From Boardrooms to Behaviors: Tackling the Root Cause of Ethical Misconduct and Transforming Organizational Culture for Lasting Change

Shortly after the Enron, Tyco, and WorldCom scandals of the early 2000’s extensive new regulatory regimes were put into place, such as Sarbanes-Oxley and a bolstered Foreign Corrupt Practices Act and Anti-Bribery legislation. 

Were they effective? Did behavior inside organizations change? Now over 2 decades on what have we learned?

In my opinion, part of the problem is that the global business community, and those that regulate it, are looking at the problem through the wrong lenses. 

Corporate misconduct is not a problem that can be solved through external regulation or intervention. If misconduct continues it is not necessarily due to faulty training or messaging.

Misconduct is an outcome of the inherent tension when humans are working towards meeting business goals.

This is a point worth stopping and pondering for a moment: Ethics and compliance problems result from failed business strategy execution. Most ethics scandals do not start off as fraudulent ventures intent on ripping off customers or shareholders. The fraud usually happens later when the cover-ups begin. 

So where do scandals actually start? 

The first steps down the slippery slope usually start in management meetings where tough issues are being discussed, decisions are required that might require trade-offs of various positions in order to reach a consensus on how to meet a goal. Under the pressure to meet deadlines or goals many ideas are circulated, some safe, and some outrageous. In the spirit of brainstorming options all ideas are good. 

But what is going on inside the conference and board rooms that allow the outrageous and risky ideas to become the accepted policy?

Think about some of the most significant scandals in recent history: VW faking diesel emissions standards, BP safety lapses in the Gulf, Wal-Mart “expediting fees” in Mexico. All of them emerged out of business decisions that were not challenged early on and grew as more and more employees joined a culture of silence.

VW, for example, was seeking ways to aggressively gain greater global market share. Their leadership announced plans to more than triple its sales in the United States within 10 years, 

But when the costs and convenience of existing diesel emission technology options needed to meet higher US standards were not feasible, leaders and engineers went to extreme measures and were not held back or dissuaded by senior leaders.

So, if the start of a scandal is benign, and if ethics and compliance programs geared towards addressing misconduct or providing positive reminders to do the right thing are seen as irrelevant to the problem at hand, what approach should leaders take to keep ethics risks within acceptable parameters?

Misconduct is like cells in your body that become cancerous. At first the cell is healthy. But then when there is an issue (as there always is) does the organization have the means to nip it in the bud early before it grows into a problem? Almost all ethics scandals start in small conversations that can be easily squelched before it ever becomes a problem. It is the organization that does not have a healthy immune system and is vulnerable to the problem growing out of control.

How to mitigate the risks?

While the details and specifics of an ethics risk mitigation strategy are unique to each organization, these steps provide the parameters to guide leaders.

• First, leaders must be willing to focus beyond “ethics and compliance” as a solution. Leaders, both line managers and finance and compliance leaders, need to go beyond “telling” employees what behavior is needed. Employees already know and want to do the right thing. Instead, leaders must understand the dynamic that causes business decisions to go awry in the first place.
• Leaders must understand the relationship of their organization’s strategy with the behaviors needed across the enterprise to achieve those goals, as well as the role of the organization’s culture in supporting or thwarting those objectives. The probability of successfully achieving a business objective is determined by the positive interaction of Strategy, Behavior and Culture.
• Leaders must acknowledge that because everyone in the organization is human, everyone is vulnerable to basic fears that can hold us back and begin the process of rationalizing our actions...which is where, if there is going to trouble, it definitively starts.

The focus needs to be on how decisions are made in the first place. Leadership need to hone in on what generates the risk, not the action. Spend less time reminding people to do the right thing and spend more time on what will prevent the problem in the first place.

From my 30+ years of working with organizations on mitigating culture-based risks, these are the three core elements that will yield the biggest return. This is what we work on specifically with our clients at Leading With Ethics:

Commitment: Employee engagement is seen as a strategic foundation and not a “nice-to-have.” Engaged employees will be willing to take personal risks to go out of their comfort zone to ask questions and have a sense of collective ownership so that inappropriate conduct will be seen as unacceptable.

Integrity: Perceptions of inconsistency and unfairness are the quickest paths for employees to shut down their sense of commitment and focus only on themselves. Leaders must be held accountable for their actions and must hold others accountable for theirs.

Transparency: Nothing will yield better results faster than ensuring that every employee has the ability to speak up and ask tough questions. Leaders must recognize that what had been seemingly innocuous behavior of managers in not truly creating an open door environment is actually one of the most dangerous, but yet manageable risk factors.

To truly create an ethical culture, leaders must change their focus and begin looking to the root causes of misconduct. Prevention by addressing the behaviors that create the climate where misconduct can arise is the highest return on investment of ethics and compliance efforts.

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