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The Importance of Ethical Culture:Increasing Trust and Driving Down Risks


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Tis report is published by the Ethics Resource Center (ERC). Allcontent contained in this report is or inormational purposes only.Te Ethics Resource Center cannot accept responsibility or anyerrors or omissions or any liability resulting rom the use or misuseo any inormation presented in this report.

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This report was made possible in part by generous contributions

from the following sponsors:

ABOU HE HCCA

Te Health Care Compliance Association (HCCA), established in 1996 and headquartered in Minneapolis, MN, is a non-prot proessional mem-

bership organization made up o approximately 6,400 compliance and ethics proessionals working in the health care industry. HCCA is dedicated

to improving the quality o compliance. Visit HCCAs Web site at www.hcca-ino.org. el: 888/580-8373. E-mail: [email protected].

ABOU HE SCCE

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practice and compliance standards in all organizations and to provide the necessary resources for compliance professionals and others who

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Founded in 1922, the Ethics Resource Center (ERC) is Ameri-

cas oldest nonprot organization devoted to the advancement

o high ethical standards and practices in public and private

institutions. For 88 years, ERC has been a resource or public

and private institutions committed to a strong ethical culture.ERCs expertise also inorms the public dialogue on ethics and

ethical behavior. ERC researchers analyze current and emerg-

ing issues and produce new ideas and benchmarks that matter

or the public trust.

For inormation about the National Business Ethics Survey, see

page 15.


5/22Research Brie rom the 2009 NBES | 1

Te Importnce o Eticl Culture:

Increasing Trust and Driving Down Risks

We like to believe that, as adults, we make decisions independently and are ar beyondsuccumbing to peer pressure. But social science research tells us that is simply

not the case. Study aer study conrms it: the vast majority o people act based on

the circumstances in their environment and the standards set by their leaders and

peers, even i it means compromising their personal moral ideals. Good people do

bad things i they are put in an environment that doesnt value values, i pressured

to believe that they dont have any choice but to get the job donewhatever it takes.

In the workplace, leaders exert power and inuence

behavior by controlling who is hired, retained, red,

or promoted. Coworkers teach lessons by whom

they choose to listen to; whom they admire; whether

they ask questions o their supervisors and whether

they publicly acknowledge the rules, but privately do

whatever gets the outcome they want. And, as a re-

sult, employees learn what reallymatters, how things

reallyget down around here1. Tis is the essence o

ethical culture.

While the term ethical culture may sound myste-

rious or esoteric, its a reality that all working peo-

ple experience whether they realize it or not. In a

strong ethical culture, ethical values matter and

that is apparent in the actions o employees (espe-

cially management), company policy and proce-

dures, and decisions about who gets rewarded, who

gets punished, and how to weather tough times. In a

weak ethical culture, ethical values arent promot-

ed and getting the job done is ar more important

than getting the job done in the ethicallyrightway.

Basically, the strength o a companys ethical culture

is the extent to which the organization makes doing

the right thing a priority.

Recognizing the importance o ethical culture, the

Ethics Resource Center (ERC) has developed indices

to measure employees perceptions about the overall

organization and their peers, direct supervisors and

senior leadership. ERC uses these indices to investi-

gate ethical culture and its impact. Te measures and

indices that serve as the basis o this report were gath-

ered in ERCs National Business Ethics Survey.2

_______________________

1. revio, Weaver, Gibson and oer. (1999) Managing Ethics andCompliance: What Works and What Hurts. Caliornia Manage-ment Review, 41 (2).

2. Six times since 1994, the Ethics Resource Center has carried outa nationally representative poll o employees at all levels thatexplores belies and experiences related to ethics and complianceat work: the National Business Ethics Survey (NBES). It is themost exacting longitudinal research efort examining businessethics rom the employee perspective and serves as a rigorousmeasurement o trends in workplace ethics and compliance,a snapshot o current behaviors and thinking, and a guide inidentiying ethics risk and measures o program efectiveness.



