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Creating an Ethical Culture in Business

Good Ethics is Good for Business

Every company should create a culture of ethics. If the senior leadership ignores or downplays a culture of ethics, they have created barriers to ethical behavior and opened the door to ethical dissonance, a situation where an individual’s ethics is at a higher level than that of the company. This kind of corrosive environment can lead to misappropriation of assets and/or fraudulent financial statements. Also, the way in which employees treat each other and interact with management might create ethical dilemmas in the workplace. A culture of ethics does not guarantee financial success, but it can add to the bottom line financial performance of a company.

There are a number of necessary ingredients that have to occur for a culture of ethics to survive. There are probably more ingredients, but these are the most important five that have been identified by many in the compliance field.

Leadership Commitment – A culture of ethics starts with corporate leaders. Top management must “walk the talk” of ethics and model ethical behavior in all that they do. Their actions must match their words to reduce or eliminate any dissonance.

Internal Communications – The company’s ethical culture depends on internal communications, such as training, messaging, meetings and other events. A strong set of internal controls are essential to building up the control environment from an ethical perspective.

Measurement and Reporting – Assuming that a company has embraced an ethical culture as one of its primary objectives, the company has to dedicate sufficient resources and priorities to attend to its ethical culture. Two key aspects of this process: measurement of the company’s culture and reporting of the company’s culture to senior management and the board as an important ethics and compliance driver. Ethical behavior should be an integral part of the performance evaluation system. Ethical performance should be rewarded while unethical actions should lead to sanctions or harsher treatment of the offenders.

Accountability – A corporate culture without accountability is doomed to crash on the rocks of cynicism. Managers and employees are skeptical when it comes to trusting their leaders and their commitment to ethics. There are certain times that a leader’s commitment to ethics can be tested – if the leader is not held accountable for failing that test, managers and employees will retreat into cynicism. Similarly, if managers and employees are not held accountable on equal terms to senior leaders, the company’s culture will derail into poor morale and lack of credibility. Equal accountability is a necessary principle for an ethical culture. Successful CEOs who have created or maintained a culture of ethics recognize the importance of equal treatment of all corporate actors.

Did you know that 34% of employees think their managers are unethical, and 42% of employees say their companies’ ethics cultures are weak? Those statistics come from the new State of Business Ethics in the U.S. infographic from Bolt Insurance.

According to the data in the infographic, most reports of employee misconduct include more than one “violation.” Misuse of company time ranks in the top spot with 33% of reports citing it, followed by abusive behavior (21%), lying to employees (20%), company resource abuse (20%), and violating company internet use policies (16%), respectively.

A lack of ethical behavior in the workplace is unlikely to end based on the statistics around retaliation against whistle blowers found in the infographic. One in five whistle blowers report that they have faced retaliation and that number is considerably higher than it was five years ago when it was reported at just over one in 10. Retaliation most frequently comes in the form of being excluded from business decisions or activities by supervisors or managers, followed by being given the cold shoulder by other employees, verbal abuse, nearly losing jobs, and not receiving promotions or pay increases, in that order.

The infographic offers several suggestions to improve business ethics, including:

  • Invest in an ethics program to educate employees.
  • Praise employees’ responses to misconduct.
  • Use social networks to start discussions about ethics issues.
  • Monitor the effect of whistle blower protections on employee reporting patterns.
  • Make ethical leadership part of performance evaluations for managers.

Ethical decision-making is a skill that can be learned through training and modeling of ethical behavior. Most colleges offer a business ethics course for this reason. Now we need companies to take it seriously and commit to create an ethical culture in their organizations.

Blog posted by Dr. Steven Mintz, aka Ethics Sage, on October 8, 2015. Professor Mintz teaches in the Orfalea College of Business at Cal Poly San Luis Obispo. He also blogs at: www.ethicssage.com.