Culture is the leading risk factor comprising integrity and compliance in companies today, says David Gebler, president of Working Values Ltd., a business ethics and training agency in Sharon, Mass. Yet, he adds, "Companies do not fully understand how their culture creates risks and how to mitigate them to stay out of trouble."

Indeed, he says, "Unethical conduct doesn't happen in a vacuum. Good people may crack when their breaking point is reached. Or they feel entitled to slip because standards are not applied consistently throughout the organization."

Gebler, a former corporate attorney and a fellow at the Center for Business Ethics at Bentley College, founded Working Values in 1993 (now a wholly-owned subsidiary of SmartPros, a professional education firm). One of his firm's missions is to assist companies in designing compliance programs that recognize the links between an organization's values and employee behaviors necessary to implement those values. Formal programs are guides to shape culture, not vice versa, he says.

"Corporate culture has a great influence on outcomes," says Gebler. For example, he explains, if employees are not surprised when misconduct occurs, or there's a discrepancy between how employees view top executives' adherence to ethical behavior and how managers perceive themselves, then the company is not moving towards a positive outcome. "What is key for a successful ethics program is the reduction of observed misconduct in the workplace."

Ethics Scandals Fuel Training

Employees are weary of managers who measure success by tallying how many individuals certify they've read the ethics code and have completed mandatory training courses. Such a "one-and-done," checklist mentality for ethics training simply doesn't work, argues Rick Keller, an organizational psychologist and president of The Healthy Business Doctor, in Summerfield, Fla.

"Despite what many people believe, very few companies are doing enough education to foster and maintain an ethical culture. Yet, education can be easy when effective leaders communicate a consistent ethical message," says Keller

The great majority of leading corporations take their ethical and legal responsibilities very seriously, as evidenced by a comprehensive study in 2006 of millions of employee compliance training records, conducted by Integrity Interactive Corp., a Waltham, Mass., provider of Web-based ethics training.

Depending on a company's size, it faces different compliance risks. The study revealed that in any given year, it is possible to identify which compliance risks are of greatest concern by reviewing the training courses employees are most frequently required to complete. Certain staple topics are applicable to the broadest cross-section of employees at all job levels, among those: mutual respect, financial integrity and proper use of computers.

Integrity Interactive's findings demonstrate the most popular compliance training topics last year corresponded closely to problems dominating business headlines. New top courses, appearing for the first time, were on subjects such as Sarbanes-Oxley internal controls, data safeguarding, privacy and human rights.

Ethics Officer Oversight Needed

Generally, good ethical decision-making requires the ability to explore all the aspects of a decision and then to weigh the options surrounding a course of action. Consider these tests once a decision is reached and implemented: If you had to explain your decision on television, would you be comfortable doing so? If you had to do the same thing over again, would you do anything differently?

This is the world of the chief ethics officer, who acts as the point person to steer all levels of employees toward integrating ethics into decision-making processes and codes of conduct. The ethics officer needs to be a strong communicator, politically savvy, able to assimilate information quickly and maintain credibility by displaying objectivity and discretion.

"Culture is not a six-month rollout or the fad du jour," comments Keith Darcy, executive director of the Ethics and Compliance Officer Association (ECOA). The 1,400-member ECOA is an international, multi-industry association for ethics and compliance practitioners that was started 15 years ago. There's no place to hide today, says Darcy, warning, "The scandals haven't stopped, and companies that treat ethics officers as window-dressing are destined for unfortunate consequences."

Ideally, the chief ethics officer should report directly to the CEO or the board's audit committee. What is typical, though, is to have the ethics officer report to the general counsel, although there is an emerging recognition that this is not the optimal reporting relationship. If the position is established in response to a regulatory problem, the ethics officer will first report to the general counsel, but that will change over time. What does not, and should not, happen is for the ethics officer to report to the CFO.

"The ethics officer must be strategically relevant and independent in order to be effective," says Darcy. It can be wise to appoint someone to the role from within the company, who has varied line experience and the ability to foster strong relationships with other senior executives. A critical protection for the ethics officer, notes Darcy, is to insist that he or she cannot be terminated without a review by the audit committee.

