Fluent Essays

Read the articles “Why Compliance Programs Fail” and “How to Design an Ethical Organization” located in the Reading and Resources area of this module. Also, review A Global Leader’s Guide to Managing Business Conduct, located in the Harvard Business Review module. The articles present research about why compliance programs fail, how to design an ethical organization, and how to manage business conduct. Using material from the articles, address the following questions in your paper: What are the shortcomings of compliance and ethics training programs? What strategies and processes may companies use to monitor business conduct? How can companies use data to standardize ethical organizational culture and maintain a sustainable brand? HBR.ORG SeptemBeR 2011 reprint W1109A Web exclusive A Global Leader’s Guide to Managing Business Conduct An extensive global survey finds that employees agree on core standards and see room for multinationals to improve their behavior. by Lynn S. Paine, Rohit Deshpandé, and Joshua D. Margolis This document is authorized for use only by Kenneth St Vincent in MBA-635-Q5943 Ethics Corp Culture & Soc Res 20TW5 at Southern New Hampshire University, 2020. http://hbr.org http://hbr.org/search/W1109A Web Exclusive MAnAgers Working outside their home environments often find that their compa- nies’ norms are inconsistent with practices followed by other businesses in the area. In response, many follow the time-honored advice given in the fourth century by the bishop of Milan to Augustine of Hippo: When in Rome, do as the Romans do. But that’s a perilous approach. Consider the outrage in the United States when the media reported that BP oil rigs in the Gulf of Mexico lacked safeguards required on similar machinery in Norway and Brazil— even though the failed equipment in the Gulf met U.S. legal requirements. Or the worldwide outcry over working conditions at Foxconn in China after some employees committed suicide, although the compa- ny’s factories were arguably no worse than thousands of others nearby. Or consider the hot water that Siemens, Lucent, and DaimlerChrysler landed in after paying bribes and making various types of side payments that were common in the coun- tries where the companies were operating. These and other incidents show that conformance with local law and practice does not guarantee stakeholder or public approval of a corporation’s behavior. But does that mean companies should auto- matically default to their home-country practices? Our research suggests that the answer is no. In surveys of more than 6,200 employ- ees from the top ranks to the front lines of four leading multinationals based in the U.S., Europe, and Japan, we found a strong consensus on basic standards of conduct that companies should follow worldwide. Our findings indicate, further, that meet- ing those standards will require new ap- proaches to managing business conduct. The compliance and ethics programs of most companies today fall short of address- ing multinationals’ basic responsibilities— such as developing their people or deliver- ing high-quality products—let alone such vexing issues as how to stay competitive in markets where rivals follow different rules. Instead of intensifying their focus on com- pliance, companies must bring to the man- agement of business conduct the same per- formance tools and concepts that they use to manage quality, innovation, and finan- cial results. Leaders need an approach that is guided by global standards, informed by systematic data, grounded in the business context, and focused on positive goals. This need is particularly acute right now. Despite the widespread adoption of ethics programs by companies around the world in recent decades, failures of corpo- rate responsibility are all too frequent and public trust in business remains distress- ingly low. At the same time, expectations continue to rise. The UK created a new anti bribery law that took effect July 1, 2011, and broadens the range of companies— both domestic and foreign—that c an be prosecuted in the UK for bribery or An extensive global survey finds that employees agree on core standards and see room for multinationals to improve their behavior. by Lynn S. Paine, Rohit Deshpandé, and Joshua D. Margolis A global leader’s guide to Managing business conduct september 2011 Harvard Business Review 2 FoR aRticle RepRints call 800-988-0886 oR 617-783-7500, oR visit HBR.oRg This document is authorized for use only by Kenneth St Vincent in MBA-635-Q5943 Ethics Corp Culture & Soc Res 20TW5 at Southern New Hampshire University, 2020. http://hbr.org for failure to prevent bribery by an associated person or entity, regardless of where the offending act took place. In this article, we offer guidelines for navigating the increasingly rugged ethical terrain that multina- tionals face every day. identify Your conduct gaps Government officials and members of the public aren’t the only ones calling for better business con- duct. Employees, too, see a need for improvement in corporate behavior. Surveys we conducted in 2006 and 2007 at some of the world’s leading global corpo- rations reveal that while there is a strong consensus on the standards that should be met, many employ- ees feel that their companies don’t fully live up to those standards. (See the exhibit “The Conduct Gap.”) The surveys, whose findings have been sup- ported by a companion study of global executives that has 880 respondents to date, show that employ- ees from every level in those organizations strongly support adherence to the 62 standards in the Global Business Standards Codex, which we developed some years ago on the basis of leading codes of cor- porate conduct. These standards, described in our 2005 HBR article “Up to Code,” cover all of a com- pany’s responsibilities, from respecting employees’ dignity to refraining from bribery to creating innova- tive products and technologies. Despite wide differences in cultural origins and business environments, the employees, when asked the extent to which they thought companies should adhere to each of the standards, responded with an average value of 6.44 on a scale of 1 to 7. Even on items that we thought would be controversial—such as respecting dignity and human rights—we found strong support. These surveys bolster our earlier research, in which we hypothesized an emerging consensus on widely accepted standards of conduct for global companies, and they belie the assumption that relativism should guide cross-border business practices. But the gap between “should” and “do” was trou- bling: The average score on adherence to the stan- dards was just 5.68 on the same seven-point scale. Moreover, we found a greater range of responses on the actuals than on the shoulds, which means employee perceptions of what their companies do are more varied than their perceptions of what the companies should do. Although every company will have a different profile of gaps between its con- duct and what employees feel that conduct should be, we observed three patterns that we suspect are widespread. the conduct gap 4.5 5 5.5 6 6.5 7 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 IMPORTANCE (MEAN VALUE OF RESPONSES FOR EACH CODEX STANDARD) VARIATION (STANDARD DEVIATION AMONG RESPONSES FOR EACH CODEX STANDARD) DISTRIBUTION OF MEAN RESPONSES FOR ALL 62 STANDARDS IN THE GLOBAL BUSINESS STANDARDS CODEX ASSESSMENT TOOL. RESPONDENTS WERE 6,263 EMPLOYEES OF FOUR MULTINATIONALS BASED IN EUROPE, THE U.S., AND JAPAN. Should Actual surveys we conducted at leading multi- national corporations show that employees tend to agree on what companies should do, but many believe their employers don’t fully live up to those standards; we also found greater consensus among employees on what companies should do as compared with what their own companies actually do. 3  Harvard Business Review september 2011 A globAl leAder’s guide to MAnAging business conduct This document is authorized for use only by Kenneth St Vincent in MBA-635-Q5943 Ethics Corp Culture & Soc Res 20TW5 at Southern New Hampshire University, 2020. The altitude effect. Those at the top of the corporate hierarchy generally have a more positive view of their companies’ conduct. For the bulk of the standards, respondents who identified themselves as corporate or division-level executives reported smaller gaps between “should” and “do” than those who identified themselves as middle management, junior management, or nonmanagement employ- ees. The altitude effect was most pronounced for employee-related issues, but it was also strongly in evidence for basic standards of business integrity such as fair dealing and promise keeping and for ba- sic standards of human welfare such as protecting health and safety. Whether the rosier view from the top indicates that executives are better informed or that they are merely out of touch, the discrepancy between their assessments and those offered by other employees is cause for some concern. At the very least, it indicates that executives need to rely on more than their own views to assess their companies’ ethical performance. Basics