United States: Style Matters!

By Levy Rivers and Marcello Bondurant

Codes of conduct have become the norm for public companies. Pursuant to the Sarbanes-Oxley Act, public companies must disclose whether or not they have a code of ethics for their principal executive, financial, and accounting officers and must disclose amendments and waivers to this code of ethics on a Form 8-K or on their websites. Similarly, the NYSE and NASDAQ listing standards require prompt disclosure of waivers of the code of conduct for any director or executive officer. Organizations that rate corporate governance inquire if one exists. Most companies view the code of conduct as an important component of the internal control system. However, simply having one is not enough. A code of conduct is an integral part of an effective compliance and ethics program, but it is not the only part.

Despite the Supreme Court ruling that compliance programs under the federal sentencing guidelines are only "advisory", the crux of the new rules established by the SEC still require "standards of conduct and internal control systems that are reasonably capable of reducing the likelihood of violations of law."  For the purpose of this article, we have assumed the position that cultural changes produce effective results for eliminating the behavior sighted in the violation(s). The specific areas that matter most to us are those that tend to impact an organization’s "voice". The information flows to the public effect its "reputation". In this context, voice is the method by which the firm’s customers or organizational members express their dissatisfaction directly to management, to some other authority to which management is subordinated, or through general protest addressed to anyone who cares to listen.

Of course the questions are many, but these should be on the agenda:

• How much time and money is required to implement a cultural program of such magnitude?
• Have such tactics proven successful? And finally,
• Does the evidence produced convince a typical board of directors that it should adopt such a program as its preferred method of compliance?

This article is much less about the full elaboration of all the twist and turns of a complete program than a focus on styles for leadership to be used in the execution of a fully designed program.

Sarbanes-Oxley continues to push organizational behavior along the path that demands public companies become increasingly more transparent to society.  The recent trials of executives have demonstrated that a shift in organizational behaviors, not one in pronouncements, is the standard preferred by both civil society and prosecutors alike.  In other words, it’s about what is being done by people that gets exposed by other people within the same organization, not after the fact testimony and public relation tactics, that carry the day. 

Ideally, a company will never find itself in the position of facing sentencing for corporate wrongdoing, but if it does, an effective compliance and ethics program is a mitigating factor that could reduce the ultimate penalty a company has to pay with respect to specific governmental fines and sanctions. -- a clear benefit to the organization. The absence of an effective program may lead a court to place a company on probation and the implementation of an "effective program" may be a condition of its probation. Also, an effective compliance program may limit the risk of aiding and abetting liability in private litigation by uncovering, correcting and preventing misconduct.

Disclosing wrongdoing either directly or indirectly on the part of one's employer, commonly known as "whistleblowing," is one of the most difficult decisions that a staff person will have to make. The board has to blend that reality with the same rigor of perspective it has for the competitive demands of the global market place -- reputation. We are assuming that those two realities vie for prominence within a governance model adopted by a typical board of directors.

The definition of a compliance program is to direct information flows out to all employees and other concerned publics that establish an individual’s obligation as to any suspected violations (covering fraud, anti-trust, discrimination and insider-trading, to name a few) and the methods and tools that are available (i.e. telephone hotline, website, normal reporting channels or if available, the business unit’s Compliance Officer or Ombudsman) to resolve it. The very scope of such a program requires the board to think about transforming both themselves as well as the organization.

One of the consequences of making this shift is more exposure and transparency. Access and openness make it harder to get away with unethical behavior, which the board and the public both demand. Job descriptions are being tuned, with a view to the type of person rather than simply the tasks. It is not just what the employee can do, but the kind of person he or she is, ethically and morally.

Transparency is to transformation as water is to soil. Transformation thrives in the tension generated by the paradox of creativity -- the creative process, the making of the new, involves destruction of the old as the old is the very antithesis of what creativity symbolizes.  Creativity’s affect on transformation is seen in how it destroys asymmetrical information barriers - opening up a space that will bare the mass of transforming practices toward greater transparency.

