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The Corporate Culture –

Impact and Implications

McGraw-Hill/IrwinBusiness Ethics: Decision-Making for Personal Integrity & Social Responsibility, Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.

Chapter4

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“Our plans miscarry because they have no aim. When a person does not know what harbor he [or she] is making for, no wind is the right wind.”

- Seneca

“A leader knows what’s best to do; a manager merely how best to do it.”

-Ken Adelman

Ethics is tougher than you think . . .

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Chapter Objectives After exploring this chapter, you will be able to:

1. Define corporate culture 2. Explain how corporate culture impacts ethical decision-making3. Discuss the differences between a compliance culture and a values-

based culture4. Discuss the role of corporate leadership in establishing the culture5. Explain the difference between effective leaders and ethical leaders6. Discuss the role of mission statements and codes in creating an ethical

corporate culture 7. Explain how various reporting mechanisms such as ethics hotlines and

ombudsman can help integrate ethics within a firm8. Discuss the role of assessment, monitoring, and auditing of the culture

and ethics program9. Explain how culture can be enforced via governmental regulation

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Opening Decision Point: Ethics Codes and Programs

List the issues that you think should be addressed in a code of ethics. Other than a code of ethics, what other elements would you include in

an ethics program? How will you define “success?” Are there any facts that you will need

to gather to make this judgment? How would you measure success? How will you measure whether your

ethics program is “working?” Who will you define as your primary stakeholders? What are their interests in your program and what are the impacts of

your program on each stakeholder? How will the measurement of the program’s success perhaps influence the type of people attracted to the firm or who are most motivated within your organization?

How will you answer the CEO’s questions about her own role in promoting ethics?

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What is Corporate Culture?(insert obj. 1)

A shared pattern of beliefs, expectations and meanings that influence and guide the thinking and behaviors of the members of that organization.

This culture shapes the people who are members of the organization.

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What is Corporate Culture and Why is it Relevant? (insert obj. 2)

Personal decision-making does not exist in a vacuum. Decision-making within a firm will be influenced, limited,

shaped, and in some cases virtually determined, by the corporate culture of the firm.

Individuals can be hindered or helped in making the right, or the wrong, decision by the expectations, values, and structure of the organization in which they live and work.

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Culture = ValueCulture does not = Value?

A firm’s culture can be its sustaining value – that which offers it direction and stability during challenging times.

It can, however, also serve to constrain an organization to the common ways of managing issues – “that’s how things have always been done here,” “that’s our prevailing climate.”

The stability that can be a benefit at one time can be a barrier to success in another.

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Defining a culture defines the culture, which defines the culture . . . .

The definition of a culture is partially based on each participant’s perception of the culture, which may actually impact the culture in a circular way – a culture exists, we perceive it to be a certain type of culture, we respond to the culture based on our perception and we thereby impact others’ experience of the culture.

Culture is also present in the following elements: Tempo of work The organization’s approach to humor Methods of problem-solving The competitive environment Incentives Individual autonomy Hierarchical structure

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What is culture?

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Linking Culture to Ethics

Each of the factors in the decision-making model we have already discussed, from fact gathering through moral imagination to assessment, can be helped or hindered by the social environment surrounding an individual.

An ethical culture would be one in which employees are empowered and expected to act in ethically responsible ways even when the law does not require it.

A corporate culture sets the expectations and norms that will determine which decisions get made.

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Linking Culture to Ethics

When we talk about decision-making, it is easy to think in terms of a rational, deliberative process in which a person consciously deliberates about and weighs each alternative before acting.

But the virtue ethics tradition reminds us that our decisions and our actions are very often less deliberate than that. So the question of where we get our habits and character is all-important.

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Linking Culture to Sustainability

An ethical culture can also have a direct and practical impact on the bottom line. If attended to and supported, a strong ethical culture can serve as a

deterrent to stakeholder damage and improve bottom line sustainability.

If ignored, the culture could instead reinforce a perception that “anything goes,” and “any way to a better bottom line is acceptable,” and destroys long-term sustainability.

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The Importance of Culture: Consider the Columbia Disaster

NASA Report on Columbia evidenced that: “NASA’s organizational culture and structure had as much to do

with this accident as the external tank foam.” Lessons to be learned:

Culture, gone wrong, can be devastating. Done right, it is central to survival.

Effective cultures are all about ethical values. Culture is not just impacted by a few high-flying personalities but

by everyone at an organization.

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Compliance vs. Values-Based Cultures (insert obj. 3)

In the 1990’s, there was a distinction in types of corporate cultures: Compliance-based cultures (the traditional approach) Values-based or integrity-based cultures

These latter cultures are perceived as more flexible and far-sighted corporate environments.

