Feature

posted 1 Jun 2011 in Volume 14 Issue 8

Leading by example

David Gebler discusses the appropriate behavioural attributes in a culture of compliance and how leadership can foster desirable, organisationwide ethics and working practices

There are multiple ways an organisation can define its culture. A more conceptual approach looks at outcomes. For example, an organisation could state as its goal a phrase such as ‘our culture is one where people feel free to do the right thing,’ or ‘in our culture ethics always comes first.’ The challenge of course is then to define how to get there.

A more pragmatic approach to looking at culture focuses on behaviours. And before looking at the range of behaviours that would define an effective ‘culture of compliance,’ it is helpful to first look at the behaviours that the organisation needs to be wary of and avoid. Targeting desired behaviours to address specific and identified negative behaviours permits compliance leadership to address ‘culture’ in a practical and measurable manner, without having to address culture with a too conceptual and intangible approach.

However, even in approaching culture from a behaviour-based perspective, compliance leadership must be mindful that in selecting desired behaviours, it is not defining behaviours in terms of outcomes, as opposed to looking at behaviours in terms of actions that employees engage in day to day. An ‘outcome’ approach tends to be reflected in terms of policy goals. For example, since the organisation must be compliant with a set of regulations, or may seek to follow a set of best practices, it may be tempting to merely list these seven steps as the behaviours necessary to create the desired culture.

But, merely enacting speed limits and posting signs and police officers does not ensure compliance. Leaders in all parts of the organisation must look at the actual behaviours people engage in. What does compliance look like on the ground? What causes people to either engage in misconduct or not report misconduct that they see, and what can be done to prevent that?

The first step is to identify the kinds of misconduct employees see in the workplace. These are the observed behaviours that generate compliance issues, fines, penalties and trouble for organisations.

According to a survey conducted by the Corporate Executive Board in 2007, inappropriate use of company time and resources was the most frequently observed misconduct, observed by 23 per cent of employees.

This research is corroborated by the Ethics Resource Center (ERC)’s 2007 National Business Ethics Survey (NBES) in which it found that nearly half (49 per cent) of employees observed some type of misconduct taking place in the workplace.

The ERC also breaks down types of observed misconduct into two categories, which will be helpful in identifying the causes of misconduct: those which are personal lapses of individual employees and which are acts engaged in to further the company’s agenda. These distinctions will prove vital in getting to the root causes of unethical behaviour.

Certainly seeing these types of misconduct is not reflected in a culture of compliance. Each organisation must make its own determination as to what level of misconduct creates a negative work environment and whether such misconduct is the norm or the exception.

In order to determine whether certain types of misconduct are the norm or not, companies need to determine the cause of the undesired behaviour. Knowing what drives the behaviour gives insights as to whether the behaviour is endemic or the exception. If it is the exception, the behaviour can be addressed in a corrective action directed towards the individual. However, if such behaviour is embedded and accepted in the culture, broader action is required to excise from the company.

What causes people to engage in misconduct?
In 2007 the Compliance and Ethics Leadership Council of the Corporate Executive Board (CELC) identified 45 factors that drive employee misconduct and conducted statistical analysis to identify the vital few factors that are predictive of misconduct. According to the CELC, the following five indicators collectively predict approximately 20 per cent of the difference in the observed increases in misconduct at a company:

A culture of retaliation and discomfort raising concerns
Not only do employees have actual fear of reporting, such a climate dampens levels of engagement and commitment, creating an environment where employees feel they have less of a stake in the outcomes of the business. They care less and see no reason to stick their necks out.

Colleagues willing to compromise values for power and control
Employees who are seeking power and success are most susceptible to temptations.

Direct managers lack trust in and respect for employees
The quality of employees’ interaction with managers has a significant impact on the likelihood of misconduct. In this instance, poor managerial quality is defined by a lack of respect and trust in employees and excludes other characteristics that are commonly used to define poor managers, i.e. weak reputation, low encouragement of employee development and weak project management skills. It should not be surprising, therefore, that a high-performing manager from a financial or operational results perspective can actually be a low-performing manager from a compliance perspective.