What We Already Knew: ERCs Past

Research on Ethical Culture

Over the years, ERC has learned several basic acts

about ethical culture:

1. Te strength o a companys ethical culture

drives:

n Whether or not employees eel pressure

to compromise company standards;

n Te rate o observed misconduct;

n Whether employees who observed

misconduct chose to report it; and

n Whether those who report eel retaliated

against.

In stronger cultures, results are more positive. Con-versely, results are more troubling in weaker cultures.

And this is true not only at the individual company

level. For example, we see that in the United States

as a whole, weaker perceptions o ethical culture co-

incide with increases in observed misconduct. When

the American workorce has a more positive percep-

tion o the ethical cultures o their workplaces, obser-

vations o misconduct decline.

Weker Perceptions o Eticl Culture Coincide witIncreses in Observed Misconduct

n Observed Misconduct Weak and Weak-Leaning Ethical Culture



2. Overall, ethical cultures are stronger during

times o heightened scrutiny, including the years

post-Enron and the recent fnancial crisis.

More Favorable Perceptions of Ethical Culture Coincidewith Greater Scrutiny During Times of Crisis

9%

43%

36%

12%

9%

51%

32%

8%

10%

47%

34%

8%

9%

43%

36%

11%

18%

44%

30%

9%

Weak Culture

Weak-Leaning Culture

Strong-Leaning Culture

Strong Culture



3. Ethical culture is experienced diferently

by diferent kinds o employees:

Perceive Stronger

Ethical Culture within Company

Perceive Weaker

Ethical Culture within Company

Managers, especially senior leaders Nonmanagement employees

Non-unionized workers Workers in a union

Older workers Younger workers3

Most-tenured employees Most recent hires

Investigations and Findings

ERCs research on ethical culture, including its

National Business Ethics Survey, is ongoing.

Recently, ERC looked at its NBES 2009 data to see

i the basic relationships between ethical culture

and outcomes still held, and to urther explore

those relationships.

Using data rom the 2009 NBES, we investigated

several key questions:

n What is the relationship between ethical

culture strength and desired results o an

ethics and compliance program (i.e., ewer

employees eeling pressure to compromise

company standards, reduction in rates o

observed misconduct, increased reporting o

observations, and reduction in retaliationagainst reporters)?

n How important are company leaders when it

comes to shaping ethical culture?

n How is ethical culture related to extremely

serious nancial misconduct, such as

misrepresenting nances and insider trading?

n

How have perceptions o culture anddiferent aspects o culture changed over

time?

n Which companies, by their nature, are less

likely to have strong ethical cultures?

_______________________

3. For more inormation on diferences between age groups andgenerational diferences in the workplace, please see the EthicsResource Centers supplemental research brieMillennials, GenX and Baby Boomers: Whos Working at Your Company andWhat Do Tey Tink About Ethics? Available at:www.ethics.org/topic/national-surveys



FINDING 1:

Ethical culture continues to have a proound impact

on pressure, observed misconduct, reporting o ob-

served misconduct, and rates o retaliation against

reporters.

Misconductespecially misconduct that

management is unaware o, and thereore cant

addressputs the company at risk. It can lead to

a damaged reputation; deteriorating relationships

with customers and clients; loss o valued employees;

prosecution; nes and even debarment. As a result,

reducing misconduct and increasing reporting o

misconduct when observed are primary goals oethics and compliance programs. Savvy ethics and

compliance practitioners also are mindul o rates

o pressure to compromise standards (a leading

indicator o observed misconduct4) and retaliation

against reporters, which drives reporting rates.5

As with past ERC studies, e.g., NBES 2007,

the 2009 NBES data reveal that strong ethical

cultures lead to better outcomes:

n In stronger cultures, ar ewer employees

(4 percent) eel pressure to commit

misconduct than in weaker cultures (15percent).

n Rates o observed misconduct in stronger

cultures are roughly hal (39 percent) as high

as in weaker cultures (76 percent).

n In stronger as opposed to weaker ethical

cultures, ailure to report observed

misconduct declines by more than a third,

rom 43 percent to 28 percent.

n Te retaliation rate in stronger ethical

cultures is 4 percent, compared to 24 percent

in weaker cultures.

