While riding the terminal shuttle at the international airport in Atlanta, Ga., a fellow passenger initiated a conversation with me by asking what I did for a living. When I told him I was a professional consultant, he retorted with a sneer, “Oh yeah? And who's doing the work?”
His questioning my work ethic disturbed me and wounded my professional pride, but it also led me to ask questions of myself: What does ethics actually mean? What causes a person to become unethical? Likewise, what keeps a person on the “straight and narrow”? These questions spurred me to take a closer look at the role of ethics in the corporate environment and the attitudes that foster unethical behavior. The list of factors is partial and fluid, but should be helpful to fraud examiners and managers.
Consequences for not braiding ethics into corporate attitudes may include loss of revenue, loss of market share, and irreparable harm to a firm’s reputation. But the results of not being ethical personally and professionally could result in suspension or revocation of professional licenses, financial bankruptcy, and even incarceration.
Designing and implementing ethical standards within a corporation requires rigorously examining the management of the business by benchmarking the ethics of each business unit against the industry standards. This can only be achieved through a holistic analysis, covering the entire range of ethical issues as they affect shareholders, customers, employees, society, and partners.
Therefore, the guidelines I present here are partial. They should be treated as an open list of potential issues that could be changed by additional situations that may compromise or affect the ethical integrity of a corporation.
The word, ethics, stems from the ancient Greek root ethos, which refers to how a person’s character is regarded.1
The definition of the word is fairly consistent in dictionaries: “a set of principles of right conduct or a theory or a system of moral values” (American Heritage); “principles of conduct governing an individual or a professional” (Webster’s New International); and “a system of moral principles” (Random House Collegiate).
But perhaps the most comprehensive definition is found in Black’s Law Dictionary, which defines the word as “of or relating to moral action, conduct, motive or character; … ethical emotion; … treating of moral feelings, duties or conduct; containing precepts of morality; moral. Professionally right or befitting; conforming to professional standards of conduct.”
Most executives, managers, and fraud examiners are familiar with the concept of ethics. However, patterns of actual unethical behavior are not always predictable or easily detectable.
Scientists tell us that behavioral patterns are affected by genetic makeup. But social behaviorists maintain that genetic predisposition is modified greatly by surrounding environments such as family upbringing and educational background.
With the latter opinion in mind, management should recognize external elements that tend to foster unethical behavior. Two important elements affecting employees’ behaviors are the corporate attitudes embedded in company policies and culture, and the overall attitudes of the employees.
Following are corporate management attitudes that can contribute to unethical behavior:
Financial policy emphasizes short-term growth. In the late 1990s workplace, competition is high, downsizing is prevalent, and the motto is “Do more with less.” Businesses may feel a subtle pressure to condone unethical behavior for monetary gain.2 For example, to achieve satisfaction with shareholders, management often commits its corporate financial ambitions to short-term goals. A policy that emphasizes short-term financial results may earn management immediate praise, bonuses, and market recognition. But aggressive short-term growth customarily is achieved through utilizing existing assets at beyond maximum capacity, increasing employee overtime, and possibly using unorthodox methods of managing, which encourages cooking the books and taking aggressive stands on reporting results.
Therefore, managers should remember that if a short-term growth policy is not part of a company-wide, long-term growth strategy or if such a policy is overly “aggressive” and not consistent with industry standards, unethical behavior may develop.
Decision-making process focuses only on financial objectives. A corporate environment that encourages managers (through action or inaction) to make decisions based solely on business and financial costs can lead to unethical decisions.
Almost one-third of the 4,035 American workers who responded to a 1994 Ethics in American Business survey conducted by the Ethics Resource Center in Washington, D.C., reported that they sometimes feel pressured to engage in misconduct to achieve business objectives. Additionally, when financial objectives failed to specifically include ethical considerations, almost one-third of the total respondents observed misconduct at work among their peers and management.3
A code of ethics does not exist. Experts such as Milton Friedman and Peter Drucker have referred to business ethics as an oxymoron. They argue that the purpose of a company is to survive and increase profits, and by doing so, the company is being socially responsible and acting as a vital economic engine in the community.4
Friedman’s and Drucker’s theories promulgate an absolute regulatory-free economic environment, which historically has been proven good for business but bad for an ethically sound social conscience. However, a more balanced approach to achieving business interests includes weaving ethical attitudes into the realm of a longer-term strategy for financial profitability.
