Strong ethical business

Fifty shades of morality

Over the past few decades we have seen many advances in the area of ​​fraud and misconduct prevention by companies, which can be attributed to new regulatory measures and global standards, among other things. Also, companies today have better ways to identify red flags and irregularities. Despite such positive developments, there is still a long way to go for companies to fight fraud and corruption effectively and sustainably. The reason for this lies not only in the weakness of the internal control mechanisms, but in the complex nature of the problem itself. It is reinforced or promoted by aspects such as human weaknesses, culture and environmental conditions.

At the same time, fraudsters counteract their fight. Systematic and predictable processes in internal control mechanisms, security measures and balance sheet audits make it easier for you to remain undetected. In short, our efforts to fight fraud and corruption with a systematic approach are not enough when it comes to a problem that is complex and difficult and extends far beyond our own company.

Ethical risks are difficult to capture

By developing “Enterprise Risk Management” (ERM) programs, companies are able to reduce risks across groups. But these programs have difficulties integrating such ethical risks into their monitoring mechanisms and operations. We speak of “ethical” risks here because compliance is represented by regulatory and legal risks within the ERM models. In reality, compliance and ethical risks cannot be separated that easily, because legal and regulatory errors often have their origin in unrecognized ethical elements.

The ERM's “blind spot” in the case of ethical risks has various causes. First of all, many people are of the opinion that they are particularly ethical in their behavior. Executives quickly turn to expert help with information technology, finance, marketing, and security issues. When it comes to ethical issues, however, they are more reluctant to do so. Research shows that people tend to overestimate their ethical compliance compared to others, as well as their ability to make ethical decisions in a given context.

Second, ERM models are designed for clearly quantifiable risks. Moral risks, however, elude precisely such types of quantification and simplification. For example, we know that corporate culture and the “tone at the top” have a significant impact on the risk of fraud. But how should the intensity or weakness of these factors be measured or how much do they contribute to minimizing ethical risks? Obviously, more research is needed in this area to find ways in which ethical risks arise in an organization in order to be able to predict how likely and to what extent such ethical-related problems may arise.

We hope that one day we will be able to more accurately determine the cost of a company's reputation and the productivity of its employees. We also hope that we can design better models that allow us to measure the complex relationships between internal and external factors that affect an organization's ethics.

Bottom up and outside in

Until these precise models exist, we advise companies to use a “bottom up” and “outside in” approach to analyzing ethical risks in order to create a more resilient organization. We call it the “bottom up” approach because people in lower positions are more closely related to company risks and have a much more unbiased perspective on how well a company is ethically positioned in terms of leadership and culture. We also recommend an “outside in” approach to incorporate the experiences and perspectives of external stakeholder groups before the problems grow and spread. Organizations can leverage these insights by incorporating them into their traditional compliance approach to identify areas with a high likelihood of ethical risk, even when no specific action is in place.
We are also of the opinion that compliance programs have to abandon their “checklist mentality” and should rather develop towards viewing the absence of routine and predictability as a useful tool.

Companies should rely more on so-called “random acts of compliance”. These can be presented in different ways, for example as the introduction of spontaneous versions of traditional approaches, such as surprising company audits. But perhaps even more important is to anchor the program deeper in the company's value chain to give compliance staff an immediate insight into the stress and challenge that company employees face. This contact with the other employees gives the compliance officers a greater appreciation of the coming risks and helps to find creative solutions to support weak points.

Think outside the box

If compliance programs want to identify ethical risks, they must also take into account aspects outside of their own company. Industrial practices, regional norms, and other institutional factors can have a profound impact on employee behavior. Many companies regularly employ temporary workers or are dependent on suppliers, often they are not even aware of the legal risks and dangers to the company's reputation that can result from this. These ethical risks are further exacerbated when compliance programs do not provide these employees with the same training and support as their own, or when they do not devote the time and resources to contracting compliance with suppliers. In short, businesses need to think outside the box as well as outside of the business itself in order to reduce the risk of fraud and misconduct.

