By: Michael Eichenwald and Susan Frank Divers

At values-based, purpose-driven organizations, falling rates of misconduct go hand in hand with rising business outcomes.

Among the greatest challenges facing the ethics community is the widespread belief that the process of building organizations that do the right things is inherently at odds with increasing productivity and profitability. And not without cause: The typically trod paths to compliant behavior — increasing layers of control and bureaucracy, opaque policies and procedures, risk aversion that paralyzes decision making —too often can stifle business operations, innovation and growth.

Senior Leader, LRN

Michael Eichenwald, Senior Leader, LRN

But this needn’t be the case. Properly conceived and thoughtfully executed, ethics and compliance initiatives can not only help to ensure that companies do the right thing, they can be a key driver of business success.

That’s the unavoidable conclusion of the latest edition of LRN’s HOW Report, one of the most ambitious, long-term research projects in the field of ethics. You can download a copy at: howmetrics.lrn.com. The 2016 edition of the HOW Report — based on comprehensive data gathered from more than 16,000 employees at for-profit, not-for-profit and governmental institutions in 17 countries — proves that to outbehave is to outperform as  values-based, purpose-driven organizations produce the strongest business results.

Indeed, the HOW Report found that 94% of employees at organizations that have a clear mission, are values-based and led with moral authority — we call these Self-Governing Organizations — report recent increases in market share, versus 74% and 32% of employees in other types of organizations. The HOW Report compares organizations governed by purpose and values (Self-Governing) to two other archetypes — those where systems are primarily organized around rules and interest, and those primarily organized around tasks and formal authority.

This trend holds across financial performance, competitive positioning, innovation levels, customer satisfaction and brand reputation, among other critical performance outcomes.

Tellingly, this significantly better performance applies to misconduct, as well. For example, a mere 2% of employees at Self-Governing Organizations report having observed misconduct in the workplace, versus 8% and 34% for the other types of organizations.

As much as anything, then, LRN’s data contradicts the perception that there is a costly trade-off between a compliance program and an organization’s business performance. In reality, the two are mutually re-enforcing. And while achieving such harmony is by no means a simple task, the 2016 HOW Report — combined with LRN’s two decades of work with hundreds of clients across the globe — provides a road map for getting there. To do so, however, ethics and compliance officers must embrace four crucial ideas.

1. CECOs cannot do it alone. LRN’s work finds that three systems animate individual and organizational behavior: Governance, Culture, and Leadership. Governance refers to formal structures, rules, and policies. Culture refers to how things really work around an organization — norms, traditions, habits, and mindsets. Leadership refers to how power works within an organization — how leaders behave, the source of authority and how it is exercised. Governance is the usual tool through which CECOs attempt to minimize misconduct and maximize doing the right thing, but the culture and leadership are far more important.

Susan Frank Divers, LRN

Susan Frank Divers, Senior Advisor, LRN

Ultimately, building a values-based, organization requires a management team that understands the need for organizational buy-in to principled behavior. Employees at Self-Governing Organizations experience their leaders as demonstrating particular qualities, for example, a deeper commitment to values and a heightened sense of connectedness among employees, to a greater extent than would those in rules-based or power-based organizations. And that’s exactly what the HOW Report found. Across four broad areas of inspirational leadership, 96% or more of employees at Self-Governing Organizations described their leaders as exhibiting such qualities, versus 28% to 42% of employees in the other organizational types.

2. It’s the culture, stupid. Of course, even the best leaders cannot be everywhere all the time, which is why the culture of an organization matters so much. The 2016 HOW Report demonstrates that the elements of a strong and moral organizational character have a cascading effect on employee behavior and performance. Specifically, character is part of an organizational “core” that has an impact on business performance that is 3.9 times greater than the impact of behaviors alone. Too often the traditional instruments of compliance—policies, controls, education—are primarily focused on getting employees to do the next thing right. Strong character, on the other hand, inspires employees to do the next right thing.

The 2016 HOW Report found that 92% of employees in Self-Governing Organizations report a willingness to report misconduct, versus 66% and 28% of employees at rules and task based organizations.

Similarly, in Self-Governing Organizations only 23% of employees report having observed retaliation for speaking out versus 68% and 92% for employees of the other types of organizations.

In a hyper-connected world — where a single employee can irreparably damage an organization’s reputation or balance sheet with one key stroke — strong organizational character is the best bulwark against forces that can bring a business to its knees.

3. Ethical organizations are innovative organizations. It’s not an accident that values-based organizations outperform across all conventional indicators. LRN has found that strong-character organizations are also high-trust organizations. That is to say, organizations in which the overwhelming majority of people believe that employees at all levels are aligned in a common pursuit of significance and integrity are more likely to extend trust to each other. And while these may sound like warm-and-fuzzy “soft” benefits, they actually produce bottom-line “hard” results. Specifically, the 2016 HOW Report shows a measurable connection between trust and innovation, the life blood of organizational progress.

High trust allows for risk-taking, fostering innovation, which is the key driver of performance. We call this dynamic: T.R.I.P.®, and our research shows that employees who work in high-trust environments are 32 times more likely to take risks that might benefit the company, 11 times more likely to see higher levels of innovation relative to their competition, and 6 times more likely to achieve higher levels of performance compared with others in their industry.

4. Building values-based, purpose-driven companies at scale requires systems. In our study, people at organizations with fewer than 2,000 employees were on average 70% more likely than those at organizations with 10,000 or more workers to describe their leaders as possessing the qualities necessary to shape character and build trust. This makes sense. Most CEOs are reasonably successful at creating Self-Governance within their team, e.g., people they’ve hired. Meet with regularly and with whom they work closely. But they generally fail to scale these same dynamics across their organizations, with the challenge intensifying as employees work further away from the C-Suite. On average, in fact, senior managers and executives experience 20 percentage points greater degrees of trust, transparency and collaboration compared to employees at other levels of an organization, and the gap widens with hierarchical distance.

These challenges highlight the need for leaders to go beyond “modeling” ideal behaviors through tone at the top or middle, and to think broader than the hiring of the right direct reports or key lieutenants. Too many organizations believe that they can change behavior without taking on the deeper challenges of fostering trust. The imperative and opportunity for today’s CECO is to inspire and to help management embark on the journey to principled performance – re-designing governance, shaping culture, and elevating leadership so that they are suited to outbehave in a reshaped world.

Michael Eichenwald and Susan Divers are leaders in the Advisory practice at LRN.

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