A Resource Guide from Ethical Systems
The ethical culture in an organization can be thought of as a slice of the overall organizational culture. So, if the organizational culture represents “how we do things around here,” the ethical culture represents “how we do things around here in relation to ethics and ethical behavior in the organization.” The ethical culture represents the organization’s “ethics personality” (Trevino & Nelson, 2011).
From an ethical systems perspective, creating and sustaining a strong ethical culture is fundamental to creating an organization that supports people making good ethical decisions and behaving ethically every day. There are several forces and factors that lead people to take ethical shortcuts. But when all relevant organizational systems are pushing people in the same ethical direction, ethical failure is much less likely.
According to Treviño and Nelson, ethical culture should be thought of in terms of a multi-system framework that includes formal and informal systems that must be aligned to support ethical judgment and action. Leadership is essential to driving the ethical culture from a formal and informal perspective. Formally, leaders provide the resources to implement structures and programs that support ethics. More informally, through their own behavior, leaders are role models whose actions speak louder than their words, conveying what is appropriate and acceptable behavior. Other formal systems include selection systems, policies and codes, orientation and training programs, performance management systems, authority structures, and formal decision processes. On the informal side are the organization’s role models and heroes, the norms of daily behavior, organizational rituals that support or do not support ethical conduct, the stories people tell about the organization and their implications for conduct, the language people use, and the confidence and ability people have to be recognized and heard (i.e., Is it okay to talk about ethics? Is ethical fading the norm? Is there a strong speak-up culture?)
ETHICAL CULTURE PAYS
Over half of senior executives believe that corporate culture is a top-three driver of firm value and 92% believe that improving their culture would increase their firm’s value(Graham, Harvey, Popadak & Rajgopal, 2017). Evidence from research suggests a strong ethical culture can provide significant benefits to an organization, such as:
- Increased employee job satisfaction, affective commitment, and willingness to recommend their organization to others.
- Reduced employee burnout and increased intention to stay.
- Decreased illegal activity and increased moral behaviors.
- Improved organizational performance, value, and innovativeness.
For more details, see our research page summarizing the evidence that ethics pays.
IDEAS TO APPLY (based on research covered below)
Consider these key ideas to apply to develop and maintain an ethical corporate culture. Note that they overlap, relate to, and reinforce each other.
Encourage ethical behavior. You have to “talk the talk” and “walk the walk.” Good behavior should be supported by both communication of ethical culture and organizational architecture (incentives, structure). Employees who detect wrongdoing should be encouraged to respond in a manner that supports corrective action and should be rewarded, not punished, for their courage.
Build for culture rather than compliance. Organizations should focus more effort on building the right culture than on building a compliance infrastructure, though of course it is essential to have a compliance infrastructure; criteria for success should be outcomes based. The organization can routinely demonstrate commitment to their espoused culture by adequately addressing everyday violations/complaints and establishing a track record of accountability.
Make ethical leadership a top priority. The continuous presence of perceived ethical leadership is important in setting the tone of ethical culture as it becomes the source of behavior reflected by the workforce. When employees perceive top managers as trustworthy and ethical, a firm’s performance is stronger.
Embed ethical values throughout the organization. Core ethical values should be infused throughout the organization in its policies, processes, and practices. This holistic approach is evident when ethical values are embedded in employee selection, communication is open, policies empower employees to behave ethically, and leadership genuinely pursues ethical outcomes. Established communities, such as ethics ambassador networks (employees trained as liaisons for promoting company values), can ensure ethical values are disseminated and supported throughout the organization.
Create ethical hiring standards. Use clearly defined ethical hiring practices to recruit and hire ethical candidates. For example, companies can implement requirements related to competence-based hiring, seeking candidates with ethics training, and informing candidates of company values before hire. Companies may also choose to ensure talent managers (e.g, hiring managers, talent- acquisition teams) are appropriately trained to effectively use an ethical framework in their various talent processes. This understanding reinforces obligations of managers to be ethical gatekeepers.
Formalize ethical programs. Establish dynamic ethical programs—those that can adapt to evolving challenges and include mechanisms for continuous improvement, for employees at all levels of the organization. These might include a code of ethics, formal training, an ethics hotline, and employees with ethics compliance as part of their job role.
