Research on more than half a million employees has shown the value of a corporate culture that ensures all employees understand the importance of acting with integrity

During the past two years, there have been several multimillion-dollar penalties related to the U.S. Foreign Corrupt Practices Act alone. Some of these penalties have exceeded well over $100 million. When you add in the costs of harassment, discrimination, conflicts of interest, fraud, records mismanagement and accounting irregularities, these numbers routinely run into the billions. And even these numbers pale in comparison to lost market access or diminished reputation among consumers that happens when a company is found guilty or even accused of unethical behavior.

In the aftermath of major crises, government officials and executives alike have implemented new rules, policies and procedures in an attempt to prevent such disasters from occurring again. Time has shown, however, this approach is inadequate and it doesn’t account for the most critical element – corporate culture. According to research completed by Corporate Executive Board, including surveys of approximately 600,000 employees in more than 140 companies, corporate culture—not process failure—most often lies at the root of corporate catastrophes.

Building Integrity Capital

As one leading executive says, “Great risk management is simply the movement of information from the informed to the empowered.” While employees are often fearful to share observations about compliance risks due to concerns about retaliation, some companies are markedly better at enabling and encouraging employees to do so. Because these firms’ employees understand the value of being transparent about compliance and ethics issues, the firms benefit from what CEB calls high “integrity capital.”

Based on our research, we found that executives can increase their firms’ integrity capital by:

1. Delivering “organizational justice” by responding quickly and consistently to unethical practices.

A firm’s culture has organizational justice when employees agree that 1) their firm responds quickly and consistently to proven unethical behavior and 2) that unethical behavior is not tolerated in their department.

While most companies respond effectively to illegal or unethical behavior, most employees (even most managers) never know it. Leading companies show employees that when ethical behavior is uncovered, people are held accountable and the company does the right thing quickly and consistently. To foster organizational justice, leaders should:

• Set clear expectations that unethical behavior is not tolerated;
• Hold employees at all levels consistently accountable; and
• Share details regarding detected, punished misconduct (within the bounds of privacy laws).

2. Finding hidden, weak links and targeting efforts on the least compliant areas.

Firms with high integrity capital have fewer incidences of misconduct and a higher rate of employees reporting unethical behavior. But even the best firms sometimes fail to identify the worst performing business units with the greatest levels of observed misconduct. The likelihood of an employee speaking up often varies by more than 30 percentage points between the most and least compliant groups.

The best managers focus attention on the least compliant locations, especially through face-to-face interaction with frontline employees. This also helps managers develop and implement effective remediation plans.

3. Focusing on four management qualities and rigorously measuring management integrity.

Leaders’ behavior shapes subordinates’ behavior. Although this may seem obvious, it is a vital fact supported by feedback from approximately 600,000 employees worldwide. Even if a firm puts in place dozens of systems and processes to manage the right flow of information, if its leaders have the wrong qualities, it will fail.

Although there are many laudable qualities associated with strong leaders, only the following four are statistically proven to foster a healthy culture and reduce the likelihood of misconduct:

1. Taking action on verified unethical conduct
2. Honesty and integrity
3. Respecting and trusting employees
4. Listening carefully to the opinions of others

All firms expect their managers to have integrity, but the best firms go much further by rigorously measuring the integrity of their management teams. They use both objective and subjective measures and give each manager a score that is often tied to their promotion and variable compensation. As managers rise in the hierarchy, they are expected to achieve increasingly high, clearly defined levels of integrity.

For example, companies may require their most senior executives to repay bonuses granted for up to five of the preceding years if an appropriate action could have prevented a direct report’s violation of an applicable law that resulted in financial loss.

Rather than implementing new rules, controls or processes, executives should invest in their company’s integrity capital to safeguard against catastrophic risk failure. In doing so they may not only protect the company but can also make it a better organization in the process.
To reach the authors, contact Joni Renick at jrenick [at] executiveboard [dot] com.

About the Authors
Tracy Davis Bradley, Ph.D., is a senior director with the Corporate Integrity Practice at the Corporate Executive Board (CEB) in Washington, D.C. Tracy was awarded the Corporate Executive Board’s highest recognition, the Force of Ideas Award, in 2008 for her quantitative research on “Identifying the Leading Indicators of Business Misconduct.” Her research has been featured in BusinessWeek, Risk Management Magazine and Corporate Secretary. Prior to joining the Corporate Executive Board in January 2006, Tracy worked as an instructor, consultant and researcher in the fields of leadership, education and public policy.

Tim Stafford is the editor of CEB Views, and was one of two founding editors of CEB’s Insight Daily email news service (for which he was awarded CEB’s Force of Ideas award in 2009). Prior to this he spent four years writing research and providing advice to heads of corporate strategy and their teams in CEB’s Corporate Strategy Board program. He has also worked with CEB’s network of human resources executives.