The tension within transparency can be seen in the following views:

• One party believes that another group is inherently dangerous, and that its potential to do harm is exacerbated by secrecy.  Therefore, accountability must be forced upon that group through the enhanced flow of information.
• Another party argues that some vital good will be threatened by heightened candor, hence wants the proposed data flow shut down.

What is the behavior of transformation?

• Policy alignment as evidence of trustworthiness
• Examples focused on revelation and development
• Installation of practices to verify and celebrate demonstrated behaviors
• Integrate short term achievement and honors

Trusted is one of those titles that companies aspire. Many of the business scandals in the past 10 years - such as Enron, WorldCom, ImClone, and Tyco – would have met with a much different reception fifty or one hundred years ago. Today many boards are alarmed since so many more concerned stakeholders can make their views known for affect. Being trusted offers great premium in both labor markets and civil society in general. So the reputation as an ethical culture lives or dies every day when someone chooses either to speak up or to remain silent. The consequences of not speaking up, however, are now more significant.

The glue of trust is what maintains society -- people with the capacity to confront mistrust. The health of a society can be measured by how openly people are able to confront problems with each other. The degree that problems are allowed to fester demonstrates the erosion within trust and many benefits of community are lost. Disclosure has become the watchword of our age. In all of history, we have found just one cure for error; a partial antidote against making and repeating grand, foolish mistakes, a remedy against self-deception.  That antidote is criticism. 

In the heavily automated workplace, a keen sense of right and wrong has become and is increasingly being valued as a job skill. The "great global brain drain" is how futurist Richard Samson describes it. As the century progresses, he predicts, more and more jobs will become automated, forcing humans to hone skills machines can't duplicate. Qualities like creativity, ethical judgment, compassion, intuition, as well as responsibility, stand out in an automated world now and increasingly so.

What is apparent, however, is that the ripple effect of unethical behavior will become more acute. "As computer systems make our work increasingly interconnected, so the chance for one unethical or incompetent person to do tremendous damage will increase," says David De Long, author of Lost Knowledge: Confronting the Threat of an Aging Workforce.

Relational knowledge, the "know-who" rather than the know-how, has become more critical from a board’s perspective in regards to how it establishes its oversight of technology systems and staffing directions. Organizational executive information flows are becoming more fluid and decentralized as huge numbers of people have enough information to make intelligent decisions and choices for themselves and networks are so highly integrated. This exposure might peak the board to maximize its corporate reputation by managing internal culture and its "voice" to the public. De Long states, "We're in the early stages of an increase in human freedom in business that may in the long run be as important a change for business as the change to democracies was for governments."

What behavior is subject to ethical question?

• Transactions that promote cognitively counter-stated behavioral goals
• Behavior that highlights cover-ups and avoidance instead of openness
• Tactics that promote a stand of deniability

If there is a recognizable problem in your organization (a legal crisis, lowered productivity, or a product quality issue), do you ignore it? Of course not! But in many companies an unacknowledged danger of equal or greater proportion threatens not only profits, but overall corporate health. That danger is the disparity between the standards articulated by a company (in a code of conduct, policies, and procedures) and the behavior of its employees. This disparity erodes integrity, undermines even the best-laid standards and allows unethical behavior to become the de facto norm. With loss of integrity comes increased financial and reputational risk, making an organization vulnerable in terms of legal liabilities and declining consumer and investor confidence. Yet the source of this risk is often ignored or unrecognized. 

 The problem is with behavior, not standards. Setting standards is the easy part. Most companies have a code of ethics. Some of the larger firms provide compliance training. However in many corporate reform efforts, the focus has been on developing standards without equal emphasis on communicating and modeling the behaviors that demonstrate those standards. 

The root of the problem is often a misunderstanding by an organization's leaders of the relationship between standards and behavior. Leaders may believe, for example, that because it has established a set of rules, employees will naturally follow them, or even worse, not establish a code because they believe that all the people they have hired are honest and do not need any training . The reality is that making rules is only a first step, and that standards alone cannot guarantee integrity.

