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Building organizational integrity

Article in Business Horizons February 2007

DOI: 10.1016/j.bushor.2006.06.001

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 DTD 5

ARTICLE IN PRESS
Business Horizons (2006) xx, xxx xxx

www.elsevier.com/locate/bushor
1

2 Building organizational integrity

3 D. Christopher Kayes a,*, David Stirling b, Tjai M. Nielsen a

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a
4 School of Business, The George Washington University, 2201 G Street, NW, Washington, DC 20052, USA
b
5 Human Capital Management Practice, IBM Business Consulting Services, 1148 Bellview Road, McLean, VA

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6 22102, USA

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8 KEYWORDS Abstract Ethical lapses by employees can put organizations at substantial risk.
9 Ethics; Although improved compliance procedures can help limit this risk, successful
10 Integrity; efforts must extend beyond compliance to build a culture of organizational
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11 Compliance; integrity. Recent changes in regulatory requirements and more stringent sentencing
12 Organizational culture guidelines demand an integrated approach to ethical awareness, one that
13 encompasses the four organizational practices of controls, clearly defined
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14 principles and purpose, core values, and culture. Inevitably, the most difficult of
15 these is building a culture of high ethical standards that are reflected in day-to-day
16 practice. To overcome the barriers to building organizational integrity, leaders
17 must question key organizational practices while constructing a culture based on
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18 ethical behaviors.
19 D 2006 Published by Kelley School of Business, Indiana University.
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20
21 1. Organizational vulnerability company for her client just before the stock 31
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received a strong dbuyT recommendation from a 32

22 As head investment advisor of one of the worlds well-known analyst. Mary was receiving informa- 33
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23 most respected and profitable banks, Mary became tion about the recommendation before the general 34
24 accustomed to making high-risk trades. Her track investing public, a practice that was both illegal 35
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25 record of success became the envy of her peers and and unethical. How could the compliance depart- 36
26 even began to gain the attention of the press. When ment, widely recognized as one of the best in the 37
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27 regulators uncovered that much of Marys success business, have missed the problem? 38
28 could be attributed to a cleverly concealed series The fact that Marys behavior went undetected 39
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29 of front running trades, her employer was stunned. by the compliance department and regulators, at 40
30 Marys front running involved buying shares in a least temporarily, put Marys organization at con- 41
siderable risk. Unfortunately, individual ethical 42
lapses that go undetected by an organization re- 43
* Corresponding author.
E-mail addresses: dckayes@gwu.edu (D.C. Kayes)8
main common. Facing new legislation and regula- 44
david.m.stirling@us.ibm.com (D. Stirling)8 tnielsen@gwu.edu tory oversight, as well as more stringent sentencing 45
(T.M. Nielsen). guidelines for compliance problems, organizations 46
0007-6813/$ - see front matter D 2006 Published by Kelley School of Business, Indiana University.
doi:10.1016/j.bushor.2006.06.001

BUSHOR-00577; No of Pages 10
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2 D.C. Kayes et al.

47 have become increasingly vulnerable to the behav- was instrumental in forcing the head of the New 100
48 ior of employees like Mary. York Stock Exchange to resign after it was revealed 101
49 The situation might have been different for Mary he was to receive over $140 million in pay. 102
50 and her company had the organization initiated a The public backlash against these ethical lapses 103
51 comprehensive approach to organizational ethics, has resulted in a harsh new regulatory environment, 104
52 rather than rely strictly on compliance to monitor which in turn has given rise to a growing number of 105
53 ethical lapses. Although Business for Social Respon- ethics-driven change programs within organizations. 106
54 sibility (2005), an industry think tank, indicated Negative sentiment stems from the popular belief 107
55 that as many as 60% of all firms and 95% of Fortune that organizations, business organizations in partic- 108
56 500 firms have an ethics program, it is likely that ular, have neglected their contract with society. To 109
57 these programs have been assembled as a reaction be sure, businesses are not the only organizations to 110
58 to a front-page scandal or have come from an off- suffer this loss of public confidence; universities, 111
59 the-shelf employee ethics training program. Stop- not-for-profits, and government-related entities 112
60 gap measures such as these only make matters have all had to deal with ethics-related problems. 113
61 worse, as they lull organizations into believing they Business organizations, however, have experienced 114
62 have protected themselves from ethical lapses. some of the most severe public backlash and the 115

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63 In this article, we share the insights we have ensuing regulatory accountability, in order to re- 116
64 gained from experience with organizations that establish investor confidence in how business is 117

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65 seek to limit their risk to lapses in ethical employee conducted and reported. 118
66 behavior (such as Marys front running). In our One of the most obvious examples of the 119

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67 work, we have studied the basis of organizational backlash against perceived ethical lapses came in 120
68 ethics practices, reviewed research, identified best the form of the 2004 revised guidelines from the 121