matter. We found that gaps for stan- dards of business integrity were among the widest. Although environmental issues emerged, somewhat predictably, with wide gaps, we also found larger- than-average gaps for fair dealing, promise keeping, and conflict-of-interest disclosure. These findings are a reminder that business leaders must remain vigilant about basic business integrity even as they strive to meet emerging standards of corporate citizenship concerning the environment, human rights, and supplier practices. Employees are an early-alert system. Gaps relating to fair compensation, responsiveness to em- ployees’ concerns, communication with employees, and developing employees’ skills topped the list. In the next tier, not far below, were gaps relating to free association, employee dignity, equal employment opportunity, and employment dislocations. Employ- ees may well be most sensitive to practices that af- fect them, but that shouldn’t provide much solace to executives. A large body of research has consistently shown that employees who feel mistreated exact a cost from the company, and many companies es- pouse the importance of treating employees the way they want employees to treat customers. The sizable gaps we found on employee standards may be an early warning of brewing trouble. develop data-driven tools With governments, the public, and employees ex- pressing a desire to see better corporate behavior, how can companies take measurable steps to im- prove their conduct? While many executives say that their companies adhere to the highest ethical standards, very few have data to assess the stringency of those standards or even a way to determine what standards their companies actually follow. Instead they typically point with pride to the company’s written code, the excellent people the company hires, or how some particular misdeed was handled. Such unsubstantiated claims would be unaccept- able in any other aspect of business. An executive who claimed that his company’s sales were among the best in the industry but whose only evidence was the company’s written sales plan, its great salespeople, or last week’s big sale would quickly be shown the door and perhaps even sued for fraud or negligence. The lack of data and rigor in assess- ing and managing business conduct is tolerated because many assume that ethics and conduct are “soft” topics not amenable to measurement or evaluation. To be sure, many companies do track the use of their hotlines and collect data on alleged code- of-conduct violations. And some companies do survey employees on their perceptions of company values or adherence to espoused standards. What is largely lacking, however, is a systematic approach to in response to a lack of clear, comprehen- sive guidelines for the conduct of global companies, we set out in 2004 to create a business-ethics index that companies could use to benchmark their behavior over time. as a first step, we systematically ana- lyzed a select group of codes of corpo- rate conduct. Distilling precepts from 23 sources, including 14 of the world’s largest companies and institutions—among them the United nations, the oecD, the global Reporting initiative, and the caux Round table—we created the global Business standards codex, a compilation of widely endorsed standards. We then conducted multilanguage field surveys to determine the extent to which businesspeople around the world believe that companies should—and do— adhere to these standards. two data sets emerged from this work, which drew on respondents from some 23 countries and regions: findings from 880 executives in Harvard Business school’s advanced Man- agement program (2006 to the present), and survey results from more than 6,200 employees of four leading global compa- nies (2006 and 2007). the global business standards Project september 2011 Harvard Business Review 4 FoR aRticle RepRints call 800-988-0886 oR 617-783-7500, oR visit HBR.oRg This document is authorized for use only by Kenneth St Vincent in MBA-635-Q5943 Ethics Corp Culture & Soc Res 20TW5 at Southern New Hampshire University, 2020. http://hbr.org assessing company performance on the standards of conduct that are expected of leading companies today. To address this problem and help leaders more accurately gauge their companies’ ethical perfor- mance, we developed an assessment tool based on the Global Business Standards Codex to survey the four global companies. Compared with more- common assessment tools, this one has several important features. First, it is based on objective rather than subjective standards (those that the company has chosen) that we have found to be widely accepted by diverse business, government, and multisector groups. Second, it generates data from throughout the company—up and down the hierarchy and across multiple units—and covers multiple dimensions of performance. Third, it fo- cuses not just on negative standards and the preva- lence of misconduct but on positive standards and the company’s performance against affirmative benchmarks. The codex assessment tool allows business lead- ers to construct an organization-wide picture of the company’s ethical strengths, weaknesses, and performance. Admittedly, it captures perceptions and beliefs rather than actual behavior, and per- ceptions can be mistaken. (An independent third- party assessment would be useful additional input.) But perceptions from a broad and diverse group of employees are a useful first approximation of ac- tual conduct—and perceptions are crucial in and of themselves, because they drive attitudes and opinions within the company. They are also useful for helping managers take three necessary steps: identifying issues that need further inquiry, pin- pointing potential risks to the company and its repu- tation, and finding areas of strength and opportuni- ties for learning. go beyond compliance-as-usual Over the past two decades, many executives have appointed chief compliance officers and established programs to foster adherence to their companies’ codes of conduct. A typical compliance program comprises best-practice elements—from a defined set of conduct standards and policies to an imple- mentation and oversight structure that goes all the way up to the board of directors, often via the board’s audit committee or a compliance committee. Com- panies that follow such programs communicate their standards to employees, appoint ombudspeople, set up anonymous hotlines, and install monitoring and auditing processes to ferret out code violations and risks. They are quick to respond to violations by go- ing after the causes and the offenders. These programs are predic ated on a well- functioning legal system, and their approach to influencing behavior relies heavily on the lawyer’s tool kit of rules and penalties. Violations are pre- sumed to originate with individuals acting against otherwise prevailing norms, so the idea is to de- tect and deter breaches by fostering transparency and strengthening disincentives. The apparatus is focused on activities inside the organization and is largely indifferent to the economic and societal con- text in which the organization operates. Moreover, it is much the same whatever the business and what- ever the content of the code. But this approach seems markedly out of step with other areas of business practice. Our research suggests the need for richer tools and a more con- textual approach to improving ethical performance. When we delved more deeply into the gaps between “should” and “do,” we found that aspects of the broader context in which respondents were working related to the size of the gaps they reported. In par- ticular, we found that employees in the emerging markets of China, India, Brazil, and Southeast Asia reported larger gaps than those in the United States, the UK, Western Europe, and Japan. More gener- ally, those in low-income countries reported larger gaps than those in middle- and high-income ones. The discrepancy between emerging and developed markets was in evidence across a wide range of ar- eas—from competitive practices and employee de- velopment to community relations and anticorrup- tion efforts. In only one area—providing customers with accurate information about products and ser- vices—did developed- market respondents report significantly larger gaps than emerging-market respondents. Gaps associated with broad contextual factors such as the economic and legal environments are dif- ficult to address with a compliance program focused on detecting and deterring individual violators. For such factors, low adherence to the codex standards may have more to do with the environment in which people are working than with deficiencies in the character or motivation of particular individuals, so replacing one set of employees with another is un- likely to make much of a difference. What’s needed is a multifaceted response that takes account of how 5  Harvard Business Review september 2011 A globAl leAder’s guide to MAnAging business conduct This document is authorized for use only by Kenneth St Vincent in MBA-635-Q5943 Ethics Corp Culture & Soc Res 20TW5 at Southern