Avoiding Ethical Misconduct Disasters

Strategic Integrity Continuity

Most organizations have long acknowledged that business continuity planning is an essential priority for effectively anticipating, preventing, mitigating, and surviving natural disasters, data loss, accidents, and deliberate malevolent acts. What many are only now discovering is that integrity continuity planning is also due diligence. Ethical issues must be on the strategic agenda. Such planning must go beyond compliance issues and reactive disciplinary policies to actually manage integrity.

Integrity management should be a priority not only because it is legally required, but because it is the right thing to do.[1] Employees who know that particular workplace decisions, behaviors, and processes exist in an ethically judged context are more aware and motivated to act ethically. Employees who perceive such activities as existing detached from an ethical context or who utilize an alternative (unethical) value paradigm (i.e. financial or perceived performance) are less aware of ethical implications and more motivated to act unethically.

Integrity management is intertwined with managing the larger corporate culture and with the informal reward/motivation processes that impact employee decisions and behaviors in ways that transcend policies printed in a written code of conduct. Common ethical and professional standards include assumptions that decisions and behaviors are conducted honestly and that employees and managers never knowingly harm or do damage to fellow employees, stakeholders, customers, clients, or vendors by deception, misrepresentation, fraudulent report, coercion, conflict of interest, or other acrimonious acts.

Recognizing the Risk for Integrity Lapses

Too frequently, top corporate executives think that ethical scandals “couldn’t happen to us.” Those sentiments are intrinsically related to the aftermath statement, “I never thought this would happen to us.” The reality is that all of the common justifications for ignoring integrity continuity planning are based on misplaced trust in unmanaged human nature and ignoring the systemic factors that give rise to ethical disasters.

Managing integrity requires strategic planning and enactment beyond hiring “good, basically moral people.” Even systematically hiring only employees with perceived high levels of morals and ethics is no sure-fire method for preventing a major scandal. For example, consider the scandals questioning conduct of some priests within the Roman Catholic Church. Neither does formulating a detailed written statement of ethics or specific documented policies provide fail-safe methods for preventing such disasters. (The final 65-page Enron corporate Code of Ethics was written in 2000 and was intended to help guide employees for “conducting the business affairs…in accordance with all applicable laws and in a moral and honest manner.”[2])

A false sense of security is a main factor that prevents companies from creating a plan of action to follow if a disaster occurs. No company is immune from scandals, and not all scandals are of a company’s making. Certainly disgruntled antagonists can and do spread false rumors and slander and distort the truth for their own self-interests.

Ethical Misconduct Disasters

Ethical misconduct disasters are specific, unexpected, and non-routine unethical events or a series of unethical events that create significant operational disruptions and threaten or are perceived to threaten an organization’s continuity of operations.

However, not every unethical decision that occurs is a crisis for the organization. In fact, businesses that effectively manage integrity can systemically absorb, react to, and appropriately adjust to most breakdowns in conduct or decision-making. Poor choices are made all the time. The key is whether the organization has adequately planned to mitigate against lapses in ethical decision making through prompt response, disciplinary actions, appropriate disclosure, communication to the workforce, and public crisis management communication so that the lapses do not escalate into catastrophes. Because of the severity, persistence, and lack of quick and appropriate response to misconduct, public scrutiny of an organization’s mishandling of such events and the resulting involvement of legal or regulatory structures may escalate so that the misconduct actually becomes a disaster for a business.

In a Sarbanes-Oxley world, what prudent executive would ignore the risks of ethical scandals? Yet numerous recent revelations about ethical misconduct make the prospects of the “unthinkable ethical disaster” a realistic concern. What do you think of when you hear the following corporate names: Martha Stewart, Qwest, Merrill Lynch, Tyco, Enron, WorldCom, Andersen, Sears, Mitsubishi Motors, United Way of America, Global Crossing, Adelphia, Citigroup? Some cases of ethical scandals have resulted in senior executives facing prison sentences.

One study revealed that 62 percent of all companies experienced a “significant or major” integrity continuity disruption between 1986 and 1996.[3] Although predicting ethical scandals in American business is not an exact science, one CFO.com projection forecasts up to 20 “major” business ethical misconduct disasters every year.[4] Ethical misconduct scandals can spring from any segment or level of a company’s operations. The major categories of such disasters typically include instances of harassment or discrimination, criminal or illegal activities, financial improprieties, customer deception, bribery or improper influence, regulatory violations, corruption, or undisclosed conflict of interest.

Sentencing guidelines, such as those of the Uniform Federal Sentencing Guidelines for Organizations, increasingly hold executives and senior management accountable by instructing judges to consider the organization’s efforts to plan, train, and implement policies to mitigate, enact full-disclosure efforts, and cooperate with authorities.

Intrinsic Ethical Assumptions

Ethical behavior is a growing concern across society in general. Times have changed since the days when one could uncritically assume that all employees are hired with a fundamental and rigid commitment to recognizing, understanding, and acting ethically in every possible situation. Furthermore, even good, moral individuals may be influenced by reward systems, unique temptations, or unseen pressures that will affect their ethical decision-making in some situations.

