© 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

© 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

© 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

© 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

© 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

© 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”

© 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

© 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

© 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

© 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”

© 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)

© 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

© 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)

© 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

© 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

© 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

© 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

© 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

© 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).

© 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).

© 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

© 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

© 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

© 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

© 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

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

© 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

© 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)

© 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

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

© V. Scott Killingsworth All Rights Reserved. 31 Bryan Cave LLP One Atlantic Center Fourteenth Floor 1201 West Peachtree Street, NW Atlanta, GA Tel Fax Scott Killingsworth Questions and Discussion