Recent lapses of standards and values have resulted in regulatory inquiries, enforcement actions, financial penalties, resignations and reputation blows for some of the world’s largest financial institutions. And while the financial services industry should take no comfort from this, it is by no means the only industry that has failed to live up to the expectations of its constituents. To be fair, the current headlines are just the most recent examples of corporate breakdowns, as we are reminded by this statement from the introduction to a special report in the June 2002 issue of FORTUNE, aptly titled, “Crisis of Confidence.”

“Nearly every known check on corporate behavior − moral, regulatory, you name it − seems to have fallen by the wayside.”

What is it in the culture of some organizations that allows these lapses to happen?

An organization may define its corporate culture as “the way things get done around here.”Culture drives the behavior and actions of an organization’s workforce, which, in turn, determines the degree of adherence to policies, procedures, regulations and values.

The ancient Greek philosopher Aristotle taught us that “all human actions have one or more of these seven causes: chance, nature, compulsion, habit, reason, passion and desire.” What’s important to note is that only one of these seven causes – reason – relates to logical decision-making. Having rulebooks, such as codes of conduct and other written policiesand procedures, is important, but it is not enough. Too often, organizations fail to recognize that effective corporate governance and compliance depend on managing behavioral risk – the risk that one or more people will make a decision, fail to take action, or engage in an activity that has negative consequences for the organization as a whole.

Most of us were taught “right and wrong” at an early age by our parents and teachers. Some of us were given tips by leaders for whom we have worked. A simple message to a young and up-and-coming professional along the lines of, “I never want to see this organization in a negative headline in The Wall Street Journal, so if you’re struggling with a decision, just remember that,” can have a powerful impact.

But behavioral risk isn’t just about right and wrong. It can have multiple root causes, both unintentional and intentional. It can stem from circumstances in which employees may have been provided inadequate training, or given unclear instructions, or are ineffectively supervised. It can result from the pressure that comes from time deadlines or resource restraints. It may result from poor judgment when well-intentioned individuals misinterpret expectations or requirements. And it can be driven by competitive pressures, hubris or even the challenge of “getting away with it.”

The organization’s goal is to make the case for “reason,” to encourage and support people in doing the right thing because it is the right thing for the organization. Encouragement caninvolve carrots and sticks. The reason can be in the form of a benefit: “I know that my company recognizes and rewards me for making decisions that are in the company’s best interest.” The reason can also be a punishment: “I know that my company will not tolerate my acting in a way that is detrimental to the company’s well-being or reputation.”

There are any number of lists of the characteristics or attributes of companies that have demonstrated their aptitude at managing behavioral risk and are recognized for their strong corporate cultures. Much also has been written about the intrinsic benefits of a strong corporate culture, such as the views of, respectively, former and current Harvard Business School professors, James Heskett and Earl Sasser, who asserted that “strong, adaptive cultures can foster innovation, productivity, and a sense of ownership among employees and customers. They outlast any charismatic leader,” and such a culture “creates a competitive edge that is hard to replicate.”

The keys to sustaining a strong corporate culture are fairly straightforward:

• Leaders must set the example. A leader, as described by John Taft, the CEO of RBC Wealth Management, practices “servant leadership.” According to Taft, “It is seeing yourself as holding a type of ‘office’ in which you are equally accountable to the four primary constituencies of any business – customers, employees, shareholders, and the communities in which those customers/ employees/shareholders live and work. It is seeing your responsibility as a leader as serving in a balanced way the long-term interests of those constituencies. That is a servant-leadership approach. It doesn’t necessarily come naturally but instead is something one has to learn over time.”If the leaders of the organization don’t recognize their responsibilities to their multiple constituents or that decisions or actions are not just for today, but may have long-term consequences for one or more of these constituencies, there is no reason to expect the rest of the workforce to do so. In this context, leaders include not only board members and members of the C-suite, but also anyone in a management role.
• There must be an organizational commitment to awareness and training. Leading organizations are clear not only about the values they believe in, but also about what their expectations are for individual employees. These expectations are set forth in job descriptions and written policies and procedures, and are reinforced through training. If you tell people what is expected of them, then you make it easier for them to understand what they need to do to make the right decision. If leaders “walk their talk” by setting the appropriate example, employees will make the right decision by emulating their example.
• There must be organizational transparency and openness. Communication flows within the organization need to be designed to ensure that information goes to the right people in time for them to correct the course if a problem is developing. Individuals throughout the organization need to feel comfortable in seeking guidance when they are uncertain how to proceed and in surfacing potential issues and problems. Thomas Donaldson, a Wharton professor of legal studies and business ethics, calls this a “culture of candor.”
• Accountability must be clearly and consistently established and reinforced. Organizations with strong corporate governance understand that actions speak louder than words. They address consistently and evenly, regardless of level or whether the transgressor is a major revenue producer, instances where individuals operate outside of the organization’s rules or values. Just as importantly, however, they also recognize individuals who model the organization’s values. Ask employees in these organizations to describe the culture of their companies, and you will often hear the word “fair.”

It’s not that easy, of course. The average person makes hundreds, if not thousands, of choices per day, some trivial and some significant. And if Aristotle is to be believed, reason must compete with emotion and habit as the basis for those choices. That said, the organization that fails to abide by the principles set forth in the four key points introduced above is clearly at a disadvantage. It’s probably the right time for many companies, from the financial services and other industries, to take a hard look at their cultures.

About the Author
Carol M. Beaumier is Protiviti’s executive vice president, global industry programs. She oversees and coordinates the efforts of the Industry Program leadership, as well as guides the strategy for the program, which encompasses seven industries. Beaumier previously served as managing director and continues to lead the Global Financial Services and Regulatory Risk Consulting practices. She also is a key member of the Protiviti Financial Crisis Team. An experienced consultant and former bank regulator, Beaumier has extensive experience in a wide range of financial industry and regulatory issues. Beaumier has more than 30 years of experience as a financial services industry consultant. Before joining Protiviti, she was a partner in Arthur Andersen’s Regulatory Risk Services practice and a managing director and founding partner of The Secura Group, where she headed the Risk Management practice. Before consulting, Beaumier spent 11 years with the Office of the Comptroller of the Currency (OCC), where she was an examiner with a particular focus on multinational and international banks. She also served as executive assistant to the Comptroller, as a member of the OCC’s senior management team, and as liaison for the Comptroller both inside and outside of the agency.