According to a 2002 national study of 12,000 high school students:

74 percent admitted cheating on an exam at least once in the past year;

38 percent admitted shoplifting at least once in the past year;

37 percent admitted that they would lie “in order to get a good job.”

Josephson, M. “Report Card 2002: The Ethics of American Youth,” (Josephson Institute of Ethics: Los Angeles, 2002).(no longer accessible).

In addition, the “inherent ethics” of the “good moral people” that a company hires include:

• 76 percent of MBA graduates who reported that they were willing to commit fraud to enhance profit reports to management, investors, and the public;[5]
• The fewer than 50 percent of employees who believe their employers have high ethical integrity;[6]
• 30 percent of all employees who currently report that they “know or suspect ethical violations such as falsifying records, unfair treatment of employees, and lying to top management;”[7]
• 41 percent of employees in the private sector and 57 percent of employees in the public/government sector who are aware of ethical misconduct or illegal activities;[8]
• 60 percent of employees who state that they know but have not reported instances of misconduct in their organizations. Most employees cite the lack of companies’ confidentiality policies as reasons for not coming forward about ethical misconduct. They fear “whistle-blower” retaliation and that existing policies won’t protect them.

Integrity Continuity Analysis

Integrity continuity considerations are commonly ignored by senior management, particularly at the chief executive level. Research has found that 60 percent of chief executives and boards of directors failed to engage in integrity continuity planning discussions or to include such considerations in strategic planning.[9] Furthermore:

• 57 percent of companies “have never” incorporated integrity continuity planning at the strategic executive or board level.[10]
• More than half of all businesses fail to assess ethical misconduct risks and to ensure integrity continuity.[11]
• 54 percent of companies do not have employee ethics compliance measurement among their performance appraisal criteria.[12]
• 56 percent of companies have never conducted an ethical behavior compliance audit.
• 23 percent of companies have never engaged senior management in ethics/compliance training efforts.[13]

It is imperative that companies carefully assess the integrity risks that are unique in their business by analyzing the following:

• On what criteria does the company base confidence in its integrity continuity?
• Do all company personnel know how to act or behave ethically and appropriately in all situations and contexts?
• Do employees know the rules for each situation that may arise?
• How does the company know that employees have this information?

In most cases, ethical disasters involve employees who failed to follow their department’s internal corporate policies and guidelines. Far too many corporate scandals have occurred because the organization was an “enabler” of the employee’s unethical behavior.

One approach that has been used effectively to assess a company’s strengths, weaknesses, opportunities, and threats is the Ethical Conduct Audit©.[14]

Ethical Conduct Audit© can:

• Gather information
• Establish reporting channels
• Assess culture
• Examine perceived reward system
• Be alert to “warning signs”
• Identify patterns of potential misconduct

Such an assessment can provide insight into both legal compliance behaviors as well as into the ethical reasoning and decision-making that is often difficult to see with unfocused or casual observation.

Five Key Steps to Reach Integrity Continuity Goals

Prudent executives can initiate the following five proactive steps that can move their organizations towards integrity continuity goals and objectives.

1. Establish Explicit Ethical Goals and Criteria

Every company should establish detailed codes of ethics and all applicable compliance expectations. Such standards can distinguish between legal and ethical conduct, but in both cases, the organization’s expectations upon individuals should be defined and put in writing. Criteria should include specific examples of common or routine situations as exemplars so that there are clear cut “models” of what criteria are expected to govern or guide decisions and behavior for employees regarding what is (or is not) considered consistent with the company’s expectations. In fact, the more such examples are descriptive of the types of choices and situations that employees might be expected to encounter during their work performance, the more powerfully such illustrations can serve as the basis for integrity ideals that are likely to be enacted. All of these written ethical codes should be distributed and reinforced with all employees.

2. Demonstrate Commitment to Ethical Goals and Criteria

Executives must demonstrate top management’s commitment to integrity as a strategic goal of the corporation. While having a written code that explicitly defines ethical expectations is important, it is also important to demonstrate to your workforce that the organization is seriously committed to expecting employees to meet and exceed such standards. Designating a corporate ethics officer or creating an ethics management team to manage a strategic integrity plan and to signal commitment helps employees readily see that any statements of ethical conduct expectations are not just “lip service.” In addition, performance appraisal processes must tie rewards systems to indicators of integrity as well as to other measurements of productivity. The rewards system (including informal rules and rewards) must be consistent with integrity expectations. Furthermore, it is important to consistently reward integrity and to make sure that these instances are publicized throughout the organization. Finally, management must insure that a clear and efficient disciplinary process for lapses of integrity is in place.

