Categorized | Leadership, Organizations

Why Ethical Organizations Outperform Their Peers

Ethics Road Sign

The discussion of organizational values and ethics is as old as organizations themselves. Although they’re not new, they have received a lot of press in the past five to seven years, due primarily to the scandals that have surfaced around the unethical behaviors of corporate leadership. Consequently, there has been a “refresh” around the dialogue on values-driven organizations, values-based leadership, and ethical codes of conduct.

The Bottom Line

A number of studies have shown that, over time, companies with high standards of ethical behavior, shared values, or a sense of social purpose, outperform their counterparts. This can be attributed to the fact that there is a focal point, or shared hierarchy of values around which decisions can be made, and that decisions are made more consistently. Less time is spent trying to “decode” management’s actions.  Customers, suppliers and other external partners know what to expect. The residuals are increased pride in and identity with the organization, trust, tolerance, and an organizational brand that attracts and retains talented, high-performing individuals.

DiversityMBA got some insights from Richard W. Gochnauer, CEO of United Stationers (US). Headquartered in Deerfield, Illinois, US is North America’s largest broad-line wholesale distributor of office and business products, with sales of $4.5 billion. Gochnauer joined US as COO and director in July 2002. In December 2002, he was named president and CEO. In just over five years, he has implemented changes that have positively impacted the firm’s culture.

“If you have established trust with your stakeholders, you have an environment that is more productive and more fun to work within,” Gochnauer says. “Customers believe you will do what you say you’re going to. They become comfortable that the person they’re conducting business with will make decisions that are fair and less one-sided. We’re a big company compared to many of our customers. Trust is critical. If there’s a high degree of trust in a customer relationship, you have more latitude if and when you make mistakes. Customers are more likely to come to you and say you messed up, and give you the chance to move on from there versus wondering what the ulterior motive was. If, on the other hand, you lose trust with customers or suppliers, there can be a huge penalty cost.”

Defining Values and Ethics

As is apparent in Gochnauer’s comments, values provide the basis for judgments about what is important for an organization to succeed in its core business. They declare what an organization stands for and are guides for the behavior of its employees. Ethics provide the basis for judgments about what is generally considered to be appropriate or moral behavior for individuals within the organization.

Across numerous companies you will find a similar list of values – customer focus, our people, integrity, diversity, quality, and so on. This is the rhetoric. How the words are interpreted, played out, and manifested varies from firm to firm.

Link to Leadership

Leadership has an important role in creating an organizational reality around values and ethics. In this respect, it truly starts at the top and includes the CEO, board and/or owners. Leaders’ internalization and demonstration of the values in how they operate can have a powerful influence on others. In a 2005 study conducted by the Aspen Institute and Booz Allen Hamilton, 85% of the respondents said their companies rely on explicit CEO support to reinforce values, and 77% said it was one of the most effective practices for reinforcing a company’s ability to act on its values.

When employees see leaders living the organizational values, it adds to the credibility of leadership and reinforces the importance and relevance of the organization’s values. Conversely, when leadership takes a casual approach, or demonstrates behaviors that conflict with codes of conduct, a negative message is sent to employees, who may then take a casual approach themselves or disengage mentally and productively from the organization.

Leaders are responsible for setting the standards, articulating them, holding others accountable, and keeping their personal actions above reproach. Gochnauer adds, “Transparency is your friend. If you can’t feel comfortable shining the light on what you’re doing, it doesn’t need to be done.”

Modeling values is an ongoing task and takes many forms. At US, the seven core values are people, honesty and integrity, respect and dignity, customers, quality and continuous improvement, teamwork, and accountability. Gochnauer and his team seek ways to exhibit and encourage behaviors that support these values. One manifestation that ties to many has been the “open door” policy. “It is difficult, the higher you go up, to find out what’s going on, and even more difficult if you’re not accessible,” Gochnauer notes.  “Although I keep my door open, people are still intimidated to come in without an appointment. So I make a habit of walking the floors and sitting in the cafeteria. I also find e-mail a tremendous tool for providing access to a broader audience. In addition, we have Town Hall meetings and leverage telephone messaging. All of this open communication helps to create the feeling that you belong and are part of something bigger than yourself.”

Creating a Values-Driven Culture

What’s involved in creating a culture that walks the talk? “At the end of the day it’s about role modeling,” Gochnauer says. “It’s about someone who makes it clear that values are important and tries to do the right thing, and when he or she doesn’t, expects to be told. Second, values become a screen in decision-making, in addition to dollars and cents. The right thing to do needs to trump the more short-term ‘We could make more profit and sales.’ It needs to be clear that adhering to our values is a requirement. Optimizing sales is a want.”

Gochnauer has made changes to reinforce the company values and purge the aura of a have and have-not work environment. Operationally this has translated into giving all levels of managers the same accommodation privileges at off-site conferences, providing inside parking spaces originally reserved for senior leaders, converting corner-office space into conference rooms, etc.

Giving Back

The next level for Gochnauer is teaching the value of giving back. “We have historically supported City of Hope and encouraged involvement in various charity walks,” he says. “We’re now encouraging involvement that ‘touches the heart.’  So in addition to putting together backpacks for students, we encourage associates to be available to personally hand them out. Getting involved in Habitat for Humanity during work hours is another example. We encourage associates to give time, talent, and other available resources. When they engage in these activities, they take pride in themselves as well as in the company for funding the efforts.”

Back to Ethics

Is building an ethical work environment the same as building a values-driven culture?  There are similarities. In both scenarios, it’s leadership’s role to drive understanding and accountability. However, creating an ethical work environment has additional legislative requirements. Various anti-discrimination laws and the passing of the Sarbanes Oxley Act of 2002 mandate compliance and help promote ethical behavior in the workplace.

Ethical business rules and guidelines apply to employees’ interactions with each other, customers, suppliers, and other external parties. Ethical codes cover a wide range including guidelines for accepting business courtesies, prohibited conflict of interest activities, guidelines regarding confidential and proprietary information, appropriate use of company property and technology, etc.

Ethics start at the top and trickle down. Accordingly, leaders are responsible for:

  • Setting the tone — publicizing the company’s commitment to a corporate code of conduct and stressing the importance for all employees to engage in ethical business conduct.
  • Establishing explicit ethics codes of conduct. Management, led by counsel, should address the various laws, regulations, and areas of potential liability most likely to apply to their specific company and industry. It’s helpful to ensure the codes are applicable across the employee population by soliciting input from diverse groups.
  • Increasing awareness and understanding of how to apply ethical codes by providing communication and training for all employees. Training is most meaningful when they can work through hypothetical scenarios.
  • Ensuring that employees have a reporting mechanism they can use without fear of reprisal, if they observe a violation of ethics. They need to be aware corrective action will be taken if necessary.

Nurturing Values-Based Leaders

Creating a culture of values and ethical behavior should be an integral part of an organization’s leadership development program. It’s possible to coach good leaders and turn them into great ones who lead from a sense of purpose. There are several programs centered on values-based leadership and values-driven companies.

Good leaders recognize that values provide a compass for the organization. Great leaders ardently accept the charge for modeling these values and infusing them within the organization. It is this consistent and persistent leadership that guides others and differentiates companies as employers and business partners of choice.

Image courtesy of Teddy Klein