Toxic Culture: Developing Organisation Integrity

VW, Tesco, FIFA and athletics’ IAAF are amongst the global organisations recently humiliated due to corporate malpractice and wrongdoing. Their exposure has led business leaders the world over to question whether their own organisations are hiding similar practices.  Financial malpractice and the falsification of key operational data can damage corporate reputation – and kill share value – overnight. But poor business practice also puts lives at risk, as BP found in its notorious Deepwater Horizon oil spill – an incident which the White House blamed on a series of corporate cost-cutting decisions and an insufficient safety system.

Issues of this magnitude often seem to erupt without warning, leaving senior management teams, and industry observers, to wonder if warning signs were missed, if a ‘toxic culture’ is developing or if a company is at risk from ‘corporate killers’ hidden within its ranks.

Shareholders are understandably annoyed. Promises have not been delivered, shareholder value has decayed. Executive remuneration is seen to continue to soar, seemingly untroubled by delivered performance.   Much attention has been focused on those who are accountable for business performance – The Board of companies. This is right. The dominant focus for addressing these issues has been the specification of Board composition, appointments, board committees and conflicts of interests of executives and non executives alike. This is necessary – but not sufficient.

We also need to focus on the internal integrity of the organisation as well as the external governance to build the confidence of the shareholder. It is only through creating an organisation with integrity can the board be confident that their direction is being followed and that the performance numbers they publish to the shareholders are accurate.

Drawing upon our experience in advising blue chip firms we have identified six sets of requirements to build organisation integrity:

1. Set out your expectations of everyone’s behaviour: Make sure that your values and ethics are made real: a company’s principles of practice need to be lived and breathed in order for them to become the norm. Be explicit about how you expect employees and team members to conduct themselves. All businesses have grey areas that test the true meaning of ethics on a daily basis, for example, loose and flexible interpretation of work in progress, stock levels, and time allocation to clients. These help us to identify the ‘thin end of the wedge’.  The VW emissions reports fail to explain why the development teams felt the use of so called ‘defeat devices’ was acceptable. It remains unclear whether this was deliberate, or an accumulation of flexible interpretations of requirements set against the need to meet performance targets.

A clear business direction and defined roles give a sense of overall purpose, the context within which each individual and team accomplishes their role. This provides one means for assessing whether their actions are in the best interest of the company. Most organisations do this rather well.  What is less evident is each unit, team and individual having a strong and shared understanding of their accountability and the accountability of those with whom they have to work to deliver the business goals. This does need to include their authority, authority to commit, authority to act and their responsibility to communicate openly.

Without a common overall picture of who does what around here it is really hard for individuals to see the context of their own role however well defined that may be.

2. Lead by example and set the tone at the top: Conspicuous consumption by senior members of staff can set the wrong tone, while a clearly stated business direction and defined roles give a sense of purpose to both the individual and the team. Leaders have the ability to strongly influence their corporate culture. Ensure that you are perceived as open and honest by living by the expectations that you set for others.

3. Find out what is going on in your business: Track organisational health and triangulate! Individuals need to feel confident that they can ‘speak out’ about unacceptable behaviour without fear of reproach. Be suspicious of the universal positivism and praise that often gets given to leaders – is it really so good? You can find out by testing views and opinions from employees as well as external customers and suppliers. You can also get external opinions through internal audits and anonymous third-party comment.  Use your full ingenuity to work out how your less scrupulous colleagues can game your incentive plans and performance management. All such plans have unintended consequences if individuals focus solely on maximising the measure rather than the business. So, be sure to assess, for yourself, unintended actions and consequences of these plans.  For example, did delaying payment to Tesco’s suppliers improve individual measures of performance and incentive pay-outs? If we hear something from one source then we should listen and act, two sources and we should be concerned, and from three sources, urgent action may be required.

4. Set up robust systems of internal control using both hard and soft measures: Broaden the remit of the Audit Committee to include culture and behaviour as well as systems, processes and compliance.  To complete the picture of effective internal governance we need to ensure robust systems of internal control. This includes finance, accounting, audit, risk committees and risk management. As with all other aspect of governance if these just become means to satisfy compliance with externally imposed rules they may run the risk of placing ‘ticks in boxes’ rather than really influencing the culture of integrity.

5. Psychological profiling: This can reduce risk by assessing and understanding an individual’s propensity to break rules, take risks, and give an indication of their concern for ethics. This, combined with understanding the extent of their desire and ambition, enables firms to mitigate costly hiring mistakes.

6. Review regularly: Ask yourselves whether you are seeing and hearing outside your own echo-chamber. Regular feedback on progress with respect to outcomes and associated behaviour is also essential as it provides a productive framework for improvement and success. Constructive reviews ensure all employees are clear on their own, and the company’s, goals.

OE Cam’s Chairman Mark Goodridge explains why the firm has produced the checklist:

“We work with senior management teams in many countries and a variety of sectors, and yet what unites them all is the fear that there may be something hidden within their organisations which could ultimately trigger a major issue. The qualities of the businesses and organisations that have been exposed in this way recently, and the clearly institutional nature of their issues, have brought this to the top of the business agenda.

Senior managers cannot be everywhere all of the time, so how can they identify and prevent the growth of the attitudes and behaviours that lead to major institutional failure, or that grow the kind of ‘rogue trader’ behaviour that cost Société Générale nearly five billion Euros in 2008? The answer lies at the heart of the business. By having a clear set of ethics that every employee shares and lives by, these behaviours become unacceptable, and the organisation becomes self-policing.”

Goodridge concludes: “Strong ethics do not undermine a company’s ability to make money, instead they can actively prevent the issues that kill corporate value and, sadly, can risk the lives of staff too.”

We face a big dilemma. Do we infect the business with large quantities of rules and regulations or do we trust our staff to make the right decisions? In reality the trade-off is between the density of our specifications (even assuming they will be read and implemented) and our investment in creating the culture of integrity.

One of the questions we frequently ask at all levels in businesses is “tell me how the organisation is supposed to work and how decisions get made”. Most often people don’t know – even very senior people. Few seem to have a picture in their minds of the various parts of the business, how they interact and who does what. Even more worryingly, such views as exist are rarely shared and are common.

The policies and practices around our people are particularly important. One of the strongest assurances for effective internal governance is the development of your own senior management talent that understands both direction and values and instinctively gives the leadership required.

Conclusion

Organisation integrity is the responsibility of the Executives of the business to achieve. They will be accountable for its achievement to the Board. As the pressures to perform get ever great, so too the temptation to take shortcuts and start to tarnish to the integrity of the business. No one wakes up in the morning deciding to corrupt the organisation. Loss of integrity comes from an accumulation of individual actions, each stretching the truth and integrity a little further.

Executives need to build into their organisational development explicit measures of integrity and ensure that their actions consistently reinforce their codes of values and ethics.

Mark Goodridge is available for interview. To arrange, please contact Shelby Haslam at shelby.haslam@war.uk.com, or call 01223 272 800.