Building an Ethical Infrastructure

In his landmark book, Leading Change, Harvard Professor John Kotter tells us that one of the main reasons organizational change fails is that the change is not anchored firmly to the corporate culture. He says that "change sticks only when it becomes 'the way we do things around here."' We believe that creating an infrastructure that makes ethical business practice an integral part of your organization's processes helps to create this anchor.

It clarifies for everyone what your standards are. We're not big fans of massive bureaucracy and lots of rules, however, when procedures and guidelines are in place, and people are accustomed to following them, the odds that everyone, including the leaders, will abide by them, goes up. Remember the analogy of living in a glass house. A formal ethics program raises the blinds and opens the windows of the house. There is no hiding behind the excuse of not knowing what is expected.

It makes ethical behavior part of everyone's job. When there is a formal ethical infrastructure in place, employees who want to speak up have a platform from which to do so and guidelines to tell them how to do it.

The nature of an ethical infrastructure depends on your company's needs and personality. In our experience, it should include the following elements:

Leadership
Philosophy
Communication
Training
Rewards and Consequences

Leadership

A new or stronger infrastructure implies a level of change that only an organization's leaders can drive. One way to do this is through a steering committee made up of the CEO and one or two senior executives, the company's legal representative, one or two middle managers, and two or three line employees. A union, if present, should be represented. This cross section of the organization will ensure that all perspectives are present.

The purpose of the steering committee, which typically meets quarterly, is to oversee the design, implementation, and operation of the company's ethics program. This includes establishing a statement of ethics and ethical guidelines. As issues arise that are not clearly defined by the guidelines, the steering committee resolves them. It also periodically audits the program to ensure it is working as planned.

If you are a top executive, you may be saying, "Wait a minute. I'm much too busy to be involved in this. Why can't I delegate it to, say, the head of human resources?" Well, you can, but then the message you send is that ethics are not as important as the other things on your plate. If that plate features finance but not ethics, the next time an employee is faced with an ethical issue that affects the bottom line, guess which one will play second fiddle?

Another important role for the steering committee is to regularly review the performance of the ethics program with the board of directors. We think semiannual formal reviews raise the odds that the organization will stay focused on the value of ethical business practices.

Some companies drive an ethical culture by creating the position of corporate ethics officer. The officer, who is a member of the steering committee, coordinates the activities of the committee and monitors ethical activities within the organization. To remain current with ethical standards and thinking, we recommend that the corporate ethics officer be involved in the Ethics Officers Association (http://www.eoa.org).

Philosophy

An ethical infrastructure stands on a philosophical foundation that defines what the company believes. This may include a statement of ethical tenets. It may include a platform of integrity based on the tenets that capture the organization's values and desired behavioral outcomes. It may also include business conduct guidelines that address specific situations, like those we described at IBM and Northrop Grumman.

One of the best examples of a strong ethical foundation can be found at Weyerhaeuser, an international forest products company that employs 58,000 people in eighteen countries. Weyerhaeuser generated $14.5 billion in sales in 2001 and has been ranked first in its industry in social responsibility by Fortune magazine for seven years.

According to its Business Conduct Office, the company's Business Conduct Vision is: "Ethics at the core of every Weyerhaeuser decision." Its mission is to "provide leadership on standards of business conduct, educate on ethical decision making, and ensure adherence to laws, company policies, and guidelines."

Under Weyerhaeuser's business conduct program, which was started in 1976, every employee receives the company's code of ethics and business conduct, takes regular ethics training, and is expected to model and promote ethical behavior. Weyerhaeuser revises the code of ethics and business conduct every three years and makes it available to customers, contractors, suppliers, and the public. Topics covered by the code include safety, antitrust, conflict of interest, environmental responsibility, gifts and entertainment, and international business conduct.

The Business Conduct Office comprises full-time professionals who report to the committee chair and the CEO. The absence of a direct reporting relationship with any business or department means the office can be an objective resource for employees

Communication

Disseminating the ethics code, as Weyerhaeuser does through regular communication and training, is key to making it part of your company's culture, but that is only half the communication battle. You also need a communication system that encourages employees to ask ethical questions and to anonymously report ethics violations. For example, Northrop Grumman includes the following in its ethics policy statement:

If for any reason you feel that you must report an incident anonymously, you can do so through our Open-Line process by phone at 410-xxx-xxxx or toll-free at 1-800-xxx-xxxx.

