Yes, ‘ethical culture’ can be measured

When the U.S. Department of Justice recently updated its “Evaluation of Corporate Compliance Programs,” the enforcement agency unambiguously underlined how important it is for a company to create and foster a culture of ethics and compliance. But how does a company measure its culture of compliance, and what steps does it take in response to its measurement of the compliance culture?

These are the questions prosecutors will ask when investigating organizations and assessing the effectiveness of their compliance efforts.

For the record, this is not the first time prosecutors and regulators have emphasized the importance of ethical culture. When the U.S. Federal Sentencing Guidelines were amended back in 2004, the notion of ethics was added to the definition of an “effective program” (in addition to having compliance standards and procedures, the organizations are expected to “otherwise promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law”).

Since then, agencies have emphasized the role of ethics in the prevention and detection of criminal conduct. For example, the DOJ/SEC Resource Guide to FCPA states that “A strong ethical culture directly supports a strong compliance program.” By doing so, prosecutors and regulators aim to look outside the traditional law enforcement toolkit — clearly not sufficient for the complex challenge of dealing with human behavior. Therefore, it is likely evident that addressing ethics is a prerequisite for a compliance and ethics program to qualify as “effective.”

Ethical culture is clearly one of the most challenging components of a compliance and ethics program in terms of reliable measurement. According to the definition proposed by Linda Trevino and Katherine Nelson, “culture expresses shared assumptions, values, and beliefs and is manifested in many ways, including formal rules and myths, norms of daily behavior, physical settings, modes of dress, special language, myths, rituals, heroes, and stories.” 

In other words, organizational culture is all about how things get done without people having to think about it or, put differently, how people behave when no one is watching. Therefore, even in cases where a company has not studied or tried to define its culture, the existing norms of behavior silently govern employees’ daily actions and judgments.

Following from the definition, it is evident that culture will inevitably vary across companies. In this case, how can we develop a comprehensive understanding of what constitutes an ethical culture yet versatile enough to accommodate the uniqueness of every organization? Instead of simply surfacing common patterns of behavior, we need to look at the key underlying elements. Although they sometimes may be labeled differently, the key five you would want to incorporate you’re your measurement include the following:

Achievability of targets, goals, and tasks. The way goals are set affects people’s behavior; therefore, a company’s goal-setting and incentives structure probably offers the best indicator as to whether compliance is taken seriously. According to recently published research on toxic cultural elements, unrealistic targets and belief in growth at all costs foster the environment of high pressure and stress. To alleviate the strain, employees may respond by violating laws and internal procedures. On the contrary, the better equipped people in an organization are, the better they are able to do what is expected of them.

Communication. As Muel Kaptein points out in his book Why Good People Sometimes Do Bad Things, the more room employees have to talk about moral issues, the more they do this, and the more they learn from one another. And it’s not only about speaking up on ethical breaches — openness to a discussion of viewpoints, tasks, emotions, and dilemmas, in general, is a prima facie indicator of the organization’s ethical focus. Obstructed communication, when employees are afraid to speak out because there will be no response or, even worse, they fear retaliation fosters the culture of silence squarely at odds with ethical orientation.

Leadership has traditionally been associated with the ability to influence and motivate others, that’s why it plays an important role in the organizational culture. Ethical role-modeling requires constant engaging in ethical conduct, but not only. A focus on inclusion that invites employees to “bring their whole selves to work,” together with engaging two-way communication on ethical issues feeds employees’ psychological safety. On the contrary, as Alison Taylor identifies in her research of organizational culture in a corrupt company, in a corrupt culture leadership is complacent and hierarchical. Abusive conduct such as yelling, humiliating, backstabbing, etc. fosters toxic culture and incivility at the workplace which may lead to serious compliance violations.

Organizational justice. Although organizational justice is commonly associated with personnel-related decisions (pay, rewards, evaluations, promotions, assignments, and dismissals), whether employees are treated fairly tends to be a high marker of ethical culture as well. Just as the perception of organizational justice promotes positive attitudes to job satisfaction and performance improvements, it fosters the atmosphere of trust and greater willingness to ‘do the right thing’. Apparently, when applying double standards is a regular practice, employees are likely to experience some level of hypocrisy and corporate cognitive dissonance. This could cause cynic attitudes and lead to unethical conduct. On the contrary, management walk the talk and consistent follow through on ethical violations in a fair manner will send a strong signal – your justice expectations are taken seriously. This is an impactful motivational factor to respect the agreed-upon rules and procedures.

Accountability. Clarity as to what constitutes desirable and undesirable behavior together with a willingness to take responsibility, especially if things go wrong, is another important “qualifier” of a company’s ethical culture. The clearer the expectations, the better people know what they must do and the more likely they are to do it. Commitment to shared values by directors, managers and employees pays off, as there will be less tendency to shift the blame to “bad apples” or “rogues,” assigning responsibility for ethical lapses to individuals. That would allow addressing the broader organizational elements that have sustained the misconduct and strengthen the company’s ethical focus.

Addressing ethics is a prerequisite for a compliance and ethics program to qualify as effective for regulators –recent guidance from DOJ has once again confirmed this understanding. The regulator is expecting organizations to proactively measure and manage the culture of compliance and ethics, and the good news is that the body of research in the field offers a wide range of instruments to do that.

Choose the one that fits best with your organization. Whether you are running a culture survey or commit to in-depth leadership interviews and employee focus groups, be sure to measure the key underlying ingredients of an ethical culture instead of surfacing common patterns of behavior. Only that would yield useful insights.

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Vera Cherepanova, FCCA, CIA, MSc (pictured above), has more than 10 years’ experience as a compliance officer. She’s the founder of Studio Etica, a boutique consultancy that provides advice on corporate ethics and compliance programs to companies around the world. She speaks English, French, Italian, and Russian. She can be contacted here.