31.01.2020

Closing the Integrity Gap: How to Build a Healthy Culture

by Ralf Schneider

Integrity: the alignment of "think, say, do" - living your values.

Building a Culture of Integrity has become a key concern for boards across most industries and jurisdictions. Much effort has gone into improving good conduct and fostering the right behaviours, particularly across regulated industries, such as banking. However, in reality the integrity gap is far from being closed. The numbers are staggering. Banks alone have paid over USD 300 billion in fines for misconduct over the past decade - and counting. The phenomenon is not limited to financial services. Reportedly, VW has paid out around USD 50 billion in fines and compensation in the aftermath of ‘Dieselgate’; others have followed. Violation of anti-bribery rules, tax regimes, anti-trust laws and environmental standards, to name but a few failings, keep making the headlines, impact people, shrink bottom lines and destroy long-term brand value.

Sophisticated conduct and compliance frameworks that are meant to safeguard integrity standards, have delivered mixed results. As a consequence, boards are asking about the effectiveness of the measures that have been taken. The list of conduct failings and material violations of internal policies and external regulations continues to be worrying and trust in business leaders is at an all time low. 

Even a cursory review of material conduct failings in Financial Services over the past decade shows that the integrity gap is far from being closed; quite the contrary.

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Image 1 - Examples of Conduct Failure post the Financial Crisis

These incidents and numbers are a stark contrast to the fact that integrity features as a top ranking value in most corporate value statements. Many companies struggle to ensure that decisions and behaviours are aligned with codes of conduct, values and compliance rules. Some regulators and boards have come to recognise that the key to addressing this gap/risk is culture and leadership - not more rules, processes and governance.

Building a culture of integrity pays off. It starts with changing the mind-set and behaviour at the leadership level and with understanding which elements of the current culture are producing undesirable or sub-optimal outcomes. These can be identified and measured using methodologies grounded in behavioural economics, psychological research and robust tools to assess behaviour-based culture indicators which drive decision-making processes, “speak up”, and compliance. 

Interestingly, and contra to popular belief, it is not usually “bad “people who are to blame. As empirical research in Behavioural Economics has shown, the dominant force that drives bad behaviour is the cultural environment within which people make choices and take decisions, specifically when faced with making judgement calls in complex areas and grey zones. From working with many executives, we know that awareness of rules is not enough to achieve integrity-based decision-making. It is the willingness of people to protect a shared cultural value/standard that makes the difference.

The ability to create a healthy culture is key to creating and sustaining high integrity standards. This can be achieved if boards prioritise and maintain a focus on culture. There are 5 questions that we encourage boards, CEO’s and senior leaders to ask themselves if they want to address the culture gap and drive the required culture shift. These questions outline a robust 5 step approach to creating the mind-set and behaviour change that is needed to achieve the desired cultural outcomes (e.g. psychological safety which leads to integrity-based decision-making). Each question probes more deeply into the causes of the current culture and, in turn, each step triggers a specific set of tailored actions based on data. Together they support the design and implementation of a company-specific roadmap for closing the identified cultural integrity gap, thereby reducing operational risk.

The Integrity Gap: the difference between an organisation’s values, brand promise, code of conduct and what actually happens in day-to-day behaviour and decision-making.

5 STEPS TO CLOSING THE INTEGRITY GAP 

The journey to closing the integrity gap starts with a fresh look at the culture you want.

5 STEPS TO CLOSING THE INTEGRITY GAP

Image 2 - 5 Steps to Closing the Integrity Gap

Step 1: What culture do we aspire to have?

Culture creates the environment that influences people’s behaviour when they are in role. It drives decision-making. Boards play a key role in defining the purpose, values and standards by which they want their organisation to operate and to which they want it to be held accountable by stakeholders. Most companies already have a clear purpose, set of values or even a full code of conduct, outlining standards for good conduct. However, many lack a clear definition of the aspired culture in terms of mind-set and behaviours, that can be measured. The first step, therefore, is to define the aspired culture and desired outcomes, which can be done using a robust and scalable process and tool that is capable of involving both senior leaders and employees at all levels. The outcome is a clear and measurable definition of the desired behaviours and mind-set. 

It is important to know what behaviours are most likely to produce the right outcomes. Take health and safety for example; outcomes have been found to be more positive in a culture of care than in a culture of compliance. A company that struggled with safety challenges realised that more strict rules, handbooks and punitive reinforcement were not improving safety in a nuclear plant. Instead it was the care and quality of relationships that employees developed during handovers between shifts that reduced incidents. 

