HR leaders sometimes must walk a tightrope to prevent unethical conduct and keep their companies -- and themselves -- out of trouble.
By Jack Robinson
The 21st Century Fox employee ethics manual clearly spells out rules against workplace misconduct, noting that "we owe a duty to the company, our stockholders and our colleagues to make sure that our businesses are conducted in accordance with the highest ethical standards."
Yet the company had to spend $20 million to settle claims from former star anchor Gretchen Carlson, who described the company's Fox News Channel as a snake pit of sexual harassment and retaliation. That came in September, soon after the company spent $40 million to jettison network CEO Roger Ailes, the man accused of fostering that toxic culture. Other women have voiced similar complaints and at least one -- former Fox personality Andrea Tantaros -- has sued. So it's still unclear what the final cost will be.
The Wells Fargo Bank code of ethics is even more detailed. It tells workers "We must be honest and fair in our dealings and communications with our customers . . . . Products provided to our customers should be in the customer's best interest, must be explained in a way that the customer can understand, and the terms and conditions must be thoroughly and accurately outlined."
Yet the bank is embroiled in a nightmarish scandal over bad conduct that dates as far back as a decade ago. Crushed by heavy sales goals, thousands of employees opened at least 2 million accounts without customer approval. A $185 million fine imposed by federal regulators in September could be just the beginning of the cost for Wells Fargo. After lawmakers savaged him in a pair of Capitol Hill hearings, CEO John Stumpf stepped down in October.
At both companies, employees have blamed unhealthy workplace cultures that simmered for years in high-performing operations. Both face claims that the company retaliated against employees who complained of misconduct.
Business observers say these two cases are extreme examples that don't represent how the vast majority of U.S. corporations are run. But they still offer sobering lessons for all HR leaders: Protecting your organization means systematically developing an ethical workplace culture. And sometimes it means taking career risks to address a surprise problem that threatens your employer's reputation -- and earnings.
Most organizations claim high ethical standards. But not all of them turn those standards into a way of life.
Words in a handbook "aren't enough," says Dick Antoine, a board member of the National Academy of Human Resources who retired after 10 years as chief human resource officer for Cincinnati-based Procter & Gamble in 2008. "Almost everyone does that. The question is, is it real?"
(See related story, page 18: A Harvard Business School professor who studies white-collar crime says ethical choices can be difficult in the "gray" world of business.)
Details of how things went wrong at Fox News and Wells Fargo will take time to emerge, says Pat Harned, CEO of the Ethics & Compliance Initiative, a business-research association based in Washington. But past scandals -- including the 2001 meltdown of Houston-based energy company Enron -- offer hints.
"There's almost always, in the aftermath, a recognition that there was a culture within the organization [in which] people did not feel they could raise concerns," Harned says. On paper, Enron had "a spectacular ethics and compliance program. And yet [it] had a culture [of] widespread wrongdoing, people were aware of it and no one came forward."
It Starts at the Top
It's a cliché, but true nonetheless, experts say: The tone set by leadership is the most important influence on an organization's ethical culture.
"The values of the company have to be owned by two people," Antoine says, "the HR leader and the CEO. It's got to come from there. If they don't do it, then it won't happen anywhere in the organization."
That's because workers take note if the company tolerates ethical misconduct, he says.
"The organization figures it out pretty quickly," he says. "When somebody misbehaves and it gets reported and nothing happens. ... And that falls right at the feet of HR, unfortunately."
Michael Volkov, a Washington-based lawyer and former federal prosecutor who helps companies with compliance problems, says he's seen dramatic differences in the tone set by top leadership.
Some CEOs, he says, "know the words they have to say ... but there's no follow-up. But when you meet a CEO who's really committed to it, there's nothing more inspiring than to watch how that vision is carried out every step of the way."
Harned says research by her organization, formerly called the Ethics Resource Center, has found that employees are most influenced by their CEO and immediate supervisor.
Employees whose supervisors are intimidating or abusive tend to see more misconduct around them and feel more pressure to break the rules, Harned says. Those with supervisors who encourage them to uphold standards are more than twice as likely to say they work in an ethical culture -- and are more likely to report wrongdoing if they see it.
Setting an ethical tone means actively encouraging employees to report their concerns, says Matthew Owenby, senior vice president and CHRO at the insurance giant Aflac. "It's one thing to say you have an open-door policy. It's another thing entirely to have a culture where people will actually walk through an open door," he says.