Training

The best way to promote consistent application of your ethics code is through a training program that reaches all employees through an orientation class for new employees and introductory and refresher courses for existing employees.

This required training program covers the meaning and application of the company's:

Ethical tenets/vision/mission
Platform of integrity
Business conduct guidelines

To be effective, the training must be more than a philosophical wish list. The best ethics training features real-life examples of ethical issues that employees have encountered, case studies of ethical dilemmas employees may face, and discussion about possible ethical solutions in these situations. The training should also touch upon those unique situations that cannot be covered by the written code. Through this training, employees will be able to think for themselves within the framework and expectations of the organization.

Rewards and Consequences

If you've taken Psychology 101—or if you've raised children—you are aware of three basic principles of behaviorism:

Reinforced behavior is more likely to be repeated.
Punished behavior will clarify boundary lines.
Rewards work better than punishment.

We think these principles should be a part of a comprehensive ethics infrastructure.

Reinforced Behavior Is More Likely to Be Repeated

If we are rewarded for doing something, we are more likely to do it again. Bob worked with a company that gives every employee a bank of points at the beginning of the year that can be traded for merchandise at the company store. Employees are encouraged to award these points to their cohorts when they "catch them doing something right." Employees cannot spend their own points, only those that have been awarded to them by others. There are no restrictions on how or why each employee doles out his points, only that the giver specifically describes the act that he is rewarding. The whole idea is to get "caught in the act" of doing something positive.

If you're cynical, you might wonder why people don't conspire to beat the system by just trading points. Since the specific acts are also published in the company's online newsletter, that hasn't been a problem.

Punished Behavior Will Clarify Boundary Lines

It is human nature to pursue pleasure and avoid pain. Punishment is the application of pain to change behavior. Of course, it is the threat and not the actual punishment that discourages most from doing wrong, and it can be a very effective tool. You are less likely to commit insider trading if you fear the pain of getting caught, having your face splashed across the headlines, and doing jail time. So it clarifies the boundary line over which you must not cross.

On the downside, threatening punishment is expensive because you must monitor and police potential violations for it to work. In addition, if people consider themselves untouchable because of their positions in life, the threat of punishment does no good. Leona Helmsley once said that only the "little people" pay taxes. Threat of punishment did not dissuade her because she obviously thought she was above the law. You have to believe you may get caught for the threat of punishment to be effective.

Don't get us wrong: We are not saying that you shouldn't include punishment in your ethics program because it is costly to monitor or because some people will figure ways around it. We think a good ethics program must include severe penalties for violation of the rules in order to make a strong statement to everyone in the company, as well as to the outside world, that ethics are important.

We just think an effective ethics program should include more than a set of penalties for crossing the integrity line. In our experience, that means there are better alternatives.

Rewards Work Better Than Punishment

When Gordon Bethune took the reigns of Continental Airlines, its on-time arrival record was the worst in the industry. In 1995, he offered employees a $65 bonus for every month the company landed in the top five as measured by the U.S. Department of Transportation. The first month they moved from last to seventh. The second month, they landed in the top five. They completed the year finishing in the top five eight out of twelve months.

We're not suggesting that you should offer to pay everyone $65 for every month your company doesn't come under fire from the SEC or your industry ethics group. But you can use the same reward systems you would use to celebrate and reward outstanding performance to encourage people to do the right thing. For example, ParaMed Health Services, a Canadian home health service runs heart-arming stories about its staff who go out of their way to provide special services for their homebound patients while off the clock.

In addition, we suggest that you include adherence to strict ethical standards in the contract and feedback phases of your performance management system. That way, every time an employee receives a review of performance and participates in the planning of future performance, ethical issues can be revisited. If more executives had had their ethical performance evaluated in 2002 during their performance reviews, perhaps the scandals would have been avoided.