New Hampshire University, 2020. legal or economic differences shape behavior and support (or discourage) adherence to the standards in question. Consider the large gaps for workplace health and safety that we found in some regions. As many com- panies have learned, an effective program for im- proving workplace safety may include investment in equipment and infrastructure, redesign of facili- ties, changes in work processes, education and train- ing of employees, and modification of performance measures. Engagement with external parties—to establish standards, improve enforcement practices, and focus public attention on safety—may also be required. None of these elements is included in the typical compliance tool kit. Similarly, efforts to combat bribery in an environ- ment where corruption is widespread must be mul- tifaceted. Instructing employees to “just say no” and punishing violators may work, but it carries a risk to the business and may drive corruption further un- derground. A more promising approach recognizes that the best protection against corruption is a supe- rior product that adds value for the customer and is not readily available elsewhere. Excellent sales and marketing skills are also important, because without them sales personnel are much more dependent on supplying personal favors, gifts, and entertainment. As in the case of workplace safety, changes in inter- nal processes may be required—for example, ap- provals for certain marketing expenses—and it may be essential to engage with external parties such as standard setters, regulatory officials, and anticorrup- tion groups. The usual compliance tool kit is useful for re- inforcing certain standards in certain operating environments, but as these examples show, busi- ness leaders will need a much more extensive set of tools to improve performance in many of the gap areas identified by our research. It is not enough to establish codes of conduct, oversight structures, reporting processes, and disciplinary systems. Managers also need to examine core aspects of the business and the operating environment and craft a performance- improvement plan that is tailored to those specifics using the full range of management tools at their disposal—from product, process, and plant design to employee training, development, and motivation; marketing strategy; external rela- tions; and community engagement. Leaders must change the context within which people are work- ing. To do so, they will need to go well beyond the activities performed by the typical compliance and ethics function. revise Your Mental Model Many executives who are serious about business conduct view the challenge with the legalistic men- tality that informs most compliance programs. This mentality is characterized by binary categories— ethical versus unethical, compliant versus noncom- pliant, legal versus illegal—that leave little room for degrees of performance or gradual improvement. It focuses on standards requiring or prohibiting actions that can be readily specified in advance, such as rules against bribery, insider trading, or collusion among competitors. Executives in this camp some- times pride themselves on having zero tolerance for unethical behavior or for insisting that ethics are nonnegotiable; compliance must be immediate, and it must be complete. Although compliance thinking and zero tolerance have their place, our research underscores the need for business leaders to see a profile of corporate con- duct that is broad, dynamic, and affirmative. By broad, we mean including not just “Thou shalt not…” but also the standards that have tradi- tionally been called “imperfect duties.” Unlike le- galistic standards that require specific acts or omis- sions, imperfect duties allow for a significant degree of freedom in how they may be satisfied. Consider, for example, the codex standards on respecting employee dignity and on fair treatment of minority shareholders. The actions required to meet those standards cannot be easily stated in generic, audit- able terms. A full third of the codex standards are of this indefinite type. (One-third are definite, and one- third are of a mixed character.) We found that in gen- eral, gaps are larger for indefinite than for definite standards. Indeed, among the largest gaps revealed in our multinational surveys, about half were associ- ated with standards that are indefinite or mixed in nature—for example, providing employees with fair compensation, protecting the environment, help- ing employees develop skills and knowledge, and, among emerging-market respondents, cooperating with others to eliminate bribery and corruption. A company stuck in a compliance mind-set may be pa- trolling violations effectively while missing out on crucial opportunities to upgrade its performance in these ethical areas. By dynamic, we mean capturing how perfor- mance shifts over time. As macroeconomic and september 2011 Harvard Business Review 6 FoR aRticle RepRints call 800-988-0886 oR 617-783-7500, oR visit HBR.oRg This document is authorized for use only by Kenneth St Vincent in MBA-635-Q5943 Ethics Corp Culture & Soc Res 20TW5 at Southern New Hampshire University, 2020. http://hbr.org industry conditions change, the pressures and op- portunities that shape individual and company con- duct also change. Periodic assessments of how the company is performing on the codex standards are crucial for spotting emerging risks and opportunities. By affirmative, we mean treating ethics as goals to strive for rather than just lapses to avoid. Business leaders will need to think in terms of continuous improvement as they seek to create the conditions and institutions necessary to support adherence to the whole range of codex standards across differing operating contexts. A broad, dynamic, and affirmative approach to managing business conduct represents a new way of looking at corporate ethics. For companies to foster this new way, a corporate-conduct dashboard may prove essential. Using data gathered with the codex assessment tool, managers can provide a snapshot of the company’s performance on key indicators to make conduct issues across the organization visible to business leaders. The data can be aggregated in various ways. For instance, they can be organized to show the extent to which employees support the “should” consensus or how employees rate the com- pany’s performance on ethical principles or respon- sibilities to stakeholders. The dashboard can also convey the largest gaps as seen by employees across the company and within different business units, regions, functions, and hierarchical levels. Depending on how the data are analyzed, it can allow for more-granular compari- sons of gaps for particular standards—or topic areas— across various geographies and business units. For instance, results for the cluster of standards relating to the environment can be aggregated, and an indi- cator for environmental issues in different regions can be included in the dashboard. A codex dashboard is only the beginning of a conver- sation. To understand what accounts for the findings that it captures, managers and directors will need to look beneath the surface and to interpret the indica- tors with care and judgment in light of other facts and data. Still, a codex dashboard can help execu- tives shift from what they sense to what systematic data reveal and from a compliance-oriented review of hotline usage, investigations, and disciplinary actions to a more holistic examination of the com- pany’s overall performance on critical standards. In- stead of debating whether a spike in reported cases is good (because it shows that employees are not afraid to use the reporting system) or bad (because miscon- duct is, in fact, escalating), business heads and board members can focus on where the threats and oppor- tunities may lie and how the company can achieve its conduct goals. With an enriched tool kit and new ways of think- ing, business leaders can, we hope, improve their companies’ ability to perform to the standards in- creasingly expected of multinationals the world over. We think that doing so is crucial for maintain- ing the public’s trust in business and the free-market system. Hbr reprint W1109a lynn s. Paine is a John g. Mclean professor of Business administration, rohit deshpandé is the sebastian s. Kresge professor of Marketing, and Joshua d. Margolis is the James Dinan and elizabeth Miller professor of Business administration at Harvard Business school. 