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69 practices, and participated in a number of organi- U.S. Sentencing Commission (USSC), which clarified 122
70 zational change efforts. The primary purpose of and made more stringent the criteria organizations 123
71 this article lies in summarizing our insights to help must follow to create an effective compliance and 124
72 organizations improve ethical awareness and limit ethics program. The USSCs focus on ethical 125
73 their risk from employees unethical behavior. In corporate behavior in this revision reflects a shift 126
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74 particular, we share our concern that many organ- in the legal landscape since the original guidelines 127
75 izations have failed to adopt a comprehensive were implemented in 1991. The updated guidelines 128
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76 ethical framework for their efforts. Instead, these provide incentives for organizations to create 129
77 organizations have settled for a quick fix based on meaningful, effective compliance and ethics pro- 130
78 improved compliance procedures. A secondary grams, tools which are essential should the organi- 131
79 purpose lies in linking our experiences with sys- zation seek to mitigate fines and/or terms of 132
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80 tematic theory and research to present a frame- probation associated with a criminal offense 133
81 work that is both useful and conceptually (e.g., front running). Moreover, these guidelines 134
82 grounded. Our position can be summarized as employ a broader definition of the term organiza- 135
83 follows: while improved compliance procedures tion; its mandates cover corporations, partner- 136
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84 serve as the foundation of ethical change efforts, ships, associations, joint-stock companies, unions, 137
85 the most successful efforts move beyond compli- trusts, pension funds, unincorporated organiza- 138
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86 ance to build a culture of organizational integrity. tions, governments, and nonprofit organizations. 139
While good business practice requires a formal 140
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set of rules and regulations as a starting point, 141

87 2. Public backlash to ethical lapses organizations of all kinds must find ways to help 142
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individual employees respond to the daily ethical 143

88 Todays business climate is one of constant pressure dilemmas they face. After all, not all behavior falls 144
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89 to produce results, increase productivity, and fend under the purview of formal rules and regulations. 145
90 off global competition. As such, the resulting spate In addition, prosecutions and lawsuits associated 146
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91 of publicized fraud and ethics violations should with many of the recent high-profile scandals 147
92 come as no surprise, nor should the rising interest indicate that improper conduct occurred not in 148
93 in corporate ethics programs. There is growing the absence of codes of ethics, but in spite of them. 149
94 public backlash against what might be considered Our assumptions are backed by academic think- 150
95 excessive ethical lapses. For example, several of ing. Anand, Ashforth, and Joshi (2005) describe a 151
96 the largest pension and investment firms in the framework for how organizations continue to per- 152
97 United States have become increasingly concerned petuate the misuse of organizational resources for 153
98 with the companies in which they invest. California personal or political purposes. While we do not go as 154
99 Public Employees Retirement System, or CalPERS, far as calling this behavior corruption, as Anand and 155
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Building organizational integrity 3

156 his colleagues do, our experience tends to confirm of dollars but cost the company the same. The 207
157 that organizations often fail to take seriously the corrective action reflected the language of 208
158 public backlash against organizational misbehavior. integrity, as the customer probably would not 209
159 Furthermore, our experience shows that many have discovered the initial mistake. The man- 210
160 organizations focus mainly or solely on compliance ager, however, understood the importance of 211
161 as a means to deal with ethical lapses. This is just the maintaining integrity, despite the fact that the 212
162 kind of incremental change and compromise that customer might have remained in the dark. 213
163 Anand et al. suggest perpetuates misbehavior. (2) Structural supports and procedures that facil- 214
164 Organizations that embrace incremental change itate ethical decision-making have been de- 215
165 and compromise ignore the hard work associated veloped. Employees have a clear channel to air 216
166 with building culture, changing attitudes, and and discuss problems, escalate issues, and 217
167 guiding individual decision makers to do the right explore gray areas of compliance. Many of the 218
168 thing. organizations we have observed have devel- 219
oped ombudsman programs, through which 220
employees can escalate or simply discuss 221
169 3. Building integrity problems anonymously and in confidence with 222

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personnel outside the company. Ombudsman 223
170 Across diverse industries and functions, our obser- programs, as well as other supports, provide an 224

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171 vations and work have shown that a comprehensive important mechanism for escalating problems 225
172 approach to building organizational integrity pro- without fear of retribution. 226

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173 vides the most promising method to limit an (3) A culture of openness, responsibility, and 227
174 organizations risk. Although the specific approach commitment to multiple business goals has 228