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Compliance Cultures

A compliance-based culture emphasizes obedience to the rules as the primary responsibility of ethics.

A compliance-based culture will empower legal and audits offices to mandate and monitor compliance with the law and with internal codes.

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Values-Based Cultures

A values-based culture is one that reinforces a particular set of values rather than a particular set of rules.

Certainly, these firms may have codes of conduct; but those codes are predicated on a statement of values and it is presumed that the code includes mere examples of the values’ application.

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In Favor of Values . . .

The argument in favor of a values-based culture that a compliance culture is only as strong and as precise as the rules with which workers are expected to comply.

A firm can only have a certain number of rules and the rules can never unambiguously apply to every conceivable situation.

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In Favor of Values . . .

Values-based organizations do often include a compliance structure within its organization.

In fact, the Ethics Resource Center found in its research that:

Strict compliance and audit programs are often springboards for implementing more comprehensive

programs addressing ethical values. When this occurs, compliance goals typically do not diminish.

Rather a focus on ethical values adds important priorities and incentives.

“

”

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Culture trumps Compliance!

Recent research shows that business leaders believe that greater management attention needs to be focused on a corporation's culture to achieve best practices in business.1

A corporation's culture was found to be the most important factor influencing the attitudes and behavior of executives.

This factor was named twice as often as any other factor, including share price (25 percent) and incentive compensation (23.2 percent)!

1http://www.workingvalues.com/Risk_WhitePaper.pdf

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Differences in Goals

The goals of a traditional compliance-oriented program may include meeting legal and regulatory requirements; minimizing risks of litigation and indictment; and improving accountability mechanisms.

The goals of a more evolved and inclusive ethics program may entail a broader and more expansive application to the firm, including: maintaining brand and reputation; recruiting and retaining desirable employees; helping to unify a firm’s global operations; creating a better working environment for employees; and doing the right thing in addition to doing things right.

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The Evolving Role of Compliance Programs into Values-Based Programs

Traditional Progressive (best practices)

Audit focus Business focus

Transaction-based Process-based

Financial account focus Customer focus

Compliance objective Risk identification, process improvement objective

Policies and procedures focus Risk management focus

Multiyear audit coverage Continual-risk-reassessment coverage

Policy adherence Change facilitator

Budgeted cost center Accountability for performance improvement results

Career auditors Opportunities for other management positions

Methodology: Focus on policies, transactions and compliance

Methodology: Focus on goals, strategies and risk management processes

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What must exist to change, alter, and enrich a culture?

"At every crossing on the road that leads to the future, each progressive spirit is opposed by a thousand appointed to guard the past."

- Maurice Maeterlinck (Belgian playwright and Nobel Prize-winning author, 1862-1949)

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An Ethical Corporate Culture or Culture Change . . .

If done right . . . . Positive impact on culture

• Employees feel a sense of responsibility and accountability for their actions and for the actions of others.

• Employees freely raise issues and concerns without fear of retaliation. • Managers model the behaviors they demand of others• Leadership understands the pressure points that drive unethical behavior.• Leadership develops processes to identify and remedy those areas where

pressure points occur. Prophylactic action against stakeholder damage Improves bottom line sustainability

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An Ethical Corporate Culture or Culture Change . . .

If ignored . . . . Creates presumption that

“anything goes” Reinforces “every person for

him/herself” Destroys long-term sustainability (Examples? Andersen, Enron, but

also Boeing & WorldCom)

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The Role of the Leader in Corporate Culture (insert obj. 4)

If the goal of corporate culture is to cultivate values, expectations, beliefs, and patterns of behavior that best and most effectively support ethical decision-making, it becomes the primary responsibility of corporate leadership to steward this effort.

Leaders are charged with this duty in part because stakeholders throughout the organization are guided to a large extent by the “tone at the top.”

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Leadership: Setting the cultural tone

Beyond personal behavior, leadership sets the tone through other mechanisms such as the dedication of resources. Ethical business leaders not only talk about ethics and act ethically

on a personal level, but they also allocate corporate resources to support and promote ethical behavior.

There is a long-standing credo of management: “budgeting is all about values.”

More common versions are: “put your money where your mouth is,” and “walk the talk.”

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Leadership: Setting the cultural tone as an “Ethical Leader”

Research shows that: It is critical that the leader is perceived as having a people-orientation, as well as

engaged in visible ethical action. Other important traits, according to research, include receptivity, listening, and

openness, in addition to the more traditionally considered traits of integrity, honesty, and trustworthiness.

Being perceived as having a broad ethical awareness and concern for multiple stakeholders, and using ethical decision processes are also important.

Those perceived as ethical leaders do many of the things “traditional leaders” do (e.g., reinforce the conduct they are looking for, create standards for behavior, etc.), but they do that within the context of an ethics agenda.