Aflac is among a handful of companies that have been named on a list of the world's most ethical companies each year since the nonprofit business research group Ethisphere began publishing it in 1997. Owenby says HR's mission at Aflac is to "make sure the culture is safe for people to drive issues, challenges [and] concerns about ethics."
On the flip side, fear is often a big driver of employee behavior in organizations where the ethical culture is weak, Harned says.
In organizations where unethical behavior is common, "there's usually a perception that if you come forward to report things, there will be ramifications for you."
Even HR executives can end up in the crosshairs in some organizations if they "are not given enough power or autonomy to do what's right," says Debra Katz, founding partner of the high-profile Washington-based civil rights and whistleblower law firm Katz, Marshall & Banks. "Conscientious HR officials often have targets on their own backs."
Where Was HR?
It's not yet clear what role HR leaders played in the scandals engulfing Fox and Wells Fargo. Neither company would say when those executives learned about the problems and what steps they took.
"What I think is that HR lacked courage," says Susan Meisinger, an author, speaker and HR consultant who also is a former president and CEO of the Society for Human Resource Management. But she also notes that there are limits to what a CHRO can do.
"If the leadership at the very top is unethical, it's very difficult to change them, to give them an ethical mind-set," she says. In such situations, "I encourage HR folks to start looking for another job."
Harned says that HR executives, like corporate compliance officers, "believe very strongly that our role is to be the people in the organization that will speak the truth when it's necessary, and be willing to walk away if we can't." But if the unethical culture is systemic, and starts at the top, she says, a CHRO must consider: "How much of a battle do I want to take on?"
Katz says HR executives who raise ethical concerns may hear that a high-ranking executive at the center of the problem "is vital to the business model, is a rainmaker" who can't be fired, she says. Senior leadership may tell HR to instead take lesser measures, such as assigning the executive to a course on sexual harassment.
"And of course these are Band-Aid measures, and good HR officials know they're Band-Aid measures," Katz says. "But in an environment that is so noncompliant, like at Fox or Wells Fargo, they're swimming upstream."
The culture supporting the creation of fake accounts at Wells Fargo may have been so overpowering that the bank's chief HR officer since 2010 -- Senior Executive Vice President Hope Hardison -- was unable to influence it, agrees Carol Anderson, a Florida-based HR consultant and author. Anderson has 35 years of experience in corporate HR, including 10 years as a senior vice president and head of HR at Crestar Bank of Richmond, Va.
"You can't tell me she didn't know exactly what was going on," Anderson says. But "when you've got something as strongly embedded as that, sometimes it just needs a cataclysmic event to bring it to light -- and I kind of think that's what's happened."
A systemically unethical corporate culture is rare, thankfully. In most organizations, a CHRO can head off trouble by intervening early. But walking into the CEO's office to flag an ethical problem in a high-performing business unit takes preparation. One thing a CHRO needs, for example, is a strong relationship with the top leader and respect for the HR function.
Volkov says he's concerned when he finds HR marginalized. "When I see a proactive, really emboldened HR person or function, it's an absolute telltale sign of a strong culture . . . . When HR is off on its own, just doing its work, you know you're in trouble."
Building credibility to intervene effectively depends in part on having a strong nuts-and-bolts understanding of how the business works.
"The HR leader does need to be a business strategist," Antoine says. "If the CHRO develops a reputation in the organization for being part of the business ... then, when you approach a senior leader or the CEO on this values-and-ethics stuff, they know you aren't just out there in la-la land."
Relationships with other senior leaders also are important. They can be key allies in making the case that questionable practices that are yielding short-term results threaten the company's long-term interests.
"You should have as your allies the general counsel and the chief financial officer," says Meisinger. The legal perspective can help make the case that action is needed to reduce risk. And the financial perspective can help quantify the costs of the misconduct. Slash-and-burn sales tactics, for example, can mean expensive staff turnover.
The organization's compliance officer, if that position is independent of the legal function, also can be "a natural ally" of HR, Harned says.
CHROs also should have relationships with board members, particularly on the audit committee, says Volkov. That way, "if there is a problem with the management team, you have a pre-existing channel to alert the board."
Having allies and ammunition doesn't mean that a conversation with the CEO about an ethical problem in a high-performing business unit will be easy.
