Modeling the Message:

Transcription

1 Modeling the Message: Driving Compliance Results through Ethical Leadership and Organizational Culture Scott Killingsworth Society of Corporate Compliance & Ethics September 26, If people are good only because they fear punishment, and hope for reward, then we are a sorry lot indeed. Albert Einstein Culture, more than rule books, determines how an organization behaves. Warren Buffett 2 Agenda Command and Control Compliance Model and its limitations Values-Based Model Pioneering Studies on Comparative Effectiveness Legitimacy: What Gives Your Rules Moral Authority? Group Dynamics, Commitment and Framing How Culture Operates, and What it Can Do Leadership s Roles in a Healthy Culture Compliance and Ethics Program Opportunities 3 1

2 Command and Control Compliance Model Aims to control or influence employee behavior mainly through negative and positive incentives Based on the rational choice theory of classical economics: We compare Reward for Misconduct to Risk Severity of Punishment Probability of Detection = Estimated Risk Biggest number wins Risk or Reward Heavy reliance on specific rules, plus monitoring, detection, punishment and deterrence to increase perception of risk 4 Command and Control Limitations Even if we accept the rational-choice assumption, Command and Control has built-in limits: Only two levers for improving results: Increase perceived risk via better detection Increase penalties Both are subject to the law of unintended consequences Risk/Reward framing puts everything up for grabs what s your price? Shouldn t right and wrong should be non-negotiable? 5 Command and Control Limitations Rationality is Overrated: In actual human beings, well-known cognitive biases distort risk/reward decision-making processes We consistently over-value definite, near-term events such as the rewards of rule-breaking We under-value uncertain, future events, even if catastrophic such as the risk of getting caught See, e.g. Predictably Irrational, Nudge, Thinking Fast and Slow, The (Honest) Truth about Dishonesty, Freakonomics Source: Messick and Bazerman, Ethical Leadership and the Psychology of Decisionmaking 6 2

3 Command and Control Limitations More cognitive biases that distort risk/reward and ethical judgments: Self-Serving Bias and Conflicts of Interest Overconfidence, Confirmation Bias and Motivated Reasoning Authority Bias and Conformity Pressures Remember the Milgram and Asch experiments? Sources: Messick and Bazerman, Ethical Leadership and the Psychology of Decisionmaking ;; Kim, The Banality of Fraud: Re-situating the Inside Counsel as Gatekeeper; Milgram, Behavioral Study of Obedience; Asch, S. E. Effects of Group Pressure upon the Modification and Distortion of Judgment 7 Command and Control Limitations Hidden costs of strong Command-and-Control Focus: Signals mistrust of employees Pygmalion Effect Adversarial relationship with employees resentment and backlash Risk/Reward framing can crowd out ethical thinking Deterrence message is one of pursuing self-interest (avoiding punishment) rather than doing the right thing Bottom Line: Command-and-Control alone is, at best, an inefficient (and therefore expensive) way to influence behavior Sources: Treviño, Weaver, et. al; Stansbury and Barry, Ethics Programs and the Paradox of Control; Ayers and Braithwaite, Responsive Regulation: Transcending the Deregulation Debate 8 Values-Based Approach The Paradigm Shift Traditional Command and Control Paradigm: Prevent bad employees (5%? 20%?) from breaking rules Forcibly impose Company standards and values upon recalcitrant employees Business and rules-based framing Values-based, Self-Regulatory Paradigm Harness the positive values of good people (80%? 95%?) Make sure Company is seen as measuring up to employees values Ethical and social framing To win loyalty and voluntary adherence to rules show that the company deserves it 9 3

