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Markkula Center for Applied Ethics

Toward an Ethical Culture

Characteristics of an Ethical Organization

Anne Federwisch

“What are the signs that a company is getting it right and addressing the most important dimensions of managing ethics in an organization?” That was the question Kirk O. Hanson, executive director of the Markkula Center for Applied Ethics, addressed at a recent meeting of the Business and Organizational Ethics Partnership.

The model

Hanson built his talk on a model he devised in 1984 and has revised over the years. “We have a lot of things to draw on that we didn’t back in 1984,” he said. There has been a lot of discussion in recent years about what the signs are that a company is taking ethics seriously. The federal government’s “guidelines for prosecution” and “sentencing guidelines” encourage federal officials to identify those signs.

As a result, he said, “I think today we have a lot more sophistication of corporate practices. Also we have these other influences, this language around Sarbanes-Oxley (2002), and Stock Exchange Standards (2003), sentencing guidelines (2004), and now the McNulty version of the principles of prosecution (2006).”

Hanson's Flow Model

The values of the organization are clarified not only in the overall corporation, but also within each unit of the corporation. The critical element is to have the executives then model those values. Through communicating the values, the company creates systems to embody those values. “If we do all of that, hopefully the values are aligned,” he explained. “But you do need these escape valves, these vehicles—whether it’s a hotline or a helpline or a committee that talks about difficult cases. You also need audit enforcement on the compliance side.”

But the model would not be complete without a renewal step. Companies like Johnson & Johnson review their values statements on a regular basis. “What they did every three years was to rewrite their credo. Maybe just a few words,” Hanson said. “One year, instead of ‘we have obligations to our employees,’ they changed it to ‘our employees and their families.’” Each renewal would lead to a new educational effort to roll out the new values.

To update and flesh out his model, Hanson discussed best practice elements—what constitutes best practices in those areas and what can go wrong. Those elements included:

Value statements

Codes of conduct

Executive modeling

Training and communication

Systems that embody values

Mechanisms to discuss difficult cases

Hotlines and helplines

Audit, enforcement, and discipline

Governance of ethics and values

Renewal process

Value statements

Ideally, values statements need to grow out of the experience of the company. An organization can’t just have single words. It needs to have concepts to go with them. “It’s not just words, but values in action—here’s what we owe to this constituency—captured in phrases and sentences,” he said.

In working with over 100 companies over the years, one of the ways he’s seen values statements go wrong is when they are unrelated to the company’s decisions and actions. For example, when he worked with the old Security Pacific Bank, the first draft of their ethics code was an incredibly aspirational document. One of the employees reviewing the document remarked, “If we rolled this out, the snicker factor would be so high. People would be laughing because the difference between our current practice and what this says is so great.”

But perhaps the worst values statement he has ever seen was at a company that wanted to convey that they didn’t take a minimal view of their role as an economic institution. But the headline they used didn’t quite capture that sentiment. It read: “to reach beyond the minimal.”

Codes of conduct

The ideal code of conduct is organized, comprehensive, and applies to all employees. While a typical values statement runs about a page, a code of conduct is usually a booklet that includes a background on policies, gives details needed to apply the policies to different departments, and includes instructive Q & A’s. “If you’re able to help interpret the code, you’re able to help explicate and answer questions,” he said.

It can go wrong if it’s written in legalese or captures last year’s trivia. Hanson read one particularly bad code that was actually fine—until it got to the section on theft of company property. “It was hilarious reading this,” he said. “Suddenly you had a page and a half about how to use taxi reimbursement forms. It was obvious that they had not been able to fire someone the year before for improper use of taxi reimbursement forms.”

But even a well-written code, he warned, is useless if it’s merely a document that sits on the shelf or has unclear application outside the United States.

Executive Modeling

What the CEO and the management team do dwarfs everything else when it comes to corporate ethics and values. They are a walking embodiment of values, day and night, in public and in private.

But they need to not only walk the walk, but also talk the talk. “The CEO tells stories about putting values to work. They’ll be sharing stories about ‘how I faced last week.’ Or ‘Here’s a problem our head of Asian operations faced, and here’s how it was resolved. That was a good way of handling the problem,’” Hanson said.

