Tackling misconduct: one step forward and two steps back?

Edited extract from Ethics Can by Cynthia Schoeman

Managing misconduct is often described as “a fight”, whether against corruption, bribery, fraud or a range of other unethical and illegal behaviours. This captures the fact that seeking to eliminate or even to reduce misconduct is not an easy task: it can feel like an on-going battle that is never won. But it is an important area of ethics management that warrants serious attention and a clear approach.

Challenging unethical behaviour

At the level of the individual employee, Mary Gentile, author of Giving Voice to Values and Senior Research Scholar at Babson College in Massachusetts, provides a clear set of guidelines about how to challenge unethical behaviour at work. She offers the following set of questions as a way to formulate a plan of action :

  • What is the conflict at hand, and what is your position on it?
  • What’s at stake for the key parties, including those who disagree with you?
  • What arguments are you trying to counter? That is, what reasons and rationalisations do you need to address?
  • What responses to those reasons and rationalisations would be most powerful and persuasive? Do you have all the information you need to craft a sound argument?
  • To whom should the argument be made?
  • At what time has your audience had a change of heart before? What can you learn from those examples?
  • What timing is optimal? Should your efforts be sequenced in some way?
  • Which allies, if any, will help you make your case?
  • What forum is right for the conversation – off-line or in public?
  • What communication style do you prefer? What style best suits this situation?
  • What sources of support do you have inside and outside the organisation? Are they adequate?

Punishment, incentives, deterrence and pitfalls

A popular approach to managing misconduct is to attempt to deter it via punishment or the threat of punishment. The effectiveness of this rests on the punishment being consistently enforced. If, for instance, it is only imposed sporadically, it will significantly erode the effectiveness of punishment as a deterrent. Thus low prosecution rates would erode the efficacy of this mechanism by allowing wrongdoers to assume that, even if they are caught, they will not be successfully prosecuted.

If the sanction is too low relative to the transgression, it will also having little or no effect. The cost can, in fact, be accepted as an unwelcome cost of doing business. The fines imposed on the South Africa construction industry for collusive practices in work done in the lead-up to the 2010 Soccer World Cup were seen by many to be far too lenient. In June 2013 15 South African construction companies agreed to pay fines totalling R1.46 billion.

Penalties can also risk damaging the organisation’s ability to continue to operate effectively. However when misconduct is frequent, the negative effect tends to be reduced. This is evident in the most recent banking scandal. Five global banks – Barclays PLC, Citigroup, JP Morgan, Royal Bank of Scotland PLC and USB AG – pleaded guilty on 20 May 2015 to foreign exchange rigging for their own financial benefit, and agreed to pay more than $5 billion in combined fines. The Wall Street Journal makes the point that “the possibility of five large banks pleading guilty to criminal charges in a single day would have been unthinkable only a few years ago, when executives warned the fallout from such a move would be disastrous to their ability to conduct business”. But the reports notes that other large overseas banks have pleaded guilty to criminal charges in the past year, with minimal effects to their operations – and that “the five banks said they expected little disruption to business”.

The issue of punishment can also be viewed as incentives that aim to encourage good conduct and discourage bad. Thus fines or penalties are imposed for bad or unacceptable behaviour and rewards or bonuses are offered for desirable or good behaviour. Steven Levitt and Stephen Dubner, in their bestselling book Freakonomics, recognise three types of incentives: economic, social and moral. For organisations that use incentive, the distinction is important, as the example they quote reveals. A study undertaken by Uri Gneezy and Aldo Rusti at a daycare centre explored the issue of parents collecting their children late. In an effort to curb this, a fine was imposed for late collections. However, the fine backfired completely because, in effect, it replaced a moral incentive with an economic one. Thus, instead of the parents’ behaviour being guided by a sense of consideration for the daycare centre staff and the guilt of being late, it was replaced with a fine, allowing parents to “buy off their guilt”.

Although these examples reflect situations where the threat or risk of punishment is not effective, it can be very effective in many situations. An extremely powerful message (warning) is sent when, for example, a senior executive is fired for misconduct or when a financial advisor who has been found guilty of misconduct is not only dismissed, but also debarred by the Financial Services Board.