Darcy held the first ethics officer position on Wall Street — a role he created when working for Prudential Securities. He's currently a faculty member in the executive education program at the Wharton School of the University of Pennsylvania.

So, what, from Darcy's perspective, is different in the way companies embrace ethics training and compliance now as opposed to 10 years ago? He acknowledges the tremendous impact on the ethics industry generated by the passage of Sarbanes-Oxley in 2002 and an amendment made to the Federal Sentencing Guidelines in 2004, requiring all organizations to not only have ethical standards, but a culture that promotes ethical conduct — language embraced by all the federal regulators.

Is There Too Much Emphasis?

It's apparent that over the past five years, businesses have become more proactive in seeking to protect themselves from future scandals. This has led some employees to believe that many companies are obsessed with ethics programs and compliance. Certainly the increased awareness of and need for ethical behavior, the establishment of hotlines to report misconduct and greater use of ethics officers and written codes of conduct are making a difference.

But besides the costs, there is another downside to implementing all these specific controls. Gebler finds some companies are exhausted from integrating all the requirements and are unable to follow through on measuring the effectiveness of their programs. "If companies are uncertain about their integrity goals and how to define success, they will ultimately fail in achieving changes in behavior," he opines.

The American Management Association concluded in a study, The Ethical Enterprise: A Global Study of Business Ethics 2005, that any approach to improving business ethics must incorporate the ethical framework as a strategy and system. As one of the study's co-authors, Keller, who has been involved in ethics training for 10 years, also stresses accountability.

"Business leaders who support and model ethical behaviors and communicate values are critical to a company's ethics," notes Keller. "If a company's underlying values do not reward ethical behaviors, then an opportunity has been missed which sets the company up for future problems," he adds.

Conversely, he says, employees should understand they will be accountable for their performance, and not just as it impacts their career advancement. Indeed, he says managers should understand they can be held responsible for their subordinates' actions. A way to drive home this message "is to let people know if their unethical behavior sabotages the business, they will be fired."

How frequently do employees cite "communication" as a significant source of trouble in the workplace? Sometimes a culture issue has a simple solution. Gebler says managers with poor communication skills become bad listeners who don't always respect and value employee opinions. Eventually, they may turn smart subordinates into bureaucrats without enthusiasm. Where good communication is lacking, management training that is geared to the ethical framework can sensitize individuals to recognize risk areas and learn how to make people comfortable in reporting problems.

Ultimate Good Business Strategy

It's clear that companies that emphasize ethics throughout the cultural framework aren't just "doing the right thing" but ultimately find they are protecting the company's reputation and brand.

When scandals erupt, the damage to reputation can create a ripple effect, starting with an employee exodus, notes Keller. "The inability to attract and retain talented employees is very expensive, and can affect loyalty, quality control and deadlines for completing initiatives. Add to the mix customer dissatisfaction, impact on stock price and loss of market share, and you have all four wheels falling off," warns Keller.

"Reputational risk is much more serious than financial risk, and all boards of directors should know that," Darcy says. And Gebler adds that while boards are still coming to terms with their increased oversight responsibilities, this does not allow them to ignore ethical issues.

How does a company build its culture to show its actions speak louder than words? Ethical culture cannot be separate from the rest of the organization, and top management must recognize and insist that all stakeholders adopt the same vision. "Starting with the board of directors, everyone needs training to learn how to identify risks and develop strategies that promote ethical conduct and trust," says Gebler. "If employees believe reporting bad news equates to failure, that organization is building a toxic culture."

CYNTHIA WALLER VALLARIO, J.D., (cwvallario@aol.com) is a freelance business writer based in Livingston, N.J., who specializes in corporate governance. She's a frequent contributor to Financial Executive, http://www.fei.org

Financial Executive is the award-winning flagship publication of Financial Executives International (FEI). The magazine provides senior financial executives with financial, business and management news, trends and strategies to help them work better, faster and smarter. For more information or to subscribe, visit www.fei.org.