It has been more than a quarter century since the new Federal Sentencing Guidelines for Organizations in the United States shined a spotlight on the importance of ethics and compliance in corporate governance. And yet it can seem as if we are no closer to seeing our leading companies meet a basic standard of fair play and appropriate behaviour. One can hardly glance at the front page of a newspaper without being confronted by another story of misconduct—whether by a single bad actor or, worse, an entire organization. This is despite tens if not hundreds of millions of dollars spent every year on ethics and compliance related activities.

These scandals come at a crossroads moment. We are in the midst of the Fourth Industrial Revolution, a fusion of technologies that is increasingly blurring the boundaries between the physical, digital and biological spheres. The result is a period of seemingly endless challenges. The Forum’s Klaus Schwab, though, has boiled them all down to a single fundamental question: How do we ensure this latest revolution does not “deprive humanity of its heart [and] soul,” but rather lifts it “to a new collective and moral consciousness based on a shared sense of destiny”?

Of course, the poor decisions and malfeasance at the core of today’s scandals are a disturbing reminder that we still haven’t mastered one of the challenges of the previous industrial revolution: meeting a basic standard of fair play and good conduct. And being able to do that is even more important, as we stand at the dawn of a new era that will cause us to confront what it means to be human in an age of intelligent machines. Schwab has challenged global business to consider and make the right decisions today to ensure the Fourth Industrial Revolution has a human heart.

Shaping company culture

So how can business leaders do a better job of creating the conditions that enable organizations not only to stay on the right side of the law but to do the right thing, consistently and at scale? And how can we operationalize a sustainable set of human values at the core of our business strategies and operations?

LRN’s CEO Dov Seidman testified in 2004 before the U.S. Sentencing Commission arguing that corporations must move from a check-the-box, compliance-only approach to instead focus on fostering ethical cultures and behaviors. His proposals were adopted and today are the very standards by which companies, cultures and programs are judged. So how do we deliver on the promise of shaping corporate cultures committed to both the law and to ethics?

New data from LRN suggests that the solution lies in a more deliberate and rigorous effort. Rather than focus on the surface aspects of governance – rules, regulations, requirements, policies, checklists and procedures – we’d clearly do better to focus on what LRN has defined as the organization’s core: its sense of purpose, commitment to values, consciousness of the other and recognition of interdependence, as well as the ability to scale real trust in a way that binds people together and shapes the way they relate to one another. Moreover, this focus needs to be a central part of the way we do business, rather than a periodic discussion that arises only when it’s time for training or an annual ethics acknowledgement.

Most evaluation criteria in the ethics and compliance area measure effectiveness solely by the presence or absence of the structural elements listed above. Following this approach, the more policies, training modules or layers of compliance procedures a programme offers, the better it is. But a key lesson of the recent scandals is that misconduct occurs despite these codes of conduct. What’s missing is the “heart” of the matter: a culture that posits that integrity, truth and respect are the baseline for doing business.

Values at work

LRN’s most recent study, the 2016 Ethics & Compliance Program Effectiveness Report is based on a survey of more than 550 ethics, compliance and legal experts. The study used the Program Effectiveness Index, or PEI, to measure outcomes across three critical areas of workplace behaviour:

  • Ethical decision-making: Are the choices employees make animated by values or expediency?
  • Organizational justice: Are senior executives and high performers held to the same standards of conduct as other employees?
  • Freedom of expression: Do employees speak up and willingly contribute and exchange ideas?

By using a behaviour-based lens instead of a checklist, LRN’s PEI study demonstrated that companies with the highest levels of ethical behaviour are the ones that have placed values at the centre of their organizations.

Among high-performing companies, two-thirds are increasingly focusing on values instead of rules. That compares with one in three of the lowest-performing companies. In fact, the highest-performing organizations in our study have elevated human values to such an extent that more than 90% of those values have become part of the company’s brand appeal. In 70% of high-performing organizations, values have also become a business enabler, providing a reference point for the tough decisions, and in turn leading to better decision-making.

At the same time, the report found that too few companies are stepping up to take responsibility when their employees fall short. For example, we found that in too many cases there is an underlying resistance to seeking the root causes of misconduct. Specifically, fewer than half (47%) of low-performing companies bothered to determine accountability in instances of executive and employee misconduct. Moreover, organizations too often fail to walk the talk, with 55% of low-performing organizations saying C-level executives do not consider ethical behaviour a prerequisite for promotion.

Five steps

In short, the data gathered by LRN suggests that companies that assess the capacity for and inspire greater ethical decision-making, organizational justice and freedom of expression are much more effective at delivering on expectations, fair play and appropriate conduct than those governed only by a checklist of rules and multiple layers of policy and controls. And that means business leaders looking for an edge must take these five steps:

1. Assess what is wrong: Bring real business rigour to the metrics, reporting and assessment of what works and what doesn’t in ethics and compliance by engaging in a deep, wide-ranging analysis of organizational culture, manager conduct and employee behaviour.

2. Catalyze new ways of leading: Surface and share the beliefs that sit at the core of how you want your organization to operate, and delineate the leadership behaviours that best exemplify those beliefs in action. Don’t stop with senior leaders; enlist middle management as the key drivers of what really happens within a business.

3. Formulate and use more effective frameworks: Embed the tools and frameworks people in your organization use to make decisions with the highest expectations of good conduct and hold people accountable for using these tools effectively and consistently.

4. Rethink communications and policy accessibility: A checklist of rules and multiple layers of policy is not enough. Introduce clear, values-based policies that excite and engage employees with their possibility.

5. Innovate when you educate: Don’t rest on a “one and done approach” of annual training; instead, consistently seek to introduce new and different ways of engaging that takes advantage of best practice in approaches to adult education.

Embedding values into the core of an organization is no easy task. But the outcome will be worth it: a human organization inspired by purpose, based on values and led with moral authority. In other words, just the organization Schwab prescribes for the Fourth Industrial Revolution.