A firm’s culture can predict how much market value that firm will create for stakeholders. Researchers have found that companies with ethical cultures significantly outperform other companies in stock value. In fact, researchers have shown that a firm’s culture is the strongest predictor of how much market value that firm will create for shareholders’ investments.
A 2012 Great Place to Work® Institute report shows the stock price growth of the 100 firms with the most ethical cultures outperformed stock market and peer measures by almost 300 percent, and more recent studies have also confirmed this. Yet, as I’ve posted about before, in at least half of our workplaces, employees report seeing unethical or actual illegal practices (Ethics Resource Center). Lapses in ethics are costly, not just in loss of trust and erosion of confidence on the part of employees, customers and the public, but in dollars as well.
In the last ten plus years, billions of dollars have been paid in fines as a result of ethical breaches by companies from WorldCom to Enron, not to mention almost all of the large Wall Street banks. Wells Fargo’s recent debacle in which 5300 employees opened up more than millions of fraudulent accounts cost them $185 million plus in fines, thus far. And that ethics lapse for the bank was just the tip of the iceberg as more fraudulent behaviors have been revealed. Wells Fargo may never recoup from its now very tarnished reputation.
The good news is some progress toward a more ethical company environment is being made as leaders take systemic steps to assure ethical standards and compliance are a core part of the culture. Yet, there’s still a long way to go. In the previous 12 months, 41% of workers are still seeing ethical misconduct and 10% felt organizational pressure to compromise ethical standards.
Talking about ethics is not nearly enough. Nor are compliance programs, ethics training or ethics policies that get reviewed, signed and put in a binder. Witness Enron’s lip service values: “moral as well as legal obligations will be fulfilled in a manner which reflects pride in the company name.” But then, let’s not forget that Enron also had a 64 plus page ethics policy.
Nick Eply, professor at the University of Chicago, in a discussion on Four Myths about Morality and Business says, “It’s a myth to think ‘Everyone is different and everything is relative.’ You actually have to teach people the relative value of principles relative to choices.”
Joseph L. Badaracco, the John Shad Professor of Business Ethics at Harvard Business School, reminds us of the continuing Wells Fargo fraudulent business practices and asks, what you would do if you were an employee facing that kind of pressure? He says “how do you handle a situation in which the incentives seem to be telling you to do something that you believe is bad for your customers/clients and may even be illegal? And what if it’s clear your boss wants you to get with the program, your bonus or a promotion or even your job is on the line?”
He advises us to make sure one really understands the situation. It is possible to take a situation out of context. Is this a practice that is outside industry standards or clearly deviates from best practices? How does it violate ethics or the law?
He asks that, if at all possible, check in with others. Get their advice and viewpoint to assure you are really clear as to what you see and possible steps to take. What are you missing? And carefully consider having a fairly candid conversation with the boss. However, be prepared for an outcome you may not like as this can be a career limiting step.
When Enron collapsed in 2001, with revelations of systemic fraud, deception and corruption as a result of persistent unethical behavior, the world was shocked. People asked how and why did this happen? One answer was that Enron’s goal-setting practices, which set difficult and specific performance goals for employees, were at the heart of the misconduct.
Excessive pressure to reach unrealistic performance goals can actually encourage unethical behavior – for a while, at least. Witness Wells Fargo and many other TBTF banks. My recent talk in Malaysia to SEACEN focused on one example of this ethical breakdown, accounting control fraud; where essentially management deliberately sets strict goals, often unrealistic, and drives those goals along with performance incentives throughout the organization, thus creating a “make the numbers” culture. Employees are thus incentivized to do whatever it takes to achieve those goals and make the numbers. To date, most of the TBTF banks are guilty in some way of accounting control fraud.
In fact, ethical behavior is the foundation upon which a company’s culture must be built and, despite good intentions, organization’s set themselves up for ethical catastrophes by creating environments in which people feel forced to make choices they could never have imagined.
Ron Carucci, the author of Why Ethical People Make Unethical Choices, says there are several ways in which organizations needlessly provoke good people into making unethical choices. He says in some organizations it is psychologically unsafe to speak up. While lip service is paid to transparency, employees realize it is unsafe to do so, or that nothing will be done anyway, so why bother? How a company handles employees speaking out is critical and sends a strong message. As many of us know, myself included, speaking out can have a heavy price tag.
Another area he mentions is that there is excessive pressure to reach unrealistic performance targets (which we have noted is also the hallmark of accounting control fraud). The author quotes from Harvard Business school research which suggests “unfettered goal setting can encourage people to make compromising choices in order to reach targets, especially if those targets seem unrealistic.” We have certainly seen much evidence of this throughout the last ten plus years. His research suggests, that conflicting goals provoke a sense of unfairness which can lead to compromise and employee sabotage.
He points out that, in some organizations, a positive example isn’t being set. “Leaders must accept they are held to higher standards than others.” Ethics and integrity are critical qualities necessary to an organization’s well-being and essential leadership traits. In James Kouzes and Barry Posner’s seminal work, The Leadership Challenge (which I’ve mentioned in a previous post), the author’s point out that honesty is the number one trait followers demand in their leaders.
Talking about what a great culture you have is not enough. Leadership must send a strong message that this is how we do things around here – and how we do things is the right and ethical way – period.
Ethics, or lack thereof, can cost or can add value and profitability to a company. The ethical choice is leadership’s to make and to enforce.
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What an Honor to Present to SEACEN in Kuala Lumpur!
Ethical Behavior Pays Off
Richard Bowen is widely known as the Citigroup whistleblower. As Business Chief Underwriter for Citigroup during the housing bubble financial crisis meltdown, he repeatedly warned Citi executive management and the board about fraudulent behavior within the organization. The company certified poor mortgages as quality mortgages and sold them to Fannie Mae, Freddie Mac and other investors.
