by Professor Owen Skea

The code

Practical steps in designing an ethical organisation


We hear so much about corruption and unethical behaviour—it has surfaced through the numerous commissions and corporate and state failures - but what we hear less about is what we should do about it other than shouting for people to go to jail.

What we need is a practical ‘how to’, something which is covered admirably in Nicholas Epley and Amit Kumar’s excellent article How to Design an Ethical Organisation, in the May/June 2019 issue of the Harvard Business Review.

Epley is the John Templeton Keller Professor of Behavioral Science at the University of Chicago Booth School of Business. Kumar is Assistant Professor of Marketing and Psychology at the University of Texas at Austin.

At the outset they emphasise that in creating an ethical culture it’s not just a “belief issue”, it is also a “design issue”, and they then highlight four pillars that need to be built, namely: explicit values, thoughts during judgment, incentives, and cultural norms. Their approach is drawn from useful, in-depth research, and all organisations in the public and private sector would do well to consider this.

1. Explicit Values

The starting point is that if explicit values are not being carried out by the people at the top, organisations can design and put in place the most laudable ethical codes but they won’t achieve the desired short-, medium- or long-term ethical change they are looking for. The challenge in South Africa where most organisations have clearly set out values, missions, visions and goals is where senior and top management is not setting a good example, and everyone else therefore feels they have the right to behave in the same way.

As they explain, all companies need well-crafted mission statements and clearly stated principles that are widely shared within an organisation. They say they need to be: Simple, short, actionable and emotionally resonant”, explaining that most corporate mission statements are too long and too obtuse to be meaningful in employees day to day lives. Employees then need to see these principles being lived out by those who set the tone at the top.

Epley and Kumar refer to Varda Liberman, Steven Samuels and Ross’s experiment in The Name of the Game: Predictive Power of Reputations Versus Situational Labels in Determining Prisoner’s Dilemma Game Moves.

In one experiment, 70% of participants playing an economic game with a partner cooperated for mutual gain when it was called the Community Game, but only 30% cooperated when it was called the Wall Street Game. This dramatic effect occurred even though the financial incentives were identical.

Liberman, Samuels and Ross also conducted another experiment amongst trainees in the Israeli Air Force Training School. They observed: For half of the participants, the game was labeled the Bursa Game (connoting the competitive norms of the stock market), whereas for the other half of our participants, it was labeled the Kommuna Game (connoting more cooperative and interdependent norms).

Their results reveal, inter alia, that whereas only 4 of the 20 Bursa Game participants opted to cooperate on their first move, 11 of the 20 Kommuna Game participants did so. This says a lot about the expectations of participants about fellow players, as the authors explain: When told they were playing the Bursa Game, participants expected defection to be the most likely response; when told they were playing the Kommuna Game, they expected cooperation to be the most likely response.

Based on these findings, the authors question whether perception and expectation can be positively leveraged in promoting a more cooperative, ethical environment and more cooperative, ethical behaviour where “communities of cooperators thrive and encourage others to follow their example”.

2. Thoughts during judgment

Many social and behavioral science experiments have been conducted to determine in which contexts people are more likely to tell the truth, and how this can be used to encourage ethical behaviour.

One experiment showed that people were more likely to tell the truth when an honour code was included at the beginning of a form—thereby putting ethics top of mind at the outset when people are completing forms, contracts or financial audits rather than asking them to verify with a signature at the end of the document that they had been honest.

This is explained in an article titled; Signing at the beginning makes ethics salient and decreases dishonest self-reports in comparison to signing at the end by Lisa L. Shua, Nina Mazarb, Francesca Ginoc, Dan Ariely, and Max H. Bazermanc. They write: “… many important transactions already require signatures to confirm compliance to an expected standard of honesty. Nevertheless, as significant economic losses demonstrate, the current practice appears insufficient in countering self-interested motivations to falsify numbers. We propose that a simple change of the signature location could lead to significant improvements in compliance.

They propose that signing at the beginning of the document emphasises ethics at the outset and that laboratory and field experiments found this “significantly reduces dishonesty”.

They write: It is important to make morality salient, right before it is needed most, so that it can remain active during the most tempting moments. When signing comes after reporting, the morality train has already left the station.

Epley and Kumar elaborate on this. They explain that during a simulation, MBA students were asked to play the role of financial adviser, and first had to complete an ethics checklist before recommending potential investment funds. This significantly decreased the percentage who recommended what turned out to be the Madoff feeder fund. When ethics were top of mind, the students were more alert to the possibility that the fund was too good to be true.

In an article titled Reducing Bounded Ethicality: How to Help Individuals Notice and Avoid Unethical Behaviour in a special issue on Bad Behaviour in Organizational Dynamics, Zhang, Ting, Pinar O. Fletcher, Francesca Gino, and Max H. Bazerman write: “… we know little about how best to help individuals notice unethical behaviours in others and in themselves. This paper identifies a solution: instilling a mindset of vigilance. In an experiment, individuals playing the role of financial advisers recommended one of four possible investments to their clients. Unbeknown to these advisers, one of the funds under consideration was actually a fraudulent feeder fund of Madoff Investment Securities. Results from this empirical study demonstrate that instilling vigilance by asking individuals to indicate their suspicions prior to making a decision was critical to helping them notice fraudulent behaviour and act on that information. In contrast, committing to a decision prior to contemplating suspicions, precluded individuals from subsequently integrating critical information about the fund’s fraudulent activity.”

They extend these findings to other interventions aimed at helping people to notice unethical behaviour and develop a vigilant mindset.

