Boards are increasingly expected to ensure that the corporations they direct are not only profitable but sustainable, not only compliant but ethical. What do boards need to know to ensure a culture of ethical decision-making at all levels of the corporation?
First, boards should understand that character alone is not a sufficient guarantee of ethical decision-making. We all want to assume that good people will make good, ethical decisions—but that is not necessarily the case. Social science research over decades has demonstrated that behavior is more dependent on context than on individual ethics or values. And context is often another word for culture.
All organizations, public, private and nonprofit, are susceptible to ethical failure that cannot be explained by the misbehavior of a few bad apples. The U.S Navy continues to investigate the “Fat Leonard” corruption scandal that has implicated a shocking number of 7th Fleet officers and enlisted personnel and raised questions about the culture aboard the command ship “Blue Ridge.”
Thousands of Wells Fargo employees committed fraud against the bank’s customers; would those same people be under indictment if they had worked for a different bank? The influential British NGO Oxfam was accused of covering up allegations that staff in Haiti hired prostitutes for orgies, raising questions about tolerance of sexual exploitation.
It’s not just about the apples, it’s about the barrel. Boards need to insist that corporate priorities, written and unwritten, support ethical behavior by employees. That requires a sound, well-designed “barrel”, an ethical scaffolding that actively rewards good decision- making. It is particularly important that board members understand corporate incentives and the kind of behavior they encourage– which may be quite different from management’s expectations or intent.
If, as Peter Drucker said, “culture eats strategy for breakfast,” incentives eat ethics for lunch. Because the board evaluates management on the corporation’s financial performance, the board has a special responsibility to ensure that financial success is built on a strong ethical foundation.
Leaders are not immune from bad behavior—and when leaders misbehave the consequences for the corporation can be catastrophic. Boards should understand that the very context of holding a senior position brings its own ethical traps.
Success leads to privilege, which can lead to entitlement; power can lead to an exaggerated sense of the ability to manipulate circumstances. Success can trip up even people of character and integrity, as described in “The Bathsheba Syndrome: The Ethical Failure of Successful Leaders,” an article that first appeared in 1993 and is clearly still relevant today.
The former Stockdale Professor of Professional Military Ethics at the U.S. Naval War College, Professor Martin Cook, used to talk about the “holy trinity” of military responses to instances of ethical failure: fire the leaders, mandate more training and issue a new policy. But as Professor Cook would point out, the new leaders, the additional training and the new policy will not fix the problem unless they incentivize and actively support ethical behavior.
What does work to lay a foundation for ethical behavior? Scenario-based training is likely to be more effective than training based simply on compliance or “thou shalt nots.” Recognizing and rewarding employees for sound ethical decisions–just as they are rewarded for meeting sales targets—will send a strong message. And the example set by the C-Suite and board members themselves will be followed by other employees, regardless of what the employee handbook says.
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