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Creating an Ethically Strong Organization CATHERINE BAILEY AND AMANDA SHANTZ

Ensuring that all employees clearly understand appropriate ways to address daily

ethical issues can prevent your company from spiraling into corporate scandal.

When German car manufacturer Volkswagen was caught

cheating on its diesel emissions testing regime a few years

ago, the subsequent scandal launched numerous lawsuits,

cost billions of dollars in fines, and severely harmed the

company’s reputation. The actions — and inaction — of

dozens of employees at all levels, across divisions and

countries, contributed to this disaster, including the

software engineers who designed the cheating device, the

workers who installed it, the managers who approved the

fitting and testing, and the members of the senior

leadership team who either orchestrated the scam or

simply turned a blind eye. 1

Of course, VW isn’t an isolated example. Consider the

costly lapses in judgment at Wells Fargo, 2 for instance,

and at Samsung Electronics. 3 Why do such scandals

continue, despite the clear moral and financial

imperatives for ethical action? And — perhaps more

important — what can be done to change matters?

Although some argue that people are innately inclined to

behave unethically out of self-interest, 4 our research

reveals that organizational ethics matter significantly to

most employees and managers, and that people want to

work for employers whose values and principles are

aligned with their own. This suggests that ethical

employers are likely to attract and retain ethical

employees. 5 What’s more, research has shown a link

between ethical leadership and task performance,

organizational citizenship, and other productive work

behaviors 6 — companies have many compelling

reasons to address ethical failings at the earliest

opportunity. The urgency is all the greater in this digital

age, since businesses must continually make rapid, high-

stakes choices about how to handle sensitive customer

and employee data.

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To uncover the reasons behind persistent unethical

conduct, we asked employees at five U.K. organizations —

a national government department, a nationwide retailer,

a nonprofit in the social services sector, a county-level

police force, and a construction company — to tell us

about their experiences of both ethical and unethical

practices on the part of their colleagues, line managers,

and senior executives. 7 (See “About the Research.”) We

found that the ethical tone of an organization is the

cumulative outcome of how its members address daily

ethical dilemmas as they go about their work. Over time,

a consistent mishandling of these micro-level issues can

spiral into macro-level corporate scandal. Here, we

discuss several murky areas that employees must navigate

and ways that organizations can help them make ethical

choices day to day.

AAbboouut tt thhe Re Reseseeaarrcchh To inform our study design, we carried out a detailed

analysis of research over the past 25 years on ethical

leadership and decision-making. We then surveyed a

representative sample of 1,319 workers in the United

Kingdom and conducted in-depth case studies in five

U.K. organizations: a central government department

with 18,000 employees, a nationwide retailer with 31,000

employees, a nonprofit in the social services sector with

1,100 permanent and 300 temporary staffers, a police

force of 3,000 officers plus civilian staffers, and a

construction company with 6,900 employees.

In four of the organizations, we surveyed 1,033 employees

and their 524 line managers. Across all five, we conducted

46 face-to-face interviews, held 16 focus groups with a

total of 79 participants, and analyzed company

documentation such as human resources policies and

statements of mission, vision, and values.

Daily Dilemmas That Trip People Up When employees don’t have a shared understanding of

events that unfold around them, what constitutes an

ethical response, and the consequences of behaving

otherwise, it often means the organization has created an

ethically weak situation for them. People essentially

become free agents, behaving idiosyncratically in the

absence of clear, strong norms. (An ethically strong

situation, in contrast, is one in which “the right thing to

do” is clearly communicated to employees and people

have the motivation and ability to behave in ways that are

consistent with the organization’s ethical code. 8 ) In the

case of VW, an ethically weak situation was allowed to

develop over many years, as senior executives prioritized

market share over environmental and legal concerns in

one judgment call after another.

Here are the daily dilemmas we found that tend to muddy

the ethical waters for individuals in decisions both large

and small.

EEtthichicaal dil disscoconnnneecct.t. Sometimes employees observe a gap

between their personal ethics and those of the wider

organization, and that makes them uneasy. An abundance

of studies show that people want to fit in at work 9 —

but it’s not just a fit with the requirements of the job or

even a fit with the organization’s culture that matters. New

research is beginning to show that people have a strong

desire to gain a sense of moral fit as well. 10

Because they feel this deep-seated need, they’re desperate

to close the gap between their own ethics and those of

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their organization. When they struggle to do so, they

often withdraw and may quit their jobs altogether. One

manager told us, “I’ve worked in businesses that I didn’t

stay in very long because of the ethics and the culture. I

didn’t feel comfortable.” This sentiment is echoed by

many.

