Fraud
May 16, 2017

Corporate culture and ethical behavior: Leading by example

Meena Chockalingam

In our last post, we saw how tough it can be to differentiate between misconduct and genuine human error when it comes to corporate fraud. The key to preventing such situations is to create a strong and ethical company culture.

It’s the people that make a business successful.

Honesty and integrity are at the forefront of every great corporate culture. Whether it’s being left out of a team outing or excluded from key business meetings, no one wants to feel out of the loop or unimportant.

As a company evolves over time, so does its culture. But who sets the tone? The people at the top. That includes the CEO, Board of Directors, Executive Officers, country leads, divisional leads, etc. We’ve commonly defined them as ‘Management.’ We unconsciously respect Management for their numerous years of experience, their vision, and their results-oriented mentality. But at what cost are those results achieved and how does that affect the company culture? 

Have CEOs become less ethical?

There are some CEOs that make headlines for their keen sense of business and financial results. There are other CEOs that have become notorious for getting headlines for all the wrong reasons - like promoting racism and sexism in companies and other toxic behavior, cutting corners, stealing ideas, misleading investors, and much more.

This year’s PwC CEO Success study shows people are holding CEOs to a far higher level of accountability for corporate fraud and ethical lapses than ever before.

The study analyzed CEO successions at the world’s largest 2,500 public companies over the past 10 years and found that forced turnover due to ethical reasons jumped 36% from 2007-'11 to 2012-'16. The largest increase was in developing nations, an area where companies expose themselves to greater ethical risks (bribery, corruption, etc.), hoping to reap the largest monetary rewards. We can attribute the global increase of unethical behavior by CEOs to 3 factors: increasing scrutiny of executives by the media, better technology to sniff out unethical behavior, and the public’s general distrust of large corporations.

 

There is increasingly less tolerance for ethical lapses at the top of corporations

 

So what’s the solution?

Incentives. Provide incentives for good behavior, and take them away for bad behavior - psychologists call this positive and negative reinforcement.

As a company evolves over time, employees play an important role in cultivating the company’s core values and beliefs. When a company is open and transparent, it can prevent distrust from fostering. As the company evolves, actions of management can influence employees to create positive behaviors that prevent fraud. Create a culture driven solely on achieving metrics and perhaps you’ll see a situation similar to the recent Wells Fargo scandal, where numerous bogus accounts were opened without customers’ knowledge for the sole purpose of achieving internal metrics. Post-investigation, over $180 million in bonuses were recovered from employees, including ex-CEO John Stumpf. This incentive-based reinforcement example demonstrates how corporate culture can impact just about every level of your company.

Culture is the cornerstone of any company’s success. If you reward employees who are willing to cut corners for personal or company benefit, letting this behavior slide sets a precedent that paves the way for others to do the same. If you condemn unethical behavior, you set a precedent that paves the way toward creating an inclusive and rewarding culture that employees will be proud of, as well as increasing company productivity, innovation and the bottom line. We’ve all heard the phrase ‘do as I say, not as I do’. Shouldn’t we expect our company leaders to either lead by example, or not to lead at all?