The critical element necessary to address the problem is a company's control environment, the foundation of the corporate culture. The control environment is the context in which decisions are made and sets the tone for the entire organization in a market place of expanding horizons. It is comprised of the attitudes, abilities, awareness, and actions of a company's employees, especially its leaders, and the responses those behaviors generate in the wider civil society. The measure of reputation runs from the individually-affected employee, pass the host communities, and pass the customer to the investment world and its networks. In order to understand how the control environment affects behavior, it is important to understand the importance of context. Ethical (or unethical) behavior does not exist in a vacuum, but is part of a broader organizational culture.

Older models of organizations focused on individual behavior. It was assumed that an employee's natural inclination was to act only in his or her self-interest, and therefore needed close monitoring; as if the organization’s actions were hidden from exposure. More contemporary and inclusive thinking focuses on the environment in which individuals and organizations act. Even good people are susceptible to negative environmental influences. In his book, The Tipping Point, Malcolm Gladwell discusses what he calls the power of context in terms of students cheating on school exams. Some students, he found, will never cheat. Others will always try to get a dishonest edge. But the vast majority -- the largest section of the bell curve of the class -- will cheat or not cheat as the classroom environment (their "control environment") dictates. Little supervision and no perceived punishment, for example, will encourage more students to copy answers off their peers' papers, while the opposite conditions seem to compel what we would call honesty. Clearly a trait that we may have believed is part of a person's innate character is influenced by context.

Weaknesses in a corporate culture or control environment increase risk. The absence of strong leadership in an organization will result in a lack of role models for the organization's employees. If leaders do not "walk the talk" and model the desired behavior, then they are expecting employees to behave appropriately as the byproduct of a "wish", not the product of program that achieves compliance. Lack of transformative leadership may also be manifest in a lack of vision. The dearth of a clear vision of organization goals and proper ethical practices increase the gap between standards and behavior. Without vision it is difficult to set appropriate standards -- rules for behavior that are neither too high and thus discouraging, nor too low and not challenging for employees. Leaders who cannot communicate and demonstrate a commitment to integrity cannot possibly instill it in others.

The key is to focus on two elements. First, an organization's leaders must identify their stance toward the specific risk factors that create or widen the gap between desired and undesired behavior. Then the organization must test its capacity to execute a plan to mitigate and manage those risk factors. As with any other business goal, leaders must face this threat with a sure vision, strategic planning, and a commitment to change. In order to really affect behavior, leaders need to commit first to a goal of execution and then to a process of continuous improvement toward the goal.

Leaders must also establish processes, tools, communication, and ongoing education to support the organization's goal. Creating a rule book will not suffice, nor will any other "quick fix" approach. Only by accepting the ongoing nature of this challenge can organizations bring employee behavior in line with the organization's standards.

The benefits of shifting behavior are threefold:

• Improved financial outlook
• Affirmed reputation
• Authentic effectiveness in an increasingly competitive workplace

In summary, bringing employee behavior closer in line with organization ethics greatly reduces the financial risks associated with unethical behavior. An organization will benefit by avoiding punitive fines in the short term. Shifted behavior provides protection against declining stock values. An organization earns affirmation of public perception. A company that demonstrates a commitment to integrity and plays fair within its field is a company that will be trusted by the public and investors.

It is the responsibility of leaders to bring about this shift in behavior by having both a vision of integrity for the organization and a strategic plan for ensuring such integrity. This vision must be articulated in a way that is relevant and actionable by employees. A vision that aims too high will not be taken seriously while one that is too pedestrian will not motivate employees.

With the spectacle of court TV to avoid, what should a board of directors use to generate a proper picture?  The style (or stance) of leadership the board wants to promote demonstrates a capacity to energize subordinates and the public to believe that the organization has risen above its singular contractual obligations and performs at the level for mutual benefit of civil society and stakeholder.

The principal finding of a McKinsey Quarterly survey of more than 1,000 board members is that having focused for a time on accounting-compliance issues, boards are now determined to play an active role in setting the strategy, assessing the risks, developing the leaders, and monitoring the long-term health of their companies.