CCoonflicnflicttining sg sttaakkeehhoolder nlder neeeedds.s. Every organization has a

range of stakeholders affected by its decisions, including

employees, suppliers, clients, senior managers, the local

community, wider society, and even the environment. 11

Organizations may have an explicit approach to balancing

these competing needs — but that may not be the same as

the implicit approach that employees witness every day.

When we asked employees and their leaders to rank the

order in which stakeholders “matter” in important

decisions, consensus was rare. As one employee in the

retail sector said, “Even though we’ve got a vision and

we’ve got an ethical policy framework, I personally feel

very strongly that [in practice] it’s shareholder, company,

colleague, in that order.”

When groups of stakeholders lobby for special treatment,

the situation becomes even more complex. For the

nonprofit we studied, a core challenge was figuring out

how to handle large donations that are linked to requests

for preferential care of the donors’ relatives. One manager

told us, “Sometimes, the choices we have to make are not

overtly compromising, but they can make things difficult

— people asking for access to services when they’re not

entitled to them, or people jumping the queue.” Managers

must weigh the monetary worth of the donation against

the nonprofit’s values of integrity, fairness, and

transparency.

While the nonprofit solved this dilemma by refusing to

provide preferential treatment in exchange for donations,

situations vary, and what is right for one organization

may not be right for another. Even different departments

within the same organization face competing priorities

when having to choose between stakeholder groups.

However, each time an employee or a leader makes a

decision that implicitly or explicitly favors one

stakeholder group over another, it sends a message to

other employees about what really matters — and whose

interests the organization is willing to sacrifice.

NNoot kt knnoowwining wg whhetethher (oer (or hr hoow) tw) to so sppeeaak uk upp.. Witnessing

unethical conduct by a colleague or superior forces

people to decide: Do I take this further? If so, how? And

what will be the consequences for me and for others?

Often, whether or not people challenge unethical

behavior depends on the nature of the infraction, the

setting within which it takes place, the seniority and roles

of those involved, and the potential risks of challenging

the behavior. Some ethical breaches are especially difficult

to challenge; in many cases, staff may be unwilling to

challenge upward. One government manager seemed to

have realized this, saying, “I’m quite an outspoken person,

and nobody has ever challenged my behavior, even

though in some circumstances I recognize that I perhaps

go a bit too far.”

Possible responses include staying silent, taking the

individual aside and discussing the matter privately,

calling the person out in front of others, reporting the

matter to senior staff, or reporting it anonymously via a

whistle-blowing or anti-harassment program.

Some employees we spoke with described instances when

they chose to stay silent. Discussing an event when

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bonuses were awarded to everyone except the hourly

workers on the front line, one retail employee said:

It did feel desperately uncomfortable, but in the end you either rise up as a whole population and say, “No, this isn’t right, none of us are taking bonuses,” or you become an outlier and a single person saying, “I don’t want my bonus, I’m going to give it to charity,” or you say nothing. I didn’t say anything.

And a junior police officer told us:

If you and I were constables and I’d seen you behave in an unethical way and challenged you about it, that could cause bad feeling. But then if you and I went out and faced somebody going crazy with a knife, I’d need to know you’d have my back. It’s not like working in an office. You

might be relying on that person to save your life.

When employees choose to stay quiet — even with good

intentions — alternate viewpoints are silenced, levels of

engagement and commitment are likely to diminish, 12

and others note that failure to challenge is the norm.

Conversely, in the construction company, an employee

was comfortable publicly challenging a colleague for the

use of sexist language; when the perpetrator apologized

immediately, the interaction sent a positive message to

others about how to handle such situations.

EEtthics vhics vererssuus exps expeediendienccyy.. Another challenge is deciding

what to do when the ethical solution to a problem is not

the expedient solution — often because there aren’t

enough hours, dollars, or people to make the ethical

solution happen. As one retail manager put it:

I think our ethics as a business are very, very good. Where we get the frustration is when we want to do the right thing with our people, but actually the resource levels that we’re asked to work on make it impossible sometimes.

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In the context of the police, this kind of problem meant

that officers had to make choices about which crimes to

investigate, causing “a huge amount of strain and stress to

officers because they can’t do the job they’re trained to do,

that they’re paid to do, that they want to do, and is the

reason why they joined in the first place,” according to a

leading officer on the force.

TTwwo Cro Criitticicaal El Elemlemenents ots of Ef Etthichicaall LLeeaderadersshihipp The number of CEOs sacked for ethical misconduct has

risen 36% in the last five years, i including such high-

profile examples as Yahoo CEO Scott Thompson, United

CEO Jeff Smisek, and LendingClub founder Renaud

Laplanche. But the problem of unethical behavior can’t be

“solved” simply by firing senior leaders who behave badly.