People perceive that the ethical leader’s goal is not simply job performance, but performance that is consistent with a set of ethical values and principles.

Finally, ethical leaders demonstrate caring for people (employees and external stakeholders) in the process.

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LEADERSHIP

An organization is only as ethical as its leaders,

and only as ethical as its leaders can encourage their followers to be.

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The Ethical Leader . . .

However, as mentioned previously, all of these traits and behaviors must be visible.

Making courageous decisions in tough situations represents a way in which ethical leaders get noticed.

Ethical leaders are “courageous enough to say ‘no’ to conduct that would be inconsistent with [their] values.”

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Effective Leaders vs. Ethical Leaders (insert obj. 5)

Being perceived as a leader plays an important role in a leader’s ability to create and transform an ethical corporate culture.

What do we mean by an “ethical” leader? A good leader is simply anyone who does well what leaders do. Good leaders are effective at getting followers to their common destination.

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Effective Leaders vs. Ethical Leaders

One key difference lies with the means used to motivate others and achieve one’s goals.

Effective leaders might be able to achieve their goals through threats, intimidation, harassment, coercion. One can also lead using more attractive means such as modeling ethical behavior, persuasion, or simply by dint of one’s institutional role.

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Effective Leaders vs. Ethical Leaders

Certainly ethically appropriate methods of leadership are central to becoming an ethical leader.

Creating a corporate culture in which employees are empowered and expected to make ethically responsible decisions is a necessary part of being an ethical business leader.

But, while some means may be ethically better than others (e.g., persuasion rather than coercion), it is not the method alone that establishes a leader as ethical.

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The Ends of Ethical Leadership

One cannot be a leader, and there cannot be followers, unless there is a direction or goal towards which one is heading.

In the business context, productivity, efficiency, and profitability are minimal goals. A business executive who leads a firm into bankruptcy is unlikely to qualify as an effective or good leader.

Definitions of Ethical Leadership

“The distinguishing mark of leadership and executive responsibility is influencing the moral behavior of others.”

"Leadership is the creation and fulfillment of worthwhile opportunities by honorable means"

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Leadership (and Maintenance) of the Leadership (and Maintenance) of the EnvironmentEnvironment

Key points: “The CEO sets the tone for an organization’s culture… if you

separate yourself from everybody else…your employees are going to get the wrong message.” (Alfred P. West Jr. CEO SEI Investments)

Ethical behavior by employees is directly attributed to the perceived ethics of their supervisors and co-workers.

Leadership involvement in the ethics and compliance effort can help further its success.

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Building a Values-Based Corporate Culture (Insert obj. 6)

One of the key manifestations of ethical leadership is the articulation of values for the organization.

It is the leader’s responsibility to ensure that the firm is guided by some set of organizing principles that can guide employees in their decision-making processes.

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The Role of the Mission Statement

In the absence of other values, the only value is profit – at any cost.

Without additional guidance from the top, a firm is sending a clear message that a worker should do whatever it takes to reap profits.

A code of conduct then may more specifically delineate this foundation both for internal stakeholders such as employees, as well as external stakeholders such as customers.

The code has the potential to therefore both enhance corporate reputation but also provide concrete guidance for internal decision-making, thus creating a built-in risk management system.

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Our plans miscarry because they have no aim. When a person does not know what harbor s/he is making for, no wind is the right wind.

- Seneca

Creating an Ethical Corporate Culture

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Developing The Culture through a Code

The second step in the development of guiding principles for the firm is the articulation of a clear vision regarding the firm’s direction.

The third step in this process is to identify clear steps as to how this cultural shift will occur. You need to have processes and procedures in place that support and then sustain that vision.

Finally, to have an effective code that will successfully impact culture, there must be a belief throughout the organization that this culture is actually possible, achievable.

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Further Integration of the Culture

Integrating an ethical cultural throughout a firm and providing means for enforcement is vitally critical both to the success of any cultural shift and to the impact on all stakeholders.

One of the most determinative elements of integration is communication since, without it, there is no clarity of purpose, priorities or process.

Communication of culture must be incorporated into the firm’s vocabulary, habits and attitudes to become an essential element in the corporate life, decision-making and determination of success.

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Challenging a Firm’s Integration:

Consider whether incentives are in the right place to encourage ethical decision making and whether ethical behavior is evaluated during a worker’s performance review.

Are employees comfortable raising questions relating to unethical behavior?

Are there multiple and varied reporting mechanisms in place? Do they believe that their reports will be free from retaliation? What can be done to ensure that employees who violate the

company code are disciplined appropriately, even if they are good performers?