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175 employed may vary based on organizational function been created and sustained. Employees can 229
176 and values, all comprehensive approaches involve articulate several business goals beyond the 230
177 changing key processes across all functions of the bottom line. Such goals might include the 231
178 organization. organizations responsibility to society, 232
179 Our experience has revealed that the best employees, the profession, or ideals. A study 233
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180 organizations progress beyond the compliant cor- featured in a psychology journal supports our 234
181 porate culture to a culture that encourages exem- point. According to the research, in a con- 235
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182 plary behavior, where doing the right thing results trolled laboratory setting, participants that 236
183 in good business rather than simple compliance to had high and narrow goals were approximately 237
184 regulations. Exemplary behavior begins with a 30% more likely to over-report performance on 238
185 comprehensive approach to ethics, one which an assigned task. Those participants who had 239
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186 reaches past the often punitive legal compliance broadly defined goals were less likely to over- 240
187 stance and emphasizes integrity. Stated more report actual performance. 241
188 bluntly, organizations that define ethics as a legal (4) Employee development is valued. Employees 242
189 compliance exercise are implicitly endorsing a code experience regular opportunities to learn and 243
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190 of moral mediocrity. Although compliance is impor- develop, including personal and career devel- 244
191 tant (in many instances, it is the price for opment opportunities within the organization. 245
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192 admission), it is no substitute for integrity. Such opportunities help individuals feel like a 246
valuable part of the organization and tie 247
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193 3.1. Characteristics of integrity individual success to organizational success, 248

which assists employees in making long-term 249
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194 We believe that organizations with integrity display decisions that are in the best interest of the 250
195 four characteristics: organization. 251
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196 252
197 (1) The language of ethical decision-making is With this understanding of integrity in mind, a 253
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198 used. Employees openly and confidently dis- number of specific practices can be integrated to 254
199 cuss the ethical implications of actions. The build integrity. 255
200 language of ethics was evident in one financial
201 services company where one of the authors
202 worked. When a manager noticed that a broker 4. The four practices of organizational 256
203 entered a faulty trade for a retail customer, he integrity 257
204 quickly directed the broker to contact the
205 customer and re-enter the trade. The newly One of the authors of this article recently outlined 258
206 executed trade saved the customer thousands a framework for understanding a comprehensive 259
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4 D.C. Kayes et al.

260 approach to organizational integrity (Kayes, in 4.2. Principles and purpose 314
261 press). The framework drew on the work of
262 sociologist Max Weber (1946), whose ideas on Regardless of their size or business sector, trans- 315
263 bureaucracy have proven highly influential in parent companies operate under principles of 316
264 developing a systematic framework for studying disclosure. Transparency means that information 317
265 organizations. Influenced by Weber and drawing on will be withheld from the public only for legitimate 318
266 our experiences in organizations, we propose privacy and legal reasons. Organizations that go 319
267 building integrity around four organizational prac- beyond their respective legal and regulatory 320
268 tices: operating controls, principles and purpose, requirements find themselves better positioned to 321
269 core values, and culture. react to changing business expectations. Extending 322
past controls and compliance entails integrating 323
270 4.1. Operating controls principles and purpose into the very core of 324
organizational practices. 325
271 All organizations require formal controls such as Ford Motor Company serves as an example. In 326
272 compliance, oversight, and accounting and audit 2003, each of Fords major business groups was 327
273 functions. These controls form the foundation for a charged with creating 2004 business plans and 328

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274 comprehensive approach to organizational integri- scorecards that reflected the companys business 329
275 ty. As a recent report released by the Committee of principles, which were adopted in 2002. This served 330

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276 Sponsoring Organizations of the Treadway Commis- as a key step toward integrating the principles into 331
277 sion (COSO) (2005) notes, inaccurate reporting is the everyday workings of the business. As a result, 332

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278 not tolerated, regardless of the size of the organi- Fords North American manufacturing business 333
279 zation. No organization can limit its risk without included targets and progress indicators that 334

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280 effective operating controls. aligned with company business principles; for 335
281 The 189-page draft of the COSO report outlines example, safety and impact on the environment 336
282 26 fundamental principles associated with the five appeared as both scorecard elements and business 337
283 key components of internal control in larger principles. Business principles such as fostering 338
284 organizations: control environment, risk assess- quality relationships with suppliers, employees, 339
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285 ment, control activities, information and commu- and the community appeared as morale on the 340
286 nication, and monitoring. The report also offers a scorecard measures; concern for producing superi- 341
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287 variety of approaches appropriate for smaller or products and meeting customer needs appeared 342
288 organizations. For any size of organization, con- as quality and product delivery. The integration of 343
289 trols ensure adherence to external guidelines and business principles into scorecard outcome meas- 344
290 internal policies. A control system establishes ures reflects an ideal way in which organizations 345
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291 specific policies and procedures for how tasks are may incorporate principles and purpose into bot- 346
292 to be handled on a regular basis. Controls place tom-line performance measures that are consistent 347
293 accountability within the business and provide the with integrity. 348
294 framework necessary for operating smoothly and
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295 within guidelines. 4.3. Core values 349

