The Importance of Integrity Capital

Opinion pages and blogs are abuzz about “Why I Am Leaving Goldman Sachs” (NYT Op-Ed, March 14).  Every executive who has led a large organization has received a letter like this and is right to take it seriously. Corporate Executive Board’s CEO makes this point in a letter to the editor.

According to research completed by CEB including surveys of approximately 600,000 employees in more than 150 companies, corporate culture, not process failure, most often lies at the root of corporate catastrophes. We believe there are three big lessons for leaders of all organizations.

Building Integrity Capital

As one leading executive says, “great risk management is simply the movement of information from the informed to the empowered.” While employees are often not willing to share observations about compliance or ethics risks, some companies are markedly better at enabling and encouraging employees to do so. Because these firms’ employees understand the value of being transparent about compliance and ethics issues, the firms benefit from what CEB calls high “integrity capital.”

Based on our research, we found that executives can increase their firms’ Integrity Capital by:

1. Delivering “organizational justice” by responding quickly and consistently to unethical practices: A firm’s culture has organizational justice when employees agree that 1) their firm responds quickly and consistently to proven unethical behavior, and 2) unethical behavior is not tolerated in their department.

While most companies respond effectively to illegal or unethical behavior, most employees (even most managers) never know it. Leading companies show employees that when ethical behavior is uncovered, people are held accountable and the company does the right thing quickly and consistently. To foster organizational justice, leaders should:

• Set clear expectations that unethical behavior is not tolerated;
• Hold employees at all levels consistently accountable; and
• Share details regarding detected, punished misconduct (within the bounds of privacy laws).

2. Finding hidden, weak links and targeting efforts on the least compliant areas: Firms with high integrity capital have fewer incidences of misconduct and a higher rate of employees reporting unethical behavior. But even the best firms sometimes fail to identify the worst-performing business units with the greatest levels of observed misconduct. The likelihood of an employee speaking up often varies by more than 30 percentage points between the most and least compliant groups.

The best managers focus attention on the least compliant locations, especially through face-to-face interaction with frontline employees. This also helps managers develop and implement effective remediation plans.

3. Focusing on four management qualities and rigorously measuring management integrity: Leaders’ behavior shapes subordinates’ behavior. Although this may seem obvious, it is a vital fact supported by feedback from approximately 600,000 employees worldwide. Even if a firm puts in place dozens of systems and processes to manage the right flow of information, if its leaders have the wrong qualities, it will fail. Although there are many laudable qualities associated with strong leaders, only the following four are statistically proven to foster a healthy culture and reduce the likelihood of misconduct:

• Taking action on verified unethical conduct,
• Honesty and integrity,
• Respecting and trusting employees,
• Listening carefully to the opinions of others

All firms expect their managers to have integrity, but the best firms go much further by rigorously measuring the integrity of their management teams. They use both objective and subjective measures and give each manager a score that is often tied to their promotion and variable compensation. As managers rise in the hierarchy, they are expected to achieve increasingly high, clearly defined levels of integrity.

For example, companies may require their seniormost executives to repay bonuses granted for up to five of the preceding years if an appropriate action could have prevented a direct report’s violation of an applicable law that resulted in financial loss.

Rather than implementing new rules, controls or processes, executives should invest in their “Integrity Capital” to safeguard their organization against catastrophic risk failure.  In doing so they may not only protect the company, but can also make it a better organization in the process.

What CEB is Doing for its Members

1. CEB has built its archive of research and resources on this topic by working with companies around the world to assess their cultures and show the relationship between culture and risk. We help our member companies detect and prevent compliance risk through the use of the RiskClarity tool.  All of CEB’s insights into employee ethical behavior are drawn from this tool, which has been deployed by over 150 leading companies and contains a benchmark group of more than 600,000 corporate employees globally.  It is available in over 30 languages.

2. Compliance professionals know how difficult it is to get employees to speak up when they have concerns; CELC research proves the importance of getting employees to speak up.    These CELC membership resources help companies to create a more open culture where employees believe their voices will be heard.

3. Audit and compliance teams need to keep an eye not only on cultural risks, but other emerging risks.  These ADR membership resources help audit teams to identify and manage emerging risks.