Step 2: What culture do we have today?

Once the target culture is clear, we need to understand the current reality. Today’s culture has been shaped by leaders of the past as well as those of the present. There is lag of past decisions and behaviours which casts a shadow over the present; e.g. values, investment decisions and hiring decisions. The current behavioural reality can be measured using a robust quantitative approach and behavioural norms. Behavioural gaps can be identified at the level of specific behaviours and mapped against the desired behaviours. Step 2 should also include the impact assessment of current organisational processes and systems (such as reward and recognition) on behaviours and cultural outcomes.

Consider an organisation that has been largely driven by top down hierarchical leadership, strict legal and operational standards and processes with strong central control. While in the past these traits helped to build the company’s strong core business, it grew a culture of risk avoidance, compliance and dependency on hierarchy and control functions. However, the need to react to disruption, disintermediation and digitisation meant the business could only survive and continue its impressive growth trajectory if the culture became more innovative and entrepreneurial. The business strategy needed to both protect the integrity of the old model and deliver on the new growth mind-set. Robust data enabled the company to understand what behaviours needed to change without letting go of its robust processes. The trick was to frame and leverage solid risk procedures and capabilities as a base to become more daring, innovative and client-focused in specific areas.

To achieve this, robust data was used to analyse and understand the current operating culture and make informed choices about the behaviours that needed to be changed. In this case, the company needed to reconsider its approach to the use of hierarchical power and change its traditionally hierarchical model of leadership. Understanding the current behaviours and relevant levers for change is the foundation for designing an effective cultural change programme.

Step 3: Where are the most significant risks?

Behavioural risk is an operational risk which can be measured and managed. But not all risks or organisational units are created equal, specifically with regard to the materiality and urgency of their behavioural risk profiles. It is therefore prudent to understand the current make-up of behavioural risk across a given business. Understanding the behavioural risk profile helps to prioritise integrity risk gaps, allocate change resources effectively and focus change efforts on the highest risk areas. Data driven assessments detect potential behaviour risk and “blind spots” and highlight the most significant risk/gaps in current behaviour against the desired culture and outcomes.

Step 4: How do we create the desired culture shift?

Reliable and scalable assessment and change methodology bring clarity to the key levers that will create the required culture shift and the actions that need to occur. The prior steps and questions provide a solid and reliable base from which to define, deploy and measure a culture change programme that will include organisational structures, systems and processes as well as mind-set and behaviours. A multi-step culture change roadmap based on the priorities highlighted by the risk assessment can be put in place to address the most significant gaps.

Step 5: How will we know what we are doing is working?

To quote Peter Drucker, “what gets measured, gets managed”. Meaningful culture KPI’s need to be formulated and included in management dashboards so that the senior leadership teams and their board can measure the progress of behavioural change against conduct metrics. Repeat assessment of culture allows boards to monitor progress on their journey to building a healthy culture and demonstrate a clear and focused strategy to close the behavioural integrity gap over time.

WHERE TO START 

A healthy culture not only reduces conduct risk, it is at the centre of delivering better business performance. Culture starts at the top, and a culture shift needs to be owned by the leadership. In our experience this often begins by helping leaders understand the impact of their own behaviours and their individual “cultural footprint” on the organisation. If leaders understand how they can make adjustments to their personal leadership strategies to motivate and encourage people to behave in the right way, a culture of integrity can be rooted and sustained. From research and our work with corporate clients, we know how organisational environments and leadership behaviours can be shaped to create a healthy culture and encourage integrity in decision-making at all levels.

#culture #integrity #betterbusiness #leadership #compliance #riskmanagement #changemanagement #decisionmaking

 

 

 

About the Author:

About the Author: Ralf Schneider is the Founder and Managing Partner of Better Business. With an academic background in business, he has spent more than two decades in leadership roles as Partner and Senior Executive in the global professional and financial services industries. As an executive, he has led large scale culture and leadership initiatives transforming global industry brands. As a thought leader he has been contributing to the development and practice of Responsible Leadership as a new model of leadership for Next Generation business. He has spearheaded award-winning talent and leadership initiatives linked to building leading global industry brands. He works with C-suite executives and their teams to shape and implement strategy and culture transformation. As the Chairman of the International Consortium for Executive Development and Research (ICEDR) and a Founding Board Member of the European Corporate Learning Forum Ralf takes an active interest in the development next generation talent and leadership practices. He is a frequent contributor at international conferences, publications and corporate leadership events in Europe, Asia and the US with a focus on culture and leadership transformation.

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