This year has seen a bumper crop of ethical scandals. What does it take to create a culture that won't tolerate such misbehavior?
By Andrew R. McIlvaine
Neil Getnick, one of the nation's most prominent corporate whistleblower attorneys, recounts a visit with a chief executive officer who -- in extolling how seriously his company took ethics -- told him about the company's extensive code of conduct, which filled a three-ring binder.
However, it quickly became apparent to Getnick that the company wasn't so serious about the subject after all.
"I asked to see the code of conduct, and the CEO turns to his aide and tells him to go find a copy," says Getnick, a partner at New York-based Getnick & Getnick. "Turns out, they don't have a copy that can be located immediately, but they're certain they can get me one within a couple of days. That tells me ethics was nothing more than a 'check-the-box' exercise there."
To Getnick, who won one of the largest whistleblower settlements ever in 2010 against drug maker GlaxoSmithKline in a $750 million Medicaid fraud case, the characteristics of companies that are either more likely or less likely to be plagued with fraudulent conduct come down to how they build ethics awareness into their cultures.
"If a response to an ethics quandary is to consult a legal-guidance memo, then there's less chance it will translate into meaningful conduct," he says.
The last year has seen a bumper crop of ethics disasters revealed at organizations ranging from General Motors -- which will be paying enormous sums to plaintiffs in lawsuits stemming from the automaker's decade-long failure to warn customers of faulty ignition switches in its vehicles -- to the Veterans Administration, where hospital administrators employed a variety of measures to conceal the long waiting times that patients were being subjected to.
An even more recent scandal involves none other than the U.S. Secret Service and its bungled responses to a series of security breaches that seriously compromised the safety of the president and his family. Members of Congress have accused the agency of tolerating a dysfunctional culture in which mistakes were routinely covered up. (A Washington Post investigation has revealed that a female agent declined to challenge what she felt was an erroneous report by her superiors on gunshots fired at the White House because she feared speaking out.)
Max Bazerman, co-director of the Center for Public Leadership at Harvard University's Kennedy School of Government and author of the new book The Power of Noticing: What the Best Leaders See, says there's a common theme running through these and other examples of ethical breakdowns.
"In all of these examples and others -- Bernie Madoff, Jerry Sandusky -- there are typically dozens, if not hundreds, of people who had a sense of the problem, yet chose to do nothing," he says. "Many organizations create cultures and norms in which people are rewarded for doing nothing."
It's important, of course, for CEOs to regularly address the importance of ethical conduct and to lead by example. Yet that's not enough -- particularly when those messages are undercut by the "mood in the middle," say Bazerman and other experts. Studies show that employees are much more likely to take their ethics-related concerns to their managers first, rather than to an anonymous tip line or website devoted specifically to ethics reporting.
Yet, if the managers themselves feel neither supported nor equipped to address the issues brought to their attention -- or worse yet, are discouraged from doing so by their own direct supervisors -- then ethics training and reporting mechanisms may be for naught, the experts warn.
"When whistleblowers are ignored or penalized, often their next stop is the prosecutor's office," says Getnick.
Do the Managers Get It?
CEB, a member-based advisory company that has devoted a decade's worth of research to understanding the factors behind corporate malfeasance, has determined that managers -- not just CEOs -- play a crucial role in conveying the ethics message.
"The tone of the culture can't come from the CEO alone," says Ronnie Kann, managing director in Arlington, Va.-based CEB's legal, risk and compliance practice. "For many employees, the so-called 'top' is their direct manager or business-unit president. So it's critical that those individuals understand what the organization expects of them in terms of behaving the proper way: Are they avoiding saying things like, 'We're going to hit these targets regardless of what it takes?' "
The signs are worrisome: In CEB's survey of line managers and senior managers, in which it asked if they felt prepared to handle employees coming forward with complaints or concerns, nearly 40 percent said they doubted their ability to respond effectively, says Kann.
Managers' abilities to respond effectively to ethics complaints has a direct effect on "organizational justice," or what employees think will happen if they raise concerns, he says.
Organizational justice is a trait of companies that have strong cultures of integrity, where misconduct is less likely to occur, says Kann. At these companies, employees tend to believe they'll be treated fairly if they come forward with concerns, he says.