4 Values-Based Approach: Motivating Compliance via Ethical Culture Ethical Culture = Engaging Employee Values so that Employees Identify Positively with the Organization and Act Accordingly Your values are what you do when no one is looking When employee aligns with Company values, motivation is intrinsic, compliance is voluntary and doesn t depend on monitoring, detection and fear of punishment Two Large-Scale Studies of Workplace Compliance: Value-based factors (legitimacy and value congruence) explained over 80% of variance in compliance behaviors Punishment and reward systems explained less than 20% Source: Tyler, Deinhart, & Thomas, The Ethical Commitment to Compliance: Building Value-Based Cultures Cultural Markers Culture and Compliance What Works and What Hurts : Very Large-Scale study of Effect of Cultural Factors on Compliance Outcomes 1. Values-Based Compliance Programs produce better results than those with a Command-and-Control, deterrence emphasis. Ethical leadership (Executive and Supervisory levels) Fair treatment of employees Rewarding ethical behavior Punishing misconduct Open discussion of ethical issues Ethical issues considered in decision-making Employee and Community Focus Compliance Goals Reducing unethical conduct Reporting misconduct Increasing awareness of ethical issues Increasing advice-seeking on ethical issues Comfort delivering bad news Better ethical decision-making Increasing employee commitment to employer Source: Treviño, Weaver, Gibson and Toffler, Managing Ethics and Legal Compliance: What Works and What Hurts, Cal. Mgmt. Rev., Vol. 41, NO. 2, 131 (1999) 11 Values-Based Approach Legitimacy and Culture What Drives Voluntary Adherence to Rules? (Tyler) Company s values and policies are perceived as measuring up to employee s moral values Company is perceived as a legitimate source of authority: employee believes it deserves to have its rules followed These factors are more influential than likelihood of detection or fear of punishment (80/20) So, how can we promote these perceptions? Measuring up on values: When managers say ethics, employees hear fairness. Sources: Tyler, Deinhart, & Thomas; Treviño, Weaver, Gibson & Toffler 12 4

5 Values-Based Approach Fairness, Legitimacy and Culture Fairness Perceptions and Ethics Outcomes (Treviño and Weaver) Measured effects of company s perceived fairness to employees Fairness strongly linked to less observed unethical conduct and with more reporting of infractions What Works/What Hurts: Fair treatment had the strongest correlation with employee commitment to the company and with comfort delivering bad news Source: Treviño and Weaver, Employees Fairness Perceptions and Ethics-Related Outcomes in Organizations, chapter in Managing Ethics in Business Organizations (2003) 13 Values-Based Approach -- Legitimacy and Culture Leading criteria for legitimacy of authority: Procedural fairness in decision-making Quality of interpersonal treatment of employees These factors are more influential than: Fairness of actual decision outcomes Whether outcomes are favorable to employee Risk of punishment Rewards of employment: salary and incentives Source: Tyler, Deinhart, & Thomas 14 Values-Based Approach-- Legitimacy and Culture What is Procedural Fairness? Opportunity for input Clear, articulated rules and processes Consistency over time and across similar cases Same rules for everybody Communicate reasons for decisions What Is Quality Interpersonal Treatment? Respect employees rights: necessary but not sufficient Courtesy and dignity respect the person Listen Communicate reasons for decisions Source: Tyler, Deinhart, & Thomas 15 5

6 Values-Based Approach Trust is the Glue Managers at all levels must earn trust Values consistent, coherent, predictable behavior trust Actions speak louder than words Mood in the Middle as well as Tone at the Top Treatment of employees is paramount Four leadership drivers of ethical culture (CEB): Honesty and dependability Respecting and trusting employees Listening carefully to input Taking action on misconduct All 4 relate to employee trust in management This is ethical leadership in a nutshell 16 Consistency is Crucial It takes many good deeds to build a good reputation, and only one bad one to lose it -Benjamin Franklin Quotations found on the Internet are not always accurate. -Abraham Lincoln Bad is Stronger than Good -Review of General Psychology, Vol 5 No. 4 (December 2001) by Baumeister, Bratslavsky, Finkenauer and Vohs. 17 Group Dynamics, Commitment and Framing People use groups to support and nourish our identities and our positive self-concepts Identification with the group promotes commitment and cooperation Fair and respectful treatment Tells employees that they are important and valued Promotes trust Encourages identification, commitment, and cooperation with the group Pride in the group also encourages identification Sources: Tyler and Blader, The Group Engagement Model: Procedural Justice, Social Identity and Cooperative Behavior, Personality and Social Psychology Review, 7: 349 (2003) 18 6

