In an era of stakeholder capitalism, with eyes on environmental, social, and corporate (ESG) governance, culture is the key to the authentic expression of a company’s commitment to purpose and values. The companies that are found guilty of corporate misconduct often find themselves paying significant fines to regulatory bodies. But that's just one part of the larger story. Ethical culture also impacts an organization's business performance, and low ethical behavior can significantly hurt its prospects.
The new LRN Benchmark on Ethical Culture report reveals unique insights into why ethical culture is critical to organizational success, explicitly detailing the impact of culture on ethical conduct and business performance. This comprehensive research is a multi-year, collaborative research effort that sampled nearly 8,000 employees—including frontline staff and top managers—across 17 industries and 14 countries.
In a nutshell: Culture matters—and you can’t manage it if you don’t measure it. Today, company stakeholders are highly focused on quantifying ESG efforts. If you also consider the increasing demand for ethical practices by regulatory bodies, only proactive and agile business leaders, capable of analyzing their company culture, can keep up with the competition and weather business uncertainties.
Industry regulators agree that culture matters
Although cultivating a company culture governed by a compelling code of ethics isn't legally binding, many regulators agree that having a quality code of conduct matters. A code benefits companies in two ways:
- It acts as a reference for employees to understand how they can get through everyday ethical dilemmas.
- It offers stakeholders a statement of corporate value and dedication, clarifying a company's mission and principles.
Other policymakers have also expressed their support for corporate commitment to ethical behaviors, including:
- U.S. Sentencing Commission Guidelines
- U.K. Ministry of Justice
- U.S. Department of Justice, Criminal Division
- UN Global Compact
- Agence Française Anti-Corruption
- Japan Corporate Governance Code
7 key findings on the State of Ethical Culture
The Benchmark on Ethical Culture offers seven key findings on corporate culture. Implementing these findings in your organization will take your ethical and business performance to the next level. Specifically, understanding the implications of each finding to ethical action and business performance is essential to improving current culture management strategies. These findings will also empower you to design practical solutions to bridge present cultural gaps.
1) There's a global need for ethical measurement
There is a widespread need for developing ethical culture across all regions of the globe, across all company sizes. According to our study, there are significant variations from sector to sector, with Information Technology (IT) recording the highest culture performance. On the extreme end, Chemicals, Fibers, Coatings, and Plastics ranked the lowest in performance across all culture metrics.
2) Businesses with the strongest ethical cultures win
There's a close association between strong ethical values and business performance. The report found that brands with the most powerful code of ethics outshine their competitors by virtually 40% across all business aspects, from employee loyalty and customer satisfaction to growth and adaptability.
Research by the University of Notre Dame further supports this finding, indicating that low unethical behaviors and high product quality are critical in predicting a company's performance. In the competitive business environment, brands always focus on improving their product offerings. It means that consumers have many options, and only a set of strong ethical values will attract the largest market share.
3) There's a disconnect across management levels
The perception of the current state of culture in organizations is disjointed. Top managers and senior executives often report that their company maintains a favorable culture. Middle managers more often rate their culture as average, while the hands-on employees (typically individual contributors, who deal directly with the consumers) have significantly lower perceptions of their companies' cultures. In other words, senior leaders must be careful when making conclusions about their company culture based on personal experiences. As a best practice, LRN recommends surveying all employees when assessing culture to get the whole picture.
4) Certain aspects of culture nurture ethical behavior more than others
LRN research notes that specific Culture Catalysts can highly influence employee conduct. Our research suggests that cultures steeped in trust and organizational justice encourage employees to express their ideas and speak out about observed instances—or personal experiences—of ethical misconduct. Employees usually exhibit unethical behavior when faced with the pressure to perform. However, if workplace behavior is based on trust and fairness, they feel motivated and obliged to uphold ethical policies.
5) There exists unequal treatment based on gender and race
Individuals identifying as female and persons of color report unequal treatment in the workplace, especially in the United States. Despite the global corporate commitment to encourage cultural diversity, equity, and inclusion (DEI), the increasing cases of ethical malfeasance on gender and racial lines continue to grow.
DEI has been a matter of concern in the U.S. Companies have included a Chief Diversity Officer (CDO) in their C-suites and amplified anti-bias training. Still, 11% of those who identify as females reported they experienced unequal treatment compared to 10% of males. On racial lines, 15% of people of color (African, Black, African-American, and Afro-Caribbean) reported discriminatory treatment in the workplace. That percentage was lower among Asians and Whites/Caucasians at 7% and 8%, respectively.
6) High trust leads to high employee loyalty
The COVID-19 pandemic has upended how people work. Many employees started working remotely while others had shorter but highly productive working hours. Such shifts in work schedules have increased their awareness of how their companies should treat them. In fact, many people have resigned from their previous jobs, citing burnouts, mental health, safety, demand for more flexibility, work-life balance, and more inclusivity as reasons for leaving their jobs.
Companies built on trust have low employee turnovers because workers feel more empowered in their respective positions, regardless of where they work. When an organization promises and practically demonstrates its commitment to diversity, equity, and inclusion, employees nurture a sense of safety and belonging.
7) The pandemic influenced widespread unethical behavior
LRN’s study found a paradoxical perception of ethical cultures as influenced by the coronavirus pandemic. During its peak, frontline healthcare workers were hailed and appreciated as the "Achilles Heel" of the global economy. The case is different across other industries and job positions. Employees in administrative offices, skilled manual workers, warehouse specialists, factory laborers, and individual contributors awarded their organization the lowest scores across all metrics of culture performance.
This Pandemic Paradox has made various news headlines. In mid-2020, Amazon came under fire after its warehouse employees took to the streets to air their dissatisfaction with the working conditions on the company. As expected, there was a disconnection in the perception of culture within the company's ranks. Top Amazon executives emphasized that it has taken measures to ensure workplace safety, yet frontline staff may report otherwise.
The key takeaway
The findings represent a strong need for companies to promote strong ethical cultures lest they lose in the competitive, stakeholder-led business environment. The LRN Benchmark for Ethical Culture makes a compelling case that organizations must focus more on culture to ensure high ethical performance and business performance. It's not enough to have written ethical policies. Organizations need to create powerful Culture Catalysts to ensure that those policies are brought to life as employees interact with each other, whether it's an executive and mid-level manager or a frontline worker and a C-suite officer.
Download a copy of the report to get full insights into company culture and its impact on ethical and business performances.