Conduct Risk: The Moral Compass – An Anachronism in a Digitally-Connected World

Why do the banks, and so many others, continue to get publicly scrutinised for unacceptable behaviour? Why do they fail to satisfy the demands of the stakeholder economy and continue to get it wrong? Is it because they confuse ethics with morality?

The Definition of Morals and Ethics


Morals are about how you define for yourself what is right and wrong in a personal realm. Time and time again, ‘good’ people doing ‘bad’ things still believe themselves to be good people. It’s simply no longer good enough. You are what you do, not what you think. Actions are what people judge you on, not your intentions but your behaviour.

Business ethics defines how the company holds firm to a set of principles that are above the law and beyond the minimum. Statements of business ethics should be clearly understood and reinforced through how performance is measured. Ethics is the cultural vein that carries the lifeblood of the organisation. If you prioritise this, you ensure not that you get it right but that you don’t get it wrong.

Where Many Get It Wrong


Sadly, for many businesses, ethics continues to be a grey area and a discretionary investment. Typically, companies assume that most people want to do the right thing. However, behaviour science shows us that this is not where leaders should be starting. The science suggests that most people are not as ethical as they think they are. They will find themselves compromising their values in certain contexts, or under specific pressures. They may even be unaware of this slippage.

Often, people operate on auto-pilot and simply go on what has gone before. They copy their peers to fit in and take short cuts because they assume they know what the context requires. This belief flies in the face of the obvious – that the world is continually changing. Most people are powerless to shape the contexts in which they find themselves. At work, people convince themselves that the end justifies the means. They do what the company needs them to do to make the figures. The customer can come first if that doesn’t get in the way of making targets and employees think that it’ll all work out in the long run.

Leaders who continue to rely on the idea of a moral compass may suffer from ‘bounded ethicality’. They fail to adopt a broader range of tools that would help them identify and manage the ethical issues in their business contexts.

How Behavioural Science Can Help


Clearly, what is needed is a paradigm shift away from the moral philosopher’s focus on individual character. Businesses must move towards an understanding of the science of behaviour. This science offers the premise that all people are all emotional beings. People respond in irrational ways to the company contexts in which they find themselves.

Business ethics are essentially about the integrity of the company. Risk management needs to be re-classified as doing business ethically. This shift in focus protects the business by building a healthy culture that can risk-proof the enterprise. This new type of accountability shifts the focus away from individual character strengths or weakness. Instead, a spotlight is placed on the actions leaders take to design the culture.

Global regulators, including APRA, are sending a strong warning message to boards. They want to highlight that behaviour in the workplace is a systemic source of financial, social, and environmental risk. Regulators expect boards to purposely manage the types of behaviour they promote.

Create an Excellent Culture to Manage Risk


A consistent culture underpins business success. To see this in action, you can look to leading brands such as GE, 3M, Patagonia, Avon, or Starbucks. They prove that it is essential to skill employees to respond to the contextual pressures they will face. Leaders play a significant role by not tolerating poor role modelling from the top.

No matter which country they are in, the culture is the same. The leader’s role is to create a context where employees are forewarned about contextual pressures. That way, they can better respond to these in ways that do not comprise ethical standards.

Australia’s current cultural perspective of ethics as up to the individual sets business standards too low. This attitude keeps board focus on compliance rather than addressing ethical risks.

Cultural and behavioural change is not an easy task. Leaders must empower people to think, feel, and act in a way that builds a culture of integrity and respect. To get there, they must offer regular training, performance management, and communicate well. Enabling systems and processes and targeted engagement can also work wonders.

It’s time to abandon reliance on moral compasses. No longer can companies hide behind the notion of grey area. Employees know what ethical behaviour looks like, customers know it, regulators know it. Social scientists have known it for over 100 years.

It’s time to sacrifice some finance people from the board and replace them with social scientists. Then maybe leaders will see the next ethical crisis coming before it decimates a hard-won reputation!

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    Code of Conduct – A Barrier to Good Conduct?

