A Critical Opportunity in Enterprise Risk Management

Companies face a growing number of risks these days, from economic volatility and corporate fraud to data security and supply chain threats, all of which can be incredibly costly to mitigate. Ethical breaches, in particular, have cost a wide range of organizations dearly in declining revenue, falling stock prices, lost market share and damaged reputations. The list of offenders seems to grow by the week – Volkswagen, Wells Fargo, Equifax, and Uber, just to name some of the most recent examples.

And yet, even as they cast about for solutions to their problems, corporate boards and senior executives often overlook the role that an ethical organizational culture may play in reducing some of these dangers and in improving the bottom line.

Building such a culture is no small feat. While systems and processes do need to be put into place to help to ensure ethical and responsible behavior in an organization, a crucial step is finding and developing ethical leaders at the top. Both the founder and the current leaders play significant roles in creating and maintaining ethical organizational cultures, and the positive reputation that can result; without Tony Hsieh or Howard Schulz at the helm, for instance, it’s hard to imagine Zappos or Starbucks retaining their singular and highly successful cultures all these years.

Even the best leaders don’t ensure an ethical culture. But leaders set the tone, for better or for worse. And since organizational culture is always changing and evolving, either intentionally or unintentionally, leaders must constantly send and reinforce the right messages. They must role model the behaviors that are acceptable in the business and reinforce the actions that matter in the culture.

Many CEOs are starting to recognize this. As a workplace psychologist who performs selection and hiring assessments on candidates for senior leadership positions, I often encounter CEOs who tell me that one of the most important qualities they are looking for in potential leaders is integrity.

So the question becomes, in part, can we reliably hire people who will behave more ethically? The answer is yes.

Although there are no guarantees, there are definitely personality qualities to look for in candidates that are associated with a higher likelihood of ethical behavior. Of course, even leaders prone to highly ethical behavior can have blind spots. We human beings are great at rationalizing our actions and decisions, and we have inherent biases that we need to work to correct for. This is why identifying ethical leaders is only part of the equation. We also need systems and processes that help us to “walk our talk” and do the right thing — especially when it is hard or when we believe that no one is looking. And we need to teach our leaders how to be aware of their own ethical biases—this is a teachable skill.

With that in mind, here are six steps that a company can take to create ethical leadership at the top:

1. Perform individual hiring and selection assessments, especially for senior leadership positions, which can help to assess for personality characteristics that predict ethical behavior. Such traits include conscientiousness, a capacity to feel guilt over mistakes, pride in one’s sense of moral identity, the lack of hostility and aggressive tendencies, reduced emotional reactivity, and the presence of humility.  Use of appropriately validated assessments in combination with well-conducted structured interviews and carefully performed reference checks can lead to hiring leaders that are more likely to exhibit ethical behavior.

2. Identify leaders who are “givers”, as social psychologist Adam Grant labels people who are not selfish and primarily focused on their own gains. One way to identify givers is to pay attention to candidates’ language. Do they use “I” or “we” when describing accomplishments? Do they give credit to others or claim credit just for themselves? How do they treat other people (including the wait staff, the secretary, the valet parking person, etc.)? Instead of only seeking references from a candidate’s boss (whom more self-interested leaders may have kissed up to), find out what their colleagues and direct reports have to say about them.
3. Once hired, leaders need to role model the behaviors they expect from others and positively reinforce such behaviors when they occur in the culture. For example, a CEO who has a policy that he or she is to be notified immediately when there is a safety violation in which an employee is injured shows employees that this is a culture where admitting mistakes is encouraged. Moreover, if the top leadership seeks ideas for safety solutions from the front-line, this shows employees that their opinions are valued. This leads to improved safety, efficiency and profitability. This has been referred to as a “speak up” culture. In addition, reinforce pro-social behavior by building in rewards for employees who help others rather than only relying on individual rewards solely for performance (e.g., generating the most sales). Every move of the senior leadership is being observed—make sure leaders behave in ways that they would be proud to have shared with their spouse or children or if published in the newspaper!
4. Create a culture of integrity versus one of compliance, where employees may just go through the motions of compliance or safety training but fail to internalize the lessons on a deeper level. If a leader behaves poorly toward another employee (be it verbally abusive or sexually harassing behavior or the like), the CEO or another senior executive should address it immediately. Such explicit action by a leader can help to reduce negative attitudes on the part of employees, who otherwise may think that company values are merely a “plaque on the wall.” Fraud and cheating are associated with increased cynicism and negativity in the culture. In addition we know that bad behaviors are copied, especially when there are no consequences for them.
5. Ethical leaders put strategies in place to check their behaviors since they recognize that they may rationalize choices that make them look good. They do this by asking questions such as “what are the downstream consequences of this decision?” For example, if people get paid for selling more widgets, will this genuinely lead to increased productivity or just to more ways to game the system or to justify overbilling? Another strategy is to ask for and model receiving feedback from others. Ask the question: “How might I be wrong?” or “What am I missing?” Employees, even senior leaders, are often fearful of speaking “truth to power.” Senior leaders should make it clear that they want to hear the truth from their team members. Ethical leaders realize that we all have biases and work to mitigate their own.
6. Senior leaders should focus on reinforcing integrity in lower-level management. The most significant opportunity for increasing integrity may lie with an employee’s immediate manager. If the manager behaves highly ethically, the employee is more likely to act in similar ways. On the other hand, if the manager justifies or rationalizes unethical behavior (as in the Wells Fargo case), cheating and other ethical breaches are apt to spread. Make sure that the lower-level manager has good support, good role modeling, and access to the leadership development and training he or she needs, as the manager’s role is critical.