Are leaders, and the cultures they spawn, an unmanaged risk to the enterprises they steer? Research shows not only the costs of failure to pay attention to business ethics costs but the financial benefits of a focus on business ethics. Board reliance on good compliance policies can only signal intent. The Board’s critical role in building organisational integrity involves four key activities.

1. Trends & special topics
Organisationalculture
hasbeendescribedasthe
lengthenedshadowofthe
personatthetop,sohow
isCEOaccountabilityfor
organisationalcultural
integritymeasured?Could
yourCEO’sleadershipstyle
beanunknownthreattoyour
business?Howconfidentis
yourboardthatyourCEOis
overseeingaregimewhere
anethicalbusinesscultureis
activelynurtured?
Despite the increasing frequency
in which business leaders and their
organisations have been exposed for
behaving badly there seems to be
slow progress in holding executives
accountable for the cultures they
oversee. We have seen recently here in
Australia unethical business practices
exposed in the financial sector where
profits trumped customer interests;
in the resources sector where paying
bribes and facilitation payments
secured business contracts and in
the transport area where marketplace
price fixing was exposed as part of the
success formula of some companies.
These practices were the symptoms
of a lack of institutional integrity with
stated values rather than the acts of
rogue individuals or a few bad apples.
In November 2013, for example, no
less than eight banks were fined by
the European Union for presiding over
organisational cultures that colluded to
form illegal cartels to fix interest rates
over several years, adversely affecting
the economies of both developed and
developing nations.
Bad apples or a bad barrel?
Spectacular high profile CEO failures
such as Enron’s Andrew Fastow, World
Com’s Bernard Ebbers, UK Barclay’s
Bob Diamond, HIH’s Ray Williams or
ABC Learning’s Eddie Groves highlight
how leaders can oversee organisations
characterised by an integrity vacuum
where an absence of an ethics
infrastructure inhibited values being
embedded as cultural norms. Typically
the ethical dimension has had to retro-
fitted after these types of leaders have
exited, usually in a media glare exposing
institutional corruption in the form
of inappropriate financial reporting,
systemic cheating and other forms
of collective practices that cannot be
slated home to a few individuals.
Board reliance on compliance
polices that, at best can only signal
management’s intent, largely ignore
the social reality of organisational life
where policies are trumped every time
by the behaviours being modelled from
the top. We say people listen with their
eyes; they take their cues from how
they see things are done and what gets
air time. If ethics is only talked about
when there is a crisis then the message
that goes out daily is that it’s not that
important, maybe even discretionary.
A focus on compliance regimes is
perhaps even the easy way out. It’s
certainly not making the leap to
recognise the power of organisational
By Dr Attracta Lagan, Principal, Managing Values
Areleaders,andtheculturesthey
spawn,anunmanagedrisktothe
enterprisestheysteer?
• Research shows not
only the costs of
failure to pay attention
to business ethics
costs but the financial
benefits of a focus on
business ethics.
• Board reliance on good
compliance policies
can only signal intent.
• The board’s critical
role in building
organisational integrity
involves four key
activities.
421Governance Directions August 2014

2. Trends & special topics
culture and the actions needed to
manage it if ethical risks are to be
prevented from emerging in the first
place. How much poor leadership
resulting in poor institutional integrity can
cost was brought home to UK investors
with KPMG’s latest research. This
showed that the costs of conduct failings
and remediation from past mis-selling
issues represented approximately 80 per
cent of the cumulative profits of the top
five banks for 2013.
High ethical standards deliver high
business returns
Just as a body of research is building
to show how failure to pay attention
to business ethics costs, so too
field research shows the financial
benefits of a focus on business ethics.
Every year the World Most Ethical
Companies (WME) Index shows that
these companies outperform the S&P
top 500 companies. So, too, research
from the US based Corporate Executive
Board (CEB) highlights how companies
with high integrity capital enjoy
financial benefits such as incurring only
one-eighth the costs of misconduct
than competitors and enjoying 12 per
cent lower labour costs because their
employees invest more discretionary
effort. CEB attributes these two
organisational integrity dynamics as
key factors in delivering shareholder
returns 5.8 per cent higher than the
average company.
