A financial services company that falsely reports its earnings may have a culture that is different in important respects from a manufacturing company that fails to correct known product defects.

Despite such industry standards, however, it is possible to list some general aspects of corporate culture that are likely to put most companies at risk for some kind of significant ethical misconduct. These risk factors include the following:

-         Any discussion of company values, if it occurs at all, is immediately seen as public relations ploy rather than a true commitment, and acting with integrity is seen as an obstacle to success, rather than a vehicle to it;

-         Open debate, questioning of the status quo, and dissent are discouraged;

-         Bad news is "spun" rather than confronted head-on, and there is a "shoot the messenger" mentality, particularly as one goes up the chain of command;

-         People often hoard information of all kinds, rather than sharing it;

-         The behavior of high-performing employees is usually not questioned, while the ends are emphasized (particularly the financial ends), and the means are largely ignored;

-         The external environment, including customers, investors, and the general public, is deemed something to be manipulated, rather than respected;

-         There is an exclusive focus on short-term financial results, often matched with unrealistic performance expectations

To prevent breaches of ethics from occurring requires more than an awareness of the risk factors, however. While even small groups can put a company at risk, ISR has found that such cultures can be changed before ethically questionable behaviors occur, are rewarded, gain momentum, spread, and erupt in scandal.

SIDEBAR REFERENCE-ISR has also monitoring system that helps companies understand how to assess the three components of an organization´s culture: company values, internal policies, and external relationships (see sidebar).

Case Study 1: A Large Multinational Financial and Insurance Services Firm Strives to Maintain its Ethical Culture

An international financial services company headquartered in the U.S. recognized that complacency regarding ethical conduct was unacceptable. The company therefore took a proactive approach to examining its internal ethics culture. The organization engaged ISR to analyze results from its employee survey in order to assess its ethical culture.

Key driver analyses revealed that employee perceptions of Company Values and aspects of Internal Policies influenced perceptions of the company´s ethical practices

ISR evaluated survey results from several departments and classified each department into one of four quadrants of an ethics framework, in relation to scores for the firm´s population overall. Each department´s placement in the framework, as well as the percent of the company falling into each quadrant, constituted its ethics profile.

As seen in Figure 3, scores for each of the cate ­gories driving ethics, as well as the score for ethics overall, were significantly below the benchmarks, an unexpected finding. These low scores signaled a need to evaluate ethical culture by department as the company was per ­forming below their target level on ethics issues.

These data were the first step in providing the internal Ethics Department with valuable information - identifying the Flawed departments needing immediate follow-up education, evaluation, and monitoring. Yet, to begin affecting change to this culture, the company needed to do more than enforce the company´s Code of Business Conduct.

Rather, interrelated cultural components need to be addressed and changed. By analyzing the key drivers of ethics for each of the four quadrants, ISR uncovered the workplace factors that most influenced employees´ ethical beliefs.

From this analysis, ISR was able to present to the leaders the organizational weaknesses they needed to address in order to strengthen the ethical culture, as well as the areas of cultural strength that the organization needed to leverage and maintain. Each department, equipped with these insights, was able to take targeted actions to ensure that the culture supported ethical practices, and that these practices were aligned with the Code of Business Conduct.

Case Study 2: A Media Company Scrutinizes Ethics at one of its Properties

In response to an ethics issue at one of its outlets, a large media company sought to uncover the underlying cultural components that might have led to the problem and understand how best to strengthen the unit´s culture to avoid such challenges in the future.

Based on ISR´s analysis, it was apparent that the company needed to focus on creating an environment of Shared Values, encouraging Diversity of Thought, and enabling a Culture of Respect & Fairness (see Figure 4). Each of these contains elements of the three monitoring mechanisms reviewed: Company Values, Internal Policies, and External Relationships.

As important as these elements were in driving percep ­tions of organizational ethics for the media outlet at an overall level, they each played different, but important, roles within each of the four quadrants (see Figure 5).

Whereas having a sense of Shared Values was the workplace factor that influenced an ethically sound culture for most departments in the company, having a Culture of Respect and Fairness differentiated the Secured and Vulnerable departments from those at risk for an ethical lapse. The senior leaders of the company typically influence setting the tone for a culture that respects employees. By role-modeling the right behaviors, leaders ensure that managers and employees are aware of and act in accordance with these implicit values.

However, the workplace factors that differentiated the departments at risk revealed that managers at this media company did not create an environment where people felt safe to speak up, debate ideas, or report dishonest behaviors. The status quo was accepted and challenging it was not encour ­aged. Thus, for this media company, a culture that respects employees was a differentiator of ethical departments while resistance in encouraging diversity of thought was prominent for unethical departments.

By identifying the departments that were classified within these quadrants, this media company has been able to concen ­trate efforts on communicating its core values and Code of Business Conduct to all employees, and begin discussions with select supervisors to ensure they are in compliance with all company rules and policies.

Assessing and Managing the Risk of an Ethics Crisis

Building on 30 years of experience consulting on issues of organizational culture, ISR has identified three areas in which managers should focus attention:

• Company Values need to be clear, leaders should encourage open sharing of thoughts, integrity is expected.
• Internal Policies and information about the company (e.g., its vision, goals, future) are shared, accurate and timely, performance evaluations are implemented fairly.
• External Relationships are characterized by responsibility to the environment, community and investors, and safe products for fair prices.

A Focus on External Stakeholders is Critical

Classifying and taking action to address internal culture is one step in the process of monitoring company ethics. The views of other company stakeholders can also be assessed and included in a more comprehensive analysis.

For instance, customers may be asked about a company´s customer relations, shareholders about shareholder relations, and suppliers about working relationships with the organization. This knowledge allows tests of gaps between the views of stakeholders and employees.

Summary

Company ethics is a complex issue, with many dimensions and wide-ranging consequences.

Because ethical crises develop gradually, accelerate, and become impossible to manage, a monitoring system that provides early warning signals and allows for course correction is critical.

Understanding, monitoring, and taking action to address ethical concerns likewise requires a comprehensive approach that incorporates employee culture as well as relationships with key stakeholders such as shareholders and customers. The payoff is enhanced security for all parties involved, resulting in employees, customers, shareholders, and suppliers investing in the company for mutual benefit and success.