At one level, the survey underlines the way the Sarbanes-Oxley Act is holding boards—not only in the United States, but also around the world—more responsible for meeting high standards in reporting and controlling the financial affairs of their companies. Yet the implications for governance are even far more reaching. To achieve as much involvement as directors say they want, they will have to use their time in meetings more effectively and develop a new understanding of their roles and responsibilities; otherwise, they will give management the impression they intend to take on day-to-day roles. Moreover, the composition and culture of boards, as well as the agendas of board meetings, will require fresh thinking.

Understanding and choosing the style of leadership necessary to create the desired environment for the organization begins with understanding the various leadership roles available to organizations today.

Leadership as Management: Developed by Friedrich Taylor, this is a managerial role that asks leaders to ensure group activity is timed, controlled, and predictable. This mind-set says little, if anything, about the leadership task of building shared values, trust, and vision. It is silent about the animating essence of business and business people. By relegating workers to the status of "cogs" in the corporate machine, it has scant appeal to the better educated, more aware, and ever-more-wanting people entering the workplace. The need to be rapidly responsive to changes in customer demand for products and services places a strain on the rigid, procedural, control mechanisms developed by this managerial mind-set -- to produce traditional outputs with multiple units of the same product to high tolerances and low margins.

Leadership as Excellent (good) Management: This view of leadership, while maintaining the mechanistic operational inclination of the firm, changes the character of the core follower (responding to the pull of the quality movement) and enlarges the domain of the manager. Essentially it retains the idea that leaders and managers do much the same thing. It limits the scope of leadership to just one function -- quality improvements -- and ignores the full range of capacities of both leader and follower. It does not address the needs of the corporation beyond a focus on high quality.

Values Leadership: This conception of leadership is rooted in the reality of human nature and conduct. The essential human nature is simple; everyone has values and these values trigger behavior. Even as it recognizes the use and importance of values in shaping behavior, out of a false desire to let each person choose their own values, it refrains from advocating any values or even discussing relative merits of alternative value systems. Indeed, it teaches that any value is equal to any other. So it recognizes that values are shaping our lives but fails to address that we do not know how to consciously set our own values systems or evaluate the merits or results of those we see in others. Values leadership clearly has set aside a space to articulate values but seems too timid and unsure to make full use of the space.

Trust Leadership: This view sees its role not so much as a function of the individual leader but as a condition of the group culture. Leadership may be spontaneous at times. Most often, it is a result of specific, planned actions to create a culture conducive to internal harmony and interpersonal trust. The leader’s task is to build a culture of shared values where people can come to trust each other enough to sublimate their differing values so that they can work together. Those accepting this leadership reality see the need for a unified, effective, harmonious culture characterized by mutual trust that allows leadership to take place. It is a collective activity, shaped and controlled by the values-laden notion of harmony as defined by its history of domination by the majority culture. Without a broad and adroit set of critical skills, the trust leader’s search for unity will tend to exclude many important insights, tactics and especially people. This view is likely to accept conformity as consensus or, even worse; it needs conformity and needs to call it consensus.

Spiritual Leadership: This view concludes that leadership is a function of the leader’s concern for the whole-soul -- the inner sense of spirituality of self and others. The belief is that leadership comes out of the leader’s true self -- his/her inner spiritual core. This inner framework, not facts or situation, determines what is good and true and beautiful, and therefore worthy of action. From this view, the notion of only looking at profit and productivity is unsatisfying as the guiding values focus on feeding the soul. It presumes that people are hungry for meaning in their lives and feel lost and empty. To fill this void, it attempts to blend an internal representation of the soul and the firm’s economic needs. This view represents one of the oldest of rationales in Western culture, that of Emanuel Kant. It understates the social value of being the best for an external customer in favor of the inner most space of the internal market -- the soul. It may be true that the key operation is metaphysical but to link to a unified soul denies the multiplicity of the forces in action. What this view is especially good at is focusing all of its attention of an empowering relationship. A leader of a metaphysical experience defines a sense of one’s own spirituality and that of co-workers so as to have a greater transformational effect on the organization, its forms, structures and processes.