Higher percentage of variable compensation
While senior executives are not as affected by the drive to gain power and control in the organisation, higher levels of variable compensation do seem to correlate with higher levels of misconduct among senior executives. For example, when a significant portion of management’s compensation is comprised of bonuses or other incentives, the value of which is dependent on meeting aggressive earnings targets, the operating environment creates higher potential for executive-level fraud and abuse.

Commitment to job greater than commitment to company
It is widely believed that increased levels of commitment to the manager, company, and the job are associated with decreased misconduct among employees. However, the ratio of an employee’s commitment to company and commitment to the job can often pose an issue – those who are more committed to their job than the company can be more susceptible to misconduct. For example, employees who fail to follow customer service or third-party vendor management guidelines in order to achieve their objectives faster or more easily could be succeeding in their roles despite an overall negative impact on the company’s brand or reputation.

The ERC also looked specifically at why employees engaged in misconduct. Ten per cent of employees feel pressure to compromise ethics standards, company policy, or the law. Almost all of the six types of pressure asked about in the 2007 NBES are significantly more common in negative work environments. More employees in such environments feel pressure from: supervisors, external stakeholders, performance objectives, concerns about their job security and the desire to save others’ jobs. This distinction will prove vital in demonstrating how creating a positive work culture will show results in reduced misconduct.

Why would people not report?
As critical as understanding what causes employees to engage in misconduct, is understanding why other employees who observe their colleagues engaging in misconduct fail to report it.

Based on the ERC’s 2005 and 2007 National Business Ethics Surveys there are five most common reasons employees do not report misconduct.

Employees are sceptical that their report would make a difference because no corrective would be taken (59 per cent in 2005);
Fear of retaliation – 46 per cent of employees who did not report in 2005 and 36 per cent in 2007 feared retaliation from at least one source. Retaliation could be overt, but more common is fear of subtle forms of retaliation, such as not being promoted, or being labeled as not a team player;
Concerns of a lack of anonymity (leading to fear of retaliation);
Someone else will take care of it (lack of accountability and personal responsibility); and
Lack of knowledge as to who to contact.

Futility and fear are the two major psychological motivators behind an employee’s personal decision not to report misconduct. Reporting misconduct involves some degree of risk. An employee must act outside of a comfort zone of not getting involved. In deciding whether to take the risk, there are several factors in the calculation. What are the chances of personal harm coming from my action (retaliation or humiliation from supervisors or peers), or will the organisation do anything with my issue or will this effort be in vain?

Characteristics of an ethical culture
So what can leadership do to overcome the resistance to reporting and to create an environment where misconduct is not tolerated? Can organisations teach employees the skills needed to maintain a culture of compliance and if so, what skills should be taught?

Some programmes, which are more compliance-based, focus on teaching employees the laws and rules they must comply with. The means by which unacceptable behaviour is prevented is based on deterrence, through threat of detection and punishment for violations of the law or the code of conduct.

Another approach is an integrity-based programme, focusing its efforts on establishing legitimacy with employees through internally developed organisational values and self-governance.1 An integrity-based programme integrates ethics into employees’ decision-making and inspires them to live up to the company’s ethical ideals.

The ERC describes an ethical culture as having four essential characteristics. These are the visible identifiers that an organisation has an ethical culture:

Ethical leadership – leaders set the right tone at the top and model ethical culture as part of earning the trust of employees. Leaders can be trusted to do the right thing;
Supervisor reinforcement – employees look to immediate supervisors for signs that the tone at the top is important and is taken seriously. Individuals directly above the employee in the company hierarchy set a good example and encourage ethical behaviour;
Peer commitment – peers talk about the importance of ethics and support one another in ‘doing the right thing’; and
Embedded ethical values – a sense of ‘how we do things around here’ is integrated into daily activities. Values promoted through informal communications channels are complementary and consistent with a company’s official values.