3. Incentives

Many organisations undervalue the power of respecting employees and showing recognition and appreciation for their efforts and achievements. This goes a long way to encouraging employees to behave ethically. Too many organisations focus solely on financial incentives, which are naturally important, but they overlook the importance of including nonfinancial incentives in encouraging an ethical culture.

Epley and Kumar write: “Leaders can reward ethical actions by showing employees the positive impact of their work on others and recognising their actions in presentations and publications. They can also create opportunities within the organisation to behave ethically toward colleagues. In one recent field experiment, managers were randomly assigned to perform five acts of kindness for certain fellow employees over a four-week period. Not only did this increase the number of kind acts observed within the organisation, but recipients were more likely than controls to subsequently do kind things for other employees, demonstrating that ethical behavior can be contagious.”

They add that an organisation’s ethics and values are revealed from the outset to prospective employees during the hiring process, notably the questions asked. They give the example of a Fortune 100 company where the interview questions are designed around core values, such as asking interviewees to describe how in the course of their work they have addressed an unmet customer need. They add that ethics can also be woven into the design of performance evaluations to highlight their importance to an organisation. They offer the example of Southwest Airlines’ four core values: every employee matters, every flight matters, every customer matters, and every shareholder matters. Each value is demonstrated by an objective measurement, for example, every flight matters by on time performance.

In an article by Duke University’s Chip Heath titled On the Social Psychology of Agency Relationships: Lay Theories of Motivation Overemphasise Extrinsic Incentives, he warns that too many leaders think that people are more motivated by extrinsic incentives (job security, pay) and less motivated by intrinsic incentives (learning new things). However, this is not underpinned by social and behavioral research. What this means is that most leaders and organisations generally don’t understand motivation and fail to draw on well researched social and behavioral findings in how they approach employees, clients and deals.

In his studies Heath lists several key extrinsic and intrinsic values that have been shown to motivate people, and influence their attitude to their company and job, including ethics, loyalty and commitment:

  • The amount of job security you have (Job security)
  • The amount of pay you get (High income)
  • The friendliness of people you work with
  • The praise you get from your supervisor
  • Your chances for a promotion or getting a better job (Good opportunities for advancement)
  • The respect you receive from the people you work with (An occupation that is recognised & respected)
  • The chances you have to accomplish something worthwhile (Gives a feeling of doing something meaningful)
  • The chances you have to do something that makes you feel good about yourself as a person
  • The amount of freedom you have on your job (A job that allows one to work independently)
  • The chances you have to learn new things (Interesting job)
  • The opportunity to develop your skills and abilities.

4. Cultural Norms

Mervyn King, when talking about conscious leadership and governance explains that it should result in the four outcomes of trust and confidence in a company: legitimacy, adequate and effective oversight, value creation in a sustainable manner, and a tone at the top of acting with intellectual honesty in the best interests of the company and all its stakeholders.

“The leader must be aware of the tone at the top, the tune in the middle and beat of the feet at the bottom of the organisation. Her ear must be close to the ground in order to listen to that tune,” says King.

Epley and Kumar state that while many leaders intuitively recognise the importance of “tone at the top” for setting ethical standards in an organisation, many overlook the “tune in the middle”, which may actually be a more significant driver of employees’ behaviour. Good leaders produce good followers; but if employees in the middle of the organisation are surrounded by co-workers who are lying, cheating, or stealing, they will most likely do the same, regardless of what their bosses say.

In other words, peer behaviour tends to exert the most social influence. This is known as normative social influence. Social and behavioural scientists understand the power of normative social influence and draw on this to develop approaches to motivate individuals to behave in an ethical manner, such as paying their taxes.

In a 2014 paper titled The Behaviouralist As Tax Collector: Using Natural Field Experiments to Enhance Tax Compliance by Michael Hallsworth, John List, Robert Metcalfe, Ivo Vlaev, the abstract reads as follows: “Tax collection problems date back to the earliest recorded history of mankind. This paper begins with a simple theoretical construct of paying (rather than declaring) taxes, which we argue has been an overlooked aspect of tax compliance … Using administrative data from more than 200 000 individuals in the UK, we show that including social norms and public goods messages in standard tax payment reminder letters considerably enhances tax compliance.”

Instead of threatening people to pay their taxes, the field experiment shared the message with non-payers that nine out of ten people in the UK pay their tax on time. The message said: You are currently in the very small minority of people who have not paid us yet. It then framed the gain to the public good of paying tax: Paying tax means we all gain from vital public services like the NHS, roads, and schools. And it framed the loss to the public good of not paying: Not paying tax means we all lose out on vital public services like the NHS, roads, and schools. This simple, cost-free approach significantly increased taxes collected by the government in the sample period.

In an article titled Normative Social Influence is Underdetected in the Personality and Social Psychology Bulletin, by Nolan, J. M., Schultz, P. W., Cialdini, R. B., Goldstein, N. J., & Griskevicius, V., they further pursue the power of normative social influence in a number of studies. One on energy conservation in California showed that normative social influence produced the greatest change in behaviour compared to information highlighting various reasons to conserve energy. Results show that normative messages can be a powerful lever of persuasion even though their influence is routinely underplayed or under-detected.

Epley and Kumar add that leaders can encourage an ethical culture by leveraging normative behaviour and highlighting the good things that employees are doing. They explain that the current tendency to focus on unethical behaviour can make undesirable actions seem more common than they really are, potentially increasing unethical behavior. They are in no way saying that unethical behaviour should not be loudly called out and exposed, what they are encouraging is that organisations should also focus on the “ethical beacons” and highlight and reward the ethical behaviour of employees: people who are putting the mission statement into practice or behaving in an exemplary fashion.

This will encourage an increase in ethical behaviour and help to imprint it as normative social behaviour in organisations. 

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