TOPIC 4CORPORATE CULTURE, GOVERNANCE AND ETHICAL LEADERSHIP

THIS CHAPTER SEEKS TODefine corporate culture

Describe how corporate culture impacts ethical decision making

Discuss the role of corporate leadership in establishing the culture

Determine between effective leaders and ethical leaders

Discuss the role of mission statements and codes in creating an ethical corporate culture

Explain how various reporting mechanisms such as ethics hotlines and ombudsmen can help

Integrate ethics within a firm

Discuss the role of assessment, monitoring, and auditing of the culture and ethics program

WHAT IS CORPORATE CULTURE?Every organization has a culture.

A culture is made by a shared pattern of beliefs, expectations, and meanings that guide the behavior of its members.

Businesses also have unspoken yet influential standards and expectations. Some examples are dress codes, working hours, and also a firm’s values.

No culture is static.

Cultures change, but modifying or having any impact on culture is like moving an iceberg. One person cannot alter its course alone, but strong leaders can have a significant impact on a culture.

WHAT IS CORPORATE CULTURE?

A firm’s culture can be its sustaining value.

Culture can offer direction and stability in challenging times, but can also constrain a firm to the common ways of managing issues.

The stability that is a benefit at one time can be a barrier to success at another time.

WHAT IS CORPORATE CULTURE?

Collins and Porras (1994) studied companies such as IBM, Johnson & Johnson, Hewlett Packard, Procter and Gamble, Wal-Mart, Merck, Motorola, Sony, Disney, General Electric, and Philip Morris, looking for common elements to explain these companies’ success.The common element among successful companies was their core ideology, which is made up of core values and a clear corporate purpose. All these companies have strong corporate cultures and clear sets of values.

CULTURE AND ETHICSIn situations where the law is an incomplete guide for ethical decision making, the corporate culture is likely to be the determining factor.

An ethical culture is one in which employees are empowered and expected to act in ethically responsible ways even when the law does not require it.

A corporate culture sets the norms and expectations that will determine which decisions get made.

An example of how cultures encourage some behaviors and discourage others is the two organizational approaches to relief efforts after Hurricane Katrina in September 2005.

CULTURE AND ETHICSFEMA and the Coast Guard responded differently following Hurricane Katrina.

Because of its bureaucratic hierarchical procedures, FEMA was unable to respond in a timely manner when the situation did not fit their usual rules.

FEMA Director Michael Brown was eventually removed and replaced with a Coast Guard admiral.

CULTURE AND ETHICSThe U.S. Coast Guard has a reputation for being less bureaucratic. Their unofficial motto is “rescue first, and get permission later.” The Coast Guard empowers front-line individuals to solve problems without waiting for authorization.

While FEMA and the Coast Guard are similar organizations with similar missions, rules, and legal regulations, their cultures are very different, and their respective decisions reflect these cultures.

CULTURE AND ETHICSThe cultivation of one’s habits, including the cultivation of ethical virtue, is greatly shaped by the culture in which one lives.

We are often as likely, or more likely, to act out of habit and based on our character, as to act based on careful deliberation.

Business institutions provide an environment in which habits are formed and virtues are created. Such an environment is an ethical corporate culture.

CULTURE AND ETHICSBesides abstract considerations, an ethical culture can also have a direct practical impact on the bottom line.

Responsibility for creating and sustaining ethical corporate cultures lies with business leaders.

Corporate cultures have great power to shape the individuals who work within them.

See Collins and Porras’ book, Built to Last: Successful Habits of Visionary Companies.

The person that you become, in your attitudes, values, expectations, mind-set, and habits, will be significantly determined by the organization in which you work.

ETHICAL LEADERSHIP AND CORPORATE CULTURECorporate leaders must both advocate and model ethical behavior.

Leadership sets the tone not only via personal behavior, but also via allocating corporate resources to support and promote ethical behavior.

It is important in ethical leadership to be perceived as a people-oriented leader.

Even traditional leadership duties are perceived as being done within the context of an ethics agenda.