The Association, in its video and workbook, “Crossing the Line: Ethical Lessons for Financial Professionals,” says a “code of ethics” is a statement of values and principles that defines the purpose of the organization. These codes, the Association says, are written to clarify the ethics of a corporation, to define its responsibilities to owners and others that have a stake in the organization, and to define the responsibilities of its employees. A firm’s code of ethics announces, “This is who we are and this is what we stand for,” with the word, we, including all employees. Employee behaviors and actions are expected to conform to the ethics and principles stated in the code.
No list of attitudes that foster unethical behavior can ever be all-encompassing because new situations and issues arise daily. Executives should continuously adapt the code of ethics as circumstances and behavioral responses change.
Without a code of ethics, a corporation may lack identity and the ability to promote its social stances, as well as be ineffective in controlling individual employee behavior. Responsible and well-publicized social stances may force corporations to be ethical and responsible because the penalty of consumer reactionary behavior or governmental fines may be perceived as a threat. For example, in the late 1980s, a series of Pulitzer Prize-winning articles alleged widespread mortgage discrimination against blacks in Atlanta, Ga. In response, government policy built the fair lending issue into a tidal wave of legal and regulatory provisions for the consumer credit industry. Since 1992, the U.S. Department of Justice has reached settlements with 13 lenders charged with credit discrimination, extracting millions of dollars in reparations to customers and other remedial steps.5
The existing code is used solely as a public relations tool. To maintain or improve their market image, many corporations commit considerable financial and human resources to create and publicize codes of ethics. In 1995, William Ruckelshaus, the chairman and CEO of Browning-Ferris Industries (BFI), said in U.S. News & World Report that the most important ethical questions for his company were that “we not break our bond of trust with the communities in which we operate our disposal facilities.”6
Using a corporate code of ethics strictly to gain consumer confidence, enhance a corporation’s market position, and increase demand for products while fully neglecting to implement internal monitoring of the code can shatter employee loyalty and encourage unethical behavior throughout the corporation.
A company does not communicate principles of the code. When managers and team leaders do not communicate, discuss, or analyze the principles of the corporate code of ethics, the internal stakeholders may not place a great deal of importance on the ethical aspects of their actions. Routine failure to update the code, periodically train line staff on its goals, or ascertain that internal controls are fully functioning may lead to complacent behavior and total disregard of the code. A company is subject to the dangers of unethical acts or unprincipled behavior when it seldom or never monitors its code. This then increases the risk of corporate liability for wrongdoing and decreases productivity.
There is not a policy and procedure manual for the code. A policy and procedure manual is designed to provide responses to questions and references for issues without involving management. A manual is needed to communicate the code, train employees in its use, to monitor compliance consistently, and to deal efficiently with ethical issues.
Employees may not be able to recognize signs of unethical behavior or understand the consequences of such behavior if a manual on the code has not been written or disseminated. Even when they recognize unethical behavior, they may report it inaccurately or not report it at all because they may discount the importance of such acts.
Eventually, this complacent attitude toward complying with corporate policies could transgress into a decrease in corporate loyalty and employee motivational drive. In this situation, product and service quality will tend to drop and the company’s market image may tarnish.
Communication channels are not clearly defined. Unethical behavior also may be fostered by a lack of clearly defined communication channels with upper-level management.
Effective communication is key to many variables affecting honest behavior. If people feel they have a conduit for concerns and their communications receive acknowledgment, then destructive behavior can be averted such as “sliding by” with a minimal amount of work, productivity lying, or stealing.7
A non-communicative business disregards issuing and disseminating organizational charts, discourages transmitting information beyond the immediate line managers, refuses to establish an open-door communication policy, and discounts employee concerns as “whining.”