_______________________

4. Troughout the history o NBES research, we have consistentlyound that employees who have elt pressure to commitmisconduct are ar more likely to actually observe misconductthan those who do not. For example, in 2009, 88 percent othose who elt pressure to compromise standards also observedmisconduct, but only 12 percent o those who did not eelpressure observed wrongdoing.

5. Structural equation modeling based on the 2007 NBES datasetrevealed that increases or decreases in retaliation causecorresponding increases or decreases in rates o reporting.



Te positive impact o ethical culture is true not

only or observed misconduct in general, but also

or every one o the 27 specic orms o misconduct

that ERC asked about in 2009.

Strong Eticl Culture Reduces Pressure, Observed Misconduct,

Filure to Report & Retlition

Weak or Weak-Leaning Strong or Strong-Leaning



Strong orstrong-leaning

Weak orweak-leaning

Diference

OBSERVED AT LEAST ONE FORM

OF MISCONDUCT IN PREVIOUS 12

MONTHS

18% 45% 149%

Misrepresenting Financial Records 1% 10% 849%6

Environmental Violations 1% 10% 745%

Insider Trading 0% 2% 590%

Illegal Political Contributions 0% 2% 578%

Anti-Competitive Practices 1% 4% 550%

Lying to Employees 6% 40% 513%

Discrimination 5% 30% 500%

Improper Hiring Practices 4% 20% 460%

Making Bribes to Public Ocials 0% 2% 457%

Employee Benets Violations 4% 23% 436%

Accepting Bribes or Kickbacks 1% 7% 415%

Lying to Customers, Vendors, or the

Public5% 23% 412%

Inappropriate Alteration o Documents 2% 12% 397%

Employee Privacy Breach 4% 20% 394%

Health & Saety Violations 5% 20% 287%

Improper Use o Competitors Inside

Ino.

1% 4% 282%

Falsiying Time/Expense Reports 5% 19% 271%

Sexual Harassment 4% 13% 254%

Abusive Behavior 11% 40% 250%

Misuse o Companys Condential Ino. 3% 10% 225%

Poor Product Quality 5% 15% 218%

Stealing 5% 15% 215%

Customer Privacy Breach 3% 10% 182%

Company Resource Abuse 14% 38% 177%Conicts o Interest 10% 26% 164%

Substance Abuse 4% 11% 144%

Internet Abuse 14% 23% 65%

_______________________

6. Percentage-point diferences are based on actual, not rounded, percentages. As a result, they may be one point higher or lower thanpercentage-point diferences between the rounded/whole-number percentages displayed in tables.



FINDING 2:

Actionsand perceptionso top managers drive the

ethical culture o the company and have a signicant

impact on outcomes.

Its no secret that leaders have a signicant impact

on the success o a company. But some leaders still

ail to see that ethical leadership is a vital component

o efective and responsible management. Such a

mindset puts the company at risk and misses out on

a signicant opportunity. 2009 NBES data provide

evidence that, even more than coworkers or direct

supervisors7, top management makes a diference

when it comes to critical outcomes. In stronger as

opposed to weaker cultures, pressure is reduced

rom 16 to 4 percent (a 300 percent decline); rates omisconduct are roughly halved rom 77 to 40 percent;

ailure to report declines rom 44 to 27 percent and

retaliation against reporters diminishes rom a rate

o 1 in 4 to 1 in 20.

_______________________

7. I top management culture was stronger, pressure to commitmisconduct ell by 75 percent compared to 69 or supervisorculture and 54 percent or coworker culture. In terms omisconduct, moving rom weaker to stronger cultures, we see a 48percent drop associated with top management and supervisorculture, but only 42 percent related to coworker culture. Instronger top management cultures, reporting is 28 percenthigher than in weaker, compared to a diference o 21 percentrelated to supervisor culture and 22 percent or coworker culture.Finally, retaliation drops by 80 percent rom stronger to weakertop management cultureshigher than the 78 percent dropconnected with supervisor cultures and 59 percent with coworkerculture.

