Corporate culture has become a subject of significant discourse lately, and it’s to no-one’s surprise given the seemingly perpetual headlines of corporate misconduct.
The good news is that since the Sarbanes-Oxley Act 2002 was passed, an ethics and compliance industry has ossified and bestowed us with incredible research and guidance to give these issues a larger audience, and our profession a louder voice.
One of the key facets of culture that the Ethics & Compliance Initiative (ECI) has been discussing at great length has been leadership and its relationship with healthy workplace culture. How does the tone from the top impress the organisation’s employees? What does this tone sound like?
Ethical leadership defined
We define ethical leadership as a demonstrated commitment to promoting and upholding workplace integrity and organisational standards and values.
Drawing from Brown, Treviño and Harrison’s ethical leadership scale (2004) and previous ECI research, our Global Business Ethics Survey investigated several behavioural characteristic of ethical leaders, and found that they:
• Talk about the importance of workplace integrity and doing the right thing;
• Set a good example;
• Do not blame others when things go wrong;
• Support employees’ efforts to do the right thing;
• Hold themselves and others accountable for violating the organisation’s code of conduct;
• Give positive feedback for acting with integrity;
• Keep their promises and commitments.
One might also be wondering: how has ethical leadership become a subject of deep interest for our profession? Past research in the US and beyond has discovered that:
• Ethical leadership is a critical factor in driving down ethics and compliance risk;
• Leaders have a “rosier” view of the state of workplace integrity, and often have more positive beliefs than employees further down the chain of command; and
• The quality of the relationship between supervisors and the reports goes a long way to determining whether employees report workplace integrity issues to management.
Benefits to business
Simply put, ethical leadership’s benefits are especially incumbent on today’s business world, and ECI is excited to have just released a report that narrows in on this area.
Our latest report, Ethical Leadership Around the World – and Why it Matters, relies on information gathered by ECI for our National Business Ethics Survey and our Global Business Ethics Survey, ECI’s most rigorous study of American perceptions of ethics in the workplace, along with insights and information from leading global compliance practitioners.
The report essentially found that stronger ethical leadership equates to reduced ethics and compliance risk, and increases the likelihood that organisations will retain valued employees. Having surveyed 13 countries around the world, it was universally evident to us that that an employee’s commitment to workplace integrity was fortified by visible ethical leadership.
When leaders lead by example:
• pressure on employees to compromise standards is reduced;
• rates of observed misconduct are lowered; and
• retaliation against whistleblowers declines.
Why is this visibility aspect of ethical leadership so necessary to it having an effect on employees? Currently, it’s widely believed that ethics and compliance procedures are established to provide a safeguard for leadership when ethical/compliance blunders take place. This is substantiated by data which reveals that employees are beset with a lack of accountability from their leaders when issues arise, often leading to employees’ distrust in the organisation.
Additionally, our research illustrates that when leaders discuss ethics without modelling them, it can be more disparaging than not talking about it at all. In times of crisis, employees become hyperaware of contradictory messages from top management. How leaders respond to a crisis has a serious effect on employees’ belief, and at a time when boards are under intense scrutiny for ethical lapses, management has no choice but to prioritise ethics.
One of the key recipes for reduced ethics and compliance risk is transparency between leaders and their employees, and this begins with the aforementioned modelling and understanding of ethics. Employees who believe their supervisors to be ethical are more likely to report observed misconduct without fear of reprisal.
This can be established with anti-retaliation measures, allowing a fluid stream of reporting between whistleblowers and leadership that will mitigate negative workplace atmospheres—the catalysts for misconduct.
For every organisation, healthy workplace culture is ancillary to its success; this is unassailable. And in this day in age, organisations must be circumspective by establishing ethical leadership efforts that create fiduciary relationships between employees and the top.
The reasons for this are threefold: sentiment toward corporate misconduct is at an all-time low; shareholders are becoming more demanding for the right systems to be put in place; and the residual effects of reputational crises can last for up to five years.
While stiff penalties and fines can be imposed for wrongdoing, it’s the tarnishing of the organisation’s name that can take the longest to recover. Not to mention that if a CEO is fired as a result of improperly handling an incident of wrongdoing, stock value can often suffer significantly in the two years following, and this is before the cost of the severance payout is considered.
The road forward is contingent now on the board and management to promote workplace integrity. Data suggests that we’re taking these matters more seriously, as the removal of CEOs has surpassed 36% in the five-year window ending in 2016, compared with the previous five years.
Boards are becoming less tolerant of the marring risks of reputational disaster, and in the wake of many high-profile scandals more organisations are becoming attentive to their cultures.
As the advocate for high-quality ethics and compliance programmes, we relish the forward momentum and will continue to push for ethical leadership as every organisation’s forte.
Patricia Harned is CEO of the Ethics & Compliance Initiative (ECI) in Arlington, US.