Internal stakeholders are treated differently than external customers. Disparate treatment of internal stakeholders includes arbitrary standards for performance appraisals, inconsistent decisions, and a “no-one-is-irreplaceable” attitude. These practices may cause employees to fail to identify with or believe in the product.
Legal department is in charge with handling ethical issues. Corporations can create fear and discomfort among employees when the legal department handles all ethical dilemmas and encourages whistleblowers to discuss any possible unethical acts with “the lawyers.” Employees who otherwise would come forward to report minor unethical acts may hesitate to do so for fear of involvement in major internal legal disputes.
Senior management and fraud examiners should be aware of employee attitudes that could foster unethical behavior. Empirical studies have revealed that group behavior differs greatly from individual behavior. Therefore, the attitudes of a team of employees can create some challenges for managers. If recognized early, however, these attitudes may be corrected by combining sound corporate policies on human resources management with active involvement and genuine concern from senior management members.
Following are employee attitudes that could foster unethical behavior:
“Management is the enemy.” Managers should be sensitive to how employees perceive management as a whole. If employees view managers as adversaries, teamwork never will develop. Employees may perceive the daily interaction between the two “teams” (themselves and management) as a competition rather than a united effort to achieve substantive productivity. Therefore, employees could sanction their “team” members’ unethical acts and willfully conceal them from management so long as these actions further the already established pattern of team belonging.
“We must stick together.” Managers also should be keen to note whether “horizontal” loyalty among co-workers is more important than “vertical” reporting of unethical acts to management. This attitude is related to the “management is the enemy” attitude. If left unresolved, this mentality could cause grave damage to team cohesiveness and the company’s bottom line.
“Questions and suggestions will get you into trouble.” When managers discount employee involvement in policy, employee behavior may stray from the corporate guidelines. Therefore, management should not discourage questions, innovative thinking, and suggestions or they may inhibit the willingness of employees to abide by the corporate code of ethics.
“The system is punitive in nature.” When employees openly question corporate policies or report what they believe to be unethical behavior, their inquiries should not be seen as whining, insubordination, or an inability to conform to pre-established corporate rules. These attitudes may cause employees to perceive the system as punitive in nature, to avoid further “upward communication,” and eventually to refuse to discuss policy-related dilemmas. They also may tend to fear reprisals, including the possibility of losing their jobs. Employees may avoid active participation of any kind because they believe it invites risk of exposure and punishment.
“Nobody up there cares about the truth.” Employees may become disloyal to the corporation if they feel that reporting what they perceive as “unethical acts” will not cause any corporate investigative concern. Of course, management should discern which reported alleged actions should be investigated further. Nevertheless, the reporting employee(s) must be informed of the final outcome and left with a sense of involvement and resolve.
“We must keep mistakes to ourselves.” When criticism is viewed as a personal attack, employees may attempt to hide their mistakes to appear “perfect” in the eyes of management. This attitude may be dealt with if management uses constructive criticism to explain ways of avoiding the same mistakes again.
When behavioral problems or mistakes in production occur and the employee is unwilling to admit responsibility, management should review the effect of the employee’s action(s) on production and/or on the team as a whole. They should discuss the consequences of those actions with the individuals in the group, and relay the reasons why undisclosed identity of the individual who erred could harm long-term viability of team efforts, production, and the health of the corporation as a whole. Furthermore, the manager should appeal to each individual employee’s concern by inviting him or her to share discontent in confidential settings with members of management.
Studies show that employee attitudes are best changed, and loyalty increased, by correcting the attitudes of managers first. Correct corporate attitudes and employee attitude problems tend to disappear and employees’ loyalty to their jobs and the company increase.
However, as mentioned earlier, severe deficiencies in manager and employee attitudes may be changed permanently only through rigorously examining the quality of management processes and benchmarking the known ethical standards to those in the internal business units as well as against industry standards. This may be achieved only through a holistic analysis, which covers the entire range of ethical issues as they affect shareholders, customers, employees, society, and partners. Following are some suggestions for fraud examiners and managers:
Evaluate and redesign the business plan. In the business plan, aggressive short-term growth should be well-substantiated by an infusion of new capital. Otherwise, short-term growth should be an integral part of a long-term financial growth strategy that is compatible with the industry in which the company operates. However, make sure the executives communicate clearly to shareholders the perils of having a highly ambitious short-term financial plan.