Strong Top Mngement Culture Reduces Pressure,

Observed Misconduct & Retlition

Weak or Weak-Leaning

Strong or Strong-Leaning



FINDING 3:

Coworker culture is particularly powerul or decreas-

ing observations o nancial misconduct, but top

management culture is associated with the greatest

increases in reporting it.

Although all misconduct is cause or concern, cer-

tain kinds are particularly worrisome. Many o the

most troubling orms o misconduct involve inap-

propriate nancial dealings: misrepresenting the

nancial health o the company, misappropriating

assets, violating contracts and the like. While these

kinds o misconduct are ar less common than more

HR-related issues like abusive behavior, even a single

incident can be very damaging or a company.

Analysis o 2009 NBES data reveals that overall

culture, as well as the three subcultures, have a de-

monstrably positive impact on reducing nancial

misconduct. By comparing overall culture and the

three levels, we see that a strong coworker culture is

related to the greatest reduction in observations o

nancial misconduct. In stronger coworker cultures,

8 percent o employees observed one or more kinds

o nancial misconduct, compared to 31 percent in

weaker cultures; that equates to cutting observations

o nancial misconduct by roughly three-ourths.

Strong Coworker Culture Connected wit Most Signifcnt

Decrese in Observtions o Finncil Misconduct


PercentageWhoObservedFINANCIALMISCONDUCT

intheprevious12months



In addition to reducing rates o nancial misconduct,

leaders are intent on increasing reporting o observa-

tions. Reporting reduces ethics risk by ensuring that

management is aware o and able to address prob-

lems instead o being vulnerable to lurking issues.

Te relationship is noticeably more modest, but, as

with observations o nancial misconduct, overall

culture and all three levels o culture are associated

with improved results. In this case, top management

seems to exert the greatest inuence. Seventy-eight

percent o employees in stronger top management

cultures who observe nancial misconduct report

it, compared to 61 percent in weaker cultures. Tis

equates to a 28 percent increase in reporting rates.

Strong Top Mngement Connected wit Gretest Increse in

Reporting o Observtions o Finncil Misconduct


PercentageWhoObservedthenReported

FINANCIALMISCONDUCT

intheprevious12months



FINDING 4:

Although overall culture and coworker culture are on

the rise, perceptions o management (top and supervi-

sors) are declining.

In 2009, more employees (62 percent) characterized

their overall ethical culture as being strong or strong-

leaning than in any past NBES. Similarly, a higher

number (68 percent) elt positively about the ethics

o their coworkers than in any year except 2003. Per-

ceptions o the ethics o top management, however,

are lower than in any year prior. And perceptions o

supervisor culture have been declining rom a zenithin 2005 and are the weakest since ERC began survey-

ing.

2003 2005 2007 2009

Strong or Strong-Leaning

OVERALL EHICS CULURE60% 58% 53% 62%

Strong or Strong-LeaningOP MANAGEMEN CULURE

71% 67% 68% 66%

Strong or Strong-LeaningSUPERVISOR CULURE

75% 78% 71% 70%

Strong or Strong-LeaningCOWORKER CULURE

76% 66% 61% 68%



FINDING 5:

When it comes to strength o ethical culture, some

companies are at an innate disadvantage.

Just as ethical culture is experienced diferently by

varying employee groups,8 certain kinds o compa-

nies areby their very naturemore likely to have

weak or weak-leaning ethical cultures. Highly union-

ized companies tend to have weaker ethical cultures.

Companies with 500 or more employees and that are

publicly-traded are also at a disadvantage.

More Likely to Have Strongor Strong-Leaning Ethical Cultures

More Likely to Have Weakor Weak-Leaning Ethical Cultures

Non-unionized workers Highly-unionized

Fewer than 500 employees 500+ employees

Privately-held Publicly-traded

Have employee-owners Employees do not hold stock

_______________________

8. For example, 82 percent o top managers consider their cultureto be strong or strong-leaning compared to 56 percent o rst-linesupervisors.



