How to Evaluate the Ethics of an Organization

I have previously blogged about the ethics of the Securities and Exchange Commission’s whistle-blowing program and concerns raised by incentives to blow the whistle in the new Dodd-Frank Financial Reform Act. Are US businesses overstating their case by predicting the disintegration of internal misconduct reporting at the hands of the SEC’s new whistleblower program? Those fears may be overblown, according to a recently released study.

As the SEC wrote rules for the new program, which was created by the 2010 Dodd-Frank law, the business community warned that offering bounties to whistleblowers would undermine their internal reporting systems. A 10% to 30% cut of penalties worth millions of dollars would be far more enticing than correcting the matter in-house, they argued.

But, according to the Ethics Resource Center, in 2011 only 2% of employees solely went outside the company and never reported the wrongdoing they observed to their employers. For those deciding whether or not to go outside the company, a potential monetary award was not a major driving factor—82% said they’d report externally if it was a big enough crime, but only 43% said they’d do so for a reward.

“This report sort of takes the wind out of that argument,” said Patricia Harned, president of the Ethics Resource Center. “Companies have been, for the most part, notified when there was an issue. Reporters went outside when they felt the problem wasn’t getting resolved.”

The Ethics Resource Center,  a nonprofit that compiles and analyzes ethics and compliance data, surveyed 4,700 working people in mid-September 2011 for the whistleblower study, which was released as a supplement to its National Business Ethics Survey. The group, whose board is largely made up of corporate lawyers and compliance officers, wanted to get inside the mind of a whistleblower, Harned said.

Overall, only 18% of whistleblowers reported externally and 84% of those did so after trying to report internally first, the study found.

Those that do go outside are not low-level employees driven by hopes of a payday. The study found that the likelihood of reporting to the government rises with management level, as 56 % of top management said they’d go to the government compared to only 41% of non-management employees. Overall reporting rises in relation how financially secure an employee feels. That’s not surprising, according to Harned.

“You’re essentially putting your job on the line by going to a government source,” she said. “Employees who feel more secure are more likely to take that risk.”

Harned said that the biggest lesson for companies from the study is that external reporting can be prevented by promoting an ethical culture. In companies where employees trust senior management, 86% report internally, the study found. “If more employees begin to report externally it will driven by them losing trust in management,” Harned said.

I believe this is an over-simplification of how to create an ethical culture in an organization. Trust in senior management is important but oftentimes the unethical actions of senior management go unnoticed. Senior management may have a code of ethics, ethics officer, ethics hot line, and all the other tools that, on the surface, make it seem ethics is a valued commodity. However, they may not “walk the talk” of ethics and since employees may not be listening, the trust Harned talks about is superficial at best.

The best way to gauge whether management is ethical is to look at other policies such as: How are the employees treated? Look a performance evaluation. Is it conducted in a fair and equitable manner? How does management treat customer and suppliers? Are they respectful of alternative points of view in the organization? Is communication a two-way street?

These are just some of the potential “red flags” that might indicate whether management can be trusted and how it might react to whistle-blowing situations. Trust, but verify is a basic element of auditing.  It is appropriate here as well. I remember something William Shakespeare once said:

“Love all, trust a few, do wrong to none.”

Blog posted by Steven Mintz, aka Ethics Sage, on June 14, 2012