7 Group Dynamics, Commitment and Framing Group norms can govern behavior more effectively than market norms Group norms = Culture Market norms = Reward and Punishment Social vs. market framing: People will do things for free, for social reasons, that they won t do for money; and social penalties can trump economic ones The power of social PLUS ethical framing: Around here, we do what s right. Sources: Tyler and Blader, The Group Engagement Model: Procedural Justice, Social Identity and Cooperative Behavior, Personality and Social Psychology Review, 7: 349 (2003); Ariely, The Cost of Social Norms, chapter in Predictably Irrational (2008). 19 Promoting Employee Commitment Employee commitment (engagement) strongly linked to: Management s actions show character and integrity Management welcomes those seeking advice about reporting policy violations Clear guidelines for acceptable behavior All 9 Ethical Culture measures in the What Works/What Hurts study Sources: McDowell, The Hidden Bonus in Doing the Right Thing; Treviño, Weaver, Gibson and Toffler Committed Employees Boost Compliance and Peformance Benefits of Committed Workforce Voluntary rule adherence Less need for surveillance/monitoring More likely to report misconduct, which means: Less accommodating environment for rule-breakers more eyes on the street Significant increase in voluntary actions to benefit the organization Oh, by the way, also: Higher sales, profits, customer satisfaction and loyalty Lower turnover Sources: Tyler, Dienhart, and Thomas; Ethics Resource Center, 2009 NBES, Supplemental Research Brief on Ethics and Employee Engagement; Harter et al, Well-Being in the Workplace and its Relationship to Business Outcomes 21 7

8 DIMENSION Do We Notice a Pattern? Trevino and Tyler Ethics Resource Corporate Corporate Weaver Legitimacy and Center Executive Board Executive Board Cultural Factors Voluntary Favorable CELC CELC that Compliance Perception of Leadership Leading indicators Drive Management Attributes that of Misconduct Compliance Drive Integrity Leadership and Modeling Ethical leadership Employee trust of Modeling good supervisor and behavior; management keeping commitments Honesty Co-workers compromise values for power and control Interpersonal Treatment Fair treatment of Quality of employees interpersonal courtesy, treatment respect, dignity courtesy, respect, trust towards employee Respect and trust employees Lack of trust and respect from direct manager Justice, Accountability, Follow-Up on Misconduct Follow-up on reports of misconduct; rewarding ethical behavior; consistent treatment Procedural fairness; same rules for everybody; consistency Maintaining accountability among all employees across the business Taking action on verified unethical conduct Fear of retaliation; discomfort speaking up Communication Open discussion of ethical issues Listen; opportunity for input from affected persons; communicate reasons for decisions Good communications, including communications on ethics Listening carefully to the opinions of others Discomfort speaking up 22 Building Culture Co-Workers Actions MANAGEMENT S WORDS (Code, policies, procedures, training ) Management s Actions LIFE 23 Effect of Ethical Culture Percentage of employees observing misconduct Source: Ethics Resource Center, 2011 National Business Ethics Survey 24 8

9 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Number of Negative Workplace Factors Present Culture and Misconduct % of Workers Witnessing Misconduct per Year Ethics Resource Center identified 5 Negative Work Environment factors: Success is rewarded regardless whether achieved through questionable means Mistrust of top management s promises and commitments Mistrust of supervisors promises and commitments Dissatisfaction with information from top management Dissatisfaction with information from supervisors Strong correlation between these negative factors and workplace misconduct Source: Ethics Research Center, 2007 Business Ethics Survey 25 Effects of Ethical Culture 16.2 percentage point swing in performance Source: Corporate Executive Board, Ethical Leadership Leadership s Role Leaders at all levels must take ownership of culture Model the message through the broader company culture: Treat employees with respect and conspicuous fairness Keep your door and your mind open to employees Engage and communicate consistently and in both directions (listen!) Transparency About responses to misconduct About reasons for decisions Be the change you want to see; live up to employee values and they ll internalize yours Create a place where people are proud to work 27 9

10 Program Opportunities Senior Executive/Board Education on Compliance and Productivity Impact of Ethical Leadership, Values-Based Culture and Organizational Justice Coordination with HR s Engagement initiatives Cultural Assessment and targeted responses to areas of weakness Company-wide weaknesses Pockets of Resistance micro-cultures Integration of values and compliance measurements into employment functions: Hiring and onboarding Evaluation, compensation, recognition, promotion, succession Managers especially Separation (bad apple disposal and exit interviews) 28 Program Opportunities Evaluate employment decision-making processes (procedural fairness, consistency, transparency, etc., not just ethics & compliance component) Ethical Decision-making Workshops Speaking up Training (e.g. GVV) Management soft-skills training Values communications through multiple channels Storytelling Real-life examples of good and bad decisions and their consequences 29 Leverage Other Voices to Get the Message Across 30 10

11 Questions and Discussion Scott Killingsworth Bryan Cave LLP One Atlantic Center Fourteenth Floor 1201 West Peachtree Street, NW Atlanta, GA Tel Fax