Most organisations within the public and private sectors accept that they need to be ethical in order to improve performance, build trust with stakeholders and achieve long-term success.
But many of them struggle to integrate ethics into the way they do business especially when nobody is watching.
The first step in building an ethical organisation is obviously to develop and implement a code of ethics but, as King III makes clear, that’s not enough: boards have a responsibility to ensure that the organisation’s ethics is managed effectively.
The social and ethics committee plays an important role in ensuring that the ethics of the company is managed effectively. Another key role player is the internal audit function, which in essence acts as the “eyes and ears” of the social and ethics committee. However, many internal auditors are not looking deeply enough at the organisations they serve.
Internal audit needs to move beyond a tick-box approach to assess the true state of an organisation’s ethics, and be more alert to the danger signs. These danger signs should also be considered by members of the social and ethics committee and the board itself.
The following seven questions can be used to help detect the danger signs of ethical shortcomings:
1. Does the organisation operate within a highly competitive environment? Such environments may cause people to bend the rules in a bid to survive. The pressure to meet demanding or unrealistic deadlines is also something to watch out for.
2. Does the organisation have a short-term focus? This is a complex question that goes to the heart of modern capitalism and the public sector is not exempt given the need for political heads to report good news regularly. An excessive focus on short-term results can provoke some executives to engage in unethical behaviour.
A powerful contributing factor is the mindset of investors or political stakeholders. If quarterly results are all that matters, management teams are “incentivised” not to take into account the longer-term implications of their actions. Short-term goals can also open the door to corruption and cronyism because the need to make money/ show results trumps everything.
3. Does the corporate culture tolerate bullying? Are whistle-blowers protected? If it’s common practice for those who do not fit the corporate mould to be overruled or even victimised in day-to-day business, it could be that the corporate culture promotes the “conform or get out” mentality. Such an environment is friendly towards corruption because the pressure to accept the status quo is immense. Similarly, in such an environment, anyone who does report unethical behaviour would not receive adequate protection, which would in turn encourage people to keep their heads down or to leave the organisation. High staff turnover could be a sign of this type of corporate culture.
4. Is there an overly deferential attitude towards leadership, or an excessively hierarchical culture? One danger sign is that authority generally is not questioned within the organisation. Another is that juniors are too eager to please their superiors. A third thing to watch out for is the iconic leader who cannot be questioned””a particular problem where a successful CEO or founder has been in office for too long.
5. Are there visible consequences for those who act unethically? Every organisation will have people who act unethically from time to time, for a wide variety of reasons. The question to consider is whether those that do so suffer real consequences, no matter how senior they are and that those consequences are obvious. These could range from court prosecution or firing to disciplinary action or other internal sanctions. It’s worth stressing that unethical behaviour needs to be dispassionately treated the requirement of equality before the law holds good.
6. Are values a key criterion in the recruitment process? It’s vital that the new people coming into the company are aligned with its ethical values, and that HR and other recruitment agencies actively search for such people.
7. Is the corporate oversight function weak? Answering this question will mean the internal audit team, social and ethics committee and even the board will need to assess honestly how much leadership acts on the recommendations of the internal audit.
Answering these questions will help the internal audit team and other role-players to look under the surface to establish the true state of corporate ethics. Diagnosis must be made before a cure can be attempted.
Dr Claudelle von Eck is the CEO of The Institute of Internal Auditors.