The ERC’s research has found that only nine per cent of companies in the US today have a strong ethical culture and embody these four attributes.2 The lack of commitment to strong cultures coupled with the increased tendency toward weak cultures has likely led to the rise in observed misconduct and deep reticence of employees to report.

While every organisation has a unique culture, there are common behaviours engaged in by employees that can have the greatest impact in determining its ethics risks. The 2005 NBES gathered data on the formal and informal actions of key members of a culture and provides evidence that there are some dynamics that seem to be essential in shaping ethical norms.

The findings suggested that organisations should use their ethics and compliance programmes to foster a culture committed to ethics throughout the organisation. These findings were based on 18 measures of ethical culture that included the ethics related actions (ERAs) of top and middle management, supervisors and coworkers.

The main top management ethics related actions are:

Communicates ethics as a priority;
Sets a good example of ethical conduct;
Keeps promises and commitments;
Provides information about what is going on; and
Employees perceive that top managers are held accountable for ethics violations.

The main middle management ethics related actions are:

Communicates ethics as a priority;
Sets a good example of ethical conduct;
Keeps promises and commitments; and
Employees perceive that top managers are held accountable for ethics violations.

The main supervisor ethics related actions are:

Communicates ethics as a priority;
Sets a good example of ethical conduct;
Keeps promises and commitments; and
Supports employees in following organisational standards.

The main co-worker ethics related actions are:

Considers ethics while making decisions;
Sets a good example of ethical conduct;
Talks about importance of ethics;
Supports employees in following organisational standards; and
Employees perceive that non-managers are held accountable for ethics violations.

The ERC’s findings suggest that organisations should focus training not only on informing employees about compliance with regulations, but also on encouraging employees to behave in a way that is conducive to a strong ethical culture. The author of this article worked with the ERC to develop additional data analysis to determine whether specific ERAs have a greater impact on outcomes than others. In addition, ERC analyses whether ethics training is more useful to senior employees than junior employees.3

The ERC identified three types of ERAs that have an especially great impact on outcomes expected of an ethics programme. ERAs such as setting a good example, keeping promises and commitments, and supporting others in adhering to ethics standards can have a powerful influence on building an ethical culture.

The NBES data suggests that when top management sets a good example of ethical conduct, disseminates adequate information about what is going on in the organisation, and keeps its promises and commitments, employees are more likely to see positive outcomes expected of an ethics programme.

Top management
An employee, for instance, who perceives that top management sets a good example, is 15 per cent less likely to observe misconduct than one who does not perceive that top management sets a good example. Likewise, an employee who is satisfied with the information distributed by top management or who feels that top management keeps their promises and commitments is 11 per cent less likely to see misconduct than an employee who is dissatisfied with information disseminated or who does not think that top management keeps their promises and commitments. In contrast, an employee who perceives that top management communicates the importance of ethics is only six per cent less likely to observe misconduct than one who does not; and an employee who perceives that top management is held accountable for ethics violations is only three per cent less likely to observe misconduct than one who does not.

Middle managers
When middle managers keep promises and commitments, employees are 26 per cent less likely to observe at least one specific type of misconduct than employees who do not see middle management demonstrate this ERA. In contrast, employees who perceive that middle management communicates the importance of ethics are eight per cent less likely to observe at least one specific type of misconduct than employees who do not perceive this.

Supervisors
As with the actions of top and middle management, when supervisors set a good example of ethical business behaviour, employees are more likely to observe several positive programme outcomes than when supervisors do not set a good example. Also when supervisors support employees in adhering to their organisation’s ethics standards, positive outcomes result. This has a much larger impact than that of merely communicating the importance of ethics.

Coworkers
Finally, among ERAs performed by co-workers, considering ethics during decision making, supporting each other’s adherence to ethics standards, and setting a good example have a greater impact on outcomes than other ERAs. Employees who perceive that their coworkers set a good example and support adherence to ethics standards are at least 17 per cent less likely to see situations that invite misconduct than employees whose co-workers do not engage in these ERAs. In contrast, an employee who perceives that their co-workers talk about the importance of ethics is neither more nor less likely to see risky situations than an employee who does not.

