Will Your Ethics Hold Up Under Pressure?

No executive wants to wake up and find themselves on the cover of theWall Street Journal, exposed in some widespread breach of ethics. TheVolkswagen debacle is every leader’s worst nightmare. Waiting to see if your organization’s ethical fabric is as bullet proof as you hope isn’t a great strategy, argues JonathanHaidt. He is a professor of Business at NYU, theNew York Times bestselling author of landmark book The Righteous Mind, and founder of Ethical Systems, a research-based non-profit dedicated to helping strengthen the ethical backbone of the business community. Over two engaging interviews, he shared his insights and hopes for helping organizations realize greater ethical strength by taking a systemic approach to cultural, structural, strategic and procedural system design. For him, this is more than a field of study. It’s a cause. He says,

Business is the engine of growth for all of humanity. The spread of markets and modern business practices is the reason why extreme poverty rates are plummeting around the world — falling into single digits this year for the first time in human history. Helping businesses to perform just a little better, just a little more ethically, is arguably the most important project humanity can undertake. It would increase the pie and divide it more equitably.

Haidt isn’t naïve about taking on such an endeavor. In the face of the last decade’s outrageous corporate behavior, 2015 holding some of the most scandalous, convincing corporations to embrace the importance of ethics isn’t a slam dunk. “The business world is heavily devoted to compliance, not ethics. Legislature has mandated it so compliance has become the lowest common denominator. Everyone knows that compliance is a check the box exercise for external accountability, but it’s not strong for ethics.” My own research bears out the challenge. Since 2008’s financial collapse, distrusting followers have raised the bar that much higher on executive integrity. Leaders are distrusted until proven trustworthy.

In an ironic appeal to self-interest, for which Haidt readily acknowledges the paradox, he says there are four important reasons “ethics pays.” First, there is the cost of reputation, which most analysts and experts acknowledge links closely to share price performance. Second, ethical organizations have lower costs of capital, as evidenced by Deutsche Bank’s commitment to focus on clients with higher ethical standards. Third, the white-hot war for talent, both recruiting and retaining top talent, takes a painful hit with an ethical scandal. Conversely, the best talent wants to associate with the best reputed companies. And finally, the astronomical cost of cleaning up an ethical mess can soar into the billions after shareholder losses, lawsuits, fines, and PR costs are added up. Still those aren’t the real reasons to focus on this, claims Haidt. The longer-term benefits to a world with greater ethical substance far outweigh the costs of cutting corners for short-term gains. Sadly, unethical choices have paid well for too many executives.

Looking at organizations holistically increases the ability to see the breeding ground for ethical failures.  “If you simply look at balance sheets, public reporting, Sarbanes-Oxley compliance, and other regulatory metrics, you cannot truly see the ethical fabric of the organization. Ethical failures start microcosmically in more insidious ways than outright greedy corruption.” You have to look deeper into the organization’s operational processes and culture to uncover the petri dishes where ethical failures grow.

Pressure Testing: Monitor The Organization’s Hardware And Software

There are two areas executives must continually monitor to detect potential ethical failure early. The organization’s “hardware,” or its systems and processes, is where you can detect what Haidt refers to as “proceduraljustice.” The basic perception of fairness in the design of an organization is vital to shaping ethical employee behavior. If employees perceive that the way resources are allocated, rewards are distributed, and priorities are set is fair, “it motivates employees to work collaboratively for the long-term good of the organization and its members. Such a long-term collaborative focus tends to produce ethical behavior.” Our experience as organization designers is consistent. The moment planning and budgeting processes appear capricious, conflicts between departments are arbitrated unfairly,decision rights are secretly distributed in conflict with stated values, or rewards are distributed politically, employees feel entitled to indulge in self-interest. And once that toxin is set in motion, the stage is set for ethical breaches.

The second place leaders must monitor is the organization’s “software,” or culture, and in particular the degree of trust evident among employees. “Within organizations, the central driver of value creation is the division of labor. When people can trust that others are doing their part, not taking for themselves, it’s a more fun environment in which to work and people don’t feel a need to ‘take.’ When people perceive generalized trust, there are high levels of performance.” Conversely, if people feel exploited, that their efforts don’t matter, or worse, matter less than peers’, they withdraw trust. They suspect others will take advantage of them, and therefore must self-protect. The result is often reducing effort to the lowest common denominator. Employees conclude, “Why should I exert more effort than she does. We get paid the same. If I work harder, I’ll end up doing her job for her.” In an environment where people perceive costs being passed on unfairly, whether it’s employees unfairly passing on work to others, or the organization passing on unfair costs to customers and suppliers, trust becomes impaired. And self-protection generated by distrust breeds ethical failure.

Creating sustainable change will require ongoing intervention and education at three levels. At the public policy and regulatory levels, as well as at the enterprise and team level of organizations, and within the individual behaviors of leaders. But Haidt in his team are determined to prevail in changing the stature of business ethics. “We will make success easier for well-meaning business leaders who know that in the long run, ethics pays. It is they who will change the world.”

 forbes