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"Building Ethical Cultures From the Inside Out" – Presented by Al Watts at the 2002 Minnesota Business Ethics Award Educational Forum and Awards Banquet

Building Ethical Cultures From the Inside Out

There is a lot of attention being paid in the “post Enron” world to fortifying corporate compliance and beefing up managerial, board and external oversight.  As most parents know, laying a solid foundation of values and providing support for good decision-making provides better and longer-term assurance that youth will “do the right thing” – especially when no one is watching – than approaches based on many specific rules, rewards and punishments.  The same is true with organizations.  Especially in complex, rapidly changing and decentralized environments, we need an approach that builds in motivation for “doing the right thing” and that reduces reliance on specific instructions and extrinsic consequences.  I call this approach “building ethical cultures from the inside out.”

In our time together we will talk about:

  • Why and how ethical cultures create value

  • What constitutes ethical cultures, and how we can we sustain them

  • What leadership’s role is building and sustaining ethical cultures

  • How we can assess ethical cultures

All we have to do these days is pick up a paper, flip on the news or cruise the internet, and we are bombarded with news of corporate misdeeds, lawsuits upon lawsuits, failed investments and more evidence that despite corporate creeds and lots of lip service to ethics, all is not well in that respect with today’s markets.  In case any of us has been living in a cave, though, or perhaps just trying to take care of what is on our own plate, let’s review the “business case” for paying attention to ethics and integrity.  (Although I think it is interesting that most everyone who is writing or talking about business ethics these days feels compelled to convince people that “doing the right thing pays,” vs. merit that has in its own right.)

First then, it makes sense to pay attention to ethics and integrity because it is expensive not to.  We may not even reach the final figure on the hundreds of millions (probably billions) of dollars that the Enron fiasco will cost.  Add that to the hundreds of millions paid out by firms annually for ethical lapses and pretty soon we’re talking about some serious change – good for lawyers perhaps, but that’s about all.  And that’s not counting the toll, hard to dollarize, on peoples’ lives, the trust fabric in our economy, or any unaccounted for impact on the environment or elsewhere in the world.

Second, I think most of us prefer to do business with ethical companies that demonstrate integrity.  Walker Information confirmed this in a 1999 national survey, when they found that ethics and integrity of business practices was the second identified reason, behind only service, that three quarters of the surveyed population provided for boycotting a product or service.

My guess is that we would all also prefer to work for organizations and leaders that demonstrate integrity.  In fact also in 1999, Walker Information learned that fifty per-cent of employees who considered their employer highly ethical were also truly loyal.  Only nine per-cent of employees who said that their employer was not highly ethical described themselves as truly loyal.  In the National Business Ethics Survey conducted by the Ethics Resource Center, they found that nine out of ten employees expected employers to do what is right and not just what is financially profitable.  Even since the job market has tightened up some, I don’t think we have to dig too deep to get a sense of the value that has in terms of attracting and retaining talent.  So third, paying attention to ethics and integrity gives us a competitive advantage recruiting and retaining employees, especially probably the kind of employees that will help us sustain ethical cultures.

For more evidence of the contribution that ethics and integrity make to the “bottom line,” consider the research cited in John Kotter’s and James Haskitt’s 1992 Corporate Culture and Performance.  They found that over an eleven year period companies which actively attend to the needs of all constituencies or stakeholders (employees, suppliers, the community, investors, etc.:)

  • Experienced four times the revenue growth than those which don’t.
  • Improved net income by 756% vs. 1%
  • Grew their work force by 282% vs. 36%
  • Increased their stock price by 901% vs. 74%.

So most of us are probably convinced that ethics and integrity pays.  (But we would probably do it anyway since it’s the right thing to do, right?!)  But how do ethical cultures – beyond rules, compliance and oversight – pay?  First of all, an ethical culture provides a strong foundation, core or center.  I am a sailor, and I like to think of an organization’s culture as the keel of a sailboat, which incidentally is about 60% of a sailboat’s total weight.  There can be lots of activity and sail trimming above deck, but the keel is always there, cutting a steady course through the waves.  The physics and weight of a keel, by the way, are what prevent a sailboat from “turtling,” and assures that it rights itself no matter how serious the storm or how many mistakes are made topside (as long as there are no holes in the hull.)

As long as I am making nautical analogies, a wise person once said that rather than taking people in to the woods to cut timber, then teaching them how to build a boat and supervising the construction, we are better off to teach them a love for the sea.  An ethical culture grounds (or “keels”) an organization so that people have that “love for the sea” and act from a strong sense of values.  Ethical core values become the “DNA,” if you will, of the organization.  Culture can be such a strong influence (for better or worse, by the way,) that it can function to countermand whatever else is going on.  As some of us in the consulting world put it, “Culture will eat strategy every time.”  Jim Mitchell, Executive Fellow of the Center for Ethical Business Cultures, cites research by Jay Forrester, MIT professor emeritus:

“According to MIT professor emeritus Jay Forrester, 90% of a firm’s effectiveness is attributable to top management’s leadership behaviors, the influence structure of the company, how goals are created, and how past traditions of the organization determine its decision-making and its future.  In other words, over 90% of a firm’s effectiveness is attributable to its culture.

Well, what is “culture,” and what is an “ethical culture?”  While culture is deep, broad and powerful, it is not always visible or conscious.  It consists of values (the real values, not necessarily the stated ones that some organizations hang on their wall or laminate) and assumptions.  Edgar Schein, also of MIT’s Sloan School of Management, tells us that these basic assumptions (for example: “The market’s ‘invisible hand’ will assure the best overall outcomes”) compose the core of culture.  Symbols (like physical structure and décor,) signs (for example lavishness of holiday parties or the look and feel of an annual report) and the kind of stories people tell are “artifacts” that provide clues about basic assumptions and core values.  Culture is the medium through which people learn “the way we do things around here,” including what gets rewarded, dominant characteristics and behaviors.  Culture becomes the “glue” that holds people together around a common mission.