Another factor that can undermine the management of misconduct is a delay in acting against culprits or in seeking their prosecution. While the legal process can take a long time, organisations should strive to act – and be seen to act – quickly. An undue delay would easily be translated as a lack of commitment to ethics. Similarly, it is counter-productive to dismiss an employee rather than pursuing an internal disciplinary process or laying legal charges. It not only allows the employee to perpetrate the same misconduct at another organisation, but communicates the lack of consequences for misconduct to other employees.

The clear lesson is, therefore, that organisations need to enforce punishment and penalties in accordance with the law and the company’s policies (typically a disciplinary code or policy) that are severe enough to be effective every time there is a breach of ethics.

Fraud, bribery and corruption management

A noteworthy approach used by Ben Heineman Jr, who was the Chief Legal Officer at General Electric (GE) for nearly 20 years, sought to merge the high performance demands at GE with equally high integrity (Harvard Business Review, April 2007).

Heineman notes that the primary governance focus within corporations is on the relationship between shareholders and the company and between the board and the CEO. However, at GE, they recognised the vital “third dimension” of governance, that being from the CEO down. In pursuit of such “governance on the front lines” he shares the set of seven inter-dependent principles and practices that they viewed as essential to avoid “integrity land mines” and to create and support such a high performance-high integrity culture.

  1. Demonstrating consistent and committed leadership. Heineman stresses that “in no area of corporate life is leadership commitment more important than in creating an integrity culture”.
  2. Going beyond formal financial and legal rules. For multinational companies global standards that are higher than the financial and legal requirements in a particular jurisdiction should be considered relative to issues that are most important for key stakeholders.
  3. Staying ahead of the sheriff. This translated into GE systematically gathering information on financial, legal and ethical developments to ensure they remained up to date and could respond timeously, for example, to adopt new standards or practices.
  4. Building standards into business processes, which GE supported by giving business leaders the primary responsibility in their divisions for performing with integrity.
  5. Encouraging finance, legal and HR to be both partner and guardian. This needs to be accompanied by the most senior leadership’s understanding of the tensions between these two roles and their encouragement to occupy both roles.
  6. Giving employees a voice. GE found that a particular challenge to their goal of a high performance-high integrity culture was educating and training employees across multiple countries. Enabling employees to share on-the-ground concerns was seen as key to creating a culture of openness and accountability. Employees have four major channels through which to report issues: the ombuds system that included anonymous reporting, via each business unit’s annual assessment, to the internal corporate audit staff and to business units’ financial, legal and HR staff.
  7. Holding business leaders accountable with integrity metrics, specifically to evaluate how leaders carry out their integrity responsibilities.

Misconduct Management Framework

Some of these GE principles or practices have particular applicability for multinational organisations. An approach that should be able to be used in almost all organisations combines the GE practices with the author’s Ethics Management System (which comprises six pillars: leadership commitment, ethics goals and strategy, ethical standards, ethical awareness, ethics assessment and reporting, and operational ethics) to create a concise Misconduct Management Framework, made up of nine steps.

  1. Leadership: consistent, committed leadership who live ethics and acknowledge the risk of misconduct
  2. Goal and strategy: formulating clear organisational ethics goals and implementing a supporting strategy that focuses effort and resources
  3. Standards: defining standards and building them into business processes and systems that go beyond minimalist compliance
  4. Controls: implementing the necessary controls, checks and balances to detect misconduct effectively
  5. Awareness: using on-going ethical awareness initiatives to keep the company informed of financial, legal and ethical developments, to keep ethics alive among all employees, and to communicate the risks and the benefits to all employees
  6. Partners and guardians: encouraging wide-spread support within the organisation for promoting ethics and reducing misconduct, specifically to ensure that finance, legal, compliance and HR act as both partners and guardians
  7. Act against transgressions: ensuring that all ethical breaches are investigated and dealt with fairly, consistently and constantly, irrespective of the seniority or position of the perpetrator
  8. Assessment: assessing the organisation’s ethics,and holding leaders and managers accountable with performance-related integrity metrics
  9. Reporting: reporting on ethics to external and internal stakeholders and creating safe, effective channels for employee reporting.

There is clearly no one method for tackling misconduct in all organisations. What is common is the fact that businesses face significant threats from misconduct by internal and external stakeholders. The crucial conclusion is that organisations need to recognise the threat and take action against those risks to avoid its forward positive steps being eroded by backward steps.

by Cynthia Schoeman