7  Harvard Business Review september 2011 A globAl leAder’s guide to MAnAging business conduct This document is authorized for use only by Kenneth St Vincent in MBA-635-Q5943 Ethics Corp Culture & Soc Res 20TW5 at Southern New Hampshire University, 2020. http://hbr.org/search/W1109A H U BE R & S TA R KE /G ET TY IM A G ES FEATURE WHY COMPLIANCE PROGRAMS FAIL 116  HARVARD BUSINESS REVIEW MARCH–APRIL 2018 WHY COMPLIANCE PROGRAMS AND HOW TO FIX THEM BY HUI CHEN AND EUGENE SOLTES FAIL MARCH–APRIL 2018 HARVARD BUSINESS REVIEW 117  accounts at Wells Fargo. Systemic deception by Volkswagen about its vehicles’ emission levels. Widespread bribery at Petrobras that damaged both the government and the economy of Brazil. While those corporate scandals made headlines in recent years, countless others failed to penetrate the global consciousness. According to the Association of Certified Fraud Examiners, almost half of all fraud cases are never reported publicly, and a typical organization loses close to $3 million in annual revenue to fraud. Furthermore, of the nearly 3,000 executives interviewed for EY’s 2016 Global Fraud Survey, 42% said they could justify unethical behavior to meet financial targets. Clearly, malfeasance remains deeply entrenched in private enterprises today. IN BRIEF THE CHALLENGE Companies spend staggering amounts on compliance efforts—training programs, hotlines, and other systems designed to detect and prevent violations of laws, regulations, and company policies. Yet corporate misconduct is widespread. THE CAUSE Too often compliance is treated as a legal box- checking exercise. THE ANSWER Develop better metrics that link initiatives more tightly to specific compliance goals. MILLIONS OF FRAUDULENT The ubiquity of corporate misconduct is especially surprising given the staggering amount firms spend on compliance efforts—the training programs, hot­ lines, and other systems designed to prevent and de­ tect violations of laws, regulations, and company poli­ cies. The average multinational spends several million dollars a year on compliance, while in highly regulated industries—like financial services and defense—the costs can be in the tens or even hundreds of millions. Still, all these assessments deeply underestimate the true costs of compliance, because training and other compliance activities consume thousands of valuable employee hours every year. Many executives are rightly frustrated about pay­ ing immense and growing compliance costs with­ out seeing clear benefits. And yet they continue to invest—not because they think it’s necessarily pro­ ductive but because they fear exposing their organi­ zations to greater liability should they fail to spend enough. Employees, too, often resent compliance 118  HARVARD BUSINESS REVIEW MARCH–APRIL 2018 FEATURE WHY COMPLIANCE PROGRAMS FAIL programs, seeing them as a series of box-checking rou- tines and mindless training exercises. In our view, all this expense and frustration is tragic—and avoidable. We’re both acutely aware of the perceptions and challenges surrounding compliance. From November 2015 until her resignation in June 2017, Chen served as the sole (and first-ever) compliance consultant at the U.S. Department of Justice (DOJ), advising prosecu- tors in evaluating the compliance efforts of companies under investigation. Soltes, in his research at Harvard Business School, has studied the obstacles general counsels and compliance officers face in ascertaining how well their programs work and explaining the ben- efits to others in their organizations. It’s obvious to us that the value of compliance must be made clearer to company leaders and employees alike. The answer, we believe, lies in better measure- ment. At its core, the idea is as simple as it is crucial: Firms cannot design effective compliance programs without effective measurement tools. For many firms, appropriate measurement can spur the creation of leaner and ultimately more-effective compliance pro- grams. Put simply, better compliance measurement leads to better compliance management. HOW WE GOT TO THIS POINT To appreciate how compliance evolved into its cur- rent state, let’s consider how such programs began. Following a stream of corporate scandals in the United States in the 1970s and 1980s, industry groups banded together and adopted internal policies and procedures for reporting and trying to prevent misconduct. Those efforts helped assuage legislators who had sought to more heavily regulate and penalize firms for dis- honest practices. Self-policing appealed to business leaders as a way to avoid the cost and disruption of additional regulation. It also eased the investigative burden on regulators, and many people believed it would successfully deter wrongdoing. Attracted by the perceived benefits, in 1991 the U.S. Sentencing Commission (USSC) amended its guide- lines and offered firms substantially reduced fines if they could show that they had an “effective compli- ance program.” A series of memoranda from senior officials at the DOJ soon followed, urging prosecutors to consider the effectiveness of a firm’s compliance program when deciding on criminal charges. Those efforts were intended not only to encourage better monitoring by companies but also to recognize that firms can become victims of rogue employees. Other civil regulators, including the Securities and Exchange Commission, the U.S. Department of Health and Human Services, and the Environmental Protection Agency, also adopted this carrot-and-stick approach to compliance. An industry quickly sprouted to provide compliance training programs, hotlines for whistle-blowers, and risk assessments. Not having a compliance program became a liability too significant for any major firm— even a foreign firm that simply utilized U.S. banks—to ignore. This potential liability has steadily increased as other countries, such as the United Kingdom, Brazil, and Spain, have enacted laws that take compliance into consideration in enforcement actions. For many company leaders, compliance programs are protection against worst-case scenarios, akin to an expensive insurance policy. Employees may be asked to sign lengthy codes of conduct attesting that they know their firm’s polices; additionally, they may sit through training programs on topics such as privacy, insider trading, and bribery. Yet individuals often pay only enough attention to these generic classes to pass the 10-question quiz at the end. Even at firms spend- ing millions of dollars annually on their programs, compliance often lacks substance. When the DOJ brought criminal charges against Morgan Stanley employee Garth Peterson in 2012, the prosecution documents noted that Peterson had received seven compliance training sessions and 35 re- lated reminders to eschew the very conduct—bribing a government official—that he ultimately engaged in. But those compliance initiatives had little influence on Peterson because he viewed them as pro forma. “You can have programs and e-mails,” he said, “but if people just delete them [or] if people have to do teleconferences but…instead of actually listening, all you have to do is say, ‘Garth Peterson’s on the phone,’ [then] they check the box that says he’s complied. And then you either quietly hang up, or you just put your phone aside and you do your other work.” The DOJ recognized that firms might be spending a lot and creating all the components of compliance programs but actually producing hollow facades. In its 2008 revision of the “Principles of Federal Prosecution of Business Organizations,” the depart- ment specifically calls for prosecutors “to deter- mine whether a corporation’s compliance program is merely a ‘paper program’ or whether it was designed, implemented, reviewed, and revised, as appropri- ate, in an effective manner.” The same year, in a case against Siemens in which a record-setting $800 mil- lion penalty was paid to the U.S. authorities, the pros- ecution repeatedly called out the inadequacies of Siemens’s “paper program.” Over and over, prosecutors have recognized that firms with ineffective compliance programs don’t deserve credit for their supposed efforts. However, MARCH–APRIL 2018 HARVARD BUSINESS REVIEW 119  it was often challenging to distinguish substantive programs from those that were merely window dressing, since evaluating a program required con- siderable time and expertise. The DOJ’s decision not to prosecute Morgan Stanley in the Peterson case, for example, was seen as validating the firm’s approach to ensuring compliance, which included numerous training sessions in addition to the standard hotline and the usual employee certifications of the firm’s code of conduct. Yet Peterson claimed that the gov- ernment was “lying to the public and saying that they [Morgan Stanley] had this wonderful compliance program, when in fact the government knows that it wasn’t getting into people’s heads, which is what really matters.” The DOJ retained Chen in the fall of 2015 to ad- dress the challenges of evaluating the actual effec- tiveness of firms’ compliance efforts. Right from the start, she observed something amiss with many of the programs she examined. Companies routinely produced large binders of policies and procedures and counted the number of controls in their financial systems. And yet they offered no evidence of hav- ing tested those policies, procedures, and controls, nor did they track how many breaches they had ex- perienced. A company might cite its long-standing internal whistle- blower program, for instance, but not have data on the program’s rate of usage by em- ployees. Firms also routinely reported how many times they had trained wrongdoers on the very topic of their misconduct, apparently blind to the irony of defending their compliance efforts