How can managers ensure that they create ethical organizational cultures

Learning Outcomes

• Describe how upper management impacts ethical culture

Each organization is responsible for creating and fostering ethical culture. The organizational level of a company creates a code of ethics to support the company mission statement and business principles. It is then passed down to every level of the organization to align everyone to the same goals. Individuals are then responsible for using the code of ethics to guide their daily decisions. So does it end there, where individuals are responsible for acting independently under the guidance of the code of ethics? In some ways, yes. Individuals are responsible for their own actions and decisions. However, management also plays a big role in helping to foster an ethical environment.

Management at the highest level creates the company code of ethics. They are the first level of management to influence company culture. It is up to them to ensure the code of ethics aligns with all of the company’s values and principles. As we discussed in the last section, the human resources management team is next in line to help implement the code of conduct by developing training programs for all employees to attend. They are also responsible for enforcing the code of conduct through managing ethics violation concerns. While the top dogs in the company and human resources each have a large role to play, the lower-level managers are equally important.

Managers interact with their team on a regular basis. Therefore, they tend to have a better idea of what ethical culture looks like in their department. It is up to managers to reinforce ethical standards on their team. The best way for a leader to create an ethical environment is to act ethically themselves, to lead by example. That is the number one responsibility of leaders. When a leader is acting ethically, they become a role model for other employees. In addition, it gives them credibility and makes them more approachable. If someone witnesses an ethics violation by a coworker, they are more likely to report it to their manager if the manager follows ethical guidelines. It is then up to the manager to continue up the chain of command to report ethical concerns. If a report of an ethics violation is swept under the rug, more than likely, the unethical behavior will continue and possibly worsen. It is up to the management team to follow all policies and procedures in place to handle ethical concerns. There need to be repercussions in place for unethical behavior. On the other hand, it is wise for management teams to reward ethical behavior. This can help to create a positive incentive for acting ethically.

Practice Question

It is also important to note that even one manager or employee has the ability to damage a company’s reputation. Earlier in this module, we examined recent lawsuits and investigations; these cases are the perfect example of how even a few employees can destroy ethical culture and company reputation. Consistency in how ethics violations are handled is key to developing a strong ethical culture. If some ethical concerns are addressed while others are not, it creates inconsistencies that may suggest that unethical behavior is sometimes tolerated. Unethical behavior should never be tolerated. It is up to the management team, on every level, to enforce each component of the code of ethics and lead their team to do the same. Without a strong ethical management team, companies face an uphill battle to establishing an ethical culture.

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Business leaders are looking to a new era of ethical and responsible business. Going forward, the right thing to do must be routinely informed not only by the law but by their companies’ own values and principles. What constitutes an ethical culture in organizations and why is it essential? And how can HR contribute to building an ethical organizational culture?

The recently published Ethics Study led by Principia in collaboration with a network of partners including the International Chamber of Commerce, shows growing commitment by CEOs to integrating purpose, ethics, and values across their organizations.

But the study based on conversations with more than 80 business leaders, together with a survey of a further 750 companies worldwide, also reveals a clear understanding of the scale of the challenge. Take just one example: 94% of leaders surveyed believe that to be an ethical organization, their company must ensure an inclusive culture that creates opportunity for all. But just 45% have a diversity and inclusion program, and just 38% have established formal targets.

This recurring gap between aspiration and action is one of the clearest insights of the research. However, CEOs also expressed how the impact of the pandemic has strengthened their resolve to close these gaps. As business leaders face increasingly difficult decisions on the right thing to do, the case for building an ethical organizational culture has never been stronger.

What is an ethical culture in organizations?

By “ethical culture in organizations”, we mean an environment defined by a sense of common purpose, in which people routinely consider the impact of their decisions. They seek to do the right thing by the company, their colleagues, their customers, and the communities in which they operate.

Organizations should strive to embed ethics into every aspect of shaping the cultural environment in which their people operate. An ethical culture is not merely one in which people obey the rules. The continuing prevalence of “ethics and compliance” teams may suggest that being ethical is simply a case of following applicable laws and regulations.

