1. © 2008-2013 V. Scott Killingsworth All Rights Reserved. 1 Modeling the Message: Driving Compliance Results through Ethical Leadership, Culture and Trust Scott Killingsworth ACE Best Practices Workshop October 24, 2013

2. © 2008-2013 V. Scott Killingsworth All Rights Reserved. 2 If people are good only because they fear punishment, and hope for reward, then we are a sorry lot indeed. — Albert Einstein Culture, more than rule books, determines how an organization behaves. — Warren Buffett

3. © 2008-2013 V. Scott Killingsworth All Rights Reserved. 3 Agenda › Command and Control Compliance Model › …and its limitations › Values-Based Model › Pioneering Studies on Comparative Effectiveness › Legitimacy: What Gives Your Rules Moral Authority? › Group Dynamics, Commitment and Framing › How Culture Operates, and What it Can Do › Leadership’s Roles in a Healthy Culture › Compliance and Ethics Program Opportunities

4. © 2008-2013 V. Scott Killingsworth All Rights Reserved. 4 Command and Control Compliance Model › Aims to control or influence employee behavior mainly through negative and positive incentives › Based on the “rational choice theory” of classical economics: › We compare Reward for Misconduct to Risk › Highest number wins – Risk or Reward › Heavy reliance on specific rules, plus monitoring, detection, punishment and deterrence to increase perception of risk Severity of Punishment Probability of Detection = Estimated Risk

5. © 2008-2013 V. Scott Killingsworth All Rights Reserved. 5 Command and Control Limitations Even if we accept the rational-choice assumption, Command and Control has built-in limits: › Only two levers for improving results: › Very costly to increase perceived risk via better detection (“Cop on every corner” method) › If punishment is too harsh, reporting of violations declines and enforcement gets spotty › Self-interested rational choices for individuals aren’t always good for the organization › A person’s situation can skew the equation › Risk/Reward framing puts everything up for grabs – what’s your price? – but right and wrong should be non-negotiable

6. © 2008-2013 V. Scott Killingsworth All Rights Reserved. 6 Command and Control Limitations › Rationality is Overrated: In actual human beings, well-known cognitive biases distort risk/reward decision-making processes (See, e.g. Predictably Irrational, Nudge, Thinking Fast and Slow, The (Honest) Truth about Dishonesty, Freakonomics) › We consistently over-value definite, near-term events – such as the rewards of rule-breaking › We under-value uncertain, future events, even if catastrophic – such as the risk of getting caught Source: Messick and Bazerman, “Ethical Leadership and the Psychology of Decisionmaking”

7. © 2008-2013 V. Scott Killingsworth All Rights Reserved. 7 Command and Control Limitations › More cognitive biases that distort risk/reward and ethical judgments: › Self-Serving Bias and Conflicts of Interest › Overconfidence, Confirmation Bias and Motivated Reasoning › Authority Bias and Conformity Pressures › Remember the Milgram and Asch experiments? Sources: Messick and Bazerman, “Ethical Leadership and the Psychology of Decisionmaking”;; Kim, The Banality of Fraud: Re-situating the Inside Counsel as Gatekeeper; Milgram, Behavioral Study of Obedience; Asch, S. E. Effects of Group Pressure upon the Modification and Distortion of Judgment

8. © 2008-2013 V. Scott Killingsworth All Rights Reserved. 8 Command and Control Limitations › Hidden costs of strong Command-and-Control Focus: › Mistrust of employees signaled through multiple channels › Reverse Pygmalion effect: projection of negative expectations may be self-fulfilling › Adversarial relationship with employees – resentment and backlash misconduct (Reactivity effect) › Risk/Reward framing can crowd out ethical thinking › Deterrence message is one of pursuing self-interest (avoiding punishment) rather than doing the right thing › Bottom Line: Command-and-Control alone is, at best, an inefficient (and therefore expensive) way to influence behavior Sources: Treviño, Weaver, et. al; Stansbury and Barry, Ethics Programs and the Paradox of Control; Ayers and Braithwaite, Responsive Regulation: Transcending the Deregulation Debate

