Why have an ethical culture?  Because experts agree that the degree of ethics in the culture of an organization has a direct impact on the financial success of the organization.  This makes having an ethical culture an important issue.  This articles explains the roles of various leaders in the ethical culture creation process.

The Role of Leaders in the Creation of an Ethical Culture

It is the leadership of an organization, comprised of founders, managers, and boards of directors that are the main contributors to the culture of an organization.  Meyers describes this process as, “those in positions of authority use their power to create the de facto rules and values and to motivate behavior consistent with them” (Meyers, 2004, p.273).  These leaders themselves are products of other macrocultures and organizations to which they have previously belonged, as are other employees who also play a part in the culture setting process so that the end product is what Schein (2010) calls a blend (Schein, 2010).  Whether re-creating culture through planned or managed change, or establishing an original culture, leaders set forth their values explicitly by way of written rules and procedures.  They reinforce their true values implicitly by their actions.  Without implicit actions, statements and policies have little effect (Meyers, 2004).

Rose Evans, the vice president of a successful property management company and member of IREM Ethics Appeal Board illustrates the type of implicit reinforcement leaders must exhibit.  During her own interview for a position at a firm that manages one of the largest  portfolios in the Northeast, she asked pointed questions about the integrity of the bidding process.  She describes procedures in place to protect their clients’ monies by requiring two signatures to move even small amounts of monies.  When hiring she asks prospective applicants ethical questions about what they believe to be acceptable behavior.  Background checks are not only done on all applicants, but carefully reviewed.  Suppliers are required to submit references, which are checked (Evans, 2009).

Leaders must possess virtues of moral character, of which three are most important.  First, they must have practical wisdom in order to analyze problems, distinguishing between relevant facts and non-relevant facts to determine the best means for achieving the desired outcome.  Second, they must be honest with themselves and with others.  Third, they must have the courage to do what is right even in the face of peer or managerial pressures (Meyers, 2004).

The Role of Boards of Directors

            Prior to passage of the Sarbanes-Oxley Act of 2002 (SOX) and SEC regulations that emphasize accountability for top managers, including boards of directors, governance experts agree that directors and trustees have always been responsible for organizational culture, albeit  with little guidance for how to assume those responsibilities.  Their ineffectiveness has been linked to scandals involving major organizations such as Enron, Washington Mutual (WaMu), and WorldCom.  Lightle (2009) rebuts the tradition of board activity being limited to matters directly related to wealth creation, and insists that boards have “The same level of responsibility for providing direction and oversight should be extended to the objective of creating and maintaining the kind of organizational culture and tone at the top so crucial to achieving long-term objectives” (Lightle, Baker, Castellano, 2009, p.69).  Lightle et al. goes on to indicate that it is the board’s responsibility to be proactive in defining the desired organizational culture and approving strategies to achieve that culture.  It then becomes management’s responsibility to develop and implement specific policies and procedures that will adequately support those strategies.  The final responsibility rests with the board to monitor the effectiveness of the policies and procedures (Lightle et al., 2009).

Lightle et al., suggest five guidelines to assist boards in meeting their fiduciary responsibilities regarding company culture:  1)  assessing the existing organizational culture; 2) defining the desired culture; 3) performing a GAP analysis; 4) developing a strategy for achieving the desired culture; and 5) monitoring management’s performance in carrying out the strategy.

            Assessing the existing culture.  In this first step, the objective is to identify behavioral norms and expectations that are currently in place.  In other words, how do people actually behave as opposed to how they are supposed to behave.  Lightle et al. suggests the retention of an outside consultant, and emphasizes the importance of obtaining input from as many stakeholders as possible.  Boards are to be proactive in the process (Lightle et al., 2009).

            Defining the desired culture.  Here, the board determines where they want the organization to be.  What exactly is the desired culture?  What is right for the organization?  What constitutes the right choice; is it that which benefits the stakeholders, the customers, or society?  What are the best practices we as an organization will follow to do our job?  What will we not do?   Lightle et al. indicates that the starting point for the desired state is to do that which is legally required by SOX and other regulatory agencies.  From there, they must choose the higher ethical principles that will govern the company, and the type of culture that will enable the organization to maintain a healthy position in its environment (Lightle et al., 2009).

            Perform a GAP analysis.  Finding the gaps is locating precisely where the organization is falling short between where the culture is and where it is desired to be.  These could be specific behaviors from either management or employees.  It could be policies that are obstacles to where the culture is desired to be.  It can be explicit or implicit behaviors that are hindering the organization from moving forward.  In this step, the board is seeking to, “ . . . determine the root causes of any ethical lapses or issues that may arise from the cultural audit” (Lightle et al., 2009, p.71).  Lightle et al. goes on to emphasize that because these are strategic as opposed to operational functions, they are very appropriate for boards (Lightle et al., 2009).

            Develop a strategy for achieving the desired culture.  At this stage management develops a strategy, with input and direction from the board, to create the desired organizational culture.  This strategy should include processes and procedures, rewards and incentives; metrics, targets, and timetables.  These strategic plans should be approved by the board (Lightle et al., 2009).

            Monitor management’s performance.  It is the board’s role to evaluate management’s performance not only in operational functions, but also with regard to cultural strategies using the approved metrics and timetables (Lightle et al., 2009).

The Role of the Ethicist

            The ethicist assumes the role of critic, one that employees and others who are an integral part of the organization cannot assume because the culture itself is a part of their identity.   Since they define themselves via that culture, it is unlikely they will be able to see alternative ways of doing things, and less likely they will be able to act accordingly.   The ethicist as an outsider helps employees to break free from old cultural paradigms, and consider new alternatives with new values.  Before the ethicist can function effectively in the role of ethicist, he must first have what Meyers (2004) calls a rich understanding of the culture within which he is working.  He must understand how it operates and reinforces behaviors.  He must be able to talk their language while retaining enough separatism to remain objective.  Meyers (2004) states that he must strive “. . . to acquire an insider’s perspective, one that sufficiently grasps the normative forces present in an organization’s culture” (Meyers, 2004, p.274).  Though he may be conversant in the culture, he does not allow himself to become immersed in it (Meyers, 2004).

References

Evans, R. (2009). Ethical cultures: establishing and developing standards within your firm.

     Journal Of Property Management, 74(5), 10.

Lightle, S. S., Baker, B., & Castellano, J. F. (2009). The role of boards of directors in shaping

     organizational culture. CPA Journal, 79(11), 68-72.

Meyers, C. (2004). Institutional Culture and Individual Behavior: Creating an Ethical

     Environment. Science & Engineering Ethics, 10(2), 269-276.

Schein, E.H. (2010). Organizational culture and leadership 4^th edition.  Jossey-Bass. 

     San Francisco, CA  94103-1741