What makes an organization ethical? Can you measure ethics, and if so, what criteria should be used for assessment? Here we present a solution for conceptualizing and measuring ethics, enabling leaders to move the needle toward a more ethical organization.

In the early 1990s, against the horizon of what were then the early stages of globalization, the Center for Ethical Business Cultures (CEBC) at the University of St. Thomas fostered the development of The Minnesota Principles—principles “developed by…business leaders to foster the fairness and integrity of business relationships in the emerging global marketplace.”

These principles were designed to serve as a foundation for dialogue by business leaders around the world. Since that time, the principles have had a global impact including providing a foundation for the Caux Round Table Principles for Business, available in 16 languages and used around the world.

The Ethical Organization Model
Drawing on its experience with The Minnesota Principles and on additional research, the CEBC developed the Ethical Organization Model (Figure 1), which describes five characteristics of an ethical organization.

Values: At the center of an ethical organization are its values. To use an organic analogy, an organization’s values are its lifeblood. For the organization to be healthy, they must flow vigorously through every cell.

Leadership Effectiveness: The ethical organization will have leaders who both “talk the talk” and “walk the talk” of ethical practice. Leaders must embody the organization’s values in their own behavior and must articulate those values in a way that is compelling for employees. They set the tone that permeates the organization’s culture. If employees perceive top leaders to care more about results than about how those results are achieved, this perception can encourage the bending or even the breaking of rules.

Stakeholder Balance: In outlining stakeholder principles, The Minnesota Principles describe the network of relationships within which the ethical organization operates. The Ethical Organization Model recognizes that stakeholder needs and demands frequently exist in tension with one another: Customers want higher quality at
a lower price; employees want higher wages and increased benefits; owners/investors want a greater return; suppliers want to be paid more; communities want companies to invest more in them; and competitors want fair competition. The model does not suggest that these tensions will disappear for the ethical organization. The ethical organization recognizes these tensions and works to maintain a balance between them. Focusing too much on any one stakeholder, whether owners/investors, customers or employees, will create a distortion that can lead to ethical lapses.

Process Integrity: Process Integrity is a focus on the systems dimension of organizational life. The ethical organization’s values must be built into every operational process. All of its operational systems, e.g., recruiting, hiring, evaluating, compensating, promoting, demoting, firing, marketing, sales, production, etc. need to be aligned with its values. At best, misaligned processes
create confusion and poor decision making within the organization; at worst, they create ethical breaches and chaos.

Long-term Perspective: While recognizing a need to assess business performance day-to-day or quarter-to-quarter, a fundamental characteristic of an ethical organization is the devotion of its leadership to strategically plan for the long-term. This characteristic evokes the question, “what is the purpose of this business?” For some, the answer is to maximize shareholder value, but for others, the goal of business is found in balancing the interests of numerous stakeholders—owner/investors and employees, customers and suppliers, communities and, yes, even competitors. Within the model, the linkage between Leadership Effectiveness and Stakeholder Balance represents a company’s commitment to serving, and its ability to return value to all stakeholders.

Assessing Organizational Ethics
Companies doing business in a global economy are confronted daily with both minor and major ethical challenges, and creating and sustaining an ethical organizational culture is critical for successfully navigating those challenges. As the adage goes, “If you can’t measure it, you can’t manage it,” data from an organizational ethical character assessment provides its leaders with an understanding of its ethical strengths and weaknesses. To provide a baseline from which to evaluate an organization’s ethical practices, CEBC and Kenexa developed the CEBC Integrity QuickCheck.

The CEBC Integrity QuickCheck is a five item instrument that provides a high level snapshot of the organization’s ethical landscape along the five dimensions of the CEBC’s Ethical Organizational Model. WorkTrends™, the Kenexa Research Institute’s annual employee opinion survey, provides normative data on these five items. The WorkTrends survey is administered to more than 10,000 full-time workers in the U.S. and approximately 1,000 employees in Canada, Mexico, Brazil, the UK, Germany, Italy, The Netherlands, China, Japan, Saudi Arabia and India, with an additional 500 respondents in Russia. The QuickCheck items ask employees if the following conditions of ethical business exist in their organization:

• Ethical issues and concerns can be discussed without negative consequences
• Senior management support and practice of high standards of ethical conduct
• Organizational commitment to serve the interests of multiple stakeholders (e.g., customers, employees, suppliers, and community), not just the shareholders
• The behavior of employees is consistent with the organization’s mission, vision and values
• Employee advancement is based on behavior that demonstrates company values

The Current State of Organizational Ethics in the U.S.
In 2008, the WorkTrends survey utilized the Integrity QuickCheck to report employees’ opinions about the ethical climate at their organization. Data demonstrates that not only is it an important issue for employees, but employees’ reports of their organization’s ethical strengths based on which industry they are in and at which level of the organization they work. Next, four key findings are discussed.

Working Americans believe that having an ethical business culture is important. The WorkTrends survey demonstrates that working Americans regard organizational ethical culture as being important as measured by the five ethics items (Figure 2). In general, “ethical culture” is perceived by working Americans to be positive when favorable responses are greater than 50 percent for all five of the ethics items—organizations are falling short by not aligning values with advancing potential.

