What do strong managers help instill into the corporation when setting examples of ethical Behaviour?

Stathis Gould | November 5, 2013 |

In a Compliance Week blog post, editor-in-chief Matt Kelly commented that MF Global demonstrates all the worst ways that senior management can let “tone at the top” go wrong (“MF Global: Tone Deaf at the Top, and Then Disaster,” April 8, 2013). Kelly cites three sentences taken from a post-mortem published by a trustee investigating MF Global:

“Before MF Global went public, it acquired several disparate companies it never properly integrated. As one subordinate wrote in April 2010, “There is little business or dispositional integration between the many offices and branches. There is, in short, no house culture. The unwieldy corporate structure lacked cohesion both in its culture and in its operating structure.””

Effective approaches to instilling ethics and integrity, and using codes of conduct, are key elements of ensuring sound corporate governance and management control. The Committee of Sponsoring Organizations of the Treadway Commission (COSO)’s principle one of the control environment in the Internal Control Integrated Framework covers the need for the organization to demonstrate a commitment to integrity and ethical values. The related points of focus for achieving such commitment include the following:

• Setting the tone at the top: the board of directors and management at all levels of the organizations demonstrate through their directives, actions, and behavior the importance of integrity and ethical values to support the functioning of the system of internal control.
• Establishing standards of conduct: the expectations of the board of directors and senior management concerning integrity and ethical values are defined in the entity’s standards of conduct and understood at all levels of the organization and by outsourced service providers and business partners.
• Evaluating adherence to standards of conduct: processes are in place to evaluate the performance of individuals and teams against the entity’s expected standards of conduct.
• Addressing deviations in a timely manner: deviations of the entity’s expected standards of conduct are identified and remedied in a timely and consistent manner.

Codes of conduct help to reassure investors and other stakeholders, in particular those looking for socially responsible investment, integrity, and a commitment to ethics. Furthermore, employees generally prefer to work for organizations committed to values and ethics, and consumers tend to prefer to buy from organizations with strong records of adherence to standards of conduct and socially sensitive behavior.

As part of their leadership role and professionalism, professional accountants have a responsibility and opportunity to ensure the entire organization is attuned to high ethical standards and aligned with the values, goals, and objectives of the organization. Foremost, those in senior positions can help to set the tone at the top by displaying and encouraging professionalism and ethical behavior. An important way of influencing ethical practices and behavior in organizations is to ensure that senior management places a high premium on ethical behavior, and tone at the top. Tone at the top dictates the integrity of an organization and how employees will conduct themselves. The right tone at the top permeates throughout an organization and can be facilitated by a values-based code of conduct.

IFAC’s guidance Defining and Developing an Effective Code of Conduct for Organizations highlights the important role that accountants can play in driving and supporting organizational ethics and fostering a values-based organization. By applying a values-based approach—leading by example rather than relying on written policies and rules—accountants can promote a culture that encourages employees to internalize the principles of integrity and to “do the right thing” by allowing them to make appropriate decisions given specific circumstances.

A good example of a values-based approach is the PepsiCo Global Code of Conduct, designed to provide employees with specific guidance on how to act ethically while performing work for PepsiCo. It reinforces Pepsi’s core values and is the foundation of their strategic mission of Performance with Purpose.

All PepsiCo employees are expected to embrace the principles of the Code and:

• Show respect in the workplace;
• Act with integrity in the marketplace;
• Ensure ethics in PepsiCo’s business activities; and
• Perform work responsibly for PepsiCo’s shareholders.

Tone at the top also needs to be connected to the tone at the middle. An interesting observation by Michael G. McMillan, director of ethics and professional standards at the CFA Institute, is that most unethical behavior that we have all read about lately has not occurred in the “c-suite” but rather at the “m-level” (“Culture of Integrity Requires Financial Firms to Renew Focus on Middle Management,” Enterprising Investor blog).

Middle managers and their subordinates, not top level executives, have been at the center of most of these scandals. Therefore, if financial institutions really want to create a culture of integrity, they must also establish a “tone at the middle.” The chief financial officer and senior management will play a critical role in aligning tone at the top to behavior and actions in the middle and on the front line through effective systems of management control, performance management, training, and “walking the talk.”

Increasingly, organizations are using their codes of conduct and compliance programs as a means of engaging, educating, and raising awareness among employees. For example, Pet Supplies retailer Petco changed its code of conduct from a list of dos and don’ts to a shorter, livelier document with examples of situations employees might face on a day-to-day basis. A values or principles-based code, rather than a prescriptive approach, generally has more scope to influence employee decisions and actions.

Key questions for assessing your approach to ethical leadership

• Do organizational values, standards of behavior, and organizational support mechanisms reinforce and encourage integrity at all levels?
• Does the leadership of the organization demonstrate high standards of integrity?
• Do they practice what they preach and set a good example?
• Do directors and senior management provide a clear signal to other employees and outside stakeholders that integrity is important to the performance and reputation of the organization?
• Does adhering to the principle of integrity override short-term gain?
• Does the organization’s leadership ensure that strategy, policies, information, and culture sustain a reputation for integrity?
• Are the organization’s objectives and strategy in line with its standards of business conduct? For example, does the strategy impose unrealistic short-term performance targets that may encourage behavior that lacks integrity?
• Does the organization have a code of conduct that defines integrity and outlines the behavior it expects directors, employees, and other stakeholders to uphold?
• Does the code and compliance program adhere to regulatory and listing requirements, including for enforcement?