Antoine says these moments test an HR executive's fortitude.
"The one thing I find absolutely necessary for an HR leader is courage," he says. "You have to have courage, because it's a tough job."
One thing that can make it easier is having an informal agreement in advance with the CEO. Antoine has great respect for CEOs he has worked with. But he still made a practice of proposing ground rules at the start of a CHRO-CEO relationship.
The conversation, he says, might go like this: "If I find out our values and ethics are being violated, including by people who are working for you, I can come to you and you're not going to throw me out of here. You're going to listen, and together we're going to figure out what to do about this."
With or without such an agreement, Antoine says, the first point to make in raising concerns about an ethical challenge is that it's the CEO's job to uphold the company's stated principles. "In my experience," he says, "that's how most CEOs operate ... the vast majority get it."
If that argument isn't working, Antoine says, he would make the case that business results achieved at the expense of ethical principles aren't sustainable over the long run.
Finally, the most concrete argument of all: History proves that CEOs eventually pay a personal price for serious ethical lapses. "I would say, 'Look, sooner or later you are going to lose your job . . . because the CEO is accountable for what happens in the organization.' "
Fostering an Ethical Culture
The best way to prevent a crisis over unethical conduct, of course, is to develop a healthy corporate culture that discourages employees from cutting corners in the first place.
Antoine says one of the most powerful signals that a company is serious about ethics comes when there's misbehavior at the senior level.
"The whole organization watches" to see what happens, he says. No matter how discreetly the matter is handled, employees "figure out what's going on." The employee reaction after a misbehaving executive is fired, he says, is "like a cannon shot through the organization: 'Woah! A senior officer left because of that behavior. I never thought they'd do that.' "
"Then there's no question," he says. "That's the ultimate proof that you believe in and act on your values and principles."
Orientation sessions for new employees provide another important moment to send a message that top leadership puts a priority on ethical behavior, Antoine says.
"To have the CEO come in and say 'We believe in integrity' can have a profound effect, he says. "If he or she gets up and says that to new recruits ... then you've got the basis for good things to happen."
Volkov agrees that the CEO can have a powerful impact by talking about the organization's ethical values to new employees. He recalls one company in which the CEO regularly addressed new employees: "He would come in and say, 'If you make money and it's unethical, I don't want the money.' Boy, what a difference that made."
Another key way to foster an ethical culture is to assess the ethical values of job candidates, particularly at the executive level, Meisinger says. Screening tools can help. But so can careful interviews that probe into how a prospective leader achieved success in past positions, she says: "You want to know not only how many widgets they were able to sell at their last company -- but if they left a trail of dead bodies behind them."
Reporting mechanisms also are critical to monitoring the ethical health of an organization. Beyond informal channels and tip lines, regular surveys can provide another channel for employees to report misconduct -- particularly for business units in ethically high-risk regions such as Russia, Volkov says.
Routine financial reports can offer hints of trouble. Financial results that seem too good to be true may be a warning sign, for example.
HR also plays a critical role in monitoring other kinds of data that can point to ethical breaches. Labor-relations complaints, lawsuits and complaints to regulators "are a great indication" of trouble, Meisinger says. "Frequently, you'll find ... there was a cluster, a sign that all is not well" in a particular department or business unit.
But it pays to be tactical in highlighting trends that raise red flags, Anderson notes. Pointing out an unusually high turnover rate in a meeting, for example, can be more effective than simply sending reports.
"Then it gets attention," she says. "HR can put that data out there in a manner that creates a little bit of peer pressure."
Harned says monitoring compensation plans is another important strategy for avoiding ethical challenges. "Oftentimes, faulty incentive structures mean people have to start cutting corners," she says. "HR has an opportunity to be an important voice in that conversation."
More broadly, she says, a key duty of HR is to be a "shepherd of the culture" in an organization. "Culture is the biggest influence on employee conduct," she adds. [Workers] get cues about how important the rules and regulations are, how important the standards are, from people around them."
In addition, Harned says, the CHRO has a critical role to play in reminding top leaders they must ensure that an organization lives up to the high-minded words in its ethics code.
As recent scandals have demonstrated, those words alone won't prevent misconduct, Harned says. But they are important -- so that "when it comes time to walk into the CEO's office, you've got something to point to and say 'This is what we said we stand for -- and we have a problem.' "