    Gallup reports that only 15% of employees are engaged at work today. Is your poorly designed code of conduct the cause of this disengagement?

    How Relevant is Your Code of Conduct?


    If you were to ask everyone in your company, “Who has read the code of conduct?” how many people would say yes? The majority? A few? Hardly anyone? Our guess is hardly anyone. Yet, the code of conduct is possibly the most critical document governing your business. It establishes the company’s relationship with its employees and safeguards its reputation and social licence to operate.

    For most organisations, the code of conduct also lays out the legal obligations between parties. This is especially true in the public sector and the larger not-for-profits. It sets out the framework for how people can expect others to treat them at work and the protections for employees in the event of a breach.

    Experience suggests that codes of conduct often have little meaning for employees. They don’t understand its contents or how to apply its directions. They simply aren’t motivated to use it as it wasn’t designed with their needs in mind.

    Typically, legal departments create the code of conduct. They often write it in ‘legalese’ – the complex version of English that lawyers need to use to make sure that they can defend their documents in a court of law. Many employees don’t understand legalese, nor its full implications. And yet, it’s presented to them on their first day in the workplace as a fait accompli, and they’re told just to sign it.

    Most often, staff sign the document despite the company not offering them the chance to read it first. No one mentions the code again until they do something wrong. Often its sole purpose is to reprimand employees for poor behaviour.

    Is There a Different Way?


    The first step in creating an excellent code of conduct is to identify what the objectives of it are. You must also decide who it is designed for before you can put pen to paper. Is it there to serve the legal department, the HR department, or the needs of employees? If its primary objective is to help employees know what the company expects of them, then you need to start with their needs in mind.

    What are the needs of the employee in understanding why their company has a code of conduct? What about the code of ethics? How best can the leaders of the organisation design a code’s content so that it resonates with employees’ needs? You need to create one that you can deliver to suit many different learning styles. It must also be suitable for the differing levels of comprehension that exist throughout most workforces.

    Different levels of staff have different accountabilities. They require various content styles and nuances while still being true to the spirit of the code. Each group of staff also requires examples of specific behaviours that represent the company’s standards.

    For one organisation, you can have several versions of the training content designed. Each will support the code of conduct’s intent for various staff stakeholders and their unique spheres of influence. Each workshop could be highly interactive, based on authentic workplace challenges that resonate with people in different occupations. Choose examples that work for many levels and those from different demographic backgrounds. Design a code of conduct training to match employees’ needs. To engage your staff, you must do it with this level of detailed nuance. Authenticity and relevance to them and their situation is the first barrier that you must surmount.

    So, does your code guide conduct, shape the context in which people work, and give them a sense of purpose? Or, does it just sit on their employee file as a ticking performance time bomb?

    This piece is an extract from a forthcoming book on how to make your code work, rewritten for context.

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      Workplace Culture: Enabling Organisational Management through Speak-Up Initiatives

      Codes of ethics and codes of conduct are increasingly part of most businesses’ cultural management strategy. Despite this, they remain ineffective because hotlines simply don’t work. There is now 20 years of field research to show that employees don’t use them. They are often afraid that raising issues will impact negatively on them. Or they believe that nothing will change – so why bother?

      This belief leaves companies vulnerable to internal risk or illegal behaviour. It is employees – not the internal or external auditors – who are the first people to see risks. So, if staff don’t speak up, then you can have a PR crisis on your hands.

      It pays off big time to invest in promoting speak-up cultures. To achieve such a culture, you must formally recognise the power of the social life of your company. It is here that employees learn what the acceptable ways are of relating to each other. These interactions can undermine formal codes and policies.