Assess your organization. Use culture measurement tools to take snapshots of your organization’s climate. Good measurement, done regularly, can show you where your problems and strengths are; whether management has the same perceptions as the rank and file; and which units or departments are changing over time. Good measurement will help—measurably—in your efforts to evaluate and strengthen your organization’s ethical culture.
AREAS OF RESEARCH
Recruiting and selecting for culture. Evidence suggests ethical culture may be an important factor affecting an organization’s workforce. It’s positively related with employee job satisfaction, affective commitment, intention to stay, and an employee’s willingness to recommend the organization to others (Ruiz-Palomino, Martínez-Cañas & Fontrodona, 2013). Organizations that support ethical practices also experience higher work engagement and lower employee burnout (Huhtala, Tolvanen, Mauno & Feldt, 2015)—both significant factors that enable organizations to retain a committed and motivated workforce (Huhtala & Feldt, 2016).
When organizations use a defined ethical-hiring standard (specific ethical practices and aims which hiring managers are responsible for upholding), employers are more likely to recruit and hire ethical candidates (Villegas, Lloyd, Tritt & Vengrouskie, 2019). Better individual fit to an organization’s ethical values, known as ethical citizenship, appears to enhance or unlock the influence of ethical culture on intentions and behavior (Ruiz-Palomino & Martínez-Cañas, 2014).
Studies examining modified recruitment techniques, such as those that incorporate ethical-hiring practices, suggest that these methods are effective in shaping organizational culture. Research by Villegas and colleagues (2019) identified six behaviors that organizations can practice to hire more ethically:
- Honestly self-reflect to recognize organizational behaviors that are less than desirable and/or unethical
- Construct core organizational values and guiding principles
- Institute ethical systems/procedures throughout the organization that affect all areas of operation, including human-resource management and hiring practices. This would also include strategies like diversity training, and internal principles that avoid discrimination and bias in hiring.
- Demonstrate adherence and embodiment of the organization’s ethical values through corporate and managerial actions
- Ensure that all applicants have a clear understanding of the ethical expectations of the firm
- Hire and onboard the most ethically qualified candidate who has the skillset needed to excel in the vacant position
Formal ethics programs and their effectiveness. Ethics programs vary significantly in content, quality, and effectiveness. Traditional programs focus on organizational compliance rather than reducing unethical behavior (Gebler, 2006). While some ethics programs may strengthen an employee’s perceptions of ethical values, effects diminish over time and do little to deliver the sustained, positive impacts necessary to create an ethical organizational culture. These include lower observed unethical behavior, increased intentions to behave ethically, increased perceptions of organizational efficacy in managing ethics (Warren, Gaspar & Laufer, 2014).
Ethics programs that incorporate multiple components—such as a code of ethics, ethics training, an ethics hotline, and an ethics officer—and are administered to all employees at all levels of the organization, appear to be most successful (Schwartz, 2013; Ardichvili, Mitchell & Jondle, 2009). Furthermore, organizations that establish measures to detect and prevent wrongdoing and encourage corrective action appear to be the most successful in implementing ethics programs (Kaptein, 2011).
However, there is a lack of consensus about how to define and measure the efficacy of ethics programs. Studies that examine this are typically specific to the organizational needs and strategies determined by its leaders. Periodic surveys aligned to various ethical frameworks, or set of codes that an individual uses to guide his or her behavior, appear to be the most common method to obtain information about changes in an organization’s ethics (Kaptein et al., 2005). While there are many theoretical frameworks for evaluating the efficacy of ethics programs, there is a lack of rigorous research to support any generalizability beyond the immediate population under study (Brown & Treviiño, 2002).
Organizational Ethics Training. Ethics training is commonly cited as a primary method for increasing employees’ ethical decision making and conduct. However, little is known about how ethics training enhances other components of an organization’s ethical environment. Workers employed in organizations that have formalized ethics training programs have more positive perceptions of their companies’ ethical culture (i.e., how well their company is equipped to provide an ethical culture) than do individuals employed in organizations that do not (Weber, 2015; Valentine & Fleischman, 2004).