296 In addition to its compliance function, a well-
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297 balanced set of operating controls should be The Gillette organization focuses on three core 350
298 integrated with performance measurement sys- values: achievement, integrity, and collaboration. 351
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299 tems. Such performance measurement systems are The first of these, achievement, emphasizes ded- 352
300 vital to success and, from a regulatory manage- ication to the highest standards of achievement and 353
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301 ment perspective, provide documentation to val- exceeding the expectations of internal and exter- 354
302 idate required business procedures. Another nal customers. The second core value, integrity, 355
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303 element of operating controls that is often over- signifies the importance of mutual respect and 356
304 looked is communication and training on critical ethical behavior as the basis for relationships with 357
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305 organizational procedures. Effective organization- colleagues, customers, and the community. Finally, 358
306 al control systems require time to explain. Espe- collaboration focuses on working together as one 359
307 cially when organizations adopt new systems, global team by emphasizing open communication, 360
308 employees need to know why these changes are establishing clear accountability for decisions, 361
309 being made and the effect the control system will identifying issues and solutions, and maximizing 362
310 have on existing processes. An effective commu- business opportunities. 363
311 nication and training system will accelerate com- The expressed values of this global consumer 364
312 pliance associated with the rules-based aspects of products company provide a framework for under- 365
313 operations. standing and expressing values, as Gillette reaches 366
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Building organizational integrity 5

367 past bottom-line results to take a more comprehen- the road and an employee is faced with a decision 418
368 sive view of its role within the broader economic and that has ethical implications, the ability to success- 419
369 social community. This global organizations values fully navigate an ethical dilemma requires a multi- 420
370 are important because they illustrate that integrity dimensional strategy. As explained previously, the 421
371 extends beyond the customer to include a variety of strategy will feature a language of ethics, structural 422
372 stakeholders. supports and procedures that facilitate ethical 423
decision-making, and, most importantly, a culture 424
373 4.4. Culture of openness, responsibility, and commitment to 425
multiple business goals. The culture aspect is the 426
374 By far, the most elusive of the four practices of most difficult to change, and it is examined further 427
375 integrity is building a culture of integrity. Culture in the next section. 428
376 appears not in formal organizational controls, but
377 in informal actions and values underlying business
378 practices. Like formal controls, culture can control 6. Building a culture of integrity 429
379 behavior, but through the tacit or hidden beliefs
380 and practices of the organization. Organizational Although integrity does not ensure that an organi- 430

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381 integrity requires building ethical awareness into zation will make better ethical choices, it implies a 431
382 the culture. systematic and comprehensive approach to assess- 432

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383 Best Buy, a Fortune 100 consumer electronics ing values, weighing choices, and considering the 433
384 retailer, dedicates significant effort toward build- multiple demands involved in decision-making. 434

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385 ing a culture of integrity. Top leaders encourage When the company culture ignores, promotes, or 435
386 employees at all levels of the organization to speak even rewards improper conduct, no amount of 436

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387 up directly and through employee engagement employee training on the intricacies of compliance 437
388 surveys designed to assess employee involvement, laws will be sufficient to prevent a business 438
389 enthusiasm, and commitment. These and other disaster. According to Ed Schein (1992), one of 439
390 actions at Best Buy reflect how the business the first scholars to systematically study how 440
391 integrates its principles into everyday work pro- organizational culture affects effectiveness, cul- 441
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392 cesses. The company culture encourages individu- ture is difficult to change because it requires 442
393 als to speak up, disagree with organizational understanding of deeply held assumptions, not just 443
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394 policies in a constructive manner, present alterna- the day-to-day behavior of those in the organiza- 444
395 tive values, and foster ethically aware behavior. tion. Systematically changing culture requires rec- 445
396 Best Buy advances the culture of integrity a step ognizing and then challenging these ingrained 446
397 further by allotting power to those who usually do beliefs. 447
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398 not have it: front-line employees. For example, Despite the difficulty in changing culture, Schein 448
399 Best Buy has instituted a process to identify key and others believe there are strategies that com- 449
400 operating issues, so that individual store employees panies can employ to increase their chances of 450
401 often have their opinions heard in the executive creating successful change. One cultural change 451
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402 suite. Even more important is that these opinions effort conducted at Best Buy (Gibson & Billings, 452
403 are highly valued by managers, who use this 2003) reveals three essential phases of successful 453
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404 information to improve responsiveness. behavioral change efforts. 454

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6.1. Phase 1: Understanding the dwhyT of 455

405 5. Integrating practices integrity 456
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406 Like the phrase implies, building integrity requires First, employees must understand why integrity is 457
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407 integrating the four distinct but interrelated prac- necessary. Organizations must employ a compre- 458
408 tices of organizational integrity into a coherent hensive approach to educate employees about the 459
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409 ethics strategy. Many of the organizations we importance of ethics and integrity in everything 460
410 observed relied on one or two of these four they do. This should begin with communicating the 461
411 practices; few, however, embraced the comprehen- vital facts regarding new ethical guidelines, poli- 462
412 sive model of integrity essential for navigating cies, and procedures. It is important to note that 463
413 todays complex ethical environment. While attend- multiple methods (e.g., e-mail, website, memo, 464
414 ing to any of these practices helps an organization, formal announcement) should be used to share this 465
415 without an integrated approach, organizations fail information and that it should occur at all levels of 466
416 to build an ethical infrastructure that can withstand the organization; in other words, it is not enough 467
417 difficult ethical encounters. When the rubber meets for the CEO to send an e-mail to all employees. The 468
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6 D.C. Kayes et al.

