The emphasis on ethical culture in organisations has become much more pronounced in recent years. There seems to be a realisation that regulations and compliance to regulations − important as they may be – simply are not sufficient to ensure sustained ethical conduct in organisations. In fact, a too strong emphasis on regulation and compliance might become counterproductive and undermine ethical conduct in organisations.
In the Third King Report on Corporate Governance for South Africa (King III), Principle 1.3 states that ‘The board should ensure that the company’s ethics are managed effectively’ − the emphasis clearly being on ethics management. In the Fourth King Report on Corporate Governance for South Africa (King IV), there is a corresponding principle (Principle 2) that states: ‘The governing body should govern the ethics of the organisation in a way that supports the establishment of an ethical culture.’ Thus there is clearly a shift beyond ethics management to the cultivation of ethical culture in organisations. It is not only in the said principle of King IV that ethical culture is mentioned − it is also explicitly mentioned in the very definition of corporate governance in King IV, which states that:
‘Corporate governance is the exercise of ethical and effective leadership by the governing body towards the achievement of the following governance outcomes:
• Ethical culture
• Good performance
• Effective Control
The shift towards an emphasis on ethical culture is not a uniquely South African phenomenon but part of a worldwide recognition that ethical culture is a precondition for the sustained ethical conduct of organisations. Recent international examples of the emphasis on corporate ethical culture can be found in the Salz Review (2013) on the business practices of Barclays Bank, the G30 report on Banking Conduct and Culture (2013) and the guidance published in the United Kingdom by the Financial Reporting Council under the title Corporate culture and the role of boards (2016).
Why the shift to ethical culture?
The shift to an emphasis on ethical culture can be best explained with reference to two factors. The first one has to do with the limitations of rules and regulations. Rules and regulations are attempts to codify what conduct is acceptable or unacceptable. Even the best-intentioned and finest-articulated rules and regulations eventually are mere words on paper that cannot in themselves ensure that persons will follow such prescriptions and prohibitions.
Furthermore, even the best rules and regulations can never exhaustively address all misdemeanours that can possibly occur in organisations. And then we are only too painfully aware that important aspects of organisational success, such as trust and integrity, can never be regulated or captured in rules or policies. They crucially depend on the character, conduct and discretion of people.
The second factor that contributed to the shift towards ethical culture is the limitations of compliance. In an attempt to ensure that the prescriptions and prohibitions found in regulations, rules, and policies are being adhered to, organisations typically rely on fear-based compliance, which is often articulated in a zero-tolerance approach. But the problem with fear-based compliance is that it crucially relies on extrinsic motivation to be effective. It only works if and when people are continuously being surveyed and observed, transgressors being caught, and then being dealt with decisively. In other words, it only works ‘as long as somebody is watching’.
There are two problems with a fear-based compliance approach. First, it is simply not possible to watch all of the people all of the time in all possible functions and at all possible places where they conduct their work in the name of the organisation. Second, and more importantly, fear-based compliance undermines the will and instinct of people to act in an ethical manner. Instead of being intrinsically motivated to do the right thing, the eleventh commandment reigns supreme: ‘Thou shalt not be caught out.’ It is exactly these limitations of regulations and compliance respectively and in combination that prompted the need not to abandon regulations and compliance but to complement both by emphasising the need for the cultivation of ethical culture in organisations.
What is ethical culture?
King IV is correct when it describes ethical culture as an outcome. It is an outcome of how people think, act and respond over time in organisations, to the point where such thinking, acting, and responding have become second nature for members of an organisation. It is thus the shared patterns of thinking, acting and responding that members of an organisation have acquired over time and that they believe is the best way of dealing with matters within their work environment. By far the most popular way of characterising culture is to refer to ‘the way we do things here’. Ethical culture – as a dimension of broader organisational culture – is thus referring to the ethical habits of thinking, doing, and responding that members of an organisation have habituated over time.
The power of a strong ethical culture lies therein that it has become a habit or second nature to do the right thing – ‘even when no-one is watching’. Thus, in organisations with strong ethical cultures, there is less need for monitoring the conduct of people to ensure that they abide by ethical standards, regulations, and rules. Instead, people adhere to ethical standards because it has become a habit to do so – ‘simply the way we do things here’.
The anatomy of ethical culture
Governance standards both in South Africa and internationally that emphasise the importance of ethical culture, implicitly assumes that one should be able to assess the strength or maturity of ethical culture. To govern or manage ethics in a manner that results in the strengthening of organisational ethical culture, some yardstick or measure of ethical culture is required to gauge the strength or maturity of ethical culture. Indicators for the health of an organisation’s ethical culture thus need to be identified and tracked over time to detect declining or inclining ethical cultures. Unless this is done, it would be hard if not impossible to report in any meaningful manner on the ethical culture of an organisation. And that is exactly what King IV expects organisations to do and what it recommends should become part of the mandate of social and ethics committees.
Research conducted by The Ethics Institute indicated that there are a number of indicators that can be tracked over time to determine the maturity or strength of ethical culture in organisations. These indicators relate to the commitment to ethical standards found at top management, middle management, and non-managerial levels in an organisation. Further indicators are whether there are positive and negative consequences for ethical and unethical behaviour respectively, whether internal and external stakeholders are treated fairly, the prevalence of ethics talk in the organisation, and the levels of awareness of ethical standards in an organisation. The combination of these indicators provides a view of the maturity of the ethical culture of an organisation that can be tracked over time. Such an assessment also enables the management of an organisation to report on the ethical culture maturity of the organisation to a social and ethics committee or to the governing body of an organisation.
AUTHOR | Professor Deon Rossouw is the CEO of The Ethics Institute and an Extraordinary Professor in Philosophy at the University of Stellenbosch