One of the most important things HR can do is create consistent expectations for managers when employees come forward with complaints and concerns, says Kann. This would include ensuring they understand their responsibilities and escalation procedures.
For most employees, managers are the key points of contact for reporting ethics-related concerns, says Kann. In fact, 63 percent of employees report misconduct to their direct manager, CEB has found, while just over 25 percent report it to HR and a mere 4.4 percent report it via a dedicated hotline.
"I think the anonymity of a hotline, the uncertainty of calling in to a black box where you're not sure what's on the other side, can be frightening," he says. "The decision to come forward can be scary and uncertain, so you're more likely to go to someone you know personally."
Law- or Business-Driven?
Training is most effective when it corresponds to the overall tone set by leadership, says Getnick, who categorizes compliance programs between "law-driven" and "business-driven." Having the latter is more effective, he adds.
"Law-driven compliance programs seek to avoid punishment by meeting the letter of the law, but not necessarily developing a deeply rooted culture of integrity in the company," says Getnick, who helped develop New York State's whistleblower laws. "In many cases, law-driven compliance programs are only grudgingly tolerated by executives and employees and, as a result, they often fail."
A business-driven integrity program, by contrast, is developed "from the top down," he says, not just by the legal department. As such, the company is able to embrace it, rather than just tolerate it, because it's seen as essential to long-term success, he adds.
"A business-driven program can and should be viewed throughout the company as a profit center and a competitive advantage," says Getnick.
Getnick cites Seattle-based Starbucks as a noteworthy example of a company that makes going beyond the minimum requirements a standard part of its everyday business practices. It offers healthcare benefits, profit sharing and tuition assistance to its retail employees that are significantly more generous than the retail average, while it sources its coffee beans from growers that treat their workers well.
"Starbucks is able to present itself and its products as different from its competitors and to use that as a way to be more -- not less -- profitable," he says. "So, in the end, all those worthwhile things are part of the profit center."
Getnick compares Starbucks' strategy with the widespread allegations of wage theft that have rocked the restaurant and retail industry lately, with workers alleging that they're routinely expected to work "off the clock," having their hours unexpectedly reduced and being subjected to last-minute scheduling changes that wreak havoc in their lives, all of it to bolster their employers' bottom lines.
"Those employers have made a judgment call that, even though that's cheating, it's going to be advantageous," he says. (Starbucks itself was in the crosshairs recently after a New York Times story profiled baristas who were often subjected to last-minute shift-scheduling changes; the company has pledged to fix the problem.)
All of this connects to ethics in a roundabout way -- not only because employers that engage in such practices are setting a poor example, says Getnick, but because ethics becomes less ingrained in the corporate culture.
From an HR standpoint, he says, the single most important thing to do is to "grow the code of conduct from the ground up." Employees at all levels, he adds, should be involved in formulating the ethics code, which should be brief, written in plain English and filled with commonplace examples that employees would be likely to encounter in the course of their normal duties.
Within organizations, randomly selected employees can partner with the leadership team to ensure the ethics code includes realistic examples that employees can relate to.
Getnick cites a hospitality company at which a maid serving on a committee to review the firm's ethics-and-compliance policy brought up the example of entering a hotel room to clean it after a guest has checked out and finding a $100 bill where tips are commonly left. What should she do? Her question led the company to include the example and the appropriate response in its revised policy.
"The goal should be that, when an employee reads it, there should be no doubt in his or her mind what's being required and what, in the service of the company, they should aspire to," he says.
Making It Real
At Stamford, Conn.-based Xerox Corp., which has been included in The Ethisphere Institute's list of the "World's Most Ethical Companies" for the last eight years, a top priority is ensuring that employees understand what constitutes ethical conduct, says Chief Human Resources Officer Tom Maddison.
"Not all ethical issues are clear-cut -- helping people understand them is important," he says, adding that the company provides employees with ethics refresher training at least every 24 months.
Xerox conducts regular surveys on ethics, in which people are randomly selected from its employee database and sent a survey to complete. The surveys include questions such as whether the employee has experienced an ethical breach within the organization, says Maddison.
