It was Peter Drucker, the Austrian-American management consultant, who once said that culture eats strategy for breakfast.
Drucker wasn’t dismissing the importance of business strategy. Rather, the US Presidential Medal of Freedom recipient, described by some as the founder of modern management, was driven by his own values. He believed in the concept of the common good, in the role of managers as leaders who set culture and who must give employees the freedom and support to contribute their creativity, ideas and hard work to business success.
His emphasis on the importance of respect for people drove his focus on culture—because your culture is about how your people behave towards one another, and how the business relates to customers and other stakeholders.
An effective business culture must be an ethical culture—a culture based on purpose, which is ultimately the reason why your business exists. It must also have clearly defined values, which shape how you deliver that purpose.
Ethical culture can be hard to define, challenging to build and even more difficult to repair if it is undermined, but is essential to employee engagement, customer trust and business success. It is also expected by regulators, with ethical culture embedded in Financial Reporting Council guidance and the Wates principles. That is why the IBE has now published guidance to support boards in promoting an ethical culture.
Culture can only be led from the top. Boards and executive leadership must define purpose and values, and must lead by example. Values and expected behaviours must be built into recruitment, pay and progression. People experience their workplace through their line managers, and those holding such responsibilities must be supported to live the values and be able to explain what they mean in practice.
Boards must also identify and manage ethical risks and should have regular reports from their ethics lead, who can report on key metrics and data, including examples of speaking up, speak up practices and employee engagement.
They must also share insights and qualitative feedback about culture and behaviours in the organisation. Data is important and must be triangulated with feedback from as many sources as possible to understand what is really happening across a business.
A code of ethics is a vital tool to set out, in one document, how the purpose and values of the company are put into effect and the standards of behaviour expected of leaders and employees. Such codes should provide practical guidance to assist decision-making at all levels of the organisation and be regularly updated to take account of changing regulatory requirements and societal expectations.
A significant part of building an ethical culture is openness to hear feedback, to encourage staff to speak up and raise concerns, and to engage widely with stakeholders. An ethical organisation will be committed to maximising its positive contribution to society and minimising harm, but none of us can fully imagine or understand our impact on others.
Powerful organisations will have decisions that really matter to communities and society, as well as to its own people. An ethical business will encourage speaking up, be rigorous in guarding against retaliation, and be open to dialogue and challenge from all those affected by its decisions.
Increasingly, people expect their leaders and managers to understand the wide range of lived experience that exists in an organisation. Whether it’s social mobility or gender equality, menopause or childcare, no leader or manager can have every life experience themselves but they can listen and be open to finding solutions and encouraging dialogue. That only works within an ethical culture where everyone can ask for the flexibility, recognition and support they need.
All human organisations are fallible, and it is the responsibility of the board to ensure that when material ethical lapses occur, they are investigated, that learning is taken on board and the consequences taken seriously.
Business history is littered with the wreckage of companies that failed to grasp the importance of an ethical culture—but there are clear actions you can take to ensure your organisation is never one of them.
There are real benefits to businesses that can show that theirs is an ethical culture at every level. Polling we undertook earlier this year showed that only about a third of Britons believe companies operate in an ethical way.
Consumers want to support organisations they see doing the right thing. Having ethical culture on your board agenda can help correct negative perceptions, build trust, engage your people and ensure you are achieving your purpose, with integrity—the only sustainable way of doing things. Peter Drucker might even have approved.
Rachael Saunders is deputy director of the Institute of Business Ethics. She is a former director of Business in the Community and chairs the Sister System charity.