Conclusions & Implications

In stronger ethical cultures, employees eel en-

gaged and committed to the company9 and the

company is protected rom the risks associated

with misconduct and lurking ethics issues. Eortsto promote ethics and develop a strong ethical

culture are not only the right thing to dothey

make business sense because in stronger ethical

cultures:

n Fewer employees eel pressure to compromise

company standards;

n Fewer employees observe misconduct and

there are ewer incidences o every kind omisconduct;

n Employees who observe misconduct are more

likely to report it; and

n Reporters are less likely to experience

retaliation.

As a result o investigation conducted or this report,ERC also has learned that:

n O the three subcultures, top management

culture is most closely associated with

improved outcomes;

n Coworker culture is most closely linked

with rates o fnancial misconduct, but top

management is associated with reporting

such observations;

n While overall and coworker cultures are

improving, perceptions o management

both senior leaders and direct supervisors

are declining; and

n Certain kinds o companies (e.g., those that

are publicly traded and/or highly unionizedand those with more than 500 employees) are

at an innate disadvantage in terms o the

strength o their ethical cultures.

Based on these fndings, ERC has several

recommendations or senior leaders wishing to

improve their companies ethical cultures:

n

Make developing a strong ethical culture abusiness priority. Recognize that ethical

culture has a proound impact on pressure,

misconduct, reporting, and retaliation and,

thereore, has huge potential to reduce ethics

risk and decrease the companys reputational

risk.

n Lead by example; talk the talk and walk the

walk. Senior leaders have the greatest impact

on their companies cultures and should takeadvantage o the opportunity it presents. By

keeping employees inormed, living up to

promises and commitments, modeling a

commitment to ethics and setting a good

example, they can have a proound impact

on their companies ethical cultures and

ethical health.10

_______________________

9. For more inormation on the relationship between companyethics and employee engagement, please see the Ethics ResourceCenters supplemental research brie to the 2009 National BusinessEthics Survey Ethics and Employee Engagement. Available soon at:www.ethics.org

_______________________

10. For more inormation, see: Ethics Resource Center. (2006).Critical elements of an organizational ethical culture.Washington, DC: A. Levanon Seligson & L. Choi.



n Develop and promote programs that

encourage ethics as a priority among workers

at all levels. By ensuring that peers support

one another and support each others eforts

to live up to ethical standards in the

workplace, leaders help drive down rates o

nancial misconduct.

n Be mindul o what challenges are innate to

your organization and nd ways to help

employees eel invested in the company.

Leaders cant easily change the basic prole

o their companies (number o employees,

public vs. private ownership, etc.) but they

can become best in class by learning rom

others successes.

n Invest time and efort in regular assessment

and careul analysis. Employee surveys will

uncover problem areas in need o

intervention and highlight strengths tolearn rom and replicate. Furthermore,

regular assessment makes it possible to track

progress over time, encouraging

accountability or the success o eforts to

promote a strong ethical culture.


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ABOUT NBES

Te 2009 National Business Ethics Survey (NBES) is the sixth

in a series o reports that began in 1994. NBES has grown into a

mainstay o research on ethics in the American workplace.

NBES is the most exacting longitudinal research efort examin-

ing organizational ethics rom the employee perspective. Te

long-term nature o the study is important because it providescontext or national trends. NBES is the only longitudinal study

that tracks the views o employees at all levels within organiza-

tions to reveal real-lie views o what is happening within orga-

nizations and the ethics risks they ace.

Download the initial 2009 NBES report at www.ethics.org/nbes.


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Ask about our workplace ethics survey

Contact Moira McGinty Kl

Ethics Resource Cent

571-480-4401 or email [email protected]

Te Ethics Resource Center is devoted to independent research and the advancement o higethical standards and practices in public and private institutions. Visit www.EHICS.or


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Ethics Resource Center

2345 Crystal Drive, Suite 201

Arlington, VA 22202

USA

elephone: 703.647.2185

FAX: 703.647.2180

Email: [email protected]

Visit Our Website: http://www.ethics.org


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This report was made possible in part by generous contributions from the following sponsors:

Supplementl RESEaRCh BRIEF

2009 Ntionl Business Etics Survey

The Importance of Ethical Culture:Increasing Trust and Driving Down Risks