To bring about lasting change, organizations must invest

in “distributed” ethical leadership. That is, they must hire

and cultivate leaders at all levels who promote ethical

behavior. Two essential ingredients are a strong vision

and a deep commitment to stakeholders.

Our research shows that employees who see their

managers as ethical leaders are more satisfied with their

work, are more willing to go the extra mile, find the work

that they carry out has significance in the broader scheme

of things, and are less likely to quit. Unfortunately, most

organizations aren’t poised to reap those rewards.

Call to Action No organization is free of these dilemmas, but they can be

managed. Our research and analysis suggest that the

following six steps can help leaders set an ethically strong

tone so that employees are better equipped to make the

right choices day to day.

1. A1. Acckknnoowwleledgdge ete ethichicaal al ammbbiguiiguittyy.. Many organizations do

not recognize or discuss ethically tricky situations their

managers and employees face. This drives individuals to

internalize their decision-making processes — which can

create a slippery slope.

In the police force we studied, even though leading

officers were well aware that budget cuts meant increased

workloads and longer hours for the rank and file, they

had not openly acknowledged these pressures with their

staff and how they might affect day-to-day decision-

making — preventing an authentic dialogue about the

problems or possible solutions. One leading officer said,

“We are really struggling, and we’re not admitting that to

people on the ground.” Officers and staff felt the pressure

but, given the lack of open discussion, assumed that

senior leaders did not care.

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In organizations with a culture of transparency, people

are more inclined to seek to understand the underlying

rationale for decisions. This has a positive effect on

ethical decision-making because values are exposed when

they are openly discussed rather than inferred from town

hall meetings or company documentation. At the

nonprofit we studied, one executive noted: “You know,

I’ve worked for places where things are done behind

closed doors and you don’t really understand the reasons.

I think here, whatever initiatives are being run, it’s done

very openly. We don’t make decisions in hiding; we make

decisions in a very consultative way.” So when its

employees wonder how, for instance, to respond to a

donor who requests a service, it’s easier for them to make

that call, because they have a clear understanding of the

organization’s ethical values and are confident they can go

to their managers for clarification or support without fear

of being negatively judged.

2. C2. Cllaarrifify ty thhe ete ethichicaal tl trade-orade-offfs.fs. Another important step is

to explicitly clarify how employees should balance the

needs of different stakeholder groups.

Most decisions will affect more than one set of

stakeholders. Although the needs of all groups can

sometimes be met, trade-offs are usually necessary. When

employees are not sure how to manage this tension,

unethical approaches can develop.

In the retail company, leaders paid lip service to meeting

customers’ needs above all others, but their behavior

wasn’t always consistent with that message, which created

confusion. Employees reported that decision-making was

more often governed by immediate profit considerations

and key performance indicators. Some felt a degree of

cynicism toward the company’s “customer first” rhetoric,

believing that in practice senior executives were more

concerned about hitting performance and sales targets by

persuading customers to buy add-on products and

services than about caring for the customer or providing

excellent customer service. One employee said: “You

always have that tagline at the end, ‘The customer comes

first,’ but at the end of the day it’s a business and the

people at the top know we need to hit a KPI figure.”

Confusion about whose needs to prioritize can be

compounded when an organization has been through a

series of mergers or takeovers that bring together

different ethical climates. In these cases, leaders have an

especially significant role in establishing a consistent

ethical framework and guidelines for balancing

stakeholder interests.

Providing employees with a clear statement of vision can

help them weigh competing concerns and make

appropriate trade-offs. In the police force, for instance, a

widely shared “Plan on a Page” helped officers understand

policing priorities (such as child abuse and exploitation,

modern slavery, and violence) and provided guidance on

serving the needs of the community (by putting the

victim first and communicating effectively with the

public) while also making the most efficient use of

resources.

3. En3. Enssurure re roole-mle-moodedelinling fg frroom tm thhe C-se C-suiuitte doe dowwn.n.

Employees observe how leaders actually handle ethical

dilemmas, rather than what they say about ethics, and

will infer the organization’s real priorities accordingly.

VW is a case in point: Though senior executives claimed

to care about “clean diesel,” they apparently both

condoned deliberate cheating on emissions tests and

encouraged employees to hide or destroy its evidence. 13

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When the senior team sends mixed ethical signals, mid-

level managers may pick and choose what to follow.

These mixed signals cascade through each level of the

organization. As one employee in the construction

business said, “If your direct line manager isn’t setting an

example for you, it detracts from the message that the

business is giving.”