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Reporting Structures – Impact on Culture (Insert obj. 7)

“Whistleblowing” involves the disclosure of unethical or illegal activities to someone who is in the position to take action to prevent or punish the wrongdoing.

Whistleblowing can expose and end unethical activities, but it can also seem disloyal, it can harm the business, and it can extract significant costs on the whistleblower.

Whistleblowing can occur internally or externally.

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Assessing and Monitoring the Culture (Insert obj. 8)

Such is the same result with regard to culture. If we cannot measure, assess, monitor culture, it is difficult to

encourage others throughout the organization to pay attention to it.

Yet, monitoring and an ongoing ethics audit allow organizations to uncover silent vulnerabilities that could pose challenges later to the firm, thus serving as a vital element in risk assessment and prevention.

Unfortunately, if one cannot measure something, it often declines in importance.

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Assessing and Monitoring the Culture – How do you do it?

But how do you detect a potentially damaging or ethically-challenged corporate culture – sometimes referred to as a “toxic” culture? The first clear sign would be a lack of any generally accepted base

values for the organization, as discussed above. In addition, there are warning signs in the various component areas of

the organization. How does the firm treat its customers, suppliers, clients, workers? The management of its internal and external relationships is critical evidence of its values. How does the firm manage its finances?

Of course, a firm can be in a state of financial disaster without engaging in even one unethical act (and vice verse), but the manner in which it manages and communicates it financial environment is telling.

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Mandating and Enforcing Culture: The Federal Sentencing Guidelines (Insert obj. 9)

When internal mechanisms for creating ethical corporate cultures prove inadequate, the business community can expect governmental regulation to fill the void.

The United States Sentencing Commission, an independent agency in the United States Judiciary, was created in 1984 to regulate sentencing policy in the federal court system.

In mandating sentencing procedures, Congress through the USSC has been able to incorporate the original purposes of sentencing in their procedures, bring some of these challenges under control.

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The U.S. Federal Sentencing Guidelines

Beginning in 1987, the USSC prescribed mandatory Federal Sentencing Guidelines that apply to individual and organizational defendants in the federal system.

The court inputs information into a sentencing grid and determines the offender’s guideline range, subject to adjustments.

In its October 2004 decision in U.S. v. Booker, however, the Supreme Court severed the “mandatory” element of the guidelines from their advisory role, holding that their mandatory nature violated the Sixth Amendment right to a jury trial.

Accordingly, though no longer mandatory, a sentencing court is still required to consider guidelines ranges, but is also permitted it to tailor a sentence in light of other statutory concerns.

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The U.S. Federal Sentencing Guidelines – Relationship to Ethics

The relevance of these guidelines to our exploration of culture is that the USSC strived in its guidelines to create both a legal and an ethical corporate environment through these adjustments.

The guidelines seek to reward corporations who create an effective ethics and compliance system so that they are not penalized (or the penalty is reduced) if they have an effective program but they find themselves in court as a result of a bad apple or two.

On the other hand, firms who did not have effective ethics and compliance systems would be sentenced additionally to a term of probation and ordered to develop a program during that time.

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The U.S. Federal Sentencing Guidelines – Relationship to Ethics

In a 1997 survey of members of the Ethics Officers Association (now Ethics & Compliance Officers Assn.), 47% of ethics officers reported that the guidelines were an influential determinant of their firm’s commitment to ethics and another Commission study showed that the guidelines influenced 44.5% of these officers to enhance their existing compliance programs.

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Discussion of Opening Decision Point: Ethics Codes and Programs

This Decision Point asks you to define the “success” of an ethics program, an extraordinary challenge even for those in this business for many years.

One way to look at the inquiry would be to consider the measures by which you might be willing to be evaluated, since this is your project.

Overall, you will need to explore whether there are pressures in your environment that encourage worker misconduct.

You will need to consider whether there are systematic problems that encourage bad decisions. Have you identified all of the major legal, ethical, and reputational risks that your organization faces, and have you determined the means by which to remediate those risks?

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Discussion of Opening Decision Point: Ethics Codes and Programs

Because you will encourage the performance that you plan to measure, it is important to determine whether you will be most concerned with the end results or consequences, or with the protection of particular values articulated by your program or codes.

If you measure outcomes, alone, you will have a singular focus on the achievement of those outcomes by decision-makers.

If you measure the protection of rights, alone, you may be failing to consider the long-term implications of decisions in terms of their costs and benefits to the firm.

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Chapter Four Vocabulary Terms After examining this Chapter, you should have a clear understanding of the

following Key Terms and you will find them defined in the Glossary:

Code of Conduct Compliance Environment Culture Ethics Officers Federal Sentencing Guidelines Mission Statement United States Sentencing Commission Values-based Organization Whistleblowing