469 message about changing to a culture of integrity turn for available, helpful resources. A compre- 521
470 must start at the top and be methodically cascaded hensive, company-wide education effort that 522
471 throughout the organization. Every manager must focuses on teaching people appropriate responses 523
472 be able to state the organizations case for change, to multiple scenarios should be initiated. This 524
473 as this increases emphasis and helps employees should be supported by familiarizing employees 525
474 understand the message in light of their specific with the process for getting help and reporting 526
475 work contexts. Once people understand why integ- concerns without reprisal. Coaching and intensive 527
476 rity is important for the organization, they want to feedback should be provided and new behaviors 528
477 know what is in it for them. should be rewarded. At the same time, old 529
behaviors should be extinguished and punished, 530
478 6.2. Phase 2: Understanding the dwhy notT of if necessary. Even if the three phases of change 531
479 integrity are successful, organizational integrity requires 532
continued support. 533
480 Second, the rewards of changing to, and the
481 consequences of not adopting, a culture of
482 integrity must be well articulated and under- 7. Ongoing efforts 534

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483 stood. This phase involves increasing the emo-
484 tional commitment of individuals and teams to This three-phase process focusing on knowledge, 535

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485 consistently engage in ethical behavior. Relating emotional commitment, and execution must be 536
486 compelling examples of the subsequent benefits continually supported, as follows: 537

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487 of changing and the dangers associated with not 538
488 doing so adds emphasis and increases comprehen- ! Through business integration. The why, the why 539
not, and the day-to-day practice of integrity

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489 sion. An appreciation for how difficult it is to 540
490 build integrity must be taken into account during must be built into the formal business processes 541
491 this phase. Employees need to have opportunities of the organization. As noted earlier, integrity 542
492 to react to the change; if they are not able to means that all functions of the organization 543
493 express their concerns and fears, they will be less support ethical decision-making. Integrity 544
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494 likely to embrace the practices of integrity. While requires that ethics be a key part of the 545
495 employees should feel free to express their feel- performance management process (i.e., promo- 546
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496 ings, they must also understand the benefits of tion, compensation), leadership development 547
497 integrity. This can be a challenge in the realm of (at all levels), and leadership selection (e.g., 548
498 ethics, as the benefits typically involve avoiding knowledge and past behavior involving ethics). 549
499 trouble. Corporate reputation and its impact on ! Through measurement. Organizations must be 550
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500 recruitment and retention, however, is a positive able to measure their progress and success in 551
501 aspect that should be highlighted, such that achieving organizational integrity in order to 552
502 employees might get a feeling for what accom- know where they stand, identify opportunities 553
503 panies ultimate success. Once everyone under- for improvement, and recognize success. 554
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504 stands the case for integrity and becomes ! Through executive support. Organizational in- 555
505 emotionally committed to the effort, they must tegrity must remain a key strategic priority for 556
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506 learn the new, accompanying behaviors and executives. The emphasis they place on the issue 557
507 processes. is necessary to keep integrity in the forefront of 558
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employees minds. 559

508 6.3. Phase 3: Understanding the practices of 560
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509 integrity Even those unique organizations that seek a 561

systematic and comprehensive approach to integ- 562
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510 Lastly, employees must comprehend the new rity face difficult barriers. Next, we explore some 563
511 behaviors they are expected to adopt and the of the most prevalent barriers to building organi- 564
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512 new processes to which they must adhere. The zational integrity. 565
513 final phase of building a culture of integrity
514 involves providing employees with the knowledge
515 and tools necessary to, through appropriate 8. Barriers to building organizational 566
516 behaviors, resist ethical lapses. Teaching people integrity 567
517 exactly which behaviors are needed to support
518 the change to organizational integrity is essential. The story of Mary, the front-running head invest- 568
519 When employees encounter ethical gray areas, ment advisor, illustrates how difficult it can be to 569
520 they must know what to do, or at least where to build organizational integrity. Despite working for 570
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Building organizational integrity 7

571 an organization with a very aggressive compliance Further, this Act requires organizations to have 626
572 program and strong values and principles, Mary ethics policies and codes of conduct as part of their 627
573 continued to engage, undeterred, in unethical and effort to prevent unethical or illegal behavior, and 628
574 illegal activity. to detect it if it does occur. 629
575 Due to increasing performance pressures and the
576 challenges of building a culture, integrity is often 8.2. Size of the company 630
577 difficult to cultivate. Efforts dedicated to fostering
578 integrity are likely to be met with resistance. Small organizations face a barrier by virtue of their 631
579 Indeed, even those organizations that manage to size: they may lack an ethics officer, a published 632
580 successfully integrate their ethical practices will code of conduct, and formal processes for reporting 633
581 find no panacea. The best organizations can misconduct, as well as the economies of scale to 634
582 experience troubles on the road to building and develop full-scale integrity efforts. Because of a 635
583 maintaining integrity. An examination of many lack of resources, they often choose to do nothing. 636
584 recent ethical scandals reveals some of these Yet, the 2004 Revised Federal Sentencing Guide- 637
585 difficulties. lines apply to all companies with at least 200 638
employees. 639