      Key steps in creating a speak-up culture include:


      1. Insist that the top team participate in any speak-up initiative. The behaviour of management gives the loudest message around the safety of raising concerns.
      2. Appeal to personal identity. Most people have a strong self-concept and self-identity that they are ethical. Employees rarely self-identify as part of the problem. That’s why appealing to employees’ sense of personal identity is a powerful lever for behaviour change.
      3. Build life skills. Values conflicts are inevitable, so forewarn employees to be alert to other stakeholder perspectives. Also, notify them of the contextual pressures surrounding them. These actions will help offset defaulting to an auto-pilot decision-making cultural norm.
      4. Train managers and employees in speak-up skills. Enabling a shared language around risk is a prerequisite to a speak-up culture.
      5. Take a systems approach. Organise training in cross-sectional groups to enable employees to hear each other’s concerns. This dynamic will amplify the usually silenced company social life that shapes employees’ assumptions. A whole of business approach shows employees that you are asking everyone to change their behaviour. Speak-up skills draw on the lessons from conflict management, mindfulness, and behaviour science. The book ‘Giving Voice To Values’ – and assertiveness training may also be useful.
      6. Implement peer to peer accountability. Managers and leaders must hold each other accountable to model the appropriate behaviour. Insist managers at every level develop action plans for what this will look like in their areas.
      7. Embed in the company. What gets measured and rewarded, gets done. Align the existing reward and recognition systems to support the speak-up cultural change program.

      Ideally, speak-up initiatives will be a cornerstone to your company living its stated values. Communicate in positive terms and invite employees to identify additional ways to raise issues that will work for them. These techniques will build trust and restore confidence in the integrity of your code of conduct or code of ethics.

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        Ethical Culture – What Does Good Look Like?

        Having a scandal-free year is at the top of most company leaders’ agendas. Such is the world today that this can seem like a lofty ambition. The internet is shrinking the world and consumers are hitting out at brands falling short of their business conduct expectations.

        Lack of Trust in Leaders


        Many leaders put profit goals ahead of the conduct risks they spawn. This mistake has resulted in trust in leaders being at an all-time low. The British Social Attitudes surveys have been around since 1983. A report published by a University of Manchester professor in 2013 noted the most significant change ever recorded by the study. This shift was the loss of public confidence in British banks between the early 1980s and 2009. Social media has become the public noticeboard to name and shame those who do wrong. It keeps the pressure on businesses refusing to recognise changing societal tolerances.

        In 2019, Google’s New York-based employees staged a sit-in. They were protesting against a perceived culture of retaliation against employees who demand higher standards of behaviour. This protest then spread to other global offices and social media via the hashtag #NotOkGoogle. That protest followed on from a previous demonstration just six months earlier. During that event, thousands of workers at Google offices around the world walked out of their jobs. They did this to protest at how the company handled sexual misconduct claims.

        Google, however, is far from being alone in its failure to respond appropriately to conduct risks. E&Y’s 2018 research shows that many employees don’t trust that their company will act on complaints or keep them confidential. There was recently a Royal Commission into Australia’s banks and insurance companies. It involved most of Australia’s top brands in this sector. The findings highlighted the real shortcomings of their state-of-the-art compliance programmes. The results sent a clear message about the drawbacks of focusing too much on compliance only.

        Leaders Must Take Charge of Risk Culture


        Companies can no longer delegate risk culture to the compliance or HR departments. It is, and always has been, the domain of CEOs. Only they have the positional power to shape it. What leaders do and reward sends the loudest message about how people should act. It determines the extent of the conduct risk.

        The advances in AI and big data cannot compensate for the past failures of the ‘three lines of defence’ model. Technology will not save ethical reputations. Leaders must step up to purposely design their company cultures. They need to take charge of monitoring activities to ensure that their teams maintain desired behaviour standards. That is how companies can save their ethical reputations.

        Why does unethical behaviour emerge in compliance run businesses? The answer is not clear-cut; there are several systemic sources. All of these emanate from the human dimensions of workplace culture.

        Relationships and interrelationships are the roots of all conduct risk. They cannot be managed by policy, no matter how sophisticated the surveillance is accompanying it. Leaders themselves must set and maintain behaviour standards. Only then will employees be able to differentiate between unethical behaviour, risk management, and criminal conduct.