Getting involved outside of the company can also bring new insights into how ethical risks can be reduced. Research shows that employees within the organization “dull” to unethical behavior. It is often said that a strong corporate culture promotes employee loyalty and engagement. In fact, helping new employees understand the company's values ​​can be helpful. This reduces employee turnover and promotes work motivation. Nonetheless, compliance officers must also be aware of the disadvantages that a corporate culture can have for the ethical behavior of their employees.

If employees are socialized by the written and unwritten rules of conduct of the organization, the question arises for each individual - can I accept these practices for myself, i.e. accept them and thus become a real "member" of the organization, or are the practices in conflict with them my personal morals and are therefore unacceptable? Employees who do not agree with the applicable standards in a company face another dilemma. They have to decide whether to leave the organization or to stay and try to change the prevailing culture. Regardless of the decision, the employee becomes an “outsider” and that puts him under enormous stress, because everyone has the need to adapt and to be part of a group.

Over time, even highly ethical corporate cultures can be eroded as they grow and drift apart, new pressure builds up and "insiders" blunted to the risks that arise from their behavior and actions. This is why companies need new employees to give them an outside perspective and to identify questionable practices. Unfortunately, these people are more likely to leave the organization than to face the difficult task and drive positive change.

In order to minimize the risk, organizations must fall back on other sources of the outside view ("outsider view"). One option is to open up the organization's ethics hotline to external stakeholders such as customers, shareholders, temporary workers, and suppliers. We are aware that there are many different international views and approaches to ethics hotline programs, but by opening up this communication channel to the outside world, you give outside parties the opportunity to report misconduct that otherwise would never have come to light. For example, a recent study shows that almost half of all fraud reports came from such external interest groups. Suppliers are particularly vigilant when it comes to questionable behavior by competitors (such as the exchange of gifts and compensation), which results in disadvantages for them in initiating new business with a particular company.

Seek the conversation

In addition to opening the ethics hotline, compliance officers can seek discussion with employees who are in regular contact with customers and suppliers. This enables them to find out if these stakeholders have raised concerns that indicate a weakness in the organization's control system or risk management. Such concerns are often not reported to the ethics hotline, but can be an important indicator of ethical risk within the organization.

Front-line employees can also assist compliance in other ways. We have proposed a "bottom-up" approach that relies on clear responsibility for ethical leadership at all levels of the organization. Studies on organizational culture emphasize the importance of ethical behavior in top management, which we call "tone at the top". We share the view that leaders with clear ethical responsibility and positive role models are an important part of an organization's ethics; but at the same time we advocate a broader view of ethical leadership. In other words, we see ethical leadership as an important part of the behavior of all employees, not just those at the top.

Other studies have shown that while the majority of employees have witnessed misconduct in the workplace, a very small percentage of these employees actually step in and report the misconduct to management. Looking the other way and keeping still are the norm when it comes to organizational ethics. It is to be feared that too much focus of the organization on the "tone at the top" inadvertently sends the signal that only top management is responsible for ethical problems. This in turn encourages responsibility to be dispersed and a “that's not my problem” attitude towards ethical matters.

In order to counteract this trend and to improve the appropriate behavior when misconduct is detected, we suggest that all employees receive training and be given incentives to further develop their ethical leadership skills. From a continuing education perspective, employees need to familiarize themselves with the various types of ethical dilemmas in the workplace and practice the steps to take to resolve such dilemmas; this also includes the question of when and how to involve the compliance department. Case studies and role plays can be particularly helpful in instilling confidence in employees in dealing with ethical issues.

From the point of view of behavioral economics, organizations should include ethical leadership as a factor in their performance evaluation, employees can be rewarded for ethical behavior, and where this is lacking can be readjusted. Combining ethical leadership goals with financial and operational goals also sends a strong signal that both are important to the success of the organization.
In addition to these elements of the compliance programs, we believe that compliance officers should find ways to embrace new science and research about ethical behavior. We can see how different research approaches on this topic converge; this development has the potential to change our models with which we explain morally right and wrong behavior. This research is in contrast to a compliance model that assumes that people make ethical decisions based solely on rational and linear considerations; Instead, they point the way to a “just in time model”, which is based on the assumption that people make decisions in ethical matters much more irrationally, impulsively and emotionally than previously assumed. In short, compliance directors and employees alike would be much better placed to minimize risk and misconduct if they were better informed and trained in the areas of ethical behavior and action sciences.