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586 8.1. Fear of being ostracized for whistle- For larger companies, although size can be an 640
587 blowing advantage in terms of scale, reach, and market 641

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share, it can also create organizational barriers in 642
588 In most of the cases we reviewed, employees were the form of silos that emerge across divisions or 643

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589 aware of problems and ethical violations, but regions. Operational expertise is required to iden- 644
590 remained silent out of fear of retribution. One tify areas of potential risk and implement processes 645

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591 study conducted jointly by the Ethics Resource for ongoing compliance and ethical risk assessment. 646
592 Center (2005) and the Society for Human Resource
593 Management found that as many as 30% of employ- 8.3. Organizational objectives 647
594 ees have witnessed wrongdoing, and half of those
595 have failed to report it for fear that the organiza- Ethics violations often occur when unrealistic 648
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596 tion will not handle the problem effectively. performance objectives are set. The ensuing pres- 649
597 Overcoming the fear of being personally and sures to meet goals at almost any cost tend to get 650
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598 professionally ostracized directly relates to how pushed down through the organizational structure. 651
599 organizations respond to both good and bad behav- A disturbing research finding by Brief, Dukerich, 652
600 ior. Some probing questions should be asked: is a Brown, and Brett (1996) indicated that managers 653
601 response to an ethical lapse doled out quickly and always knew right from wrong, but did not feel 654
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602 consistently? Are efforts to acknowledge and cor- obliged to act on those beliefs when faced with 655
603 rect wrongdoing celebrated in some way by lead- ethical decisions. Too often, there is a disconnect, 656
604 ership? Where is the structural support for ethics in as those responsible for setting organizational goals 657
605 the organization? are not the ones thinking about ethics issues. 658
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606 With the enactment of the Sarbanes-Oxley Measuring what really matters is critical. It is no 659
607 Corporate Reform Act of 2002, whistleblower accident that great companies develop unique 660
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608 protection has been extended to all employees in standards of performance, and that these standards 661
609 publicly traded companies for the first time. The often involve people. For example, Hewlett-Pack- 662
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610 provisions of Sarbanes-Oxley: ard evaluates its managers based on their subordi- 663
611 nates assessment of their managerial behavior and 664
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612 ! Make it illegal to act against whistleblowers in adherence to company values. Motorola has a 665
613 any way; company goal of providing each employee with at 666
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614 ! Establish criminal penalties of up to 10 years for least 40 h of training per year, and measures 667
615 executives who retaliate against whistleblowers; managers by the proportion of their people who 668
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616 ! Require board audit committees to establish get the requisite amount of training. For its part, 669
617 procedures for hearing whistleblower com- Singapore Airlines spends 15% of its payroll costs on 670
618 plaints; training, which clearly contributes to the compa- 671
619 ! Allow the secretary of labor to order a company nys routinely high customer service ratings. 672
620 to rehire a terminated employee with no court
621 hearing; and 8.4. Workforce demographics 673
622 ! Give a whistleblower the right to a jury trial,
623 bypassing months or years of administrative A survey conducted by Zogby International (2005) 674
625
624 hearings. showed that 96% of young adults aged 18 to 24 675
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8 D.C. Kayes et al.

676 believe that honesty and trust are important in the 9.1. Do you know the rules? 725
677 workplace. Yet, 31% add a caveat, saying that
678 ethics are important as long as they do not In any business sector, you will find rules of the 726
679 compromise personal goals. Obviously, this segment road; for example, the way a company recognizes 727
680 of the workforce has conflicting feelings regarding and reports its revenue, or the way trading desks in 728
681 being ethical versus getting ahead. Other studies a financial services firm are prohibited from acting 729
682 undertaken by such organizations as the Ethics on unreleased information for the benefit of their 730
683 Resource Center (2005) support this finding. Their investment portfolio. These rules are often re- 731
684 information indicates that 43% of employees in the ferred to as the companys policies and procedures 732
685 18- to 24-year age group will not report miscon- for conducting business. They are the hard and fast 733
686 duct; employees in that age group, as well as boundaries within which good business can freely 734
687 nonmanagers in any age group, are the least likely be conducted, and are typically monitored as part 735
688 to report misconduct. Business leaders concerned of the operating controls environment. 736
689 with ethics and integrity should keep this potential Historically, the role of compliance, with respect 737
690 barrier in mind when developing communications to the rules, has been that of an advisor to the 738
691 and training programs around ethics. business. Today, the environment has shifted: the 739

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regulatory community expects the compliance 740
692 8.5. The state of the organization department to serve as a watchdog. This implies 741

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tracking more data and inspecting and document- 742
693 Organizations in some form of transition (be it a ing more activity. As a result, leaders of compliance 743

