Corporate Governance

Developing an Ethical Corporate Culture in an Age of Indiscretions

Developing an organizational culture based on ethics requires leaders who communicate policies and reinforce them with consistently ethical behaviors.
By Royston Arch

The United Nations Development Programme defines organization culture as the sum of the "way people behave in the workplace, how they go about doing their work and the values that they demonstrate through their actions and decision-making." Culture is something passed through tiers of employees and time, meaning it is as much or more influenced by the way people behave as it is by written policies and procedures.

The culture can be based on positive and ethical values, expectations, decision-making and policies or the opposite – unethical values and behaviors. Employees choose to do the wrong thing for numerous reasons, and one is leadership that sends the wrong message through their own behaviors or fails to consistently engage employees in its policies of transparency and honesty.

Employees that regularly undermine an organization's efforts to maintain an ethical culture are a sure sign there are deeper problems to address than errant behavior.

Poor Decisions for Many Reasons
There are employees who make poor decisions at work because of personal issues of which their managers are unaware. They may have financial problems, lack character, or want to avoid doing anything that could jeopardize their career progression or performance ratings. Some people simply have difficulty handling criticism, so they avoid it at all costs. Many of these people do not see the connection between their behaviors and outcomes or have no concern for the impact of their unethical behaviors on others.

There are also organizational cultures that send a message through leadership behaviors that unethical behaviors are acceptable. The managers make poor decisions or encourage people to act in a cutthroat manner. Encouragement is given when a manager does not enforce employee ethical conduct or punishes people who speak up when they discover or witness transgressions.

Developing and communicating a code of conduct is important, but its existence alone will not create an ethical culture. One company required its employees to sign an ethics statement that read, "Employees are charged with conducting their business affairs in accordance with the highest ethical standards. Moral as well as legal obligations will be fulfilled in a manner which will reflect pride on the Company's name." The company was Enron.

Feeling Pressure
Unethical employees can act in many different ways. They include stealing assets, falsifying reports, following unethical directives issues by their supervisors, manipulating others to perform unethical acts, failing to adhere to compliance standards, utilizing benefits for other than their intended purpose (i.e. calling in sick when desiring a vacation day), cheating or lying to customers or business associates, abusive behavior, bribery, corruption, and on the list goes.

The Institute of Business Ethics reviewed 11 research efforts conducted through 2016 that addressed business ethics. The results found that employees feeling pressure to compromise organizational standards is a key indicator for potential ethical violations.

The U.S. Ethics and Compliance Initiative's "2016 Global Business Ethics Survey" found that in 10 out of 13 countries, half or more of the survey respondents said they had observed misconduct. In 11 out of 13 countries, one out of three respondents experienced retaliation. The UK's Institute of Business Ethics' "Corporate Ethics Policies and Programmes: 2016 UK and Continental Europe Survey" also found the main issues of concern were bribery and corruption, whistleblowing, and supply chain issues.

Fair and Consistent Leadership
Research has found that psychological reasons underlie the reasons many employees have an unwillingness to speak up when they know of ethical violations.

One is that the organizational culture does not support speaking up in reality, despite a policy encouraging an open door policy and well-communicated reporting processes concerning unethical activities. People have a fear of speaking up to begin with, and if they see their efforts as futile or bringing repercussions for their honesty, they will not make reports. Managers must convey support for hearing the employee's concerns.

Some ethical violations result from organizations setting unrealistic performance goals. To meet goals, employees feel pressured to lie on reports or to cheat in other ways. In 2016, it was discovered that Wells Fargo employees set up millions of fraudulent checking, savings and credit card accounts in the names of its customers. The primary reason was that management had set unrealistic sales goals. It is important for managers to set reachable goals and to provide employees the tools and resources they need to achieve the goals.

Consistent leadership behavior is also critical. Managers cannot let one employee get away with unethical behavior and punish another. Organizational leaders must serve as the models of behavior, personally through their own actions and decisions and as managers supporting ethics among staff. Leaders must also reinforce the desired behavior.

Many organizations are making use of technology to broadcast the ethical behaviors of employees. They publicly recognize employees on websites and social media, and in company newsletters and reward sites. Senior executives can reinforce ethics through messaging, Human Resources can make ethics visible through training sessions, and frontline managers can hold regular conversations with staff.

Changing an Organizational Culture
Changing an unethical culture to one that is ethical is not always easy.

Wells Fargo proved that point. In 2017, the company admitted 528,000 customers were enrolled in online bill pay services without their permission. Also in 2017, the bank publicly reported that 800,000 bank auto loan customers were charged for car insurance they did not need, and they had known of the problem since July 2016. Approximately 20,000 people had their vehicles repossessed.

JPMorgan analyst Vivek Juneja raised questions about the lack of disclosure and how it indicates that Wells Fargo's culture still needs changes. Late in October 2017, Wells Fargo was back in the limelight when it admitted it had inappropriately charged 110,000 customers for mortgage rate lock extension fees. Employees were told to blame customers for late paperwork that was due to bank delays.

A toxic organizational culture is the result of poor management. Most companies do not reach the level of unethical behaviors experienced by companies like Enron and Wells Fargo. An ethical organization builds employee trust, loyalty and responsibility for performing in an ethical manner. They need organizational leaders from the top-down who communicate the importance of ethics and reinforce the importance through their own consistently ethical behaviors.