3. Communicate Ethical Expectations and Train Workforce to Enact Ethical Goals and Criteria

Every employee, manager, and executive in your company should participate in ethical training programs as part of the strategic commitment to integrity continuity management. Recognizing ethical dimensions of various situations, understanding the company’s ethical expectations, applying ethical criteria in “complex” situations, instituting ethical decision-making processes, implementing ethics in action, and ensuring legal compliance are all part of an on-going integrated training program that should be in place in every organization. Given the recent scandals, prudent company executives should also determine what sorts of on-going ethical training initiatives are underway at their accounting firms and among suppliers, vendors, distributors, and other “intertwined” entities. Finally, such training cannot be “theoretical.” It is imperative that everyone be thoroughly trained in transferring and applying ethical principles to the specific situations and decisions that they face in the performance of their jobs.

4. Assess and Monitor Employee Behavior and Decisions

It is essential to monitor and audit employee conduct (formal and informal) to have a realistic picture of the types of behaviors and decisions that occur within your organization. Start with a comprehensive Ethical Conduct Audit ©[15] to get an overview of the current enactment of integrity across your organization. Review the various decision systems and critical points where your organization may be vulnerable to lapses in integrity. Review ongoing extensive surveillance and collaborative participation efforts to ensure that all behaviors and decisions are being conducted ethically. Create and maintain confidential “whistle-blower” channels, policies, and protections for those who report unethical conduct.

5. Maintain On-going Proactive Integrity Continuity Management

Create and maintain a supportive climate for ethical conduct by recognizing and rewarding acts of integrity and ethical decisions. Abide by and enforce disciplinary policies in consistent and fair ways. Anticipate potential threats to integrity continuity. Develop plans for reacting and responding to the discovery of unethical behavior. Prepare contingency plans for handling issues that might potentially become major scandals and disruptions to your ongoing operations.

Proactive Integrity Continuity Management Tactics

• Set and maintain integrity goals at the strategic level.
• Demonstrate top management commitment to integrity.
• Monitor and audit conduct (formal and informal).
• Tie performance rewards system to integrity conduct.
• Distribute written rules, policies, and procedures.
• Reinforce written rules, policies, and procedures.
• Train employees to recognize and make ethical decisions.
• Establish Corporate Ethics Officer/Team.
• Designate Ethical Compliance Manager.
• Install surveillance and evaluative processes and foster collaborative participation.
• Maintain “whistle-blower” channels and policies.
• Ensure supportive climate for ethical conduct.
• Reward acts of integrity and ethical decisions.
• Abide by and enforce disciplinary policy consistently and fairly.
• Offer Organizational Transformation (OT) training and development programs.
• Immediately respond to misconduct; follow procedures consistently and fairly.

Summary: When Ethical Scandals Occur

If an ethical scandal does occur, the response must be quick and decisive. It is always important to follow procedures consistently and fairly. It is also important to document all aspects of your efforts for integrity management as well as all actions and steps followed in response to episodes of ethical misconduct followed by immediate action. Rest assured that every step taken (or not taken) will be closely watched by other employees and eventually by the media as well as the public at large. If employees know the company’s internal procedures and policies as well as its legal and regulatory requirements, follow disciplinary policy consistently and swiftly, contact and cooperate with law enforcement (when appropriate), and review stakeholder agendas, then possibly the company may emerge gracefully from the disaster.

[1] LeClair, D. T., Ferrell, O. C., and Fraedrich, J. P. (1998) Integrity Management: A Guide to Managing Legal and Ethical Issues in the Workplace, University of Tampa Press.

[2] Enron Code of Ethics, Enron Corporation, 2000: 2.

[3] Gottlich, J. A. and Sanzgiri, J. “Towards an Ethical Dimension of Decision Making in Organizations,” Journal of Business Ethics. 15 (12) 1996: 1275-1285.

[4] Taub, S. “Crisis of Ethics: Ethics Officers Predict a New Wave of Corporate Scandals,” CFO.COM, 19 June 2002. http://www.cfo.com/article.cfm/3005220?f=search.

[5] Lazere, C. “Ethically Challenged:Teaching Ethics Is Required But Schools Have Wide Latitude in How They Do It, “CFO Magazine, April 1997.

[6] Walker Information and Hudson Institute. Workforce 2020, (Indianapolis, Indiana: Walker Information and Hudson Institute, 1999).

[7] Ibid. Walker Information and Hudson Institute, 1999.

[8] “Integrity and Ethics in Public Administration: Polls and Surveys,” Public Management, October, 1998, (Public Management: Washington, DC): 3-4.

[9] Taub, S. (2002). http://www.cfo.com/article.cfm/3005220?f=search.

[10] Ibid.

[11] Chandler, R. C. and Wallace, J. D. “Brief Results of the Pepperdine University Ethical Misconduct Disaster Recovery Preparedness Survey,” Disaster Recovery Journal, 14, Summer 2001 (3), 2001: 21-22.

[12] Taub, S. (2002). http://www.cfo.com/article.cfm/3005220?f=search.

[13] Chandler, R. C. and Wallace, J.D. (2001); 22.

[14] Chandler, R. C. “Managing Ethical and Regulatory Compliance Contingencies: Planning and Training Guidelines,” Contingency Planning and Management 2000 Proceedings, (Witter Publishing: Flemington, NJ, 2000): 6-7.

[15] Chandler, R. C. Ethical Conduct Audit. Pepperdine University, 2005.