The culture of a company influences the moral judgment of employees and stakeholders. Companies that work to create a strong ethical culture motivate everyone to speak and act with honesty and integrity. Companies that portray strong ethics attract customers to their products and services.

Customers are happy and confident in knowing they’re dealing with an honest company. Ethical companies also retain the bulk of their employees for the long-term which reduces costs associated with turnover. Investors have peace of mind when they invest in companies that display good ethics because they feel assured that their funds are protected. Good ethics keep share prices high and protect businesses from takeovers.

Creating an ethical organizational culture:

One of the most noticeable ways that companies can demonstrate their commitment to creating an ethical organizational culture is to ensure that top managers and leaders lead by example. Employees look to the behavior of top management as an example of the type of behavior that the company finds acceptable in the workplace. Actions speak louder than words, so when top executives display ethical behavior, it sends a positive message to employees. Senior leaders need to be mindful of the fact that they’re being watched and be sure to practice what they preach.

Research backs up the notion of leading by example. Stanford psychologist, Al Bandura is known for his research on observational learning. Bandura’s stages of observational learning are:

• Attention
• Retention
• Reproduction
• Motivation

The stages suggest that people pay attention to the behavior of others and retain thoughts about it. Then they reproduce the behavior. After repeated times of having a good experience with behavior, people are motivated to repeat it.

Companies that create and disseminate an official code of ethics send a clear message of the expectations for their employees. A code of ethics or code of conduct clearly outlines the organization’s primary values and ethical rules that they expect everyone to follow. The code should indicate that it applies to attire, attitudes, and behavior. Cultural norms and expectations are also inferred and are easily detected by observing the environment.

While it’s good to have a written record of the code of ethics, means nothing if top management fails to model ethical behavior. Employees are observant. They take note of whether the company is adhering to the ethical principles that it set or whether they are merely paying lip service.

A formal ethics training program sends a strong message about a company’s ethical stance. Seminars, workshops, and other ethical training programs reinforce the organization’s standards of conduct and clarify the types of behaviors that the company deems permissible or out of bounds. Situational examples help to address how to handle possible ethical dilemmas. Workshops can help employees to work on their problem-solving skills. Trainings may include consultations from peers or mentors.

Corporate culture always begins at the top. Managers should be evaluated on their ethical behavior as part of their annual performance appraisals. Their appraisals should include specific questions about how their decisions measure up against the code of ethics. Top executives should also be evaluated on the means they take to achieve their ethical goals as well as how the means lead to the ends.

Once again, research supports ethical principles. The principle of operant conditioning, by B.F. Skinner, represents that it’s possible to reinforce the behavior you want to see in others. The principle of operant conditioning also shows that companies shouldn’t reinforce behavior they don’t want to see in others.

People who act ethically should be noticeably rewarded for their behavior and those who fail to act and behave ethically should have consequences for unethical behavior. Rather than fire good employees who demonstrate a single ethics violation, the company may choose to provide correct feedback for the behavior along with a short probationary period. Correction should be conducted in the spirit of collaboration and education rather than punishment or chastisement.

This step should encourage companies to offer their employees opportunities for rewards, recognition, and social reinforcements. Rewards and recognition should be thoughtfully considered taking care to deliver it with attention to detail to avoid unintended consequences.

Most employees will want to do the right thing especially if they work for a company that has high moral and ethical standards. It can be difficult for anyone to report unethical behavior that they witness in other people at the company. Shy or introverted employees may find it particularly challenging to report unethical behavior. Almost anyone would feel intimidated if they felt the need to report the unethical behavior of one of their superiors or someone in a senior management position.

There are several ways that companies can assure their employees that they can safely report unethical behavior without fear of losing their jobs or getting some sort of punishment or consequence. An objective third party such as an ethics counselor, ethics officer, ombudsman, or ethics consultant can be helpful in these situations. An ombudsman can get the tools and resources to help with a consultation or investigation of a complaint about ethical behavior.

Using Technology to Support Creating an Ethical Organizational Culture

In the best-case scenario, your company will never have to deal with an infraction of your Code of Ethics policy. Unfortunately, that’s not the reality for many companies. Here’s where it pays to take a modern approach to creating an ethical organizational culture. BoardEffect offers the perfect electronic platform for securely storing your code of conduct policies, reports, investigations, and the outcome of investigative results.  It provides a secure, confidential online space where a team can investigate, communicate, and collaborate about ethical reports that have the potential to harm the company’s reputation. In the event that an incident takes a legal turn, attorneys have quick access to the company’s code and all other documentation regarding the incident. The board administrator has the ability to limit the users who can participate in such discussions.

The best judgment you can use to protect your company is to implement modern governance processes with the help of a BoardEffect board management software solution.

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