        What Does an Ethical Organisational Culture Look Like?


        The good news is that most conduct risk is avoidable. It requires leaders to get serious about managing culture or maintaining the one they have inherited. So, what makes for ethical workplace culture?

        It is actions, not words, that set the tone from the top. Behaviour demonstrates for all employees how they should pursue business goals. Ethical cultures emerge when leaders lead by example.

        For the board, this means selecting executives who can champion the company’s ethical standards and values. Actions of the board and top executives need to align with the company’s values. Then, employees can relax, the rules are clear, and it’s safe to expose unethical conduct.

        Company culture is about human behaviour. That’s why leaders need to understand personal beliefs, motivations, and incentives. The new must-have is knowledge of how these interact with leadership styles and the design of policies and systems to create conduct risk. It requires a lot of reframing of old ideas of why people do the things they do.

        New ‘mental models’ of leadership and human motivations are also useful for this. The behavioural sciences are a powerful tool that can be used by leaders. This information can enable them to encourage responsible decision-making and improve behaviour. Leaders can leverage behavioural science insights in their interventions.

        This material gives them the chance to forewarn employees about the ethical business issues they will face. Then staff can prepare themselves to offset contextual pressures.

        It is also important for leaders to manage the ‘the mood in the middle’. That is, how middle managers behave and react to unethical behaviour. After all, it is middle managers who have the most impact on how employees act.

        How Ethical Cultures are Created


        Ethical cultures embed formal and informal incentives promoting and reinforcing desired conduct. Employees are rewarded not just for achieving operational goals but also for how they gain them. The rewards could be in the form of informal praise or through a formal company recognition system. These are public symbols of leaders’ commitment to promoting ethical behaviour. They also serve as validations for employees.

        Ethical businesses jealously protect and promote their culture because they know it is their competitive edge. They recruit in their likeness and ensure newbies sign up to their standards as part of their employment contract. The famous Zappo culture offers a prime example. After four weeks of training and a week on the job, all new hires are given more than just payment for their time. Zappo also offers them a $2,000 bonus if they decide the company is not right for them. That is how serious Zappo is about maintaining their cultural advantage.

        Even where leaders formally manage culture, misconduct can still emerge. In this scenario, however, there is a much greater chance that someone will report it. When left unreported, unethical behaviour undermines cultural strengths, enabling risk to flourish. Employees opt-out of pointing out risks, especially when their managers are involved. The reason is that they believe no one will do anything about it.

        Companies must address this significant internal barrier to risk management. One way of doing so is by investing in building ‘speak up’ cultures and showing zero tolerance for backlash. Companies can learn about where the system is failing by removing the fear of speaking up. By doing this, they enable realignment between employee motivation, skill set, and risk management.

        Good governance requires a focus on leaders’ traits and behaviours and how they influence others. That may be through guidance, communications, rewards, and discipline. Boards need to reframe the role of leaders. They need to recognise ethical leadership as a process of social influence. It is a process where leaders steer staff towards a standard of behaviour and hold people accountable when they breach it.

        It’s time that people distinguished between ethical leadership and leadership as usual. Ethical leaders make it as easy as possible for employees to adhere to ethical standards.

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          Survey says 50% of employees witness conduct risk

          In 2019, a new Global Business Ethics Survey (GBES) into unethical workplace behaviour was released. The survey again showed that conflict of interest is the number one unethical practice observed by employees. Around 34% of those who see it fail to report it. Globally, nearly half of all employees reported witnessing conduct risk.

          Why Don’t Employees Speak Up?


          Fear of retaliation is a significant factor as to why employees don’t speak up. Backlash can happen in many different forms; fewer working hours, missed promotions, unpopular work assignments. The #metoo movement has made efforts to raise awareness of the pervasive nature of workplace harassment. However, 46% of those reporting sexual harassment in 2019 continue to experience retaliation.