9. © 2008-2013 V. Scott Killingsworth All Rights Reserved. 9 Values-Based Approach – The Paradigm Shift › Traditional Command and Control Paradigm: › Prevent “bad” employees (5%? 20%?) from breaking rules › Forcibly impose Company standards and values upon recalcitrant employees › Business and rules-based framing › Values-based, Self-Regulatory Paradigm › Harness the positive values of good people (80%? 95%?) › Make sure Company is seen as measuring up to employee’s values › Ethical and social framing › To win loyalty – and voluntary adherence to rules – show that the company deserves it – Walk the talk

10. © 2008-2013 V. Scott Killingsworth All Rights Reserved. 10 Values-Based Approach: Motivating Compliance via Ethical Culture › Ethical Culture = Engaging Employee Values so that Employees Identify Positively with the Organization and Act Accordingly › “Your values are what you do when no one is looking” › When employee aligns with Company values, motivation is intrinsic, compliance is voluntary and doesn’t depend on monitoring, detection and fear of punishment › Tyler’s Studies of Workplace Compliance: › Value-based factors (legitimacy and value congruence) explained over 80% of variance in compliance behaviors › Punishment and reward systems explained less than 20% Source: Tyler, Deinhart, & Thomas, “The Ethical Commitment to Compliance: Building Value-Based Cultures”

11. © 2008-2013 V. Scott Killingsworth All Rights Reserved. 11 Culture and Compliance Cultural Markers › Ethical leadership (Executive and Supervisory levels) › Fair treatment of employees › Rewarding ethical behavior › Punishing misconduct › Open discussion of ethical issues › Ethical issues considered in decisionmaking › Employee and Community Focus Compliance Goals › Reducing unethical conduct › Reporting misconduct › Increasing awareness of ethical issues › Increasing advice-seeking on ethical issues › Comfort delivering bad news › Better ethical decision- making › Increasing employee commitment to employer “What Works and What Hurts”: Very Large-Scale study of Effect of Cultural Factors on Compliance Outcomes 1.Values-Based Compliance Programs produce better results than those with a Command-and-Control, deterrence emphasis. 2. Source: Treviño, Weaver, Gibson and Toffler, “Managing Ethics and Legal Compliance: What Works and What Hurts, Cal. Mgmt. Rev., Vol. 41, NO. 2, 131 (1999)

12. © 2008-2013 V. Scott Killingsworth All Rights Reserved. 12 Values-Based Approach -- Legitimacy and Culture › What Drives Voluntary Adherence to Rules? (Tyler) › Company’s values and policies are perceived as measuring up to employee’s moral values › Company is perceived as a legitimate source of authority: employee believes it deserves to have its rules followed › These factors are more influential than likelihood of detection or fear of punishment (80/20) › So, how can we promote these perceptions? › Measuring up on values: “When managers say ‘ethics,’ employees hear ‘fairness.’” Sources: Tyler, Deinhart, & Thomas; Treviño, Weaver, Gibson & Toffler PSYCHO- PATHS SAINTS TARGET POPULATION

13. © 2008-2013 V. Scott Killingsworth All Rights Reserved. 13 Values-Based Approach – Fairness, Legitimacy and Culture › Fairness Perceptions and Ethics Outcomes (Treviño and Weaver) › Measured effects of company’s perceived fairness to employees › Fairness strongly correlated with less observed unethical conduct and with more reporting of infractions › What Works/What Hurts: Fair treatment had the strongest correlation with employee commitment to the company and with comfort delivering bad news Source: Treviño and Weaver, “Employees’ Fairness Perceptions and Ethics-Related Outcomes in Organizations,” chapter in Managing Ethics in Business Organizations (2003)

14. © 2008-2013 V. Scott Killingsworth All Rights Reserved. 14 Values-Based Approach -- Legitimacy and Culture › Leading criteria for legitimacy of authority › Procedural fairness in decision-making › Quality of interpersonal treatment of employee › These factors are more influential than: › Fairness of actual decision outcomes › Whether outcomes are favorable to employee › Risk of punishment › Rewards of employment: salary and incentives Source: Tyler, Deinhart, & Thomas

15. © 2008-2013 V. Scott Killingsworth All Rights Reserved. 15 Values-Based Approach-- Legitimacy and Culture › What is Procedural Fairness? › Opportunity for input from affected persons › Understandable, articulated rules and processes › Consistency over time and across similar cases › Objectivity: Same rules for everybody › Communicate reasons for decisions › What Is Quality Interpersonal Treatment? › Respect employees’ rights: necessary but not sufficient › Courtesy and dignity – respect the person › Listen › Communicate reasons for decisions › Employee feels trusted Source: Tyler, Deinhart, & Thomas