From a historical perspective, all indicators of ethics have consistently risen over the last three administrations of WorkTrends, no doubt due, in part, to the passing of the Sarbanes-Oxley Act in 2002. Since the formalization of ethical practices in this high-visibility legislation, organizations have had more reason to be proactive about ethical practices within the organizations. The survey results reveal a need for prudent concern. Risks from lapses in ethical judgment are nearly always present within an organization, regardless of the espoused culture. With each of the ethics items, one-third to onehalf of all employees imply, by responding neutrally or unfavorably, that ethical behavior is not ubiquitous or innately grounded within their organization’s culture. The implication is that there exists
significant opportunity for costly misconduct and significant latitude for improvement.

Misalignment of organizational systems is a potential problem. The Process Integrity item reports on the perception of “my coworkers’ ability to advance within their organization…unless their behavior clearly demonstrates company values,” and unfortunately, only 50 percent of respondents in 2008 agreed that there was “integrity” in their organizational systems (Figure 2). Processes include the way a company hires, fires, educates, compensates, recognizes, etc. This result identifies a potentially serious weakness and a major risk factor within organizational cultures. Process Integrity forms the cornerstone of system effectiveness and efficiency as it relates to behavioral modification and in contributing to creating an ethical culture.

The implication of these results is that operational systems within many organizations are not totally aligned with organizational values and thus do not effectively integrate and promote ethical behavior. The underlying message—one-half of working Americans do not associate a relationship between living their company’s values and advancement in their company. Employees do not feel empowered or even obligated to do the right thing. For management, this should create a sense of foreboding when assessing the effectiveness of training and communication programs aimed at moderating compliance risks. Either company values are, in general, out-of-synch with mainstream American values or company programs are not effective in conveying what is defined as acceptable behavior for employees.

There are important differences in the strength of ethical culture between industrial sectors. Investigating the U.S. industry differences of the Integrity QuickCheck revealed differences (Figure 3). In general, industries considered more highly regulated score more favorably. Regulated industries operate in a more structured
environment of auditing and reporting which might generate an appreciation for and application of ethical decision-making and ethical behavior and might contribute to the higher overall score. In contrast, Retail/Wholesale Trade, Restaurant, Light Manufacturing, Food Industry and Government/Public Administration present in the lower third.

Workers with various jobs perceive ethics differently. When workers employed at various levels within the organizational hierarchy are compared, QuickCheck results demonstrated that the more senior the respondent’s job classification, the more favorable their response. The data demonstrates a wide gap between perceptions of ethics of management and line worker; whereas 75 percent of senior management feels as though their organization is ethical, only 51 percent of laborers have faith in their organization’s ethical constitution. We refer to this hierarchical disconnect as “the gap,” indicating that 1) executives might not be doing as good a job at “setting the tone at the top” as would be hoped, 2) the systems employed to disseminate the message are not effective and 3) employees are naturally skeptical when it comes to senior management’s behavior.

This type of gap is typical of organizations, but should not be considered an acceptable characteristic inherent in the hierarchy of an organization. It is an indicator of potential risk or an agent of harm to the organization, and should not be ignored. The gap represents detachment from the real world, from the opinions or perspectives of others, and represents a potential source of consternation for management.

A key element in creating and sustaining an ethical culture is establishing management’s role in “setting the tone at the top.” If that role is not effectively communicated to the rank and file employee, there is an opportunity to inadvertently instill mistrust between management and non-management with disastrous consequences. The data indicate misalignment between what management believes they are saying and doing to promote ethical behavior within the organization and what non-management perceives to be actually occurring in the operational frontlines. For management, the “gap” has the unfortunate potential of fostering a false sense of complacency that could lead to increases in ethical breakdowns.

As an Added Bonus: Strong Ethical Cultures Demonstrate Organizational Benefits
Major differences were revealed between strong and weak ethical cultures when they were compared to organizational outcomes, including employee engagement and changes in reputation and performance (Figure 5). Kenexa’s employment engagement index is comprised of four items that tap employee’s pride to work at their organization, their overall company satisfaction, the likelihood they would refer the organization to friends and family as a good place to work, and the extent to which they think about leaving their job. A strong sense of ethics in an organization is positively related to employee engagement—75 percent more employees were engaged who worked in strong ethical cultures than in organizations with a weak sense of ethics.

Despite common perception that meeting the multiple needs of stakeholders and having an ethical focus could negatively affect fiscal performance, the WorkTrends data show that this assumption is false. Of the employees who reported that their organization’s performance and reputation improved in the past year, 45 percent were employed in a strong ethical culture, and only 4-5 percent were in a weak ethical culture. Results reported as an Ethics Index, defined as a measure of ethical culture, calculated by aggregating the five QuickCheck items and calculating a mean percent favorable score.

Conclusion
Employees believe that working in ethical organizations is important, both for them and for the companies in which they work. Most people want to work for companies that do the right thing for all of their stakeholders, creating products and services that serve their customers, fairly compensating employees, suppliers
and owners/investors, competing with integrity and contributing to the common good. The data revealed two important gaps; the difference in perception of ethics between leaders and workers, and the disparity between work systems and organizational values; in both cases, the wider the disparity, the greater the risk of breakdowns. The onus is on leadership to close these gaps using assessment tools, such as the data derived from the Ethical Organization Model and CEBC Integrity QuickCheck.