          When employees do speak up, they tend to do this with their manager rather than anonymously. The results of the 2019 survey are again consistent with this. Typically, Australian workplaces do not provide specific training for managers on how to respond when employees raise concerns. Is this a barrier to managing conduct risk?

          Lack of respect and civility in the workplace is the second most common type of observed misconduct. Abusive behaviour creates low trust workplaces. Aggressive, degrading, or intimidating behaviour is of no benefit to anyone. It not only lowers a company’s ethical standards but also saps employee commitment and overall performance. Is this another unspoken barrier to increased employee productivity?

          Is Change Possible?


          It is possible to change workplaces to make them more civil and more inclusive. Companies must upskill to be better able to listen and respond to employees’ concerns. There is some good news in that regard. The 2019 survey found that employees reporting violations of health and/or safety regulations were less likely to experience retaliation. Around 30% experienced retaliation vs the 46% reporting sexual harassment.

          Isn’t it way past time that leaders allocated sufficient resources to training managers and leaders in how to respond when their people point to risks? eLearning is not going to cut it!

          It is time for leaders to step up. They need to design company contexts which enable employees to feel safe when identifying risks. Behavioural sciences show us how to develop workplace cultures that encourage speaking up. Let’s use them.

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            Making ethics and code of conduct training work

            Why do so many business ethics and code of conduct training programs fail? They don’t manage to engage employees nor protect employers. For many companies, the annual code of conduct or ethics training session is a waste of time. People end up resenting the lack of opportunity given to discuss current ethical issues in the business.

            These insincere practices lull companies into a false sense of security regarding risk management. Recent scandals and public enquiries have made us all aware of high-risk areas. Now, it seems intentional to not act upon this knowledge to eliminate known risks.

            Much training fails simply because of its poor design and its lack of resourcing. A strictly legal or compliance approach drives content rather than the needs of its intended audiences. Lawyers tend to focus on telling employees about what they can and can’t do. They overlook the employees’ innate need to make sense of the requirements and how to apply them. The compliance approach assumes everyone will have the same interpretation. One size does not fit all, and companies can’t ignore the myriad of different situations that arise.

            Perhaps more insidious is the training that stays silent on the informal cultural priorities that shape workplace behaviour. For example, obeying the hierarchy, doing more with less, and making financial targets. Many companies insist that employees meet deadlines or stretch goals. Training often stays silent on unwritten rules where people see what behaviour is rewarded and take their cue from this.

            Annual online training is often used instead of face to face interaction. Moving all programs online squashes authentic learning.  Many high profile global brands such as Wells Fargo or Volkswagen have been found lacking despite their state of the art ethics programs. This issue highlights why there is a need for a new approach that is fit for purpose.

            So how do you design ethics or Code of Conduct training with integrity?

            • The authenticity of the content is the first principle. Risk managers need to identify the real ethical challenges employees face. Then they must use this to tailor training content. Such design sends a powerful signal to regulators. It suggests that leaders are genuine in their desire to create an ethical culture where employees are supported to do the right thing.
            • The design of content needs to be informed by the new behaviour sciences. These show how organisational context trumps employees’ values. Behaviour science insights enable leaders to design the cultures they want in collaboration with all employees. Organisational justice research finds that if employees see the organisation as unfair, they are likely to retaliate. Retaliation may include fraud, data leaks and inappropriate behaviours.
            • Training also needs to be tailored to specific organisational contexts that are known as high-risk. Focusing on risky situations is more effective than focusing on high-risk individuals. Employees need to be skilled in managing corporate cultural pressures such as making the end of month sales quotas. Or in procurement areas, offsetting the pressures from ‘relationship marketing’ by suppliers.
            • Ethical issues arise daily. Conversations, in addition to timely and regular training, signal that leaders are keen to make it as easy as possible for employees to do the right thing. The frequency of ethical conversations offsets “cultural drift”. Don’t let informal ways of doing things gradually overtake the formal policies.

            It’s time to reset the default button on code of conduct and business ethics training. Both employees and employers will reap the benefit of genuine workplace learning opportunities as a result.

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