Building ethical culture: cost or investment

Wednesday 15 June, 2016

Every organisation typically wants their employees to enjoy their jobs so that they will also be productive at work.

CQUniversity Associate Professor and MBA Director Michael Segon says this is a basic concept related to Maslow’s hierarchy of motivational needs.

Similarly organisations want their employees to meet goals and objectives, make decisions that advance the interests of the organisations that do not expose the organisation to risk, by either breaking laws or making bad decisions that stakeholders view negatively, damaging corporate reputation.

Yet the majority of Australian organisations fail to adequately address their own culture and equip their employees with the knowledge, skills and capabilities to identify and address ethical issues.

As a consequence this increases the likelihood of unethical and potentially illegal decisions that may damage corporate and organisational reputation.

A productive and ethical organisational culture does not emerge by chance. Rather it is a function of selecting the right people, establishing an effective and interactive orientation program that educates new employees about an organisation’s values, polices and decision making systems, that risk management and codes of ethics and conduct are developed and regularly reviewed, constant communicating standards and values, training people, encouraging dialogue, role modelling by senior managers etc.

The main reason for organisations failing to address this important aspect of developing an ethical culture is because most see it as a substantial cost and because for the most part it is not mandated like occupational health and safety - it simply not required. Another often cited reason by senior leaders for not implementing strategies for developing an ethical culture is because “we don’t have that type of problem here.”

Australian organisations have been slow to adopt and implement strategies designed to develop ethical cultures compared to those in the United States and Europe.

In part this is due to the regulatory requires of US laws such as the Sentencing Guidelines, the Sarbanes Oxley Act and the Foreign Corrupt Practices Act and similar legislation in the UK and EU that make reference to the requirement for codes and cultures to be developed. These may be taken into account by Federal judges when corporations are subject to legal proceedings.

Most states in Australia have public service acts that require aspects of ethical culture to be implemented such as values and codes of conduct. Similarly companies listed on the stock exchange are also required to have an appropriate code of conduct.

However experience has shown that this is often at a minimal compliance level and most organisations do not develop specific polices and processes designed for their context, they do not integrate existing strategies within an ethical or integrity framework nor do they train people in ethical decision making.

Recent corporate scandals in Australia highlight the need for organisations to take the development of ethical culture seriously. The international bribery scandal that engulfed the Reserve bank through its subsidiary and joint ventures of Securrency and Note Printing only a few years ago came down to individual managers and employees engaging in unethical practice.

Similarly scandals in the Victorian Public Sector’s Department of Education and Department of Transport were a combination of individual managers making unethical decisions based on self-interest, conflict of interest and an unwillingness of individuals within the organisations to utilise whistle-blowing systems to highlight the problems.  Ultimately it comes down to culture - yet it appears lessons from the past have not been learnt.

In the aftermath of the Australian Wheat Board’s bribery scandal in the early 2000s Justice Cole’s inquiry in 2006 stated:

“AWB had “a closed culture of superiority and impregnability, of dominance and self-importance.  Legislation cannot destroy such a culture or create a satisfactory one.  That is the task of boards and the management of companies.  The starting point is an ethical base.  At AWB, the Board and management failed to create, instill or maintain a culture of ethical dealing.”

As Professor Lyn Sharp Paine of Harvard University has stated:          

“Ethics has everything to do with management. Managers who fail to provide proper leadership and to institute systems that facilitate ethical conduct share responsibility with those who conceive, execute, and knowingly benefit from corporate misdeeds.”

A major problem facing the Australian context is that concepts such as business ethics, integrity and corporate social responsibility are seen as “add-ons” not just in the private and public sectors but also within business education.

Courses in organisational ethics, decision-making and CSR are generally not featured in programs such as MBAs. Nor do they feature prominently in programs such as Human Resource Management and Corporate Law. Most often it is these professionals and or departments in organisations that are delegated the task of creating codes of conduct and ethical systems - a task for which they are not equipped nor qualified.

For example, a common and recurring error is the confusion around what is a code of ethics, a code of conduct and a code of practice. These terms are used synonymously in the Australian context yet they serve different purposes.

So why should organisations invest time and money to create systems and processes designed to address these issues?

An effective ethical culture has been shown to promote better quality decision-making and reduced incidents of unethical and illegal practices. This is because people feel more comfortable in discussing and challenging decisions before such decisions are implemented.

Secondly research has shown that ethical culture promote respect and values among employees. This means that they are not only more productive but are also less likely to leave which reduces indirect and direct employment costs significantly.

Reputation and organisational “goodwill” are significantly enhanced by ethical culture and there is increasing evidence that customers and stakeholders favour companies and organisations with ethical positions.

Lastly, evidence from the United States has shown that companies with a commitment to ethics tend to have a Market Added Value (MAV) of 2-3 times that of companies who do not. This information was put forward by Chicago DePaul University’s Professor Curtis Verschoor based on studies using established financial measures to distinguish the financial performance of ethical vs. non-ethical organisations.

It would appear that developing ethical polices and processes not only minimizes cost and risks it also can increase profitability and financial performance.


Join CQUniversity’s MBA Director Michael Segon for a June 24 Webinar, Rethinking Professionalism, in which he discusses what defines a professional in the modern day and the standards which should be demonstrated. Register here.


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