It's also reinforced to managers that, if they want to move up in the company, they can't be passive on ethics, he says.
The general manager for each Xerox business, and for each of its country locations, is expected to take an active role in supporting Xerox's ethics strategy by treating it as a management and operational matter, says Maddison.
"They review their performance for the previous year, submit action plans for the upcoming year detailing how they plan to improve the ethics policy, whether it be through more training [or] improved communication, and then assess performance against that plan," he says. "They're expected to chair their local ethics committee, not assign it to someone else."
Companywide, all Xerox employees are encouraged to report concerns directly to the ethics office.
"Direct contact between employees and the central ethics office is critical to ensuring things don't get 'lost in the middle,' " says Maddison.
In addition to an ethics hotline and email address that's accessible to Xerox employees worldwide, Maddison cites a "disciplined" process for responding to ethics-related complaints from employees.
All employees submitting complaints receive immediate follow-ups thanking them for their concern and explaining where they can go to receive updates on the investigation, he says. Each investigation is assigned a case number and the people who carry out each investigation are carefully chosen.
"You need competent investigators from every part of the business who understand how each business works," he says. HR works closely with business units to ensure that the investigators chosen to look into potential violations have a thorough understanding of the area in which the violation is alleged to have taken place. The subjects of any investigation are informed that no presumption of guilt is being made and that the process is confidential, he says.
This ensures that the process is fair, not only to whistleblowers, but to the subjects of any investigation, says Maddison.
"We're very rigorous in [being] fair and reasonable," he says.
At Xerox, the company's high ethical standards are a recruiting selling point, particularly in global locations that "lack a history of cultural transparency," says Maddison.
"[Employees] have told us the reason they work for us is because of our ethics culture -- they'd seen examples of companies that weren't ethical and wanted no part of them," he says.
Maddison tries to set the example by being the first to complete new ethics training and he often participates in ethics investigations.
"A lot of organizations have processes -- the difference is whether they're alive or dead bureaucratic policies," he says. "Only leaders can breathe life into them."
At Appleton, Wis.-based Thrivent Financial, which has made the Ethisphere Institute's "Most Ethical" list for the last three years in a row, ethics has also been inculcated into the culture.
"We want people to think about 'The Thrivent Way' all the time here," says Alayne Russom, manager of the company's code of conduct. "We act like owners and treat each other like owners. It's ingrained in everything we do."
Russom uses her blog to amplify Thrivent's ethics policy, writing posts reminding employees that even if the concerns they bring forward prove to be unsubstantiated, no one will get in trouble.
"My blog is one of the main reasons people know I'm here -- my photo is on the blog, I post regularly about what we do, I conduct annual in-person training," she says.
Thrivent isn't shy about discussing incidents that have involved high-ranking, high-performing employees, for the sake of ensuring new hires and long-time employees alike understand that ethics violators will be penalized regardless of rank, says Russom.
During training, employees are walked through actual investigations that have taken place at Thrivent (minus the names of the people involved; the company also asks the employees involved in reporting and investigating incidents to ensure they feel comfortable with it, even though their names won't be used).
"We hold everyone to the same standard," she says.
Thrivent regularly surveys employees to see whether they believe the company has an ethical culture and to surface any potential problems that may be emerging.
"It's really important to stay on top of your game," says Russom. "You can't ever settle for the status quo."
HR can never rest when it comes to guarding the organization's integrity, says Bazerman.
HR can do three things to create a "noticing organization," he says. First is to ensure that the organization is hiring people who have the perception, skills and courage to both recognize and stand up to wrongdoing. Second, HR can deploy leadership training to help managers make better decisions, he says. Finally, they should conduct regular organization-wide audits to determine whether they are, in fact, creating a noticing organization.
"The hallmarks of a noticing organization are rewarding people for noticing, avoiding conflicts of interest and highlighting examples of people who stood up and did something to stop wrongdoing [as opposed to] creating an environment in which people are afraid to notice and act," says Bazerman.
Ultimately, actions matter far more than words, says Getnick.
"If a company is serious about integrity, it will welcome an internal report, investigate vigorously and shield the whistleblower from retaliation," he says.