The brain automatically thinks ethically

Social psychological studies show that many things in everyday working life influence the ability of employees to deal with ethical dilemmas. Stress, time pressure, physical and mental exhaustion as well as the fear of a loss of status all contribute to people behaving unethically. Neurological research suggests that our brains are programmed to make certain kinds of moral and ethical decisions automatically; Emotions, in turn, can either facilitate or suppress such decisions. Even the way we communicate and express ourselves can subconsciously affect whether we perceive a moral problem as particularly urgent or marginal in a particular situation. In their research, biologists have identified the hormone oxytocin as the physiological signature for empathy, the core of our actions towards others. At the same time, studies in psychology and sociology have discovered a dark side of empathy, which means that in situations in which we are under social pressure or influenced by group norms, we are prone to bad ethical decisions that are indeed for the good of the group, but at the expense of individuals; we also tend to ignore unethical behavior on the part of our colleagues.

Compliance programs can use these insights to give employees a momentum in the right direction. For example, employees are more likely to adhere to rules of conduct if they are based on voluntary and voluntary commitment. Sharing information about decision-making processes with employees helps them to view the decisions made as fair, even if they experience personal disadvantages as a result of the decision. Incorporating personal reminders of the importance of honesty, integrity, and values ​​into employees' day-to-day work can also counteract the tendency to take short cuts or overlook problems.

There would be further great benefits for the organization if employees were regularly trained in how to recognize and control their emotions and how to use them to deal with ethical problems. Perhaps these very new predictive behavior models, mobile apps, and new technologies can be strategic partners in helping employees and co-workers fight ethical risk when they are most vulnerable.

These interdisciplinary discoveries are more than just interesting coincidences. If we can integrate these into explanatory models of how people make ethical decisions, they will permanently change the way we train employees on ethics and compliance matters and how we deal with people and ethical crisis situations.
If we look further beyond the horizon, compliance programs can also take advantage of the fact that they incorporate modern reflection practices and meditation. Ethical risks lurk everywhere, even if they are not always immediately apparent. We believe that reflective practices make it easier for compliance staff to clearly define ethical risks. An important practice is that after a case of fraud allegations, as a group, discuss successful and problematic processes in dealing with the case, emphasize all important points in dealing with the allegation in order to adapt or improve them for the future. The compliance department should avoid acting impulsively and solely isolating the perpetrator, handling the matter administratively and then moving on to the next topic.Instead, the organization should take the time to investigate the reasons for the wrongdoing, find out how widespread the problem is, and finally take action to prevent further wrongdoing. Such a procedure not only improves case management and the identification of ethical risks, but also creates the conditions for learning and improvement. Without this approach and its consistent implementation within the workflow, we will never be able to make the progress that is necessary to understand the background to misconduct and to take preventive action against it.

Most employees underestimate the influence of their environment on their behavior and the subconscious, involuntary nature of ethical judgments. Studies show that attention and contemplative practices address these weaknesses and can critically influence ethical behavior. For example, certain types of meditation have been linked to the increase in neurons in areas of the brain that are responsible for empathy. Being able to understand the feelings of colleagues makes it possible to be sensitized to your own decisions and behavior and to understand how these affect employees and the environment.

Findings from the cognitive sciences indicate that meditation can help employees to better control their impulses and emotions and to translate them into appropriate behavior. Even the smallest cognitive space between impulse and action can mean the difference between making an ethical mistake or preventing a crisis. A large group of companies support meditative practices, such as stress reduction through attention meditation. There is growing evidence that such practices affect self-awareness and self-control in ways that encourage individuals and organizations to behave in a way that supports ethical behavior.

We believe that ethical organizations depend on strong leadership and that responsibility for ethical issues is shared among multiple shoulders. We believe that ethical organizations promote a healthy work environment that inspires employees and external stakeholders to solve problems together and create shared value. We believe compliance works most effectively when it does not rely on ready-made formulas to solve ethical risks. In addition, we believe that incorporating new science from behavioral research will help compliance workers break the traditional image of the “law maker and enforcer” and become more effective leaders in global efforts to create ethical organizations.