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How can companies create a solid compliance and ethics culture that protects them against unethical decision-making and corporate misconduct?
“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.”
This famous quote by Warren Buffet, American business magnate and CEO of the US holding company Berkshire Hathaway, sums up why companies should take compliance and ethics seriously. Simply put, not doing so puts your brand at serious risk, especially in today’s world of instant, global online communication.
“In the days of social media, corporate misconduct can quickly lead to more significant reputational damage than before. And in a globalized economy, misconduct in one country often leads to legal and social consequences in multiple countries, magnifying the cost,” describes Hui Chen, a Global Ethics and Compliance Consultant. Chen has served as the first-ever Compliance Counsel Expert at the United States Department of Justice.
In a transparent world, corporations face increasing ethical scrutiny by both regulators and journalists as well as consumers and investors. And with global supply chains, they need to ensure not only the integrity of their own operations but also that of their suppliers and subcontractors.
“Stakeholder awareness and moral expectations for businesses have grown immensely during the last decade,” says Kati Mattila, the Head of Compliance & Ethics at Konecranes. “And there are no signs of this trend decreasing.”
With everyone’s eyes on you, being good is starting to make really good business sense. And, adds Chen, an ethical business goes far beyond just not breaking the law.
“While compliance means obedience to external demands, behaving according to rules and regulations, ethics is about internal reflections. Every decision a company makes and the way they treat their stakeholders should be in line with the company’s values and mission,” she describes.
Mattila agrees: “Ethics isn’t just about whether we can do this. It’s about whether we should. What kind of company do we want to be? That directly affects whether people want to work for us, buy from us or invest in us.”
So, if compliance and ethics are critical for business, why is it that seemingly good companies end up getting their reputations ruined in front page scandals? What has enabled large-scale account fraud in the banking industry or telecom operators’ bribery scandals?
Many scandal-hit companies have been well-respected in their field, and some of them even had extensive compliance and ethics policies and programs in place. Yet they still ended up paying billions of dollars in fines for widespread misconduct.
According to Guido Palazzo, Professor of Business Ethics at the University of Lausanne, who has studied several corporate scandals and worked with companies trying to recover from them, scandals keep happening because most people – including the majority of business leaders – have the wrong idea about what causes unethical behavior. Consequently, they also take the wrong approach to preventing it.
“We tend to think that bad stuff happens because of bad people,” Palazzo says. “But when you look into these scandals, these were normal people, just like you and me, who end up making the wrong decisions. And if we do not understand why good people can move to ‘the dark side of the force’ we cannot protect our organizations against it.”
Instead of blaming bad decisions on individual character flaws, Palazzo says we should look at the context in which employees make their decisions: the company culture and larger social dynamics that push people towards unethical behavior.
“What kind of leadership style does the company have? Is there fear? What incentives do they have? How do they evaluate people? Do they humiliate people who don’t perform well?” lists Palazzo.
Usually the trouble isn’t that companies have mistakenly hired bad apples, liars and cheaters, but that the pressures of their corporate culture have created them. In a high-pressure context, people begin to overlook ethical concerns. Palazzo calls this “ethical blindness.”
“Decision-making has become so routinized that employees are unable to see what they are doing as wrong,” he describes. “There’s often a sensemaking in the company that ‘everyone is doing this.’”
The wrong practices may become normalized within a company, sometimes even within an entire industry. In some cases, companies have created goals that are unachievable without cheating, or the pressure to get the deal done becomes so overpowering that there’s no room to think of ethics. Many companies’ incentives and feedback systems only reward success, not how safely or ethically it was reached.
Employees can be afraid of bringing up unethical behavior because of an aggressive leadership style.
“The driving force behind a lot of corporate scandals is fear. When people are afraid, they will do whatever it takes to survive, whether ethical or not,” says Palazzo.
In Palazzo’s view, most ethics and compliance programs fail to protect against scandals because they don’t address a company’s informal culture, which guides people’s thoughts and actions far more than the official code of conduct.
