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.

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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

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Organization Synergist (OS)

Organizations are a pervasive part of the every-day lives of most people.  We enter the world through an organization called a hospital.  We live in virtual organizations called communities that have laws and rules that we generally obey without question.  Our social worlds are filled with various types of organizations such as schools, churches, and grocery stores.  Many of us voluntarily join organizations whose objectives align with our own heartfelt passions.   We spend a significant amount of time as employees in organizations.  We even trust organizations with our most valuable resources when we enroll our children in schools and deposit our money in banks.   Driskill and Brenton say it like this, “Organizations are places that carry us from cradle to grave by shaping our sense of identity, role, and meaning in life” (Driskill, Brenton, 2011, p.4).

The bottom line:  organizations play a major role in our lives.  Over the past two decades, scandals have destroyed the trust and confidence of many consumers as major organizations like Enron, AIG, Fannie Mae, and Countrywide Financial and more, have been reprimanded for engaging in deceptive, illegal, and unethical practices that have cost society losses in the billions of dollars.   In response, two major initiatives have resulted.   First, new federal regulations like the Sarbanes-Oxley Act (SOX) and the Federal Sentencing Guidelines for Organizations (FSGO)  have been passed to establish new ethical guidelines that will help to protect consumers from unethical practices and restore public confidence.  The second result is increased public awareness and sensitivity to unethical behaviors in organizations.

What these two responses have effectively done, in conjunction with pressures from increased competition, is to force organizations to operate and function with new and higher standards of ethics.  In order, however, for them to change how they function and operate, they must examine cultural aspects of their organization that cause them to do what they do the way they do it.   In order for them to achieve substantive changes through the creation of new cultural values, they will have to recreate and change aspects of their organizational culture.  Schein (2010) explains how the culture of an organization has within itself powerful unseen forces that dictate how members of that organization operate and function.   Those unseen forces must be identified before they can be changed (Schein, 2010).   Whatever the cultural values are, they play a significant role in the behavior of its stakeholders.  As such, organizational culture plays a significant role in the performance of members, and therefore, the overall success of the organization.

A team of managers who desire to improve operations, would have to first look at the cultural values accepted and shared by its employees.   For instance, to transition from an unethical to an ethical culture, would involve as Meyers (2004) explains, an understanding of ethical behavior.  One would have to understand why ethical problems exist in the first place.  With respect to organizational culture, Meyers (2004) states that one must go beyond identification to an understanding of the role that culture plays in the ethical decision-making process.  Beginning with the former, Meyers (2004) states there are three possible explanations for unethical decisions that are made in organizations (Meyers, 2004).  The first explanation is that good people sometimes make unethical decisions because of ignorance or simply not knowing what the right thing to do is.  Ferrell, Fraedrich and Ferrell (2013) point out the complexities involved, in that businesses have a duplicative responsibility to not only be ethical, but to also make a profit.   For this reason, the approach to the ethical dilemma cannot be limited to the philosophical dimension (Ferrell et al., 2013).   The second explanation given by Meyers (2004) for unethical decisions is that sometimes good people make unethical decisions by reason of being overcome by some personal weakness (Meyers, 2004).   This can be limited by increasing accountability.   Meyers’ (2004) third explanation is that some people are bad, and bad people simply do bad things (Meyers, 2004).   These are bad apples that must be terminated (Ferrell et al.. 2013).

The point is, while all three causes are valid, Meyers correctly insists that the three causes present an incomplete picture of the ethical decision-making process in that they do not take into consideration the organizational culture within which the unethical decisions are made (Meyers, 2004).  Schein (2010) reinforces Meyers’ position when he alludes to the powerful forces that are inherent within the culture of an organization.  Schein (2010) attributes the strength of those inherent forces to the fact that they operate outside of one’s awareness, in the subconscious realm, meaning that one may not even be aware of their existence (Schein, 2010).

The indication is that in order to successfully implement substantive change that will impact the successful achievement of organizational goals, will require some degree of cultural analysis.  Without incorporating this necessary step, it is unlikely that change will be significant or long-term.

References

Driskill, G.W., Brenton, A.L. (2011). Organizational culture in action a cultural analysis

     workbook 2^nd edition.  SAGE Publications, Inc.  Thousand Oaks, CA  91320.

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.

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.

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Corporate Culture and organizational performance

A second key component to the OD process is changing some aspect of the corporate culture of the target organization.  Shared beliefs, values, assumptions, and norms all play a major role in what organizational stakeholders do and how they do it.  Brown states, “Management style and corporate culture are central factors in the success of a company” (Brown, 2011, p.64).  Schein explains why we must understand cultural forces.  He says, “We need to understand them not only because of their power, but also because they help to explain many of our puzzling and frustrating experiences in social and organizational life” (Schein, 2010, p.7).  The perception of an organization by its external environment is central to its ability to engage with that environment.  Ferrell, Fraedrich, and Ferrell state, “Some cultures are so strong that to outsiders they come to represent the character of the entire organization” (Ferrell, et al., 2013).  Corporate culture influences how managers and employees alike, problem-solve, respond to customers and react to competitors, and how they do what they do (Brown, 2011).

All OD change will not necessarily include a cultural change; although many will.  Cultural change differs from other OD change in that it affects the basic values of the organization, changing the hearts and minds of its employees.  Brown calls culture the very essence of organizations (Brown, 2011).  It begins with a thorough assessment of why it’s being done, what problem is attempting to be solved, and what one means by culture.  Schein explains the key assumptions this type of assessment is based upon (Schein, 2010):

o   Initial data should be obtained in a group setting because culture involves shared;

o   Assumptions;

o   It’s more important for the members of the group to understand the meaning of their assumptions, than it is for the agent to understand them.

o   Not all cultural aspects are pertinent to every problem;

o   The agent should assist as a process-consultant, helping the group members decipher the meanings of their shared assumptions;

o   Some assumptions will be helpful in assisting the organization with its goals, while others will be detrimental.  The groups must categorize their assumptions;

o   The culture-deciphering process often reveals that new practices can and should be derived from the existing culture;

o   If the basic paradigm of the organization has to change, it will be a multiyear change process.

