Creating an Ethical Culture
More Than Just a Warm, Fuzzy Feeling

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OCTOBER 2006 - Managers focused primarily on the bottom line tend to marginalize the discussion of ethics by shrugging their shoulders and insisting that “you can’t teach ethics.” What they really mean is that you can’t teach values. Although each individual’s moral compass is shaped by countless experiences over a lifetime—family, culture, friends, education, and religion—many organizations have established a code of conduct to guide their employees regarding their ethical responsibilities. An employee who departs from this guidance may have the burden of justifying such a departure in a disciplinary or legal proceeding.

Because of the many recent widely publicized corporate scandals, an entire generation has lost trust in the business community. But ethical business conduct is critical to every business’ well-being. Corporate culture must include a commitment to embracing ethical values, not simply to avoid scandals but to regain the public’s trust.

An online survey of more than 1,100 participants conducted by the American Management Association in 2005 found that the number-one reason cited for compromising one’s ethical standards is “pressure to meet unrealistic business objectives/deadlines.” The second response was “a desire to further one’s career,” and the number-three answer was “a desire to protect one’s livelihood.” I found it both surprising and unsettling that furthering one’s career placed higher in the pecking order than protecting one’s livelihood. It’s a sad and telling commentary on the values of our society that the reason many individuals compromise their ethical standards is less for economic necessity than for greed.

Tone at the Top

Whenever professional ethics is discussed, the “tone at the top” of an organization is usually part of that discussion. This concept entails 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.

Develop an ethics policy. Developing a strong, detailed ethics policy is a good beginning, but only that—a beginning. Contradictions between the values reflected in a written policy and management’s actions are glaringly apparent to an organization’s employees. When faced with choosing between adhering to official guidelines in a manual that’s dusted off once a year or following the lead of their supervisor’s actions, employees will generally take the latter route.

Implement controls. Developing and implementing controls to detect violations of established policies is another integral step in the ethics compliance process. Because many ethics policies reflect legal and regulatory requirements, violating these laws and regulations can create significant liability for the organization, its directors, officers, and other employees. One of the best detection methods for unethical or illegal conduct is through tips from employees, vendors, or anonymous sources. Proactive procedures should be established to encourage open lines of communication for reporting violations, such as an anonymous (whistleblower) hotline. Retaliation of any kind against an employee who reports a violation or assists in an investigation of such violation should be prohibited.

Establish penalties and rewards. I learned everything I needed to know about corporate governance as a parent. An effective disciplinary process is essential to engender a culture of compliance. Procedures to ensure fairness and due process should be established and well communicated. In addition, appropriate penalties to “fit the crime,” as well as rewards for positive reinforcement of ethical behavior, should be unambiguous.

Communicate policies and procedures. Although establishing an ethics policy within an organization is necessary to define clear accountabilities and responsibilities, how the policy is communicated throughout the organization is equally important. Common (official) methods of communicating policies include a combination of management meetings, training sessions, e-mail messages, employee orientation, and the organization’s general manual. Although not generally thought of as a method of communication, the expectations of a company’s culture are most effectively communicated through the actions of its management.

Enforce policies consistently. The enforcement of an organization’s disciplinary process will determine the extent to which its policies are followed. If employees are not convinced that corrective action will be taken upon detection of a violation of company policy, future compliance is less likely.

Ethics Violations Are Not ‘Victimless Crimes’

The purpose of an ethics policy is to support a culture of openness, trust, and integrity in a company’s management and business practices. Unless employees, managers, and directors understand that a violation of ethical standards is not a victimless crime, they are more likely to expose the company to significant business risk. When an organization breaches its ethical standards, someone—customers, investors, or employees—always gets hurt.

As always, I welcome your comments on these and other issues.

Mary-Jo Kranacher, MBA, CPA, CFE





















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