BUSINESS
06/20/2016 04:35 pm ET | Updated Nov 23, 2016

The Truth About Ethical Organizations

There are many ideas about the factors that contribute to the ethics of an organization. These ideas range from ethical leadership to a concern for stakeholders to having a mission beyond economic success. While these ideas seem plausible, there is little evidence to support them. More importantly, there is often little you can do to affect these factors. A company that makes coat hangers is limited in the extent to which it can make its mission inspiring.

So a team of researchers set out to isolate actionable factors that contribute to an organization's ethics. By relying on publicly available data together with survey research on over 100 companies, the team built a survey instrument now widely used to measure the ethical performance of organizations. Their research found three factors that any organization can use to improve its ethics.

The first factor is a work culture in which employees are never retaliated against for reporting concerns. Many studies show that organizations in which employees report errors do better on quality measures and our research supports this. Employees in all organizations fear retaliation to some extent, especially when reporting on their managers. This fear of speaking up allowed unethical practices to persist at GM and Volkswagen even when many employees knew better. Ethical organizations don't pretend that fear of retaliation does not exist but instead work to create a culture in which retaliation is not tolerated and reporting is expected.

The second factor is a reward system in which ethics figures prominently. The strongest signal an organization gives employees about what the organization values is the organization's reward system. You can talk about ethics until you are blue in the face, but if ethics matters little on payday you will not accomplish much. In ethical organizations, you are rewarded not only for what you accomplish but also for how you accomplish it. Many organizations don't reward ethics because the HR function says it is too hard to measure. This is the same HR function which believes it can measure such intangibles as whether or not an individual is a team player. The key is not so much rewarding conduct that is ethical, but not rewarding conduct that produces results while cutting ethical corners. In high ethics organizations, there is always attention not only to results but to how the result are achieved. For example, progressive brokerage firms are looking not only at commissions earned but at long term client retention - a sign that clients believe they are being treated fairly. Healthcare company GuideWell has made doing things the right way a cornerstone of its culture.

The third factor promoting organizational ethics is action to resolve ethical issues when they arise. While employees are used to ignoring organizational communications as manipulative fluff, they watch an organization's actions carefully when unethical conduct is uncovered. The CEO of a major financial services company caught in an ethics crisis told me that he was more worried about what his employees would think than he was about what the pubic would think. He was wise in knowing that public opinion would eventually come around but if his own people learned to act unethically, there would be no end to the company's problems. If a lot of foot soldiers are executed in an organizational crisis while the ringleader goes unpunished, employees will draw the right conclusion. On the other hand, if investigations into wrongdoing go to the top, you have made major progress toward establishing an ethical culture.

While these three factors are, perhaps, less sexy than talking about stakeholders, holacracy and quality improvement fads, they go a long way towards determining the ethics of an organization. It all comes down to listening, rewarding what matters and investigating wrong-doing fairly and completely.

Previously appeared in The Chief Executive Magazine

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