The Design of Business Ethics

Thomas Fox
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Compliance Evangelist

How can you design an ethical organization? Is it different from one which does business in compliance with anti-corruption laws such as the Foreign Corrupt Practices Act (FCPA) or UK Bribery Act (UKBA)? According to Nicolas Epley and Amit Kumar, writing in the Harvard Business Review in an article entitled, “How to Design an Ethical Organization the answer is yes they are different. The authors believe that “Compliance programs increasingly take a legalistic approach to ethics that focuses on individual accountability. They’re designed to educate employees and then punish wrongdoing among the “bad apples” who misbehave.”

Conversely an ethical organization “Creating an ethical culture thus requires thinking about ethics not simply as a belief problem but also as a design problem. We have identified four critical features that need to be addressed when designing an ethical culture: explicit values, thoughts during judgment, incentives, and cultural norms.”

Explicit values should be clearly stated and can be widely shared within a company. The authors state, “clearly stated principles that can be widely shared within the organization. A well-crafted mission statement can help achieve this, as long as it is used correctly.” While it may seem like a small thing, the authors point to “in one experiment, 70% of participants playing an economic game with a partner cooperated for mutual gain when it was called the Community Game, but only 30% cooperated when it was called the Wall Street Game. This dramatic effect occurred even though the financial incentives were identical.”

Thinking about ethical values during times of decision making is driven the corporate culture puts ethics at the center of the company. The authors believe that “Behavior tends to be guided by what comes to mind immediately before engaging in an action, and those thoughts can be meaningfully affected by context.” This can be done by a simple an act as putting a truth certification at the top of an expense report rather than at the end. If you can make the conversation “is it ethical” rather than “is it legal” you have gone far in this area.

Incentives and more appropriately phased mis-aligned incentives can clearly be problematic. Wells Fargo may be the best (or worst) example of this with its “8 is Great” program which drove illegal behavior within the company. Further while employees tend to engage in behavior which is incented, their behavior is not solely driven on this point. Here the authors state, “In addition to aligning financial incentives with desired outcomes, ethical cultures provide explicit opportunities to benefit others and reward people who do so with recognition, praise, and validation. If, for instance, your employees are making people’s lives meaningfully better in some way, pointing that out will encourage future ethical behavior.”

It is well known that tone is set by more than simply that at the top. While tone at the top is a critical starting point, good tone must be communicated not only down into the middle but middle management must actually model that ethical tone. The authors related, “if employees in the middle of the organization are surrounded by coworkers who are lying, cheating, or stealing, they will most likely do the same, regardless of what their bosses say. So-called descriptive norms—how peers actually behave—tend to exert the most social influence.”

After you design the ethical framework for your organization, the next step is to put it into practice. The authors believe that “A leader designing an ethical culture should try to create contexts that keep ethical principles top of mind, reward ethics through formal and informal incentives and opportunities, and weave ethics into day-to-day behavior.” They then go on to provide some examples which are excellent for review and use by a Chief Compliance Officer (CCO) or compliance professional.

The use of Human Resources (HR) in the hiring process to establish cultural norms can be critical.  While much of the hiring process is designed to help a company hire the right person, it can also be used to communicate corporate values. The authors said, “Highlighting values in the interview reveals their importance to the organization. It is one piece of a broader system that draws attention to ethics.” This can occur throughout the hiring process with every interview and continue in the onboarding process.

A key area which the Department of Justice (DOJ) has noted is in the ongoing evaluation process. Obviously a year-end evaluation with an attendant discretionary monetary incentive can be a prime opportunity for reinforcement of a company’s ethical values. Yet with the advent of 360 Evaluations and other employment lifecycle techniques which are ongoing during the employment lifecycle, a company can continually put forward and emphasize its ethical principles.

I touched upon compensation in the use of a portion of your discretionary bonus but driving ethical values through compensation is actually broader. Moreover I can also be more difficult. The authors provided the following example from Southwest Airlines, the company uses “an executive scorecard to tie compensation to its four core values: every employee matters, every flight matters, every customer matters, and every shareholder matters. Each value is demonstrated by an objective measurement—“every employee matters” by voluntary turnover; “every flight matters” by ontime performance. This scorecard highlights how well core ethical values align with business success, helps keep employees’ attention on them, and suggests the behaviors needed to realize them.”

But once again it is not solely financial incentives. The authors cited one company which mandated its middle managers to perform “five random acts of kindness over a five-week period.” If you want to go in a more tangible direction, how about publicly rewarding employees with shirts which are monikered as “MVP” for an ethical action. Make the presentation in front of their co-workers and tell the story of how their actions demonstrated the company’s values in action.

The authors end by stating, “Real people are not purely good or purely evil but are capable of doing both good and evil. Organizations should aim to design a system that makes being good as easy as possible. That means attending carefully to the contexts people are actually in, making ethical principles foundational in strategies and policies, keeping ethics top of mind, rewarding ethical behavior through a variety of incentives, and encouraging ethical norms in day-to-day practices. Doing so will never turn an organization full of humans into a host of angels, but it can help them be as ethical as they are capable of being.” Why not design your ethical program around the way people actually are and how they want to be?

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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