Ethical traits and behavior must be socially visible and understood (“walking the talk”) to have influence.

EFFECTIVE LEADERSHIP AND ETHICAL LEADERSHIP

Being a good or effective leader does not necessarily mean being an ethical leader.

Ken Lay and Jeffrey Skilling of Enron were good and effective business leaders, and were also unethical leaders.

One key difference between effective leaders and ethical leaders is the motivators used to achieve goals.

Threats, intimidation, harassment, and coercion can be used effectively, but modeling, persuasion, and use of one’s role in the company are ethical as well as effective.

EFFECTIVE LEADERSHIP AND ETHICAL LEADERSHIP

An ethical style or method of leading, while central, is not sufficient to establishing ethical leadership.

The other element involves the goal or end toward which the leader leads.

There cannot be leaders or followers without a goal or direction.

Productivity, efficiency, and profitability are minimal goals.

EFFECTIVE LEADERSHIP AND ETHICAL LEADERSHIPAn executive who makes a business productive, efficient, and profitable, and respects and empowers subordinates, may seem to be both effective and ethical at first glance.

But what if this executive’s business has unethical products – i.e., publishing child pornography, polluting the environment, or selling weapons to terrorists?

Socially responsible goals may be necessary for a leader to be fully ethical.

BUILDING A VALUES-BASED CORPORATE CULTURE

Before impacting the culture via a code of conduct or statement of values, a firm must first determine its mission.

The Johnson & Johnson credo is an excellent example of a clear ethical mission statement.

After developing a mission statement, a code of conduct then can delineate this foundation more specifically.

The code of conduct can enhance corporate reputation.

The code can give concrete guidance for internal decision making, thus creating a built-in system for risk management.

BUILDING A VALUES-BASED CORPORATE CULTUREAfter establishing corporate codes of conduct and mission statements, the second step in developing guiding principles for a firm is articulating a clear vision statement.

In addition to showing the firm’s direction, the vision shows how its members apply their values to their daily business practices.

After the mission statement and code of conduct, and the vision statement, the third step in the process is to identify how the cultural shift will occur.

You can’t simply “print, post and pray” (-- Stuart Gilman, President, Ethics Resource Center).

Implementation and follow-through are critical.

BUILDING A VALUES-BASED CORPORATE CULTURE

The final step in having an effective code that will influence the culture is a company-wide belief that this culture is attainable.

If conflicts prevent certain parts from being realized, or if key leadership is not on board, no one will have faith in the proposed changes.

Critical to the success of any cultural shift are the following:

Integrating an ethical culture throughout the firm

Providing means for enforcement

Means for enforcement includes allowing employees to come forward with questions, concerns, and information about unethical behavior.

BUILDING A VALUES-BASED CORPORATE CULTURE

A key element of integration is communication.

Without communication, there is no clarity of purpose, priorities, or process.

The Ethics & Policy Integration Centre claims that communication patterns describe the company better than organization charts do.

Reporting ethically suspect behavior is difficult.

“Whistleblowing” can expose and end unethical activities.

Whistleblowing can also seem disloyal, harm the business, and harm the whistleblower.

Because reporting to external groups can be so harmful, internal reporting mechanisms are preferable.

BUILDING A VALUES-BASED CORPORATE CULTURE

Internal mechanisms for reporting wrongdoing, while preferable, must:

Be effective

Allow anonymity

Protect the rights of the accused

Allow employees to report wrongdoing

Create procedures for follow-up and enforcement

BUILDING A VALUES-BASED CORPORATE CULTURE

Internal mechanisms for reporting wrongdoing which have been created by many firms:

Responsibilities of ethics officers

Responsibilities of compliance officers

Ethics ombudsmen

Ethics hotlines

BUILDING A VALUES-BASED CORPORATE CULTUREIf we cannot measure, assess, and monitor culture, it declines in importance.

Ongoing ethics audits allow companies to uncover silent vulnerabilities that could later pose challenges.

Ongoing audits serve as a vital element in risk assessment and prevention.

A firm’s management of its internal and external relationships is critical evidence of its values.