that way. In response to her mandate to focus on effective- ness, Chen drafted an extensive list of questions for prosecutors to consider when assessing compliance programs. The questions covered a wide range of compliance areas, including training (“What analy- sis has the company undertaken to determine who should be trained and on what subjects?”), individ- ual accountability (“Were managers held accountable for misconduct that occurred under their supervi- sion?”), and leadership (“What compliance expertise has been available on the board of directors?”). The DOJ publicly released the questions in February 2017 in a document titled “Evaluation of Corporate Compliance Programs.” The document was not intended to be used as a checklist; instead, as it stated, it listed “some im- portant topics and sample questions that the Fraud Section has frequently found relevant in evaluat- ing a corporate compliance program.” Indeed, all evaluations would continue to be individualized. Nonetheless, as Soltes observed in his interactions with managers and corporate attorneys at the time, firms quickly began to appropriate the document as a manual on constructing an effective program. In par- ticular, managers believed that if they could provide an answer to each question, they could assure them- selves that they were meeting the DOJ’s expectations. Even more worrisome, Soltes saw firms selectively picking data to support the notion that their practices were effective, rather than recognizing that some were clearly falling short. For example, one question in the DOJ document asks firms how they evaluate the quality and effec- tiveness of their training. A survey by Deloitte and Compliance Week suggests that the most common way is to measure completion rates and to deem training effective if enough employees—perhaps 90% or 95%— finish it. However, that metric reflects neither the quality of a training (how appropriate and valuable the content is) nor its effectiveness (how much employees actually learn and put into practice). Firms rely on completion rates not because do- ing so has been shown to be the “right way” to mea- sure success but because their objective is merely to demonstrate to regulators that they’ve accomplished the task—they can check that training box. While some firms surely provide their employees with ef- fective instruction about following the rules, we have seen many more delude themselves into believing that their training is satisfactory simply because it’s been completed. One of the main reasons that companies keep investing more and more in compliance is that they do not have the right measures and thus cannot tell what works and what doesn’t. At many companies, strengthening compliance has become synonymous with hiring more compliance managers, buying FIRMS ROUTINELY REPORTED HOW MANY TIMES THEY HAD TRAINED WRONGDOERS ON THE VERY TOPIC OF THEIR MISCONDUCT, APPARENTLY BLIND TO THE IRONY OF DEFENDING THEIR COMPLIANCE EFFORTS THAT WAY. 120  HARVARD BUSINESS REVIEW MARCH–APRIL 2018 FEATURE WHY COMPLIANCE PROGRAMS FAIL H U BE R & S TA R KE /G ET TY IM A G ES MARCH–APRIL 2018 HARVARD BUSINESS REVIEW 121  more-sophisticated software, and creating more policies, even when those moves are redundant and wasteful or just don’t deliver results. HOW COMPLIANCE METRICS GO ASTRAY According to Deloitte and Compliance Week, only 70% of firms even try to measure the effectiveness of their compliance programs. And of those that do, only a third are either confident or very confident that they are using the right metrics. In early 2017 the U.S. Department of Health and Human Services convened a meeting to develop metrics to help health care or- ganizations better judge their compliance programs’ effectiveness. The group produced a report detailing more than 550 different indicators. The report ac- knowledged that a given organization would need only a subset of those, tailored to the firm’s specific business or risk profile. Still, with so many metrics to choose from, ascertaining which would be appro- priate in which instances remains challenging and beyond the grasp of most firms. In seeking to assess program effectiveness quanti- tatively, firms tend to make the same mistakes. Here are the common pitfalls: Incomplete metrics. The DOJ and USSC guide- lines expect effective compliance programs to hold individuals accountable for violations. The DOJ evalu- ation document, for example, asks: “Has the company ever terminated or otherwise disciplined anyone for the type of misconduct at issue?” and “Have the dis- ciplinary actions and incentives been fairly and con- sistently applied across the organization?” To demon- strate individual accountability, firms often list the employees who have been terminated or denied pro- motions and bonuses as a result of compliance- related transgressions. Yet such statistics aren’t enough to substantiate that a firm rigorously holds employees accountable since they don’t indicate the number of employees who were not disciplined. A firm that disci- plines five employees because five people behaved im- properly during the year is very different from one that sanctions five employees out of the 50 who violated company policies. We’ve seen firms punish lower- level employees or those with less potential, while protect- ing high earners or senior executives. So the simple statistic on the number of sanctioned employees can be incomplete and misleading. Invalid metrics. Although a wide range of data may be collected on the various facets of a compliance program, only a subset of that data actually correlates with the impact of a program. For example, in re- sponse to the DOJ question asking how the company has measured the effectiveness of its training, firms SENIOR AND MIDDLE MANAGEMENT • How have senior leaders, through their words and actions, encouraged or discouraged the type of misconduct in question? • What types of information have the board of directors and senior management examined in their exercise of oversight? AUTONOMY AND RESOURCES • What has been the turnover rate for compliance and relevant control function personnel? • Have there been specific transactions or deals that were stopped, modified, or more closely examined as a result of compliance concerns? POLICIES AND PROCEDURES • How has the company assessed whether [applicable] policies and procedures have been effectively implemented? • How has the company evaluated the usefulness of these policies and procedures? RISK ASSESSMENT • What methodology has the company used to identify, analyze, and address the particular risks it faced? • What information or metrics has the company collected and used to help detect the type of misconduct in question? TRAINING AND COMMUNICATIONS • How has the company assessed whether its employees know when to seek advice and whether they would be willing to do so? • How has the company measured the effectiveness of [employees’] training? CONFIDENTIAL REPORTING AND INVESTIGATION • How has the company collected, analyzed, and used information from its reporting mechanisms? • How high up in the company do investigative findings go? INCENTIVES AND DISCIPLINARY MEASURES • What is the company’s record (e.g., number and types of disciplinary actions) on employee discipline relating to the type(s) of conduct at issue? • Have the disciplinary actions and incentives been fairly and consistently applied across the organization? CONTINUOUS IMPROVEMENT, PERIODIC TESTING, AND REVIEW • Has the company reviewed and audited its compliance program, including testing of relevant controls, collection and analysis of compliance data, and interviews of employees and third parties? • What types of relevant audit findings and remediation progress have been reported to management and the board on a regular basis? THIRD-PARTY MANAGEMENT • How has the company monitored the third parties in question? • How has the company incentivized compliance and ethical behavior by third parties? HOW EFFECTIVE IS YOUR COMPLIANCE PROGRAM? When the U.S. Department of Justice prosecutes a company, it evaluates the effectiveness of the organization’s compliance program. Below are key topics and sample questions that the Fraud Section considers, excerpted from its 2017 document titled “Evaluation of Corporate Compliance Programs.” 