The major accountancy firms agree
that failure to manage for integrity is
a risk issue. According to E&Y’s 2011
global survey for example, as many
as 52 per cent of C-suite executives
think their boards are out of touch in
understanding the ethical issues facing
the business, and especially so in
rapid-growth markets.
Ethical cultures are intentional
Our experience working in the business
ethics field has taught us what good
‘tone at the top’ looks like and it’s
largely about institutionalising systems
and processes to promote integrity
rather than any big man theory.
Typically, it’s the implementation
and maintenance of a robust ethics
infrastructure involving ethical
leadership training for executives;
executives signing up to a ‘mandate
letter’ that commits them to managing
in accordance to stated values
and rewards them accordingly and
overseeing annual cultural surveys to
assess how well employees experience
the ethics system as working.
These measurements are externally
benchmarked against industry leaders
to ensure continuous improvement. We
have worked, for example, alongside
Asia’s biggest insurance company, AIA,
and in its operations across 14 countries,
as it embeds an ethical regime which
includes all of the above measurable
initiatives to ensure all managers know
their personal accountability and are
measured against it.
Every year, for example, each country
operation conducts a cultural review
to measure how successful managers
are in embedding the organisation’s
operating principles and new targets
and initiatives are then agreed for the
next 12 months. The interdependent
relationship between institutional
integrity and trust in the brand is
jealously guarded and actively managed.
Global names like GE and Lockheed
Martin have won many accolades for
their ethical infrastructures which
include executives engaging in regular
ethics training to remind them that
financial performance and high
standards of governance are mutually
complementing.
Business ethics is anything but easy
and yet here in Australia it continues
to be managed informally unlike in
America where every publicly listed
company by law has to appoint and
resource a dedicated ethics officer.
An organisational culture context
can corrupt its employees
Edgar Schein’s research1
on
culture and leadership points to the
complexities of managing culture
because so much of it is tacit and
unquestioned. His famous iceberg
model of organisational culture
(Figure 1) reminds us that behaviours
are only the tip of an iceberg and
if they are to be managed then the
hidden motivations, assumptions and
personal world views or perspectives
of employees must also be surfaced
and addressed. Shein’s vast academic
research in this area suggests that
managing or changing culture can
only be achieved through primary
embedding mechanisms (systems and
processes) and secondary reinforcing
mechanisms (rewards and sanctions).
In reality, it is these mechanisms that
set the ethical tone and therefore need
to be carefully managed.
Business ethics is difficult because
typically it revolves around seemingly
competing needs against a backdrop
of complexity and a time frame where
short term imperatives are often
valued over long term sustainability.
How these tensions are managed and
how tradeoffs are made in a way that
is fair and transparent and in line with
stated values is often missing from risk
assessments or board reviews.
Business is arguably the most
powerful institution in most societies.
With increased power comes great
Figure 1: The complexity of organisational culture
Artifacts:
Stories, metaphors,
rituals, heroes &
symbols
Beliefs, values
and attitudes
Basic assumptions
Schein Culture iceberg
422

3. accountability to hone a sophisticated
governance system that will safeguard
the enterprise and its stakeholders.
Increased accountability is being
demanded by a networked world society
where more people can quickly see how
business gets done and take immediate
action where an organisation is found
wanting. This consumer backlash led for
example to the run on the UK’s financial
institutions during the financial crisis of
2007–2010. The GFC’s legacy has been
a simmering resentment against boards
for the compensation practices they
oversaw which, many continue to believe,
encourages the rise to a new generation
of amoral business managers. These
amoral managers focus on the upside
only and typically fail to canvass the
ethical dimension which entails the
potential negative impacts on others or
on the common good.
The field of behavioural ethics suggests
that employee ethical standards are
highly malleable and dynamic. It is the
workplace context (culture) that shapes
how managers and employees behave.
In other words, an organisational
culture has the power to corrupt its
members.