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694 merger, acquisition, or wholesale restructuring or departments strive for a thoughtful balance be- 744
695 transformation) also face inherent barriers to tween the regulatory community and their internal 745

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696 building organizational integrity. Because they business colleagues. At present, the reconfigured 746
697 are particularly susceptible to transgressions and compliance department often partners with reve- 747
698 misconduct, these organizations must pay close nue-producing divisions of an organization to inte- 748
699 attention to their ethics communications and grate compliance into everyday practice. 749
700 programs. In an effort to thwart potential danger, In light of the regulatory environment, each and 750
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701 they should create a common language around how every employee in the organization must know the 751
702 business is to be conducted and support a collab- rules. Regulators have begun to display a kind of 752
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703 orative environment to enhance organizational oversight one-upmanship, exhibiting more and 753
704 trust. more aggressive tactics in the pursuit of fraud. 754
According to many lawyers on Wall Street, the 755
705 8.6. Cynicism Securities and Exchange Commission is not just 756
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investigating outright abuse; it is also reviewing 757

706 Results of recent studies indicate that the general cases in which the spirit of the rules might have 758
707 public is quite cynical about the ability of the been disregarded (Gasparino, 2005). 759
708 business marketplace to regulate its own ethical
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709 behavior. For example, in a study conducted by 9.2. What is the tone from the top? 760
710 Harris Interactive, Inc. (2005), more than half of
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711 American workers questioned the basic morality of Consider the interesting scenario that played out 761
712 their organizations top leaders and said that their recently at Boeing. In March of 2005, CEO Harry 762
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713 managers did not treat them fairly. Furthermore, Stonecipher was forced to resign, after it surfaced 763
714 only 36% of workers said they believed top that he was involved in an extramarital affair with 764
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715 management cared about advancing employee a female executive. In addition to praising the 765
716 skills. boards action, Stonecipher, in the Wall Street 766
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Journal, recounted how he violated his own stand- 767

ards and used poor judgment (Lunsford, Pasztar, & 768
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717 9. Questioning organizational practices Lublin, 2005). Such self-reflection could be viewed 769
as a noble attempt to demonstrate ethical leader- 770
718 Despite the barriers to building organizational ship or, skeptically, as verbal window-dressing of 771
719 integrity, many of the organizations we work with poor judgment from the top. 772
720 are well on their way to successfully integrating This example highlights a second question organ- 773
721 their controls, values, principles, and culture. To izations are being asked: what is the tone from the 774
722 this end, we have developed a set of questions that top? Do leaders speak and act consistently with the 775
723 serve as indicators to help organizations gauge firms stated values? Some firms get caught up in a 776
724 their progress. focus on the external media. Although having its 777
 ARTICLE IN PRESS
Building organizational integrity 9

778 name in the headlines for the wrong reasons from the mission statement printed in the annual 829
779 certainly will not elevate an organizations reputa- report or remember terms recited at the most 830
780 tion, more damage can arguably be done by the recent quarterly meeting. Does the act of memo- 831
781 behavioral cues rank-and-file staff gather from the rizing the companys values reduce ethical risk and 832
782 actions of top management. Whereas it may be raise awareness? Certainly not. That said, programs 833
783 easier, and certainly quicker, to measure the that incorporate the organizations values in its 834
784 reputational impact of scandal by monitoring stock fabric provide the positive behavioral influences 835
785 price, it is the immeasurable impact on staff offered by a values-based culture. 836
786 behavior that probably has the greatest negative Such practice is exemplified by the Adolph 837
787 long-term impact on finances and performance. Coors Company. Since it adopted an ethics policy 838
788 Consider also the recent series of scandals faced some 15 years ago, the company has continually 839
789 by a global U.S.-based financial institution, scan- built upon that foundation with strategies focused 840
790 dals that included participation in fraud and a well- on prevention, rather than investigation. The goal 841
791 publicized European bond trading disgrace. Taken of the program at Coors is to provide the 842
792 together, these present a mountain of evidence to information, resources, and training necessary to 843
793 fuel support for the CEOs new emphasis on a enable employees to go beyond rules and guide- 844

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794 culture of ethics. In spite of the inclusion and focus lines to think about, clarify, and analyze situa- 845
795 on ethics training as part of the CEOs initiative, his tions using a values-based approach. For this 846

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796 own involvement was seen as key. Yet, one has to track record of continuous refinement, and for 847
797 ask if the damage done by the bad examples is implementing a customized program that has 848

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798 irreversible. A near certainty is that it will silently directly affected the way employees perceive 849
799 impact the behavior of staff for some time to come. their work and do their jobs, the Adolph Coors 850