This can go wrong if an executive’s private behavior is inconsistent with the values or if he “pleasures” himself with corporate funds, as one executive put it. “This is the problem of the Smithsonian, but it’s also the problem of Kozlowski and a whole lot of other people,” Hanson remarked.

Another potential stumbling block can be if the executives never mention values or show disdain for their employees.

Training and Communication

Best practices include constant communication about values, not only for new hires, but also on a regular basis with all employees, including regular and engaging training. Training can come up short if it’s obvious that trainers and executives are only paying lip service to the values, or make snickering references to them.

One of the things Hanson worries about most as a threat to effective communication is the reductionist approach. “’Not in person,’ they’ll say, ‘it takes too much time. So let’s do it online, but maybe we don’t want to take two hours to do it online each year. Maybe we can give them a five-minute test and only if they flunked the test do they have to do our two-hour training.’” Such shortcuts, he warned, can undermine an otherwise seemingly effective program.

Systems that embody values

Creating systems that embody values requires having a performance evaluation system that has explicit references to values, having values integrated into operating systems, and examining key decisions in light of values.

But if the systems are ignored or if performance pressure or financial criteria trump values, the ethics get lost.

When Hanson studied Johnson & Johnson, he noticed that employees from throughout the organization commented on the company’s credo. “That’s a credo issue,” they’d say, in a variety of different contexts when a problem arose. “It seems to me, that’s best practice in action,” Hanson said.

Mechanisms to discuss difficult cases

Transparency needs to exist regarding tough cases, he stressed. “Employees need to be confident that they can take a tough case to the boss, even if the cost is high and they don’t know what to do.” Mechanisms, such as a corporate committee, need to be in place to vet cases. Most importantly, employees need to be confident that they will not be penalized for implementing values.

Those mechanisms are worthless, though, if there’s a “don’t ask” culture or an unwillingness of executives to share the burden.

Hotlines and helplines

In the best cases, hotlines and helplines have external and credible reporting. Anonymity is available with no possibility of retribution. And calls are followed-up effectively.

If those are lacking, if employees don’t understand the purpose of the hotlines, or if the people who answer the phones lack empathy, a hotline goes cold quickly.

Audit, enforcement, and discipline

Good rules of thumb in this category include auditing everything that is important, putting compliance into context, investigating thoroughly and respectfully, and disciplining appropriately and justly.

Conversely, companies can run into problems if compliance is the whole of the values message, if compliance and discipline are easier on executives than on front-line staff, and if the compliance system merely protects the company.

Governance of ethics and values

Best practices involve having a senior executive overseeing the ethics effort, having a dedicated ethics officer, and having an active audit or ethics committee, with periodic reporting to the board.

However, if ethics is assigned to a lower-level executive, if the ethics officer is not respected, if the audit committee is uninterested, or if reporting is merely perfunctory, the governance will be ineffective.

Renewal process

Ideally, revised values and standards should be rolled out periodically, about every three years. There should be a freshness of the message for each renewal and an engagement of the organization in the fresh message.

“One of the things that I think is powerful about the J&J model is what they call their ‘credo challenge meetings,’ where one-third of the senior staff comes to a meeting each year and talks about what’s happening in the world of credo issues that were not dealt with well or are not covered by the current policies and values statements. They build those up over three years and then they use that as input to the rewrite,” he said.

A renewal can be unsuccessful, though, if the message remains stale and unchanged, if there’s no effort to seek input from the organization, or if recent incidents are either ignored or overemphasized.

Ongoing process

Developing best practices in creating ethical cultures is, of course, an on-going process, Hanson stressed. “There’s this whole issue of individual empowerment and how we build in our senior people the sense of ethical backbone, ethical courage, personal responsibility and accountability, that should be included.”

He said he also wants to tweak the taxonomy to somehow address the issue of getting bad news to the top, getting people to recognize the ethics in what they don’t immediately think of as an ethics issue, and to somehow build into best practices the collegial, collaborative process.

Anne Federwisch is a freelance writer.

Apr 1, 2007