Cultural assessment is a major objective that should only be attempted with the full commitment and consent of the organization’s leaders.  Using the problem to be solved as criteria, a group should be selected to participate in the assessment.  The group can be as small as three and as large as 30.  The room should be comfortable, with seating arranged in a circular fashion.  Breakout rooms may also be necessary, especially with larger groups (Schein, 2010).

The meeting begins with statement of purpose by someone with major authority in the organization, to bring clarity to the meeting, and inclusion.  The consultant presents a 15-minute lecture on culture, what it is and what it means.  The group should then describe artifacts, which are written down.  The question regarding artifacts is:  What’s going on here.  It helps to have new people in the organization, describe what they felt and saw upon entering the organization.  Next is identifying espoused values.  The question is:  Why are you doing what you are doing?  To get underlying assumptions, you check to see if espoused values that have been identified explain all the artifacts.  Or, are things happening that are clearly not explained or in direct opposition with the values.  Now they must categorize the assumptions as to whether they will aid or hinder the change process.  Lastly, they reach a consensus on what they believe are the relevant shared assumptions, and how they affect the organizational goals (Schein, 2010).

Brown provides three initiatives to follow after the assessment.  A leader needs to cast a vision for the future that employees can share with one another, focus on, and commit to.  Develop a model group to lead the change.  Ensure that the old culture is no longer rewarded.  Use pay, promotion, and other incentives to reward the new behavior (Brown, 2011).

References

Brown, D.R.  (2011).  An experiential approach to organization development eighth

     edition.  Prentice Hall.  Upper Saddle River, New Jersey  07458.

Ferrell, O.C., Fraedrich, J., Ferrell, L.  (2013).  Business ethics ethical decision making and

     cases.  South-Western, Cengage Learning.  Mason, OH  45040.

Schein, E.H.  (2010).  Organization culture and leadership 4^th edition.  Jossey-Bass.  San      Francisco, CA  94103-1741.

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Change – the ultimate OD objective

Change is the primary method by which the OD process achieves the ultimate goal, the transformation of an organization from a static hierarchical ineffective structure, to a flexible, viable, and adaptable organization that is capable of flowing in sync with its external components (McShane, Von Glinow, 2012).  Because those external components are rapidly and constantly changing, for any organization to remain in sync necessitates that they too must be rapidly and constantly changing.  OD change is more clearly portrayed by Baulcomb who states, “Managing change is seen as being skilled at creating, acquiring, and transferring knowledge to reflect new knowledge and insights” (Baulcomb, 2003, p.275).

The difficulty in managing change, whether it is planned or unplanned, lies in the competition between what Lewin called driving and restraining forces.  Lewin describes the driving forces as the problems and opportunities that create the need for change; such as a downturn in the economy, new government regulations, increased competition.  He identifies restraining forces as the barriers that prevent the desired change from occurring.  These barriers could be a lack of financial resources, scarcity of skilled labor, or even a lack of motivation on the part of staff and/or employees for change.   Lewin’s theory of force-field analysis advocates identifying the respective forces, and then removing as many restraining forces as necessary, thereby strengthening the driving forces, enabling the implementation of the desired change to occur (Daft, Marcic, 2011).

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Once restraining forces have been minimized, the change agent can begin the implementation process of change.  Implementation involves three stages of planned change, also identified by Lewin as:  unfreezing, movement, and refreezing.  Lewin refers to unfreezing as the creation of motivation for change by creating serious disequilibrium through the use of disconfirming data that threatens the accomplishment of organizational goals, and creates anxiety which becomes the motivation for change.  Psychological safety is created to decrease learning anxiety connected to learning new desired skills through the use of a compelling vision, formal and informal training that is also autonomous; practice fields, coaching and feedback;  role models, support groups, and systems and structures to support the new concepts or skills (Schein, 2010).

Once psychological safety has been established, learning anxiety is under control, and the organization or group has been unfrozen, movement can then occur where new learning is reflected by one of two ways:  scanning (trial and error), or by role modeling.   When there are clear ways for things to be done, role modeling works best.  When mastery of new skills involves personality and options, scanning is the most appropriate method.  During this stage, cognitive redefinition occurs, or restructuring the new learning to give it acceptable meaning throughout the organization.  This important step undergirds and aids the actual behavioral changes by creating new and palatable organizational paradigms (Schein, 2010).

In the third and final stage of learning change called refreezing, new concepts/learning has been internalized by the employees and stabilized.  Stabilization of new behavior only occurs when new behavior has been confirmed by better results (Schein, 2010).  Mitchell adds that strategies must be incorporated to prevent a return to the replaced behaviors (Mitchell, 2013).

References

Baulcomb, J.  (2003).  Management of change through force field analysis.  Journal Of Nursing

     Management, 11(4), 275-280. doi:10.1046/j.1365-2834.2003.00401.x

Daft, R.L.. Marcic, D.  (2011).   Understanding management 7^th edition.  South-Western

     Cengage Learning.  Mason, OH  45040.

McShane, S.L., Von Glinow, M.A.  (2012).  Organizational behavior.  McGraw-Hill

     Irwin.  New York, NY  10020.

Mitchell, G. (2013).  Selecting the best theory to implement planned change.  Nursing

     Management – UK, 20(1), 32-37.

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

     Francisco, CA  94103-1741.

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