This research is useful for organisations in several ways. The findings emphasise the notion of actions speaking louder than words.

By identifying which ERAs have a greater impact, organisations can better target training to promote a culture committed to ethical conduct in the workplace. Organisations that dedicate substantial resources to the communication of ethical values may find that resources are better spent encouraging leadership to set a good example of ethical behaviour, establishing organisational trustworthiness in keeping promises, and helping employees to make ethical decisions. The findings are also instructive in pointing out how organisations can tailor their ethics training to different levels of employees. Top management may need less emphasis on how to handle ethical dilemmas and more emphasis on how to engage in ERAs, while junior employees may need instructions on how to proceed when faced with ethics challenges.

Why do so few companies embody these ethical attributes? On the surface they seem like the attributes that every company would want. It may be that organisations assume that their leaders have these attributes and focusing on these softer skills is lesser priority than ensuring that the proper controls are in place.

Experts in audit and fraud are more direct in seeing a disconnection between leaders’ perceptions and what happens in the field. John Gill, research director at the Association of Certified Fraud Examiners, minces no words: “Senior management doesn’t have a connection between internal controls and tone at the top necessarily. Probably most companies are more concerned about just meeting the compliance requirements,” he says.

Companies know they need to have a control-conscious environment and an ethics policy and that they have to communicate it to employees, Gill says, but he believes they still haven’t baked that awareness deep into the day-to-day conduct of business.4 Despite the best efforts of organisations to address these culture issues through existing controls and audit processes, to date such efforts have been underwhelming

Companies have to fight the tendency to feel a problem is solved by enacting a solution as opposed to developing a set of expected behaviours that need to be monitored and guided over time.

Here are some excerpts of internal control disclosures about tone at the top weaknesses recently published in Compliance Week:5

Stone Energy Corp
“Lacked adequate internal guidance or training on the SEC definition of proved reserves; there is also evidence that there was an optimistic and aggressive ‘tone from the top’ with respect to estimating proved reserves.”

Shurgard Storage Centers
“We did not maintain an effective control environment. We lacked adequately documented financial accounting and reporting policies and procedures related to the timely preparation and review of our interim and annual consolidated financial statements and supporting schedules. We did not maintain a sufficient complement of personnel with an appropriate level of accounting knowledge, experience and training in the selection and application of US GAAP commensurate with our financial reporting requirements.

We did not maintain adequate controls over the preparation of our interim and annual consolidated financial statements, and, our period-end financial accounting and reporting process lacked timely oversight and monitoring by the appropriate personnel necessitated by our decentralized organisational structure.”

Asyst Technologies
“The financial reporting organisational structure was not adequate to support the size, complexity or activities of the company. In addition, certain key finance positions were staffed with individuals who did not possess the appropriate skills, training or experience to meet the objectives of their job descriptions. This control deficiency indicated that we did not maintain an effective control environment…We did not maintain effective controls over the preparation of our interim and annual consolidated financial statements.”

To create a culture of compliance an organisation will need to systematically assess the characteristics of its employees, especially its leaders, to uncover barriers to trust and the building blocks that will create the desired environment.

This article is adapted from an excerpt of Building a Culture of Compliance, written by David Gebler and published by Ark. For further information or to obtain a copy of the report, contact Robyn Macé at rmace@ark-group.com

David Gebler is president of Skout, which helps organisations reduce people-based risks, while improving productivity and corporate reputation: www.skoutgroup.com/

References

Sharp Paine, L., ‘Managing for Organizational Integrity’, Harvard Business Review, 1 March 1994, p106, 110-11.
NBES, ibid.
Critical Elements of an Organisational Ethical Culture, ERC Research Report, Ethics Resource Centre, 31 December 2006.
Whitehouse, T., ‘How ‘Tone At The Top’
Still Dogs Companies’, Compliance Week,
19 September 2006.
Ibid.