122  HARVARD BUSINESS REVIEW MARCH–APRIL 2018 FEATURE WHY COMPLIANCE PROGRAMS FAIL often focus on the percentage of employees who’ve completed the training, as we noted earlier, or the number of hours they’ve spent doing so. Those are entirely the wrong metrics to use. Completion rates may be relevant for a firm to track for other purposes, but a meaningful measure of effectiveness must be di- rectly tied to a clearly articulated outcome—for exam- ple, employees’ demonstrated understanding of pol- icies and procedures, their acquisition of useful skills for confronting anticipated scenarios, or a change in their behavior. As another example, to back up the assertion that management has a “strong” commitment to compli- ance, firms may cite the number of pro-compliance communications that top executives issue. However, such a metric is invalid if employee surveys show a lack of trust in management and a belief that whistle- blowers face retaliation. Mistaking legal accountability for compliance effectiveness. Compliance policies serve important legal functions, but forcing them into legal frame- works may limit their ability to positively influence employee behavior. Take this question: “How has the company assessed whether these policies and pro- cedures have been effectively implemented?” Firms often respond by showing that employees signed a statement that they had read and understood the company’s policies and codes of conduct. While such a signature may provide legal grounds to fire some- one who violates a rule, it does not demonstrate that an employee has converted knowledge about poli- cies into everyday work practices. How many times do we all reflexively assent to the legal terms of an agreement, especially those that we have no power to negotiate? Employees may sign an acknowledgment of corporate policies without actually having read or understood the terms. Moreover, the policies may be hard to grasp because they are written in language that is legalistic, technical, or just plain dense. There could also be an implicit understanding within the firm that the policies don’t really have to be followed or that best practices can be improvised. Thus, count- ing employees’ legally binding assents to policies is not an appropriate way to quantify the effectiveness of a compliance initiative. Self-reporting and self-selection bias. Com- pliance managers often rely on surveys to assess the performance of their programs. For instance, to gauge employee comfort with reporting mechanisms, a firm might ask: “Do you know when to seek compliance advice? Are you willing to do so?” The challenge with surveys is that self-reporting and self-selection by the respondents may bias the results and lead managers to draw incorrect conclusions. Employees who have observed dishonest behavior, for example, may be reluctant to “out” their colleagues and may choose not to answer related survey questions, which will skew the results toward employees who have not observed wrongdoing. Similarly, people in senior po- sitions and those who actually do engage in miscon- duct may be less inclined to participate. Thus, bias in the data collected needs to be accounted for when interpreting the metrics. LINKING COMPLIANCE INITIATIVES TO OBJECTIVES So how do you create models that can credibly eval- uate the impact of a compliance program? The first step is recognizing that such programs actually have multiple purposes. As laid out in numerous mem- oranda by senior officials at the DOJ, the three main goals are to prevent misconduct, to detect miscon- duct, and to align corporate policies with laws, rules, and regulations. Each component of a compliance program should be linked to one of these objectives. For example, training serves to prevent misconduct, whistle-blower hotlines are designed to detect it, and codes of conduct are intended to align employees’ behavior with company policies and external regu- lations. Although it’s possible that one compliance initiative will overlap with or impact another, clearly identifying the goals of each will help managers create more-meaningful metrics. Consider a confidential hotline for whistle- blowers. Its objective is to improve the timely de- tection of wrongdoing. To understand whether it’s achieving this goal, several pieces of information are needed, including whether the hotline works (“mys- tery tester” reports), whether people actually use it (usage data), how they use it (data on types of calls received), the firm’s responsiveness to allegations (response time, investigation completion time, in- vestigation results, communication of results), and whether employees feel comfortable contacting the hotline (periodic surveys of employees’ sentiments). Each of those metrics captures a different dimension of the initiative’s efficacy. However, tracking those variables independently is insufficient, because it doesn’t allow managers to identify which ones are responsible for particular outcomes. For instance, a “hot” hotline might reflect a rising number of problems or just a high level of employee comfort with calling. To get clarification, managers can apply multivariate regression analysis. Regression models allow an investigator to examine the impact of one variable while holding the others constant. In this case, to ascertain whether an increase in calls indicates an increase in compliance breaches, MARCH–APRIL 2018 HARVARD BUSINESS REVIEW 123  H U BE R & S TA R KE /G ET TY IM A G ES 124  HARVARD BUSINESS REVIEW MARCH–APRIL 2018 FEATURE WHY COMPLIANCE PROGRAMS FAIL we would seek to hold the following other factors constant: the availability of the hotline, people’s com- fort in using it, its operational performance, and the number of potential callers (people who have access to it). Designing appropriate regression models takes time and experience, but it is the most reliable way to know whether to be reassured by or concerned about shifts in call volume. Let’s take another example—compliance training, the objective of which is to prevent misconduct by helping employees internalize rules and regulations. Assessing how well employees understand what’s expected of them after they complete training is, by itself, insufficient to establish the training’s effective- ness. A high degree of understanding could reflect the positive influence of the instruction they received, but it could also simply reflect employees’ baseline knowledge. Therefore, firms must assess what em- ployees know both before and after training. If there is little change, the training may be unnecessary, or it may need to be refined to more fully engage people and make better use of their time. Of course, the goal of training is not only to im- prove employees’ understanding of the rules but also to instill and perpetuate appropriate behavior. Again, a regression model can help firms understand the link between training sessions and changes in employee behavior. By controlling for the other factors that may contribute to policy violations, we can test whether the individuals who undergo training become more or less inclined to break the rules. As these examples demonstrate, firms should use empirical data generated from their compliance pro- grams to gauge how well a program is meeting its ob- jectives. Again, we stress that firms need to do more than simply track metrics independently. They must focus on creating models that measure the desired output while controlling or excluding other factors. In the past, firms trying to show the effectiveness of their programs might have been able to offer met- rics that were not well aligned with compliance ob- jectives, but the standards and stakes are changing. Prosecutors, courts, and regulators increasingly seek more-rigorous evidence. This means that firms must have the capacity to back up compliance claims with better data and models—a process that’s possible only when the capabilities to accurately measure a program’s performance are in place. COMPLIANCE ENGINEERING Some companies may be willing to invest signifi- cant time and resources in compliance and ethics programs because they see them as critical to the organization’s long-term success. But we’re prag- matists. We understand that with all the other com- peting demands on a firm’s limited resources, the ever-present regulatory and liability concerns often become the rationale driving compliance efforts. Yet this focus on the regulatory aspect is exactly why it’s critical to get serious about measuring outcomes. As compliance programs continue to be more closely scrutinized, those that cannot show meaningful re- sults will fail to meet the stronger regulatory stan- dards being applied today. To put it more bluntly, if the best that can be said for, say, an anti-corruption training course is that employees finish it, prosecu- tors, courts, and regulators are not going to give a company credit for having an effective program. While many firms continue to see ensuring com- pliance as a legal exercise, it is really much more a behavioral science. That assertion may make attor- neys uncomfortable, but for compliance programs to have real impact, managers need to test what works and what doesn’t. This will require firms to engage in some experimentation and innovation. Codes of con- duct should articulate policies that are core to a firm’s success. And hotlines should exist not only to record reports of wrongdoing but also to help employees re- solve predicaments before they make a bad move. By developing better measures of effectiveness, firms can adopt more ambitious and innovative programs that really do curb improper behavior. Given all the complex regulations governing busi- ness today, it’s no wonder that companies struggle to understand and meet their legal and ethical obliga- tions. It would be convenient if there were a one-size- fits-all yardstick that could show if a compliance pro- gram is on track or not. But simple univariate metrics will not adequately