We did find that the ethical conduct of mid-level

managers can compensate for mixed messages from the

C-suite, slowing or even reversing the development of an

ethically weak situation. In the retail business, for

example, the staff talked positively of the “family

atmosphere” and shared values within individual stores

and regions that counteracted the dominant “cost

control” messages from the head office. However, a much

more reliable approach is to set the desired example at the

top. The nonprofit fostered an ethically strong situation

by clearly showing how core ethical dilemmas should be

resolved: When a company bidding to work with it asked

one of the nonprofit’s trustees to put in a good word for it,

its leaders immediately ruled out the company as a

partner due to a misalignment of ethical values.

4. Em4. Embbeed etd ethics in cohics in corrppooraratte pe poolicies alicies annd pd prrogograramms.s.

Ethically strong situations are developed in settings with

robust codes of conduct and policies for enforcing those

codes. 14 Such policies should include clear rules about

bullying, harassment, and whistle-blowing. And they

should be conveyed and reinforced through on-boarding,

leadership development, and other training programs.

Without formalized policies around ethics, efforts to

create an ethically strong situation will most likely

founder. As one police officer said, they “help people

understand why we need to behave, act, do things in a

certain way, and what the consequences are for not doing that.”

Although corporate policies and programs alone will not

eliminate unethical practices, 15 their existence is

essential. For example, at the nonprofit we examined,

employees were frequently confronted with ethical

dilemmas when working with clients, such as how to

assess mental capacity or how to manage end-of-life

issues and determine appropriate levels of treatment and

support. The organization helps its employees make

ethical decisions by developing clear policies on

approaches to care and providing training that specifically

focuses on such challenges.

Similarly, at the construction company, part of the

recruitment process involves matching applicants’ ethical

values with those of the business. It has also adopted a

code of conduct and a formal framework called “What

Good Looks Like” to guide employee behavior. Training

on topics such as how to deal with anti-competition risks

and health and safety issues is compulsory for line

managers, and an online system allows for logging any

health and safety issues as they arise. Although employees

sometimes feel that these processes slow decision-

making, they provide clarity and “consistency, and people

know what is expected of them,” according to a front-line

manager.

5. Em5. Emppoowwer iner indidivvididuuaalls ts to ho haannddle etle ethichicaal bl brreeacachhes.es.

Ethical breaches will inevitably arise, of course —

whether through error, neglect, or deliberate action. But

ethically strong organizations explicitly say how people

should deal with them when they do occur, in addition to

trying to prevent them in the first place. Employees at all

levels then feel more empowered — and obliged — to call

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out bad behavior, even when doing so may be difficult.

For example, employees in the construction company are

required to challenge decisions and actions that could

compromise the health and safety of employees and

customers alike. One manager said that the culture

around this is so strong that “in extreme circumstances,

people have lost their jobs because they haven’t followed

through on what really is their duty to either challenge it

there and then or report it later to make sure remedial

action can be put in place.”

In ethically weak organizations, challenging people’s

behavior is not the norm. Sometimes employees fear

retribution, because they do not see others around them

raising questions. Or they may feel that no action will be

taken if they do speak up. 16 Sadly, that assumption isn’t

necessarily unfounded. While some VW employees

apparently did challenge the use of “defeat devices”

designed to cheat the emissions tests, their concerns were

ignored. 17 So far, the evidence suggests that more than

40 VW employees in different roles and at varying levels

of seniority were implicated in the diesel emissions

scandal. 18 Had individuals felt empowered to challenge

ethical breaches, perhaps the scandal could have been

contained before erupting on such a massive scale.

6. Em6. Embbrace a higrace a highher cer caauussee.. Finally, ethically strong

situations are characterized by the presence of a

transcendent cause that unites the organization behind a

vision and set of values that go beyond self-interest. One

employee called this “the vision that brings you back

tomorrow.”

The nonprofit’s transcendent cause is to provide care and

support for the community; for the police, it is to keep the

community safe from harm. The construction company’s

ethical vision of sustainability translates into protecting

the environment as well as safeguarding its employees

and customers. As one of its managers told us, “A lot of

practices in our industry do create harm for the planet,

and so we’re trying to reduce our CO2 emissions.”

When a company’s mission or vision is unclear or

divorced from ethics, or, as a senior leader at the retail

organization said, when “the ‘why’ is missing” altogether,

an opportunity to provide guidance is lost and an

ethically weak situation develops. But an overarching

sense of purpose creates a context within which micro-

level ethical dilemmas can be resolved.