Contextual Leadership: This view is a celebration of "maturity". Contextualism is a view of life that takes seriously the idea of maturity -- a wide base of knowledge and a life filled with challenge. Maturity expresses a commitment to courageously choose to define and protect ones social space in the presence of hostile forces while maintaining an adroit process of self-criticism and accountability for those choices. A wide base of knowledge infers more than a mere accumulation of data but rather an ongoing quest to be conversant with the many discourses and varied articulations they entail. Challenge-filled refers to a belief in a bursting forth of possibilities. This belief in open possibilities, limited by responsibility, explains the relationship between management and contextual leadership. Simply put, contextual leadership calls into question the very core of historical management rationale that emphasize rules, universality, and impartiality over contingent ways of reasoning that emphasize relationships, particularity, and partiality. Most management systems seek to transcend the individual. Contextual leadership delights in the play of unfixedness, incompleteness, and temporality. From this view, the spectacle of the open forum represents the true reality of our time. All other versions of reality that call for the unity, objectivity, or a wholeness of social bodies as presupposed in most management systems, are systems used for domination and repression.

Each leadership style brings distinct philosophies and value systems to the practice of operating and leading an organization yet they all fail to address the experience of the leaders themselves. We believe that the keys to effectively leading transformational activities in an organization are first to recognize one’s own leadership style along with its strengths and weaknesses. Second, to identify the likely opportunities and issues created within the organization’s culture and its ability to be transparent and effective in and for society associated with that leadership style. And finally, to develop a point of reference, or "place to stand," that allows leaders to act with confidence and consistency.

While the activities of transforming the ethical and compliance culture of an organization are important, fundamentally, the approach leaders take to demonstrate integrity and transparency will determine what the real cultural context will be.

Your leadership, its style and basis, create the context for the organization and guide the development and evolution of your organization’s culture in powerful and far reaching ways. As leaders, it is easy to become consumed by the day-to-day activities required by our roles within the organization. Meetings, clients, staff, and those we report to, all place demands for time and attention. Without the ability to create space for reflection and purposeful preparation, we simply lead based upon our historical experience of other leaders or, even worse, simply take as a given the historical culture of our organizations. While this may have been adequate in the past, the dynamics and demands of modern social expectations and the heightened expectations of compliance and oversight systems make that approach inadequate for the future. Whether you exercise your leadership as part of a Board of Directors, as a C-level executive, or as a leader responsible for a segment of an organization, you, more than any other person, have the ability to create a powerful context and culture that celebrates transparency, receives and demonstrates trust, and effectively guides employees as they make the myriad daily decisions necessary to grow and evolve your organization. Ultimately, compliance and risk management is a product of the choices made by individuals. Their guide through this minefield of temptations and challenges is the cultural context you have established supported by the policies, practices, and resources available to them.

Phronêsis works with leaders to create a context of peace in action from which to conduct their work within the organization. We understand the peaceful undertaking of this behavioral shift to mean that "there is nothing wrong", rather than initiating these actions on the basis "what’s wrong and who’s responsible." Operating from this stance of peace in action allows leaders to improve communication, listening, trust, effectiveness, and transparency in all of their activities. Leading becomes enjoyable and the challenges faced each day become openings for possibility rather than obstacles to overcome.

We ultimately believe that leadership is about who you are being each moment of every day. Your capacity to understand the style of leader necessary for your organization will determine how effective you will be in establishing and sustaining a compliance program that protects and fuels your organization’s future. If you are interested in understanding how to make peace in action the basis for your leadership, desire an analysis of where you are now, or simply want to explore how compliance and culture could impact your organization’s success, we welcome further discussion and an opportunity to explore these ideas with you.

We create conversations for individuals, groups, and forums that provide access to and a framework for pursuing the nature of peace. We impact a leader’s ability to be effective while executing a compliance program that changes the organization’s culture. Creating space for reflection is critical for deepening one’s understanding and perspective as a leader. Compliance is a product of culture and culture is created by leadership. How peaceful are you?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.