Evidence for effectiveness of ethics training is limited to improvements in the thoughts and perceptions of trainees (Waples et al., 2009; Watts et al., 2017) rather than ethical behavior. Ethics training may be more effective when focused on specific topics rather than general (Medeiros et al., 2017), and when it does have an impact the gains may not last (Warren et al., 2014). Existing research has been hampered by limitations in measuring behavioral outcomes effectively and by the implementation of less effective training methods. Weber (2015) lists several additional ethics training concerns:
- The need for expanding ethics training, possibly using outside experts, up and down the organization
- The current reliance on short, infrequent, sessions, or limiting training to orientation
- The emergence of online or technology-enhanced training and the use of the lecture method without other, educationally proven techniques
- The minimal assessment of ethics training using weak tools or metrics, if assessment is conducted at all
- A new employee demographic [generational, racial, and other shifts] that will further challenge the impact of ethics training as an effective means in promoting ethical behavior or deterring unethical behavior.
Impacts of Ethical Culture. An organization’s ethical culture appears to be positively associated with improved ethical behavior among workers, improved overall firm performance, and organizational innovativeness. (See our research page on when and why ethics pays). Additionally, job satisfaction and organizational commitment are related to employees’ attitudes about their company ethical culture, as well as the alignment between an organization’s perceived and stated values (Huhtala & Feldt, 2016; Ortega-Parra & Sastre-Castillo, 2013; Valentine & Fleischman, 2004).
Role of Ethical Leaders. Research findings suggest a strong relationship between ethical leadership, ethical organizational climate, and unethical behavior (Kuenzi, Mayer & Greenbaum, 2020). Ethical leadership appears to be a significant influence on an organization’s subordinate leader behavior, even when the organization has a complex hierarchy (Schaubroeck et al., 2012). Several characteristics of executives have been found to be most attributed to ethical business cultures: Mission-and Values-Driven, Stakeholder Balance, Leadership Effectiveness, Process Integrity, and Long-term Perspective (Ardichvili, Mitchell, & Jondle, 2009).
Embodied values. Strong ethical cultures, those that actually deter unethical and illegal activity, may depend on the extent to which core ethical values have been infused throughout an organization, are evident in formal programs, and demonstrate ethical leadership with an appropriate “tone at the top” (Schwartz, 2013). But organizations differ substantially in their efforts to see that those policies or codes actually are put into practice (Weaver, Treviño & Cochran, 1999).
Understanding ethics in organizations. Research suggests that using standardized, validated cultural assessment measures can assist in formulating policies to strengthen ethical culture (Treviño, Haidt & Filabi, 2017). However, the fact that currently available approaches frequently use samples that do not represent working adults limits them. Their designs also often fail to capture the contextual complexity that defines the day‐to‐day realities of organizational life (Mitchell, Reynolds, & Treviño, 2020).
Ethical Climate. Ethical climate is a related area of research that refers to the broad climates that either support or do not support ethics. Culture and climate both impact behavior in an organization. Culture is a product of the relationship history in an organization while climate is a function of how people perceive those relationships in the present. Climate is narrow, about the shared perceptions of the people in a group or organization. Culture goes deeper to include the immediate environment and what people believe and value, which includes how people feel about the organization and the beliefs, values, and assumptions that form the group’s identity and set the standards of behavior. (James et al., 1978; Cooke & Rousseau, 1988). Simply stated, culture refers to “the way we do things around here” while climate refers to the feel of the environment.
There is disagreement on how to accurately examine ethical climate. For example, the ethical climate questionnaire was originally developed to measure nine climates but most research has supported the existence of three to five climate types. In this case, the perception that the organization has a “benevolence climate,” meaning a climate that supports multiple stakeholders inside and outside the organization, is associated with positive employee attitudes and behaviors. By contrast, perceptions that the organization has a “self-interest climate,” where it’s every person for him or herself, are associated with negative attitudes and behaviors (Trevino & Nelson, 2011).
- Recovering Trust After Corporate Misconduct at Wells Fargo (2020), by Suraj Srinivasan and Jonah Goldberg and published through the Harvard Business School. This describes the widespread misconduct at Wells Fargo Community Bank in the period leading up to 2017 and the company’s subsequent attempts to improve internal controls, company culture, and corporate governance.
- Faster, Higher, Farther: The Volkswagen Scandal (2017), by New York Timesjournalist Jack Ewing, describes the journey of the car manufacturer leading up to the global emissions scandal of 2015 and how leaders fostered a corporate culture that ultimately drove employees to illegal methods.