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But the reality of ethical organizational culture is more complex. The law can only guide us on black-and-white considerations of what we can do. On the contrary, ethics guides us in grey areas towards decisions on what we should do. An ethical culture is one in which employees consider the impact of their organization’s decisions on society and the planet. They feel empowered to challenge superiors, and openly discuss “grey area” decisions about the right thing to do.

HR plays an instrumental role in shaping organizational culture and building an inclusive work environment through their involvement in the whole employee lifecycle; from recruiting through onboarding and training to post-employment. HR helps promote ethical culture in organizations through strategic interventions as well as everyday actions. In short, building an ethical culture is a key priority for HR.

Why is an ethical culture in organizations important?

Take one of the most egregious examples of unethical practice from the subprime crisis, as banks sought to foreclose on customers’ mortgages – such as that of 90-year-old Ossie Lofton – often for negligible payment arrears. At every stage of the chain, the bankers involved might say that they obeyed all applicable laws, regulations, and processes. But the result was clearly suboptimal for both the banks and their customers and society as a whole.

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n an organizational culture more attuned to the ethical implications of their decisions, might someone have raised a hand? Might someone have questioned not simply whether the bank could foreclose, but whether they should?

In an era of radical transparency, as societal expectations on companies rise, ethical culture will be more critical than ever before. Shaping the capabilities and motivations of their people will enable leaders to have confidence that, even in challenging circumstances, their organizations can reliably and consistently do the right thing.

How can HR shape ethical organizational culture?

The Ethics Study shows that CEOs believe translating aspiration into action will partly depend on establishing the systems that enable people at every level to take ethics into account in the course of their day-to-day work.

But leaders are also clear that building the right structures and processes will not be sufficient. Fulfilling their vision will require a wholesale cultural transformation of their organizations.

Transforming the culture of an organization is no easy task. The attitudes, mindsets, and behaviors we take for granted are often deeply embedded and difficult to change. But shaping a more ethical organization demands that leaders pay greater attention to the capabilities and motivations of their people. This regards their ability to identify ethically charged decisions and their willingness to prioritize the interests of the company, or the wellbeing of customers, over personal gain.

1. Assess and quantify the current state of ethical culture

HR teams have devoted significant time and attention to enhancing the measurement and monitoring of culture. Realizing that traditional engagement surveys are insufficient in providing insight, a lot of teams have built new capabilities through broader surveys, regular pulse checks, and behavioral monitoring tools.

But for many, the result is a complex, fragmented, and burdensome array of uncoordinated metrics. And while traditional HR metrics may provide a starting point in assessing the strength of ethical culture, they are unlikely to be sufficient. To meet expectations, HR leaders will need to understand how a broader range of cultural factors translates into business outcomes.

• Leading companies are beginning to integrate new aspects of culture into the critical factors they assess and monitor. To what extent are people motivated by and connected to the purpose of the organization?
• What determines who is respected and valued? Are the ‘rainmakers’ the most respected people in the organization? Or is it those who are seen to be committed to long-term stewardship?
• How comfortable are people speaking up with ethical concerns or challenging their superiors with alternative perspectives? To what extent are those who speak up respected and valued? 

Understanding the material factors that contribute to ethical culture and developing new ways to accurately assess the cultural health of the organization is a critical starting point for HR leaders.

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2. Connect culture metrics to business outcomes

Regulators worldwide are stepping up their scrutiny of corporate culture. The Financial Reporting Council in the UK has called on companies to increase their focus on assessing and monitoring culture. In the United States, new disclosure rules issued by the SEC mandate all public companies to disclose material human capital metrics in quarterly and annual filings.

A critical component will be the ability to measure what matters. Having taken an effective temperature check of the health of organizational culture, HR leaders must collaborate across the business to demonstrate how culture impacts business outcomes. Correlating culture metrics with outcome measures such as customer satisfaction or Net Promoter Scores can aid the company’s understanding of the critical aspects of culture. That way, the organization can guide investment decisions towards the factors that will drive the greatest return.

