Organizational leaders can no longer choose whether or not to have an ethical culture, with measurable and enforceable standards.  The Sarbanes Oxley Act (SOX) and the Federal Sentencing Guidelines for Organizations (FSGO) both dictate that leaders of organizations will be held liable for the oversight of their organization.  New federal regulations remove the defense of ignorance, holding board of directors, CEOs, CFOs, and other leaders accountable for what employees do.  This article looks at the process of developing ethical standards with regard to content, training and communication, and enforcement.

Organization Synergist (OS)

Developing Ethical Standards

            The standards themselves are the nuts and bolts of the ethical culture being created and established. They come in the form of a code of conduct, a code of ethics, or a statement of values.  The code of ethics is typically the most comprehensive, although all three forms are interchangeable.  Participants in composing standards should be the president, board of directors, and the CEO (Ferrell et al., 2013).  Two critical components most important when developing ethical standards are what Kranacher (2006) calls the tone at the top.  Kranacher (2006) describes the tone at the top concept as, “a comprehensive program that goes beyond ‘setting a good example’ and ‘doing the right thing’; it requires an organization’s management to act on the principles embodied in its formal ethics policy” (Kranacher, 2006, p.80).   No matter how well written the standards are or what format they take, they must be visibly supported and upheld by the actions of those at the top.

The second critical component of the standards is the content.  They must reflect the desires of top management for compliance to the organization’s cultural values, rules, and policies.  They should also address what Ferrell et al. describes as “high-risk activities that fall within the scope of daily operations” (Ferrell et al., 2013, p.223).  Other considerations for inclusion are:

1).     Stating risk areas complemented with the values and the explicit conduct that is necessary for compliance with laws and regulations.  In other words, do not assume that readers are capable of connecting the values and knowing the right conduct.  When you spell out the values and conduct, it makes it easier for them to obey (Ferrell et al., 2013).

2)     Identifying and addressing the specific ethical issues that are relevant to the organization.  This, of course, is indicative of the fact that an analysis must precede the construction of the ethics program (Ferrell et al., 2013).

3)     Consider values from the stakeholders’ perspective, and look for areas of overlap, where stakeholders and organization values are the same.  Including stakeholder values creates inclusiveness and unity among the organization and its stakeholders (Ferrell et al., 2013).

4)     Use examples to reflect values.  Draw pictures for people to help them understand the value behind the rule or procedure.  When people understand why they are being asked to do something, they become more agreeable (Ferrell et al., 2013).

5)     The code must be communicated frequently and in a way that people can thoroughly understand (Ferrell et al., 2013).

6)     The code should be revised each year, allowing input from all stakeholders.  As the organization grows, new issues will arise and need to be included.  This is a continuing project (Ferrell et al., 2013).

Training and Communicating the Ethics Program

            A major component to establishing an ethical culture is ethics training.  According to Ferrell et al., three factors influence ethical decision-making of employees:  the corporate culture, co-workers and supervisors, and opportunities to engage in unethical behaviors.  Ethics training can impact all three areas of influence.  Employees who understand their company’s philosophical position on ethical behavior are less likely to engage in unethical behaviors.  Every department manager must be involved in the development of ethics training, which should be individualized for the unique features of the organization.  Components of an effective training program should include:  a theoretical foundation, a code of ethics, procedural guidelines for airing ethical issues, involvement from both line and staff, and explicit executive priorities regarding ethics (Ferrell et al., 2013).

                When creating and establishing a new ethical culture in an organization, training can be used as a strategy for building shared vision.  It is through genuinely shared vision that leaders are able to obtain commitment and focus from their members.  Peter Senge (1994) in his book, “The Fifth Discipline Fieldbook,” shares the story of Vaclav Havel, who was elected president of Czechoslovakia in 1989, when it first became a democracy.  Although Havel had plenty of ideas about what this new country should be like, understanding the dangers of imposing vision, he wisely restrained himself and developed strategic mechanisms that involved the entire country in the process of rebuilding.  While he admits that sharing vision did not solve all of the country’s problems, it did create an environment where, “ . . . people believed they were part of a common entity – community” (Senge, 1994, p.298).  In this same way, training can be strategically used to create community through the sharing of vision.

Monitoring and Enforcing Ethical Standards

            When codes of ethics are aggressively enforced and become an integral part of the company’s culture, ethical behavior in the organization will improve.  Enforcement and employee conduct must, however, be measured and evaluated for effectiveness, and altered when necessary.  Among the variety of methods that can be used are internal audits, observing employees, surveys, questionnaires, and hotlines.  One of the keys to measuring effectiveness is input and feedback from employees (Ferrell et al., 2013).

            Another major tool for determining the effectiveness of an ethics program is the ethics audit which identifies and measures an organization’s commitment to its ethical procedures and policies.  It uses objective systematic evaluation to determine whether its program and policies are effective.   It is not required, but when used demonstrates to stakeholders that the company is committed to improving its strategic planning, and serious about its responsibility to comply with legal and ethical standards (Ferrell et al., 2013).

            Organizations of all types play a major role in all of society.   As a result of increased competition, advanced technologies, and public scandals, companies are being forced to operate and function at a higher level of ethical standards.   Many organizations in their efforts to meet these new requirements will have to re-create and establish a new ethical culture.  This major initiative begins with an understanding about the role that organizational culture plays in the decision-making process.  Leaders must then be acquainted with new responsibilities connected to new roles as ethical leaders in a new culture.  A new ethics programs will have to be developed and implemented with the involvement of employees at every level of the organization.  Once implemented, the new ethics program should be monitored and systematically evaluated for effectiveness.   

References

Ferrell, O.C., Fraedrich, J., Ferrell, L. (2013). Business ethics ethical decision making and cases (9^th edition).     

     South-Western Cengage Learning.  Mason, OH  45040.

Kranacher, M. (2006, October). Creating an Ethical Culture. CPA Journal. p. 80.

Senge, P. (1994). The fifth discipline fieldbook: strategies and tools for building a learning organization. 

     Doubleday.  www.currencybooks.com.

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