Build your ethical culture strength to mitigate risk, optimize performance

By Jim Nortz
BridgeTower Media Newswires
 
Chapter 8, §8B2.1 of the U.S. Federal Sentencing Guidelines (the “Guidelines”) sets forth the elements of an effective compliance and ethics program that have become an internationally recognized standard for good corporate governance. Specifically, the Guide­lines state:

To have an effective compliance and ethics programs...an organization shall—

(1) exercise due diligence to prevent and detect criminal conduct; and

(2) otherwise promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law.

The Guidelines’ focus on ethical culture strength to reduce compliance risks is born of common sense and strongly supported by decades of research by organizational psychologists. In the 1950s and ’60s, Stanley Milgram and Solomon Asch conducted ground-breaking experiments demonstrating that social dynamics (response to authority and conformity to social norms respectively) are surprisingly strong drivers of human behavior. Their work and numerous studies that followed found that we are all extraordinarily susceptible to normative pressures and the influence of our superiors. These attributes of human behavior are amplified for good or ill in hierarchical organizations like corporations where employees depend upon sustained social acceptance and their superiors’ support for their livelihoods.

A prime factor in determining whether these ever-present social dynamics induce ethical or unethical behavior is the magnitude of organizational “strain” or performance pressure there is relative to ethical culture strength. A 2010 paper published in The Academy of Management Annals entitled “Organizations Gone Wild: The Causes, Processes, and Consequences of Organizational Misconduct” that reviewed and critiqued research on organizational causes of misconduct reported that studies show:

Misconduct may arise from strain stemming from organization-level goals rather than individual-level ones...That is, when the organization is under strain, individuals who internalize the achievement gap may be motivated to engage in misconduct.

As anyone who has ever worked for a for-profit corporation knows, there is always “strain” to perform at every level of the organization. Systemic corporate corruption is not the product of a small number of corrupt business professionals. Instead, corrupt business practices erupt in every instance in which an organization’s ethical culture is too weak to withstand the strain to achieve performance goals. As Philip Zimbardo, a luminary in the field of organizational psychology observed in his book The Lucifer Effect, the root cause of organizational misconduct is not a few “bad apples,” but, instead, “bad barrels.”

Data gathered by the Ethics and Compliance Initiative validates Zimbardo’s claim and the primacy of ethical culture strength in reducing misconduct rates. In their March 2018 “State of Ethics & Compliance in the Workplace” report, the Ethics and Compliance Initiative observed that compared to employees in strong ethical cultures, employees in weak ethical cultures are:

• Three times more likely to say they experienced pressure to compromise standards

• Three times more likely to say they observed misconduct

• 41% less likely to report observed misconduct

• 27% more likely to say they experienced retaliation after reporting misconduct.

In addition to reducing compliance and ethics risks, there is compelling evidence that strong ethical cultures enhance financial performance. The Report of the National Association of Corporate Directors Blue Ribbon Commission on Corporate Culture as an Asset observed that “[I]f led and managed well, culture is the rocket fuel for delivering value to stakeholders.” This statement is well supported by financial performance data gathered by numerous organizations.

In their 2010 report entitled “Ethical Leadership: The Important Links between Culture, Risk Management, and Business Performance,” the Compliance and Ethics Leadership Council stated that their data showed that companies with strong ethical cultures had:

• Higher employee productivity;

• Better strategic management; and

• Improved business performance.

Data gathered by Raj Sisodia and published in the Conscious Capitalism Field Guide, shows that over a 20 year period ending in June 2017, companies who subscribe to the four tenets of Conscious Capitalism that includes a “conscious culture” that “intentionally fosters cultures with high levels of trust, authenticity, transparency and genuine caring” outperformed the S&P 500 index by a factor of nearly 8 to 1.

Similarly, a 2016 Great Place to Work Institute Report entitled The Business Case for a High-Trust Culture observed that between 1998 and 2016 firms that have high “trust indexes” and comprised their lists of the “Top 100 Companies to Work For” over that time period have collectively outperformed the Russell 3000 stock index by a factor of nearly 3 to 1. The report also cites several studies that found a compelling connection between factors key to ethical culture strength and company performance. These included a 2013 study led by Luigi Guiso, of the Einaudi Institute for Economics and Finance & CEPR that found that in companies where employees reported that their leaders act with integrity (an essential component of a strong ethical culture), a number of competitive advantages emerged, including:

• Higher productivity;

• Better industrial relations;

• Greater attraction of top job applicants; and

• Increased profitability

Another 2013 study cited in the Great Place to Work Institute report conducted by Herbert Nold, professor of business administration at Polk State College in Winter Haven, Fla., came to similar conclusions. Specifically, Nold found that the great workplaces achieved superior results over a period of several years in:

• Operating income per employee

• Operating margin

• Growth rate

• Return on assets

• Tobin’s Q (the ratio between an asset’s market and replacement value)

The fact that ethical culture strength reduces risk and drives superior financial performance should not be surprising. Given the power of social dynamics in driving behavior in organizations, the most potent protection against systemic corporate corruption is a robust ethical culture sufficiently strong to ensure compliance with legal and ethical requirements regardless of the strain placed on the organization at every level to achieve performance goals. Further, corporations are human institutions whose performance is dependent upon relationships between internal and external stakeholders. These relationships are universally enhanced by cultures governed by ethical values like honesty, respect, responsibility, fairness and compassion.

If you haven’t done so already, deploy a professionally developed anonymous survey to determine your firm’s ethical culture strength and take action to promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law. This is the best investment you can make in minimizing your enterprise risk and maximizing business performance over the long term.

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Jim Nortz is Founder & President of Axiom Compliance & Ethics Solutions. He serves on the Conscious Capitalism Rochester Board of Directors, is a member of the International Association of Independent Corporate Monitors and is a National Association of Corporate Directors Fellow. Jim also is a former Board member of the Rochester Area Business Ethics Foundation (RABEF) and the Ethics and Compliance Officer Association (ECOA). Nortz can be reached at jimnortz@ AxiomCES.com.

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