Conclusion Setting the stage for ethical behavior isn’t just a top-down

exercise — though clear direction and positive role-

modeling from senior executives do help. Organizations

must also consider the daily ethical dilemmas that their

managers and employees face and give them the tools to

make good choices. This involves regularly checking in to

ensure that codes of conduct are clearly articulated and

upheld — and imposing consequences when they are not.

No company is immune from ethically questionable

decision-making. But by openly acknowledging and

carefully managing murky situations that come up again

and again, organizations become much less susceptible to

egregious lapses in judgment — and less likely to incur

the associated reputational and financial costs.

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About the Authors

Catherine Bailey is a professor of work and employment at King’s Business School, King’s College London. Amanda Shantz is an associate professor in human resources and organizational behavior at Trinity Business School, Trinity College Dublin.

Acknowledgments

The authors would like to thank the Chartered Institute of Personnel and Development for the funding that supported this research and the Involvement and Participation Association for its assistance in gathering data.

References

1.1. R. Parloff, “How VW Paid $25 Billion for ‘Dieselgate’ — and Got Off Easy,” Fortune, Feb. 6, 2018.

2.2. “The Wells Fargo Fake Account Scandal Just Got a Lot Worse,” Fortune, Aug. 31, 2017.

3.3. “Samsung Heir Lee Jae-Yong Jailed for Corruption,” Aug. 25, 2017, www.bbc.com.

4.4. T. Haugh, “The Trouble With Corporate Compliance Programs,” MIT Sloan Management Review 59, no. 1 (fall 2017): 55-62.

5.5. D.R. May, Y.K. Chang, and R. Shao, “Does Ethical Membership Matter? Moral Identification and Its Organizational Implications,” Journal of Applied Psychology 100, no. 3 (2015): 681-694; and O. Demirtas and A.A. Akdogan, “The Effect of Ethical Leadership Behaviour on Ethical Climate, Turnover Intention, and Affective Commitment,” Journal of Business Ethics 130 (2015): 59-67.

6.6. T.W. Ng and D.C. Feldman, “Ethical Leadership: Meta-Analytic Evidence of Criterion-Related and Incremental Validity,” Journal of Applied Psychology 100, no. 3 (2015): 948-965.

7.7. C. Bailey, A. Shantz, P. Brione, R. Yarlagadda, and K. Zheltoukhova, “Purposeful Leadership: What Is It, What Causes It, and Does It Matter?” technical report, Chartered Institute of Personnel and Development, London, June 2017, www.cipd.co.uk.

8.8. We draw here on the ideas of W. Mischel, “Personality and Assessment” (New York: Wiley, 1968).

9.9. A.L. Kristof-Brown, R.D. Zimmerman, and E.C. Johnson, “Consequences of Individuals’ Fit at Work: A Meta-Analysis of Person-Job, Person-Organization, Person-Group, and Person-Supervisor Fit,” Personnel Psychology 58, no. 2 (June 2005): 281-342.

10.10. M. Motyl, R. Iyer, S. Oishi, S. Trawalter, and B.A. Nosek, “How Ideological Migration Geographically Segregates Groups,” Journal of Experimental Social Psychology 51 (2014): 1-14.

11.11. C. Frisch and M. Huppenbauer, “New Insights Into Ethical Leadership: A Qualitative Investigation of the Experiences of Executive Ethical Leaders,” Journal of Business Ethics 123, no. 1 (2014): 23-43.

12.12. J. Pucic, “Do as I Say (and Do): Ethical Leadership Through the Eyes of Lower Ranks,” Journal of Business Ethics 129, no. 3 (2014): 655-671.

13.13. Parloff, “How VW Paid $25 Billion for ‘Dieselgate.’”

14.14. S.A. Eisenbeiss, D. van Knippenberg, and C.M. Fahrbach, “Doing Well by Doing Good? Analyzing the Relationship Between CEO Ethical Leadership and Firm Performance,” Journal of Business Ethics 128 (2014): 635-651.

15.15. T. Haugh, “The Trouble with Corporate Compliance Programs.”

16.16. J.R. Detert and E.R. Burris, “Can Your Employees Really Speak Freely?” Harvard

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http://fortune.com/2018/02/06/volkswagen-vw-emissions-scandal-penalties/

http://fortune.com/2017/08/31/wells-fargo-increases-fake-account-estimate/

http://www.bbc.com/news/business-41033568

http://www.cipd.co.uk/knowledge/strategy/leadership/purposeful-leadership-report

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Business Review 94, no. 1 (January- February 2016): 80-87.

17.17. Parloff, “How VW Paid $25 Billion for ‘Dieselgate.’”

18.18. Ibid.