- Dara Khosrowshahi: Changing the Company Culture at Uber (2020) introduces the new CEO of Uber and the challenges and difficulties he faces as they attempt to change the toxic company culture established by the former CEO.
- Final Accounting (2004), by Barbara Toffler, chronicles the culture that she found at Arthur Andersen a few years before the company’s downfall.
- What Happened to Goldman Sachs (2013), by Steven Mandis, is a more recent story of a culture that changed (in a negative direction) during the author’s time with the firm.
- Google’s Project Oxygen: Do Managers Matter? Provided by Harvard Business Publishing Education, this case explores how Google used an evidence-based approach to improve the practice of management without disrupting their highly valued and technocratic organizational culture.
- Zappos: Delivering Happiness to Stakeholders, published by the Daniels Fund Ethics Initiatives, investigates Zappos’ history, core values, and unique business model, and how its continual focus on stakeholder happiness has contributed to its success when faced with multiple business and ethical challenges.
- Cradle to Cradle Design at Herman Miller: Moving Toward Environmental Sustainability is a Harvard Business Publishing case that highlights the importance of company selection, values, and decision-making processes in a decision about whether to switch from toxic PVC to an alternative material to be used in chair arm pads.
- IKEA’s Global Sourcing Challenge: Indian Rugs and Child Labor (A) is a Harvard Business Publishing case that demonstrates how a company’s commitment to its values can help it address the child-labor problem in the sourcing of its carpets.
- Fighting Corruption at Siemens is an interactive HBS case that represents both a failure (as the culture allowed bribery to continue long after the law had changed in Germany to no longer allow it) and a success as the company demonstrates its efforts to change its culture in a systematic way and over time.
FUTURE RESEARCH RECOMMENDATIONS
- Exploring the role of employee selection in ethical culture. Can organizations select members and leaders who will be more ethical, meaning less effort is needed to enculturate them? (See some ideas on our Personality and Personnel page)
- Determine the effectiveness of training on actual ethical behavior. What type of training, and through which delivery channels, are the most effective not only in changing perceptions but also behavior over the long term.
- Analyze what happens when different components of company culture (compliance policies, performance management, leadership) are misaligned on cultural messaging, as well as which are the most critical determinants of culture, and how the components are interrelated.
- Identify the impact of cross-cultural differences on ethical culture and training, toward fair and effective policies and interventions.
- Chapter 5 in Trevino & Nelson Managing Business Ethics: Straight Talk about How to Do It Right, Seventh Edition. [Read our book summary of the 5th edition.]
- Schein, Organizational Culture and Leadership. 5th Edition [digital copy], 2016.
- Riivari, E., & Lämsä, A. M. (2014). Does it pay to be ethical? Examining the relationship between organisations’ ethical culture and innovativeness. Journal of Business Ethics, 124(1), 1-17.
- Trevino, L. K., & Nelson, K. A. (2016). Managing business ethics: Straight talk about how to do it right. John Wiley & Sons.
Press & Industry Articles
- Groysberg, B., Lee, J., Price, J., & Cheng, J. (2018). The leader’s guide to corporate culture. Harvard Business Review, 96(1), 44-52.
- HR Can’t Change Corporate Culture By Itself, Harvard Business Review, November 2016.
- The Building Blocks of Business Ethics (includes a ethics checklist for companies to evaluate their culture), Dividend, the magazine of University of Michigan, Ross School of Business, Fall 2015.
Adam Grant talks about some of the challenges of diagnosing ethical culture:
Barry Schwartz talks about cultivating an ethical climate:
Marc Hodak looks corporate culture from a corporate governance perspective:
Edgar Schein answers some questions about corporate culture in the modern context:
See more from Linda Treviño, Adam Grant, and Marc Hodak, as well as other experts discussing issues in the corporate culture sphere on our Corporate Culture playlist at the Ethical Systems YouTube Channel.
Rise of litigiousness and fear of discovery during depositions can strangle change-making. See “How to fix a legal minefield” TED talk by Phillip Howard.
Miscellaneous Links & References
- In scandal’s wake, McKinsey seeks culture shift, NYT 1/11/14, story about Dominic Barton’s efforts to restore the ethical culture at McKinsey
- Cohn et al. have an excellent study on “Business culture and dishonesty in the banking industry“