capture a program’s effectiveness. Successful compliance engineering requires some creativity, some testing, and careful model design to appropriately … 144 Harvard Business ReviewMay–June 2019 How to Design an Ethical Organization _HBR_MayJun19 Harvard Business Review May–June 2019 145 Nicholas Epley Professor, Booth School of Business Amit Kumar Assistant professor, University of Texas at Austin PHOTOGRAPHER STEVEN DERKS E T H I C S AUTHORS I D E A I N B R I E F THE PROBLEM Unethical behavior ruins reputations, harms employee morale, and increases regulatory costs— not to mention damages society’s trust in business. Yet corporate scandals are a recurring reality. WHAT DOESN’ T WORK Compliance programs take a legalistic approach to ethics that focuses on individual accountability—but a large body of behavioral science research suggests that even well-meaning and well-informed individuals are ethically malleable. A BETTER WAY Leaders must design workplace contexts that encourage good behavior. Keeping prosocial values top of mind for employees as they make decisions will reduce the likelihood of transgressions while making workers happier and more productive. From Volkswagen’s emissions fiasco to Wells Fargo’s deceptive sales practices to Uber’s privacy intrusions, corporate wrongdoing is a continuing reality in global business. Unethical behavior takes a significant toll on organizations by damaging reputations, harming employee morale, and increasing regulatory costs—not to mention the wider damage to society’s overall trust in business. Few executives set out to achieve advantage by breaking the rules, and most companies have programs in place to prevent malfeasance at all levels. Yet recurring scandals show that we could do better. S TA RT H E R E 146 Harvard Business ReviewMay–June 2019 Interventions to encourage ethical behavior are often based on misperceptions of how transgressions occur, and thus are not as effective as they could be. Compliance programs increasingly take a legalistic approach to ethics that focuses on individual accountability. They’re designed to educate employees and then punish wrongdoing among the “bad apples” who misbehave. Yet a large body of behav- ioral science research suggests that even well-meaning and well-informed people are more ethically malleable than one might guess. When watching a potential emergency unfold, for example, people are much more likely to intervene if they are alone than if other bystanders are around—because they think others will deal with the situation, believe that others are more qualified to help, or fail to recognize an emergency because others don’t look alarmed. Small changes to the context can have a significant effect on a person’s behav- ior. Yet people in the midst of these situations tend not to recognize the influence of context. In Stanley Milgram’s famous obedience experiments, participants who were told by an authority figure to deliver increasingly powerful electric shocks to another person progressed to a much higher voltage than other people predicted they themselves would deliver. Context is not just powerful, researchers have learned; it is surprisingly powerful. Pillars of an Ethical Culture C R E A T I N G A N E T H I C A L culture thus requires thinking about ethics not simply as a belief problem but also as a design prob- lem. We have identified four critical features that need to be addressed when designing an ethical culture: explicit values, thoughts during judgment, incentives, and cultural norms. E X P L I C I T VA LU E S > Strategies and practices should be anchored to clearly stated principles that can be widely shared within the organization. A well-crafted mission statement can help achieve this, as long as it is used correctly. Leaders can refer to it to guide the creation of any new strategy or initiative and note its connection to the compa- ny’s principles when addressing employees, thus reinforcing the broader ethical system. Employees should easily be able to see how ethical principles influence a company’s practices. They’re likely to behave differently if they think the organization is being guided by the ethos of Mr. Rogers, the relentlessly kind PBS show host, versus that of Gordon Gekko, the relentlessly greedy banker in the film Wall Street. Indeed, in one experiment, 70% of participants playing an economic game with a partner cooperated for mutual gain when it was called the Community Game, but only 30% cooperated when it was called the Wall Street Game. This dramatic effect occurred even though the financial incen- tives were identical. A mission statement should be simple, short, actionable, and emotionally resonant. Most corporate mission state- ments today are too long to remember, too obvious to need stating, too clearly tailored for regulators, or too distant from day-to-day practices to meaningfully guide employees. A statement can’t be just words on paper; it must undergird not only strategy but policies around hiring, firing, promoting, and operations so that core ethical principles are deeply embedded throughout the organization. Patagonia’s mission statement, for instance, is “Build the best product, cause no unnecessary harm, use business to inspire and imple- ment solutions to the environmental crisis.” Its Worn Wear initiative implements its mission by enabling employees to help consumers repair or recycle their products. Patagonia also developed a standardized metric, posted on its website, to evaluate the environmental impact of its entire supply chain. Zappos says its number one core value is to “Deliver WOW through service” to customers, according them respect and dignity. It implements this value by not measuring the average length of customer service calls (the industry stan- dard), so employees can spend as much time with customers as necessary. Mission statements like these help keep an organization’s values crystal clear in employees’ minds. T H O U G H T S D U R I N G J U D G M E N T > Most people have less difficulty knowing what’s right or wrong than they do keeping ethical considerations top of mind when making decisions. Ethical lapses can therefore be reduced in a culture where ethics are at the center of attention. You might know that it’s wrong to hurt someone else’s chances of being hired but fail to think of the harm you cause to unknown applicants when trying to help a friend, a family member, or a business school classmate land a job. Behavior tends to be guided by what comes to mind immediately before Even well-meaning and well-informed people are more ethically malleable than one might guess. E T H I C S Harvard Business Review May–June 2019 147 engaging in an action, and those thoughts can be meaning- fully affected by context. Should someone remind you that helping a friend necessarily hurts the chances of people you don’t happen to know, you might think twice about whether your advocacy efforts are appropriate. Several experiments make this point. In one, people were more likely to tell the truth when an honor code came at the beginning of a form—thereby putting ethics top of mind as they completed the form—than when it was posted at the end. In a large field experiment of approximately 18,000 U.S. government contractors, simply adding a box for filers to check certifying their honesty while reporting yielded $28.6 million more in sales tax revenue than did a condition that omitted the box. And in a simulation that asked MBA students to play the role of financial adviser, having them complete an ethics checklist before recommending potential investment funds significantly decreased the percentage who recommended what turned out to be the Madoff feeder fund. When ethics were top of mind, the students were more alert to the possibility that the fund was too good to be true. As a counterexample, Enron was notorious for its constant focus on stock price, even posting it in the elevators. Reflect- ing on his own misdeeds, its former CFO Andy Fastow said, “I knew it was wrong.… But I didn’t think it was illegal.