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Ethical Behaviour - the Application of External Regulation or Changing the Internal Culture?

During the Istanbul Annual Meeting of the World Bank and International Monetary Fund (October 2009), Richard Green, the Chairman of HSBC, stated that the entire banking industry ‘owes the real world an apology’.  He points out that the demonstration of this will be for the banking industry to show ‘a commitment to learn the lessons.  Some of them are about governance and ethics and culture’.

We believe there are two essential lessons drawn from the experience of the recent financial crisis. 

The first is that positive change, to create more ethical operations, will not be delivered by legislative or regulatory acts from external agencies

The second is that commitment to learn is not enough, there also needs to be a commitment and desire to act internally

Green was very clear on the first lesson.  This was the fact that any change in behaviour, from learning the lessons, will not be delivered by rules and regulations alone.  This is a critical point.  Rules and regulations applied by external agencies, or internally, do not deliver sustainable or meaningful change.  They have not done so in the past, nor do they in the present, so what hope can we have that such regulatory procedures will create positive change in the future?

Currently, it might be possible to see this need for ethical driven change as being an issue for the world’s financial institutions alone.  But this is far from the case.  Unethical organizational behaviours are embarrassingly commonplace, and include major acts such as the dumping of polluted waste, price fixing or kick-back schemes; to the more, seemingly, minor acts such as fiddling expenses, adapting performance figures or bullying of employees.  Such acts take place and continue to take place regardless of existing rules, regulations and policies.  This is not to say that such rules are not important, it is simply to say that they are not the answer to bringing about meaningful change.

Green was absolutely correct in stating that the difference will not be achieved by the simple application of regulations.  Something else is called for, and this is the promotion of an ethical culture through the values and behaviours adopted by organizations and their members.  One of the positive features of the recent recession and economic crisis is that corporate culture and values are back on the leadership agenda.  There has been a real groundswell of interest and activity amongst businesses in the UK to search for and find ways to make this cultural change real.

In our experience, and supported by a considerable body of research, there are three key features to brining about such change. 

First, and not surprisingly, there is the focus on the executive board and senior management team.  Individuals holding senior roles not only need to demonstrate a consciousness of the ethical considerations but they also need to ensure that these are translated into their own behaviours

Second, behaviours associated with the corporate values need to be recognised and rewarded within the organizational systems.  Activities such as induction, appraisals, preferment, rewards and bonuses, and management 1:1s all need to clearly reflect the corporate value structure in addition to other content.

Third, the organization must work to institutionalise the ethical norms and behaviours so that they become part of ‘the way we do things around here’.  Together, these activities enable a cultural shift in a far more powerful manner than the applications of rules.

To make these sorts of change happen is a challenge, and this is why many CEOs are looking outside their organizations to find the support and leverage that will enable such change to be realised.  The first steps in enabling and promoting a sustainable ethical culture are: 

• The recognition that this topic is now a key feature on the leadership agenda
• That its impact will provide positive brand advantage
• Careful selection of the right partner to support such change is vital.

This article was published in the on-line magazine ‘Connection’.  To view the magazine article click here.