How Corporate Ethics Pay Off

They should be weaved into your company’s culture. The bottom line is at stake.

This column features faculty from the Department of Management and Organizations at SMU’s Cox School of Business exploring topics related to organizational and individual effectiveness. This month, Dr. Maribeth Kuenzi discusses the importance of ethics in organizations and how leaders can promote ethical behavior.

Does it pay to be ethical in business? After all, companies appear to be rewarded for unethical behavior, especially so in short-term gains. However, in 2011, Linda Treviño and Katherine Nelson published a study debunking that. In examing penalties imposed on nearly 600 firms for financial misrepresentation, they found not only monetary penalties (which averaged $23.5 million), but also reputational ones imposed by the market. Firms lost 41 percent of market value when misconduct was revealed; most of this decrease was attributed to damaged reputations.

The prevalence of unethical behavior in the workplace is staggering. In a 2007 Ethics Resource Center study of American companies, employees reported seeing: lying behaviors (20 percent), abusive behavior (21 percent), work hours misrepresented (17 percent), Internet abuse (16 percent), safety standard violations (15 percent), discriminatory behavior (13 percent), theft (11 percent), and sexual harassment (10 percent). Even more unethical behaviors often go unnoticed.

So, what can you do to help prevent these things in your organization?

1. Make ethics a priority. Research indicates ethical behavior “trickles down” from top management. Leaders should model and reward ethical behavior while addressing unethical behaviors.

2. Create an ethical culture. Selection systems, policies and codes, orientation and training programs, performance management systems, and decision-making processes have to be aligned to create an environment for ethics.

3. Create and follow policies regarding ethical behavior. Management must commit to educating employees on ethics policies. The top of the chain should attend training sessions, discuss ethics when decisions are made, and reward individuals for following the policies.

4. Encourage and reward ethical leadership. Make sure supervisors are aware of the focus to behave ethically and are rewarded not just on outcomes, but also on the process of reaching them. An ethics component should be embedded in incentives. 

5. Select ethical leaders. Companies should use selection tools like integrity tests and ask questions that have an ethical dilemma to tap into integrity and moral standards of potential leaders.

6. Train leaders to be ethical. Leaders must be ethical role models who communicate ethics in decision-making, reward and praise employees for ethical behavior, and do not unintentionally reward unethical behavior. 

7. Conduct annual reviews. Review business goals and policies annually to ensure they promote ethical behavior and are not rewarding individuals on just the bottom line. Then weave it into annual performance reviews. —Dr. Maribeth Kuenzi   

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