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800 A positive example of this sort is the btalk- Company was recently awarded the 2005 Optimas 851
801 walkingQ being done at Goldman Sachs by its Award for Ethical Practice (Workforce Manage- 852
802 chairman, Hank Paulson, who has engineered a ment, 2005). 853
803 series of training and communication events tar-
804 geting the entire employee base. Most recently,
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805 Paulson introduced a signature event geared to- 10. An enormous but essential task 854
806 ward the senior leaders of the firm, during which he
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807 personally led over 40 sessions worldwide. Building organizational integrity is an enormous 855
task. No one-size-fits-all program exists; after all, a 856
code of ethics for a gas and exploration company 857
808 9.3. When does legally right versus ethically
would differ greatly from one designed for a 858
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809 wrong have a suitable outcome? financial firm. Employees face too many difficult 859
issues and situations that require them to make 860
810 As the margin for error has tightened around
judgment calls. Helping individuals make these 861
811 business performance, it has raised the frequency
decisions is the ultimate reward for having organi- 862
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812 of decisions fraught with complexity and laced with

zational integrity. 863
813 risk in both the financial and ethical sense. As
While all types of organizations remain vulnera- 864
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814 noted by one industry observer (Fandray, 2000),

ble to unethical behavior by an individual or by 865
815 Raytheon has a set of questions it suggests its
systematic corruption, organizations can strive to 866
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816 employees ask themselves when confronted with a

make integrity a primary goal. Changing social 867
817 dilemma: is the action legal? Is the action right?
standards, increased scrutiny by regulators and 868
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818 Who will be affected? Does it fit Raytheons values?

the media, and increased need for efficiency and 869
819 How will I feel afterward? How would it look in the
productivity create pressures that might lead 870
newspaper? Will it reflect poorly on the company?
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820
organizations to make decisions that are perceived 871
821 Such self-tests help organizations focus on commu-
as unethical. Unfortunately, pressures like these 872
822 nicating core values and ethical behavior. Ulti-
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make the activities of front-running Mary all too 873

823 mately, it takes the misjudgment of just one person
common in organizations. With a comprehensive 874
824 to put the reputation of the entire organization at
and integrated approach to organizational ethics, 875
825 risk.
organizations can begin to build integrity in day-to- 876
day activities. Organizations that are able to face 877
826 9.4. How are values communicated? the turbulent business environment armed with 878
increased integrity will minimize the risk they face 879
827 When questioned about the values of their firm, from unethical employee behavior, and be better 880
828 most employees will probably try to pull words able to recover if and when this does occur. 881
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10 D.C. Kayes et al.

882 References Gibson, E., & Billings, A. (2003). Big change at Best Buy: Working 907
through hypergrowth to sustained excellence. Weaverville, 908
883 NC7 Davies-Black Publishing. 909
884 Anand, V., Ashforth, B. E., & Joshi, M. (2005). Business as Harris Interactive, Inc. (2005, January 20). Problems at the top 910
885 usual: The acceptance and perpetuation of corruption apathy, contempt for managers. Retrieved March 1, 2006, 911
886 in organizations. Academy of Management Executive, 19(4), from http://www.concoursgroup.com/publications/EEE_ 912
887 9 23.
011905_PressRelease.pdf 913
888 Brief, A. P., Dukerich, J. M., Brown, P. R., & Brett, J. F. (1996). Kayes, D. C. (in press). Organizational corruption as theodicy. 914
889 Whats wrong with the Treadway Commission Report? Exper- Journal of Business Ethics. 915
890 imental analyses of the effects of personal values and codes
Lunsford, J. L., Pasztar, A., & Lublin, J. S. (2005, March 8). 916
891 of conduct on fraudulent financial reporting. Journal of Emergency exit: Boeings CEO forced to resign over his affair 917
892 Business Ethics, 15(2), 183 198. with employee. Wall Street Journal, A1. 918
893 Business for Social Responsibility. (2005). Ethics codes and ethics Schein, E. (1992). Organizational culture and leadership (2nd 919
894 training (Issue Brief). Retrieved March 2, 2006, from http://
ed.). San Francisco7 Jossey-Bass. 920
895 www.bsr.org/CSRResources/IssueBriefDetail.cfm?Documen- Weber, M. (1946). From Max Weber: Essays in sociology (H. H. 921
896 tID=50967 Gerth & C. W. Mills, Eds. & Trans.). Oxford, UK: Oxford 922
897 Committee of Sponsoring Organizations of the Treadway Com- University Press. 923
898 mission. (2005). Guidance for smaller public companies
Workforce Management. (2005). 2005 Optimas Award winners: 924
899 reporting on internal control over financial reporting Ethical practices. Retrieved March 2, 2006, from http:// 925
900 (Exposure Draft). Washington, DC: Multiple Authors.

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www.workforce.com/section/15/feature/23/92/70/index. 926
901 Ethics Resource Center. (2005). Ethics in the workplace. New
html 927
902 York7 IBM Business Consulting Services Issue Brief.

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Zogby International. (2005, May 9). Do ethics still matter? 928
903 Fandray, D. (2000). The ethical company. Workforce Manage- Lichtman/Zogby poll of young Americans say, byes, but....Q 929
904 ment, 79(12), 74 77. Retrieved March 2, 2006, from http://www.zogby.com/ 930
Gasparino, C. (2005). Regulators muscle up. Newsweek, 145(16),

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