CHAPTER 1
VALUE OF A STRONG ETHICAL CULTURE

The Value of an Ethical Corporate Culture

An independent U.S. research study conducted by LRN, a provider of governance, ethics, and compliance management, shows additional evidence that a company's ability to maintain an ethical corporate culture is key to the attraction, retention, and productivity of employees. In other words, money invested in ethics education, help lines, assessment of ethics programs, and risk evaluation is money well spent. The LRN Ethics Study involved 834 full-time employees from various industries across the United States. Respondents included both men and women, all 18 or older.

According to the LRN study, 94% of employees said it is either critical or important that the company they work for is ethical. This compares to 76% who said so in a similar survey six months earlier. Eighty-two percent said they would rather be paid less but work at a company that had ethical business practices than receive higher pay at a company with questionable ethics. More than a third (36%) had left a job because they disagreed with the actions of either fellow employees or managers. This is true across all ages, genders, and socioeconomic factors.

Other findings of the survey include 80% of respondents reporting that a disagreement with the ethics of a supervisor, fellow employee, or management was the most important reason for leaving a job and 21% citing pressure to engage in illegal activity.

Working for an ethical company is slightly more critical to women (63%) than to men (53%). Full-time employees in the western and southern U.S. consider the factor more important than those in the north central and northeast. Two-thirds of those in managerial and professional occupations find ethics important, compared to 45% of blue-collar workers.

The LRN study found that a majority (56%) of Americans working full-time say their current employer embraces ethics and corporate values in everything they do. Despite this, about 25% have witnessed unethical or even illegal behavior at their job in the past six months. Among those, only 11% say they weren't affected by it. About 30% of respondents say their company merely toes the line by following the letter of the law and company policy. Nine percent say they work at a company where they either do what they are told and aren't encouraged to ask questions about what is right or wrong or they often see management and peers acting in questionable ways.

Among those who witness unethical behavior, about one in four say they do so at least once a week, including 12% who say it is a daily occurrence. Unethical behavior affects a company's costs and ability to recruit, train, and retain employees; increases the legal, regulatory, and compliance risks a company faces; and has an impact on productivity. Half of all respondents indicated that unethical behavior was a distraction on the job. While most merely spent time discussing ethical issues with colleagues, nearly one-third (32%) made a formal complaint or went to speak with management about a specific issue.

Dov Seidman, chairman and CEO of LRN, believes, "An ethical culture where employees and management use values and not rules to self-govern can only take root when executives, managers, supervisors, and employees understand and embrace the company's principles and values and incorporate them into their daily conduct."

George S. May International Company, a consulting firm that specializes in helping small and midsize businesses, has developed the three "Rs" of business ethics: respect, responsibility, and results.

Respect includes behavior such as:

• Treating everyone (customers, coworkers, vendors, etc.) with dignity and courtesy.
• Using company supplies, equipment, time, and money appropriately, efficiently, and for business purposes only.
• Protecting and improving your work environment and abiding by laws, rules, and regulations that exist to protect our world and our way of life.

Responsibility applies to customers, coworkers, the organization, and yourself. Included are behaviors such as:

• Providing timely, high-quality goods and services.
• Working collaboratively and carrying your share of the load.
• Meeting all performance expectations and adding value.

Essential for attaining results is an understanding that the way they are attained-the "means"-are every bit as and maybe more important than the ultimate goal-the "ends." The phrase "the ends justify the means" is an excuse that is used too often to explain an emotional response or action that wasn't well planned or considered carefully.

The May firm suggests that considering the three "Rs" before taking action will help you avoid the following common rationalizations:

• Everyone else does it.
• They'll never miss it.
• Nobody will care.
• The boss does it.
• No one will know.
• I don't have time to do it right.
• That's close enough.
• Some rules were meant to be broken.
• It's not my job.

Is Business Ethics Getting Better or Worse?

Several recently published reports discussing the incidence of fraud within the business environment provide conflicting evidence as to whether the rate of wrongdoing in companies is increasing or decreasing. It's possible that the rate for some kinds of misdeeds might be decreasing in the United States but growing globally.

One report that describes increasing unethical behavior is the 2014 Global Economic Crime Survey (GECS), "Economic Crime: A Threat to Business Globally," published by PricewaterhouseCoopers (PwC). This report says that global economic crime continues to be a major concern for organizations of all sizes, across all regions, and in virtually every sector, as 37% of all organizations report being hit by economic crime. Fraud rates increased from 30% of companies in 2009 to 34% in 2011 and 37% in 2014.

According to the survey, the five most common types of fraud consistently reported are asset misappropriation (69%), procurement fraud (29%), bribery and corruption (27%), cybercrime (24%), and accounting fraud (22%). The highest levels of economic crime are consistently reported by respondents in Africa (50%) and North America (41%), and the lowest levels are reported in the Middle East (21%). According to PwC's Steven Skalak, "The real story is that economic crime is threatening your business processes, eroding the integrity of your employees, and tarnishing your reputation."

The U.S. Supplement to the survey (GECS-U.S.) reports that 45% of responding U.S. organizations suffered from economic crime in the past two years, and 71% of respondents perceived an increased risk within that period. The study states, "54% of U.S. respondents reported their companies experienced fraud in excess of $100,000 with 8% reporting fraud in excess of $5 million." Asset misappropriation continues to be the largest type of misdoing, but it has dropped in significance from 93% in 2011 to 69% in 2014.

Cybercrime was the second-largest crime category at 44%, a slight increase from 40% in 2011. Accounting fraud increased from 16% in 2011 to 23% in 2014. Procurement fraud was introduced to the study in 2014 and is the third-largest fraud category, amounting to an incidence rate of 27%. The major aspects of procurement fraud occur at the vendor level, where key participants in the process influence vendor selection or maintenance. Procurement fraud during the payment process occurred in 43% of the cases, both in the U.S. and globally.

The U.S. General Services Administration (GSA) Office of Inspector General describes some of the mechanisms:

• Bid Rigging. Fraud that impedes free and open competitive bidding to obtain the best goods and services at the lowest price.
• Kickbacks. Any money, fee, commission, gift, credit, gratuity, or item of value that is provided either directly or indirectly in exchange for preferential treatment.
• Bribery. The offering, receiving/giving, or soliciting of anything of value to influence action as an official or in discharge of legal or public duty.
• Collusion. The secret combination, conspiracy, or concert of action between two or more persons for fraudulent or deceitful purpose.

The GECS-U.S. also reports that bribery and corruption are on the rise and present a higher risk than money laundering and anticompetitive practices. Although only 14% of global and U.S. companies reported their organization had been asked to pay a bribe in the last 24 months, the risk of bribery and corruption is growing as companies increasingly operate and pursue opportunities in high-risk markets. As sales and marketing staffs experience pressure to deliver higher sales, the risk of bribery and corruption is likely to increase.

More favorable news is provided by the 2013 National Business Ethics Survey® (NBES), published by the Ethics Resource Center (ERC). This survey is frequently described as the national benchmark for business ethics, and the ERC is devoted to independent research and the advancement of high ethical standards and practices in public and private organizations.

The report found that the amount of misconduct in U.S. businesses declined substantially for the third straight survey, putting it at the lowest point since the ERC began...