16. © 2008-2013 V. Scott Killingsworth All Rights Reserved. 16 Values-Based Approach – Trust is the Glue › Managers at all levels must earn trust › Values → consistent, coherent, predictable behavior → trust › Actions speak louder than words (or Codes of Conduct) › “Mood in the Middle” as well as Tone at the Top › Treatment of employees is paramount › Interactions with third parties matter too › Social Media: untrustworthy to one → known by all › Four leadership drivers of ethical culture (CEB): › Honesty – truthfulness, promise-keeping › Respecting and trusting employees › Listening carefully to the opinions of others › Taking action on verified misconduct › All 4 relate to employee trust in management Source: Tyler, Deinhart, & Thomas

17. © 2008-2013 V. Scott Killingsworth All Rights Reserved. 17 Consistency is Crucial “It takes many good deeds to build a good reputation, and only one bad one to lose it” -Benjamin Franklin “Bad is Stronger than Good” -Review of General Psychology, Vol 5 No. 4 (December 2001) by Baumeister, Bratslavsky, Finkenauer and Vohs. “Quotations found on the Internet are not always accurate.” -Abraham Lincoln

18. © 2008-2013 V. Scott Killingsworth All Rights Reserved. 18 Culture and Misconduct – The Role of Trust Ethics Resource Center identified 5 “Negative Work Environment” factors: › Success is rewarded regardless whether achieved through questionable means › Mistrust of top management’s promises and commitments › Mistrust of supervisors’ promises and commitments › Dissatisfaction with information from top management › Dissatisfaction with information from supervisors › Strong correlation between these negative factors and workplace misconduct Number of Negative Workplace Factors Present Source: Ethics Research Center, 2007 Business Ethics Survey

19. © 2008-2013 V. Scott Killingsworth All Rights Reserved. 19 Group Dynamics, Commitment and Framing › People use groups to support and nourish our identities and our positive self-concepts › Identification with the group promotes commitment, engagement and cooperation › Fair and respectful treatment › Tells employees that they are important and valued › Promotes trust › Encourages identification, commitment, and cooperation with the group › Pride in the group also encourages identification Sources: Tyler and Blader, “The Group Engagement Model: Procedural Justice, Social Identity and Cooperative Behavior, Personality and Social Psychology Review, 7: 349 (2003); Ariely, “The Cost of Social Norms,” chapter in Predictably Irrational (2008).

20. © 2008-2013 V. Scott Killingsworth All Rights Reserved. 20 Group Dynamics, Commitment and Framing › Social/Group norms can govern behavior more effectively than market norms › Social norms = Culture › Market norms = Reward and Punishment › Social vs. market framing: People will do things for free, for social reasons, that they won’t do for money; and social penalties can trump economic ones › The power of social PLUS ethical framing: “Around here, we do what’s right.” Sources: Tyler and Blader, “The Group Engagement Model: Procedural Justice, Social Identity and Cooperative Behavior, Personality and Social Psychology Review, 7: 349 (2003); Ariely, “The Cost of Social Norms,” chapter in Predictably Irrational (2008).

21. © 2008-2013 V. Scott Killingsworth All Rights Reserved. Promoting Employee Commitment › Employee commitment (engagement) strongly linked to: › Management’s actions show character and integrity › Management welcomes those seeking advice about reporting policy violations › Clear guidelines for acceptable behavior › All 9 Ethical Culture measures in the What Works/What Hurts study Sources: McDowell, “The Hidden Bonus in ‘Doing the Right Thing; Treviño, Weaver, Gibson and Toffler

22. © 2008-2013 V. Scott Killingsworth All Rights Reserved. 22 Committed Employees Boost Compliance and Peformance › Benefits of Committed Workforce › Voluntary rule adherence › Less need for surveillance/monitoring › More likely to report misconduct, which means: › Less accommodating environment for rule-breakers – more “eyes on the street” › Significant increase in voluntary actions to benefit the organization › Oh, by the way, also: › Higher sales, profits, customer satisfaction and loyalty › Lower turnover Sources: Tyler, Dienhart, and Thomas; Ethics Resource Center, 2009 NBES, Supplemental Research Brief on Ethics and Employee Engagement; Harter et al, Well-Being in the Workplace and its Relationship to Business Outcomes