Review corporate ethical culture. Periodically, senior management should re-evaluate the code of ethics and reconsider its provisions. As a follow-up, the policies and procedures manual(s) should be adapted to closely follow the code.
Bob Holland, a former member of the Federal Reserve Board, stated that a corporate commitment to ethics is a solid indicator of future financial performance, in much the same way an investment in research and development or quality enhancement can be a short-term expense with a long-term payoff.8
Align rewards with corporation’s core values. Ensure that all performance incentives, financial or otherwise, are in line with the corporation’s core values.
Get involved in the unethical behavior reporting process. Management should explain the consequences of not reporting behavior that is contrary to the code and avail themselves to employees for questions and dilemmas.
Periodically retrain employees on the code of ethics. Management should help every new and experienced employee understand the code of ethics and ascertain if employees are willing to abide by it.
Periodically review internal compliance program. Design an ongoing compliance program to closely follow the code of ethics’ manual(s) on policies and procedures. Designate a team of employees whose responsibility is to implement and review the compliance program and be available if and when employees feel uncomfortable about approaching their line managers.
Treat internal stakeholders ethically. Top management should strongly support ethical conduct by acting ethically. Managers should treat internal stakeholders the same as external ones – by respecting individual choices, rewarding innovative thinking, and following up on complaints and reported deviations from the code of ethics. When top management is seen as giving strong support for ethical conduct, job satisfaction increases along with employee identification with the corporation.9
Communicate, communicate, and communicate. Managers must consistently communicate company core values internally as well as externally. Furthermore, the corporation should have a well-publicized organizational chart, which clearly defines the upstream communication channels. Managers should familiarize employees with these communication channels, encourage involvement and an “open-door” policy, and periodically test the effectiveness of the communication channels.
Implement a “bottom-up” reviewing process. Stakeholders should be encouraged to review periodically the manager’s performance. Employees’ satisfaction with management’s skill to guide them in their professional tasks, satisfaction with their managers’ applied interpersonal communication, and their perception of the “care” factor displayed by the senior corporate strata should be assessed occasionally by the corporate board. To ensure openness and truthfulness, anonymity of responses should be encouraged.
Remove the legal department from the process of reporting unethical acts. Create a separate layer between the employees and the legal department for reporting ethical violations. The legal department should be involved only when a question of state or federal law, rule, or regulations arises.
Top managers, fraud examiners, and employees should use these guidelines to prevent unethical acts and ascertain a healthy working environment. Nevertheless, new dilemmas and challenges will continue to face executives in their ambitions for success.
In summing up the dilemmas and challenges facing fraud examiners and other executives, we must recognize that a lack of controls and involvement compromise ethical integrity. On the other hand, ethical failure also may occur as a result of too much control and restraining of freedom of expression. Either of these extremes ultimately may cause individuals to act purposefully in a deviant manner. Finally, we should remember what the Association outlines in its ethical training materials.
The Association tells us that, “Often, the individuals who are caught and blamed were convinced that their actions were permitted or even encouraged; that demanding ‘whatever it takes’ to get results can help rationalize sharp practices; and that ‘everyone does it’ covers a multitude of ethically questionable activities.”10
Even though global business leaders such as Levi Strauss’ Robert Hass admit that financial obligations and other business pressures on companies can make it difficult to actively pursue ethical commitments, he also states that for him and his associates, ethics trump all other considerations. “Ultimately, there are important commercial benefits to be gained from managing your business in a responsible and ethical way that best serves your long-term interest. The opposite seems equally clear: The dangers of not doing so are profound.”11
[Some source links referenced in this article are no longer available. — Ed.]
Marcela Halmagean, J.D., MBA, CFE, has recently accepted the position of legal counsel for ABB Energy Ventures in Zurich, Switzerland. Previously, she was manager of forensic investigations for PricewaterhouseCoopers in Zurich.
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