… The question I should have asked is not what is the rule, but what is the principle.” People working in an ethical culture are routinely triggered to think, Is it right? rather than Is it legal? I N C E N T I V E S > It is a boring truism that people do what they’re incentivized to do, meaning that aligning rewards with ethical outcomes is an obvious solution to many ethical problems. That may sound simple (just pay people for acting ethically), but money goes only so far, and incentive pro- grams must provide a variety of rewards to be effective. Along with earning an income, employees care about doing meaningful work, making a positive impact, and being respected or appreciated for their efforts. In one experiment, hospital staff members were more likely to follow correct handwashing procedures when a sign above the sink reminded them of consequences to others (“Hand hygiene prevents patients from catching diseases”) than when it reminded them of personal consequences. Never- theless, managers may easily overlook the importance of nonfinancial incentives. When asked how important such incentives were to employees, customer service managers at one Fortune 500 firm tended to dramatically underestimate what they meant to their reports. In addition to aligning financial incentives with desired outcomes, ethical cultures provide explicit opportunities to benefit others and reward people who do so with recogni- tion, praise, and validation. If, for instance, your employees are making people’s lives meaningfully better in some way, pointing that out will encourage future ethical behavior. It may even improve performance, because the reward is aligned with ethical motivation. In one experiment, sales- people for a large pharmaceutical company performed dramatically better after participating in a prosocial bonus system, which encouraged them to spend a small award on their teammates, compared with a typical “proself” bonus system, in which they spent the award on themselves. This approach to incentives may have ancillary HR benefits. People tend to underestimate both how positive they will feel about connecting with others in a prosocial way and the positive impact their behavior will have on others. In a field experiment with Virgin Atlantic pilots, a bonus system for increasing fuel economy was structured so that the bonus went to a charity of their choosing. The resulting increase in their job satisfaction was similar in magnitude to the effect of moving from poor health to good health. Companies that use prosocial incentives are likely to produce happier, more satisfied, and more loyal employees. An ethical culture not only does good; it also feels good. C U LT U R A L N O R M S > Most leaders intuitively recog- nize the importance of “tone at the top” for setting ethical standards in an organization. Easily overlooked is “tone in the middle,” which may actually be a more significant driver of employees’ behavior. Good leaders produce good followers; but if employees in the middle of the organization are surrounded by coworkers who are lying, cheating, or stealing, they will most likely do the same, regardless of what their bosses say. So-called descriptive norms—how peers actually behave—tend to exert the most social influence. In one field experiment conducted by a UK government agency, 13 versions of a letter were sent to delinquent taxpayers, including versions that referenced moral principles, the ease E T H I C S Money goes only so far; incentive programs must provide a variety of rewards to be effective. 148 Harvard Business ReviewMay–June 2019 of paying taxes, or financial penalties. The most effective letter compared the recipient’s behavior with that of fellow citizens: “Nine out of ten people in the UK pay their taxes on time. You are currently in the very small minority of people who have not paid us yet.” People often fail to appreciate the power of social norms. When researchers were interested in determining how best to encourage energy efficiency among a group of Califor- nians, for instance, they first asked a group of nearly 1,000 residents to predict the effectiveness of various approaches, including appeals to environmental protection, personal financial benefits, societal benefits, and social norms (what percentage of neighbors conserved energy by using fans). These residents expected that the environmental appeal would be most persuasive and the social norm appeal least persuasive. But when the researchers sent about 1,000 other residents one of the four appeals, the social norm had by far the biggest effect on reducing energy use. Leaders can encourage an ethical culture by highlighting the good things employees are doing. Although the natural tendency is to focus on cautionary tales or “ethical black holes,” doing so can make undesirable actions seem more Harvard Business Review May–June 2019 149 common than they really are, potentially increasing uneth- ical behavior. To create more ethical norms, focus instead on “ethical beacons” in your organization: people who are putting the mission statement into practice or behaving in an exemplary fashion. Putting Ethical Design into Practice A L E A D E R D E S I G N I N G an ethical culture should try to create contexts that keep ethical principles top of mind, reward ethics through formal and informal incentives and opportu- nities, and weave ethics into day-to-day behavior. Precisely how this is achieved will vary among organizations, but here are a few examples. H I R I N G > First impressions are inordinately powerful. For many employees, an organization’s values were revealed during the hiring process. Although interviews are typically treated as opportunities for identifying the best candidate, they also begin the acculturation process. At one Fortune 100 firm, for instance, interview questions are designed around a core value, such as putting customer needs first. In one inter- view script, candidates are told of this value and then asked, “Tell me about a time when you uncovered an unmet need of a customer that you were able to address.” We don’t know if this question identified people who are good at treating customers respectfully, but that’s not necessarily the point. Highlighting values in the interview reveals their importance to the organization. It is one piece of a broader system that draws attention to ethics. E VA LUAT I O N > Ethics can also be woven into the design of performance evaluations to highlight their importance to an organization as well as to reward and encourage good behav- ior. At Johnson & Johnson, for instance, each executive’s 360-degree evaluation is built on the four components of the company’s famous credo, which expresses commitment to customers, employees, communities, and stakeholders. In one version of the evaluation we saw, each executive was rated on items such as “nurtures commitment to our Credo,” “confronts actions that are, or border on, the unethical,” and “establishes an environment in which uncompromising integrity is the norm.” C O M P E N S AT I O N > Aligning financial incentives with eth- ical outcomes may sound easy in principle, but it is tricky in practice. This is where a mission statement can help. South- west Airlines has used an executive scorecard to tie compen- sation to its four core values: every employee matters, every flight matters, every customer matters, and every share- holder matters. Each value is demonstrated by an objective measurement—“every employee matters” by voluntary turnover; “every flight matters” by ontime performance. This scorecard highlights how well core ethical values align with business success, helps keep employees’ attention on them, and suggests the behaviors needed to realize them. Leaders can reward ethical actions by showing employees the positive impact of their work on others and recognizing their actions in presentations and publications. They can also create opportunities within the organization to behave ethi- cally toward colleagues. In one recent field experiment, man- agers were randomly assigned to perform five acts of kindness for certain fellow employees over a four-week period. Not only did this increase the number of kind acts observed within the organization, but recipients were more likely than controls to subsequently do kind things for other employees, demon- strating that ethical behavior can be contagious. These acts of kindness improved well-being for those performing them as well as for recipients. Perhaps most important, depressive symptoms dropped dramatically among both groups com- pared with the control condition, a result that continued for at least three months beyond the initial one-month intervention. Ethics, by Design N O C O M P A N Y W I L L ever be perfect, because no human being is perfect. Indeed, some companies we’ve used as examples have had serious ethical lapses. Real people are not purely good or purely evil but are capable of doing both good and evil. Organizations should aim to design a system that makes being good as easy as possible. That means attending carefully to the contexts people are actually in, making ethi- cal principles foundational in strategies and policies, keeping ethics top of mind, rewarding ethical behavior through a variety of incentives, and encouraging ethical norms in day- to-day practices. Doing so will never turn an organization full of humans into a host of angels, but it can help them be as ethical as they are capable of being. HBR Reprint R1903K NICHOLAS EPLEY is the John Templeton Keller Professor of Behavioral Science at the University of Chicago Booth School of Business and the author of Mindwise: How We Understand What Others Think, Believe, Feel, and Want (Knopf, 2014). AMIT KUMAR is an assistant professor of marketing and psychology at the University of Texas at Austin. E T H I C S 150 Harvard Business ReviewMay–June 2019 Copyright 2019 Harvard Business Publishing. All Rights Reserved. Additional restrictions may apply including the use of this content as assigned course material. Please consult your institution's librarian about any restrictions that might apply under the license with your institution. 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