With one US-based company, for example, the Principia research team found what the most significant influence on people’s conduct and behavior was. It was their understanding of how their day-to-day decisions contributed to the purpose of the company. Armed with this information, the company decided to focus its attention on strengthening the bonds of common purpose. It helped drive greater engagement and better conduct outcomes across the firm.

3. Ensure an inclusive culture that creates opportunity for all

With more attention than ever on issues of diversity, equity, and inclusion, business leaders see an urgent imperative to ensure that their companies foster an inclusive culture.

One of the most evident themes emerging from the findings of the Ethics Study is a business leaders’ focus on shifting the discussion away from targets that measure representation of traditionally underrepresented groups. Instead, this is moving towards a clearer understanding of equity and inclusion.

For HR leaders, this shift in mindset presents an opportunity to rethink goal-setting and measures of success. In the past, it may have been sufficient to report progress on increasing the proportion of female leaders, or the number of board members from ethnic minority backgrounds. However, it is now the responsibility of HR teams to drive inclusion and equity and track people’s sense of belonging in every part of the organization.

A critical element in these efforts will be to establish common standards of conduct and behavior. These determine how the company expects people to treat one another. Pan-African banking group Ecobank has launched a Pledge for all Ecobankers. This articulates the values and character traits that they expect their people to live by in every interaction.

4. Equip all employees to consider ethics in decision-making

The pervasive understanding of ethics as synonymous with compliance is one of the most significant barriers to effective decision-making. Combined with an atmosphere of zero tolerance for ethical failure – most common in highly regulated industries – a lack of confidence in identifying and navigating grey areas can lead to disastrous consequences.

HR leaders can take a proactive approach to reviewing training curriculums, particularly in modules dedicated to ethics and compliance. They should ensure that materials include guidance on how to identify and deliberate on ethical dilemmas, as well as instructions on who to turn to for help. US-based Citigroup, for example, focuses on “ethical fitness”. The company emphasizes the need to continuously practice and improve the skills implicit in ethical decision-making as a core professional capability.

Similarly, equipping risk and compliance functions, for example, with the ability to work side-by-side with colleagues to navigate complex decisions, can also build the company’s effectiveness in decision-making and people’s comfort in having open conversations on the right thing to do.

5. Create a culture of speaking up

A growing number of companies are beginning to recognize the importance of people working to resolve ethical dilemmas. However, social pressures still often inhibit candid discussion.

People may be reluctant to state their concerns or to challenge others’ opinions or choices. They may fear being seen as confrontational or of being labeled a whistleblower. A tendency to treat ethical dilemmas as categorical, with a heavy focus on compliance, exacerbates these barriers.

Leaders need to demonstrate their commitment to creating an open environment for dialogue. They should continuously encourage employees to speak up when they have concerns or questions.

For HR, this means encouraging employees to speak with their leaders rather than about them. Whistleblowing and ethics hotlines can provide a last resort. Still, in an organization with an ethical culture, issues are raised as a matter of course, as a natural element of day-to-day interactions.

For example, to assess the strength of ethical culture, organizations can field an anonymous questionnaire asking employees not only whether they have observed unethical behavior but also whether they have reported it – and if not, why not. In fact, the gap between people observing unethical behavior and those reporting it is often more than 30%. In some organizations, only a minority of those witnessing misconduct report it.

The top two reasons for a failure to speak up are fear of retaliation and a sense of futility. Employees believe that effective action will not be taken. HR departments can address the former by protecting employees against retaliation and strengthening systems to ensure fairness throughout the employee lifecycle. They can address the latter by dealing with reports of unethical behavior immediately. They should inform those who raised the issue about the status and outcome of the investigation. HR can also help communicate more transparently across the organization about how the company addresses misconduct and ethical failure.

A final word

As business leaders look to purpose, ethics, and values as the foundation of competitive advantage, HR teams will be at the center of the transformation. By building new ethical capabilities among their people and integrating the ability to monitor and track the ethical health of the organization, HR can play a leading role in building the foundations of long-term, sustainable success. All in all, creating and managing an ethical culture in organizations will be one of the key priorities for HR teams all over the world.