“Codes and policies are absolutely necessary, but they are only the first step. Unfortunately, they often remain purely legal documents, designed to keep people in check, so to speak,” Palazzo says.
“They cannot change fundamental elements of the company culture such as leadership style or the unwritten rules of the organization or industry. Therefore, they won’t prevent complete corporate cultures from gradually shifting towards illegal routines.”
Mattila agrees that compliance and ethics should go far beyond crafting and disseminating official policies.
“I’m a lawyer myself, so I’m familiar with laws and regulations, but what makes compliance and ethics so fascinating to me is that it’s actually more about culture and people’s behavior. How do we as a company create the kind of environment that enables our people to make the right choices every day?”
So how exactly does an organization create a healthy, ethical culture? Palazzo stresses that active commitment from top leadership is absolutely crucial.
“When I start working with a company, I insist that we start by training the top management on ethical blindness and the reasons that lead to it. Their leadership style will directly influence how their teams will see right and wrong, on every level. If they create too much pressure, the others will bend the rules,” he says.
The attitude set by senior managers towards ethics is often referred to as “tone at the top,” which is communicated through both words and actions.
For example, Buffet’s letter as CEO to Berkshire Hathaway managers in 2014 prioritizes ethical concerns over financial success:
"We can afford to lose money – even a lot of money. But we can't afford to lose reputation – even a shred of reputation."
He then urges his managers to measure each of their actions against not only the law but the idea that it might someday be written about on the frontpage of national newspapers.
“Will management fire their best sales person if he or she is caught doing something wrong? Is bad behavior tolerated as long as the results are good?” Palazzo continues. “Do leaders put pressure on people or instil a war mentality through the language they use? A lot of scandal-hit companies I’ve studied have used war terminology which breeds fear in people: rules don’t count when you are at war.”
By contrast, a study by KPMG suggests that good, ethical leaders will listen and respond to employees' ethical concerns, emphasize the value of ethics and integrity over short-term business goals – both in speech and in the reward systems they create – and respond swiftly and with appropriate measure to misconduct.
From the bottom up, a healthy culture will encourage employees to consider and voice their ethical concerns.
“If employees feel safe enough to speak up and say ‘No, stop, we should not do that’ or ‘This goal seems unrealistic’, that’s a strong sign of a healthy culture,” Palazzo says.
Mattila concurs: “This is something we try to stress to everyone at Konecranes: compliance and ethics are not just the lawyers’ job, but a part of everyone’s work, every day. If you feel unsure or uneasy about decisions being made, talk to your superior.”
For example, Konecranes has implemented an anonymous whistle-blowing channel. However, speaking up early is always preferable.
“Whistle-blowing is something you do when things have already gone wrong. Speaking up means that people feel comfortable bringing things up before they become a problem,” Palazzo says.
“There are no stupid questions or concerns. No employee, customer or supplier should feel alone in this. It’s always in our shared interest to think of ethics proactively, before we have crisis on our hands,” Mattila adds.
Beyond avoiding reputational damage, the experts see that cultivating a compliant and ethical culture can bring in clear business benefits.
“Pragmatically speaking, compliance and ethics matter simply because a company should avoid scandals and having to pay large, sometimes million-dollar fines,” says Palazzo. “But moreover, you often find that an unhealthy corporate culture, which breeds unethical behavior, is also inefficient in other ways. With the wrong routines, a company will grow toxic not only in a legal sense but also in their overall performance.”
In the long term, companies with high integrity will most likely perform better, as they will stay out of trouble and aligned with their purpose.
“Done right, attention to compliance brings discipline and efficiency to the company’s processes. And attention to ethics brings a constant focus to the company’s mission, as it invites the question: ‘Is what we are doing consistent with who we want to be and what we want to achieve?’” says Chen.
Konecranes’ Mattila agrees that the business case for compliance and ethics is undeniable.
“I believe people want to come to work feeling good about what they do. It gives us peace of mind to act right, and according to our values. Then we don’t have to worry about ‘being caught’ or going from crisis to crisis, but can actually focus on doing great business and helping our customers.”
Text: Mari Suonto