Why Corporate Culture Is So Maddening a Challenge

I don’t know that corporations will ever “solve” the predicament of building and maintaining an ethical corporate culture—but an excellent new report from the International Corporate Governance Network at least sheds more light on how intractable the problem is.

The report summarizes a recent roundtable the ICGN held with the Institute of Business Ethics and the Institute of Chartered Secretaries and Administrators. Who was there? Roughly 20 governance executives, mostly from large financial firms with extensive operations on both sides of the Atlantic, plus a few others from the pharmaceutical or manufacturing sectors. What did they try to do? Not define “culture” per se, but rather to identify the drivers of culture within a corporation—and particularly drivers of bad culture that push your business into the ditch.

The bad drivers this group identified are not surprising: corporate stress, too much focus on short-term financial performance, and tolerance of small breaches of rules that, over time, compound into a weak culture overall. Even if you are in a small company or outside highly regulated sectors like finance or pharmaceuticals, your head is probably nodding in agreement about those three causes of bad culture. (Mine did.) What worries me more is that these three forces underline the inherent contradictions we all gloss over when we talk about corporate compliance and building effective cultures—contradictions that companies and boards alone might not be able to resolve, ever.

Let’s take tolerance of small breaches as an example. In the ICGN report, one participant gave the example of senior executives using the corporate jet for personal use, but the board didn’t want to impose any discipline “because the individuals in question were working so hard.” Others at the roundtable talked about expense accounts slightly fudged or disclosures not completely made.

We don’t know the details behind these examples, but at a high level they point to the muddle of upholding ethical standards, allowing people to learn from mistakes, and accepting the reality that humans can be ethically rigorous for only so long before we need a break. This is the collision of lofty goals and human nature—which happens a lot in discussions of corporate behavior, because the very concept of “corporate” weeds out the natural inclinations of individual humans to be, well, human.

The truth is, we all stretch our expense reports from time to time. Usually we do it as a reward of some kind: putting a few expensive cocktails on the company tab after a hellish day of business travel, or treating a friend to dinner after closing a large sale, or some similar scenario. Those examples are very prosaic, I know, but they speak to a larger truth: we rationalize small ethics violations because: (a) they’re small; or (b) we “earned it” because we did some other especially dedicated task for the company’s benefit.

When you take that fact of human reality, and add it to the other well-known research that zero-tolerance policies tend to breed silent misconduct rather than good ethics, you’re left with a big problem. You get boards of large organizations looking for easy-to-implement tools to improve culture across large populations of workers, when none exist. No matter how you do it, improving ethical culture demands hard work—painstaking, incremental experiments in policy, reporting, discipline, and communication.

Stress Levels

The report also talked at length about “stress,” a catch-all for a bunch of problems: bad bosses, obsession over short-term results, and even poor pay. As the report diplomatically phrased it: “An autocratic chief executive was likely to be a cause of stress as was the emphasis on achieving demanding short term financial targets, especially when these were accompanied by a threat of sanctions if they were not met. In the latter case the market was seen as imposing stress on companies.”
Again, the diagnosis is accurate, but the current design of Corporate America doesn’t give boards many paths to a cure. Our regulatory system is predicated on disclosure of company performance—which is a fine way to drive economic activity through capital markets; it also leaves companies open to abuse from those who want to use short-term results against you. (Think of the disaster at JC Penney, where hedge funds forced the company to hire a disaster of a CEO who laid off thousands and nearly ruined the business. Imagine the culture there before investors forced a retreat and the board sacked the ill-fitted CEO.)

If a board truly wants to build a strong culture, then part of its duty will be to fend off that short-term thinking—to given employees, from the CEO down to the shop floor, more breath
ing room to try, fail, and then try again. That’s true for ethics training as much as it’s true for financial performance: a zealous insistence on success every time will simply lead people to lie about when they come up short.

I know that providing breathing space isn’t easy, since the board also has a duty to shareholders to preserve the value of the company. You could even say those two values of nurturing a culture, and preserving shareholder value, exist in tension with each other. (I often think they do.) It is a constant balancing act, and a hard one to achieve.

You could say the same of all problems of corporate culture, really: they are easy to describe in examples, and unfortunately the solution is constant, attentive, hard work.