23. © 2008-2013 V. Scott Killingsworth All Rights Reserved. 23 Do We Notice a Pattern? DIMENSION Trevino and Weaver Cultural Factors that Drive Compliance Tyler Legitimacy and Voluntary Compliance Ethics Resource Center Favorable Perception of Management Corporate Executive Board – CELC Leadership Attributes that Drive Integrity Corporate Executive Board – CELC Leading indicators of Misconduct Leadership and Modeling Ethical leadership Employee trust of supervisor and management Modeling good behavior; keeping commitments HonestyCo-workers compromise values for power and control Interpersonal Treatment Fair treatment of employees – courtesy, respect, dignity Quality of interpersonal treatment – courtesy, respect, trust towards employee Respect and trust employees Lack of trust and respect from direct manager Justice, Accountability, Follow-Up on Misconduct Follow-up on reports of misconduct; rewarding ethical behavior; consistent treatment Procedural fairness; same rules for everybody; consistency Maintaining accountability among all employees across the business Taking action on verified unethical conduct Fear of retaliation; discomfort speaking up Communication Open discussion of ethical issues Listen; opportunity for input from affected persons; communicate reasons for decisions Good communications, including communications on ethics Listening carefully to the opinions of others Discomfort speaking up

24. © 2008-2013 V. Scott Killingsworth All Rights Reserved. 24 Building Culture RESULTS ACTIONS AND BEHAVIORS BELIEFS AND ATTITUDES EXPERIENCES MANAGEMENT’S WORDS (Code, policies, procedures, training…) Management’s Actions Co-Workers’ Actions LIFE

25. © 2008-2013 V. Scott Killingsworth All Rights Reserved. Effect of Ethical Culture 25 Source: Ethics Resource Center, 2011 National Business Ethics Survey Percentage of employees observing misconduct

26. © 2008-2013 V. Scott Killingsworth All Rights Reserved. Effects of Ethical Culture 26 Source: Corporate Executive Board, “Ethical Leadership” 2010 16.2 percentage point swing

27. © 2008-2013 V. Scott Killingsworth All Rights Reserved. 27 Leadership’s Role › Leaders at all levels must take ownership of organizational culture › Model the message through the broader company culture: › Treat employees with respect and conspicuous fairness › Keep your door and your mind open to employees › Engage and communicate – consistently and in both directions (listen!) › Transparency › About responses to misconduct › About reasons for decisions › Be the change you want to see; live up to employee values and they’ll internalize yours › Create a place where people are proud to work

28. © 2008-2013 V. Scott Killingsworth All Rights Reserved. 28 Program Opportunities › Senior Executive/Board Education on Compliance and Productivity Impact of Ethical Leadership, Values-Based Culture and Organizational Justice › Coordination with HR/Engagement initiatives › Cultural Assessment and targeted responses to areas of weakness › Company-wide weaknesses › “Pockets of Resistance” -- microcultures › Integration of values and compliance measurements into employment functions: › Hiring and onboarding › Evaluation, compensation, recognition, promotion › Managers especially › Separation (bad apple disposal and exit interviews)

29. © 2008-2013 V. Scott Killingsworth All Rights Reserved. 29 Program Opportunities › Senior Executive/Board “Tone at the Top” training › Evaluate employment decisionmaking processes (procedural fairness, consistency, transparency, etc.) › Ethical Decisionmaking Training › “Speaking up” Training › Management soft-skills training › Values communications through m ultiple channels › Storytelling (See, e.g. KathleenEdmond.com) › Real-life examples of good and bad decisions and their consequences

30. © 2008-2013 V. Scott Killingsworth All Rights Reserved. 30 Leverage Other Voices to Get the Message Across

31. © 2008-2013 V. Scott Killingsworth All Rights Reserved. 31 Bryan Cave LLP One Atlantic Center Fourteenth Floor 1201 West Peachtree Street, NW Atlanta, GA 30309 Tel. 404.572.6600 Fax. 404.572.6999 www.bryancave.com Scott Killingsworth scott.killingsworth@bryancave.com 404.572.6702 Questions and Discussion