Tone at the top must be monitored,
measured and safeguarded
Setting the ethical tone then means
ensuring the right sort of culture is
being promoted so that employees at
all levels know what’s non-negotiable;
specifically the boundaries that must
not be crossed in pursuit of business
success. It was the absence of such
boundaries that arguably gave us the
GFC and continues to claim the public
reputations as well as the premature
deaths of enterprises today.
Tone at the top means overseeing
a regime that keeps the enterprise
safe and this includes a clear focus
on how the CEO is playing the game.
Behavioural ethics research leaves little
doubt that the organisational culture
trumps personal values every time. So
it matters greatly how a CEO sets the
organisational context for employees.
If we are to learn from the lessons of the
past, boards today need to be regularly
assessing the cultures emerging under
their CEO’s. They need to test ‘the mood
in the middle’ to ensure they are being
appropriately led. The board’s role in
building organisational integrity is vital
if for no other reason than the fact that
board’s have a much longer tenure
than CEO’s these days and therefore
have a greater opportunity to set the
ethical standards and recruit CEO’s who
undertake to safeguard these.
The board’s critical role in building
organisational integrity involves four
key activities:
1 Participating in setting and
safeguarding the collective values
and standards that will underpin
the organisation’s success formula.
This is no easy task as each
organisation operates in a specific
context that has its own unique
ethical challenges. The ethical
challenges facing the resources
sector are quite different from
those facing the service sector.
The board needs to pay particular
attention to the incentives and
other mechanisms that are in place
to enable good intentions to be
transformed into good behaviour.
2 Advocating for a culture of integrity
by ensuring institutional integrity is
measured as a KPI for key executives
This can be achieved through an
executive mandate letter focusing
on cultural accountability.
3 Moving beyond a compliance paper
trail to ensure cultural norms are
being measured.
This requires a review of how
business tensions and possible
tradeoffs are made; how fairness
and transparency are safeguarded
and how stated values are
supported to ensure institutional
integrity
4 Since every dimension of workplace
behaviour has an ethical dimension,
ensuring there is regular training for
executives and employees in ethical
decision making
Through engagement with these four
activities, boards can be reassured that
they have put in place a governance
system that nurtures and promotes
an organisational culture that is self-
policing; one that encourages ‘a speak
up culture’ where risks to the institution’s
integrity are identified at early stages.
These cultures enable ongoing remedial
actions rather than paying a very high
price to retrofit an ethic regime after
adverse media exposure.
Like fraud risk, cultural risks and the
ethical issues they spawn, need to be
anticipated, managed and discussed.
This means a clear focus on quantifying
the risks posed by leadership styles
and the organisational cultures these
give rise to. Beyond this, boards need
to motivate and reward CEOs who are
culture builders and not just bottom
line inflators. If we are to learn from the
corporate collapses of the past we must
recognise that organisational culture
is the game changer and managing
for greater institutional integrity a
prerequisite of sustainable success.
In June this year French banking
giant BNP Paribas pleaded guilty to
wilfully evading US embargoes on
Iran, Sudan and Cuba. BNP agreed
to pay an $8.9 billion fine, one of the
largest in US history, and admitted
that it had taken steps to conceal
the true nature of the banking
transactions it executed in violation
of the embargoes. The BNP case is
notable because the investigation
was substantially aided by
whistleblowers. An internal whistle-
blower alerted authorities that BNP
was violating US embargoes as
early as 2009 while the Statement
of Facts by the Department of
Justice suggested that an internal
whistleblower (along with several
compliance officials, had expressed
concern within BNP about its illegal
conduct, but that these warnings
went unaddressed. The case shows
that boards can be forewarned of
unethical behaviour if they ensure
a sound ethics infrastructure is in
place as this always revolves around
a detailed ladder of escalation on
how employees at every level can
raise issues safely.
Dr Attracta Lagan can be contacted
on 0430488875 or by email at
attracta@values.com.au.
Website www.values.com.au
Note
1 Schein, E.H (1992) Organisational Culture
and Leadership, Jossey- Bass. San Francisco.
423Governance Directions August 2014