By definition, Edgar Schein says that to be a “group” or organization one must have a culture.  So every organization has one.  The question is “What kind of culture will it be?”  Here is inTEgro’s definition of an “ethical culture,” or “culture of integrity:”

An ethical culture, or culture of integrity, is a propensity to “do the right thing” – reinforced and perpetuated by core ideology, leadership, organizational “levers” or processes, and practices.

It is a powerful force that maximizes the chances of an organization and its members acting in a socially responsible manner – balancing the interests of all stakeholders – in the face of change, uncertainty and external pressure.

A culture’s “building blocks” include:

  • The organization’s purpose
  • Its core values (real, not espoused)
  • What gets attention and measured
  • Who is hired or fired
  • What gets recognized or rewarded
  • The stories that get told and retold, “rituals” and other “artifacts.”  (Think archaeology.)
  • What we could see people doing every day – especially leaders’ decisions and practices.

To what degree a culture is ethical or demonstrates integrity is driven by the form these take.

I changed the mission, or direction of my consulting practice a few years ago to focus on what I call organizational or leadership integrity, to include ethics, but which I define broadly as “helping leaders and organizations fulfill their promise.”  As I reflected on my nearly twenty years of experience, surveyed the literature and conducted research, I crafted a working model, or framework, for organizational and leader integrity.  The main dimensions are Identity, Authenticity, Alignment and Accountability.  Let me outline these dimensions in the form of questions that I hope will help you assess the integrity of your culture:

Identity

  • Have you clearly articulated a “meaningful mission” – beyond your financial purpose?
  • Have you clearly articulated core values so that everyone knows what they really mean?
  • Have you defined your relationship and responsibility to multiple stakeholders?
  • Have you clarified your and your profession’s or industry group’s ethical principles, policies and decision-making / practice guidelines?

Authenticity

  • How complete and accurate are your disclosures?
  • Are your financial reports true representations of your organization’s status and value?
  • Do you ever not tell the truth to investors, employees, suppliers, customers or stakeholders?
  • Is your environment safe for “truth-telling?”
  • Do people in your organization question assumptions or question practices they do not believe are right?
  • Are diverse opinions and challenges welcomed?

Alignment

  • Does your organization “walk its talk?”  Does reality (practices) square with espoused purpose and values?
  • Do leaders “walk the talk?”  Do they model the organization’s core values and “doing the right thing?”
  • Are organizational systems / “levers” aligned?  Do they send consistent messages and reinforce stated ethical intentions?
  • Hiring, firing and performance management
  • What gets tracked and measured
  • Internal and external communication
  • Recognition and rewards
  • Are you balancing and aligned with the needs of your multiple stakeholders?

Accountability

  • Are you measuring what matters?  Do you have balanced measures that go beyond financial performance?  Do measures reflect adherence to core values and ethical intentions?
  • Do you “keep your promises” – to customers, employees, suppliers, creditors and other stakeholders?
  • How would you and others rate your stewardship?
    • Of natural resources
    • Of people resources
    • As a community and global citizen?

InTEgro has developed an Ethical Culture Survey, a variation of its standard Organizational Integrity Survey, to help organizations get a more systematic reading on the ethical character of their cultures and what may need attention.

Someone asked me this question in one of my presentations recently: “Do you think that ethics and integrity is driven by the top leadership of an organization or from below?”  My answer was “yes,” and that more accurately it is driven by the culture – a combination of leaders’ and everyone else’s behavior over time – kind of a “virtuous circle” (or not.)  Clearly, though, a leader’s values, vision and behavior play a crucial role.  What is the leader’s role building and sustaining an ethical culture?

First we need to know who we are as a leader – how do we define our own purpose (mine is “to be a catalyst for integrity,”) and what are our core values?  Then we need to be that – to “walk our talk” as Warren Bennis puts it.  As Spinoza put it many years earlier: “To be what we are, and to become what we are capable of becoming, is the only end in life.”

Leaders are the primary “keepers of the culture.”  Part of how they do that is  managing by values – constantly reinforcing the organization’s core ideology so the organization can be what it professes to be.  The book Ethics Matters by Dawn-Marie Driscoll and W. Michael Hoffman makes a strong case for managing and leading by values vs. emphasizing compliance.  Again, leading by values helps people internalize “ethical decision rules” and know what to do – and why, vs. what not to do.

One of a leader’s primary tasks is to groom future leaders.  If we are serious about sustaining ethical cultures we need to grow and promote leaders who also embody core ethical values and will be tomorrow’s ethical “culture keepers.”

Leaders need to model telling the truth (different than not lying) and cultivate environments that encourage “truth-telling.”  I was amazed by Jeff Skilling’s and Ken Lay’s professed ignorance of Enron’s corporate misbehavior.  I suspect it was either because it was too “inconvenient” to listen to the “truth tellers,” or because of conscious or unconscious practices and “cultural cues” that discouraged it.

Last but not least on my list of leadership’s role building and sustaining ethical cultures is what Jim Collins (Built to Last) calls “preserving the core while stimulating progress.”  I suppose that is why this is so hard, but I would argue that is what really distinguishes “ethical leaders” from the “also rans.”  I would also argue, and this may open a can of worms for future conversation, that the ability to stimulate progress to meet the market’s incredible demands while preserving core ethical values is what really merits the fantastic compensation that CEOs can command these days.
 

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721 West Minnehaha Parkway, Minneapolis, MN 55419    •   (612) 827-2363   •   awatts@integro-inc.com

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Last modified: June 28, 2010