How to respond to an ethics crisis


How to respond to an ethics crisis

In the end it took less than 72 hours for confidence in Credit Suisse to collapse. Years of ethics and risk control failures had fatally eroded the trust of clients, investors, and regulators.  The bank lost its CEO to a spying scandal, its chairman over Covid protocol breaches and was found guilty of laundering money for a Bulgarian drug gang.  In one chaotic weekend, the 167-year-old bank was forced into a humiliating rescue by its rival UBS.   Yet Credit Suisse remained well-capitalised and had secure credit until the end.  This was not a traditional liquidity or solvency crisis. It was a crisis of trust in the underlying culture of the bank.

An ethics crisis occurs when misconduct or irresponsible action erodes trust to the point that it threatens the stability, or the very survival, of an organization.  The context can vary: fraud, mis-selling, collusion, price-fixing, cheating, abusive practices, safety breaches, environmental damage, bullying, racist behaviour, sexual misconduct…the list is as varied as is the catalogue of human vices. But the common denominator of these crises is that leadership is not able to prevent individual acts of misconduct from snowballing into a broader loss of trust.  Effective management of a crisis involves creating circuit breakers in this vicious cycle by demonstrating a path to a stronger ethical culture.

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At Principia we have worked with some of the world’s largest organizations to respond and rebuild after ethical crises.  Here are five key lessons we have learned.

Ethics crises build slowly but erupt explosively – early warning is essential.

When a crisis hits the headlines, it often causes shock and surprise. But almost all crises build over years, through a slow erosion of standards and weakening of guardrails. Social scientists call this process “the normalization of deviance”, and like the proverbial boiling frog it can be extremely difficult to identify from the inside.  Often standards of behaviour change more broadly within a whole industry or sector – as for example it did in the banking sector before 2008 – making the slippage even harder to spot by insiders. 

This means that developing a conscious approach to early warning is essential.  Many organizations are building ethical culture questions into their engagement survey cycle, or running a dedicated ethical culture assessment processes at regular intervals to benchmark key elements of ethical culture and identify changes that could signify risk.  If your organization has experienced a ‘near-miss’ ethics incident, or if a peer organization has experienced a significant ethics crisis, this is a good signal that it is a good time to look more closely at ethical culture.

To get ahead of a crisis, treat ethics with the seriousness it deserves.

Ethical misconduct damages trust, and trust is fundamental to the functioning and survival of the organization.  It is vital to show seriousness of intent to get ahead of an ethics crisis.  The worst reaction is to take piecemeal action, minimise incidents, or to move slowly or reluctantly to address concerns – a key mistake made by Credit Suisse.  Effective crisis management means moving quickly and have remedial work led by key leaders, ideally by the CEO with close support and collaboration with the Chair.  If the issues implicate senior leadership, then remedial work should always be delegated to relevant board members.

A second principle is to ensure that any response is based on evidence-based understanding of root causes. While speed is critical, taking action without a full understanding of underlying causes can be ineffective at best, and damaging at worst.  

There is often deep-seated scepticism from employees about whether anything will change and especially whether powerful figures will be held to account. Working with external partners to provide an independent ‘outside in’ assessment can be invaluable in confronting this scepticism.  It helps to ensure that the right actions are taken in the right parts of the organization and ensures the integrity and trustworthiness of the recommended course of action. 

Everyone will know what caused the crisis; everyone will be wrong.

When we work with companies that have had a major ethics crisis, almost everyone has a strong intuitive sense for what caused things to go wrong: a few bad apples; insufficient compliance oversight; trouble located in peripheral geographies or functions; misaligned incentives. But these simple explanations are almost always wrong – or at best incomplete.  Most often ethics failures involve ‘systemic’ causes that cannot be put down to a few rogue actors– even in organizations with highly sophisticated compliance and risk functions.  They often originate from – or deeply involve – decisions taken at head office and core geographies, and bad incentives are most often not a sufficient explanation of bad behaviours.  Very often we find that senior leaders have a fundamentally different view of dynamics within the firm, to those experienced by middle managers and more junior personnel. Though it can be difficult and sometimes uncomfortable, it is crucial to challenge these powerful but misleading ‘myths’ to make real progress. 

Take a ‘whole systems’ approach.

The first response to ethics crises often focusses on strengthening compliance systems and controls.  However, such measures on their own are highly unlikely to create the conditions for consistent and responsible action. Over-reliance on prescriptive compliance systems may even be self-defeating. It adds complexity and cost to business processes, and it can erode the ability of your people to navigate ‘grey area’ issues by ‘crowding out’ the broader capacities and motivation for responsible ethical deliberation. The objective is to create the right baseline of rules and controls, supported by employees with the mindset to apply them responsibly and ethically.

This requires paying attention to how the ‘hardware’ of risk and compliance systems interacts with, and is reinforced by, the ‘software’ of culture, values, expectations, and employee capabilities. Very often, empowering people and providing the right incentives, skills, and support for responsible behaviour is more effective (and economical) than adding additional layers of control. 

To build this blend of hardware and software you must think carefully about how different functions across the organization work together.  Compliance and Risk have a critical role, but so too do HR, L&D, and most importantly leadership and frontline managers.  An effective ethics development program requires harmonizing these functions in a way that creates a combined effect greater than the sum of its parts.

Quick actions create momentum, shifting underlying dynamics create enduring change.

In any crisis it is important to rapidly take visible actions that show the direction of travel and demonstrate that change is real and possible. In an ethics crisis the starting point is often terminating responsible individuals and potentially shuttering programs or reorganizing poorly performing functions.  While demonstrating accountability is incredibly important, it must be followed by deeper changes that identify and disrupt problematic dynamics and replace them with positive cultural dynamics.

An example of this is the environment of ‘speak up’.  Misconduct is typically undertaken by a small group of individuals but observed by a much larger group. Why did the observers not say anything? Often this is driven by underlying dynamics that has little to do with the immediate context of whether there are reporting mechanisms or not. For example, in one former client, we found that people did not trust or understand the appraisal system for promotions, leading them to form strong ‘patronage’ relationships with their managers that they were reluctant to lose or disrupt by reporting problematic behaviour.  Only by addressing these underlying dynamics can real and durable progress be made.

Rebuilding trust is a long game that requires consistency, communication, and conviction. It requires sustained effort and can be all too easy to slip back into old habits. It is also essential to engage external stakeholders, including customers, investors, regulators, and civil society, in the rebuilding process.

Learn more as David Rodin and Sabrina Bushe explore this topic in more detail:

About the author

David Rodin is one of the world’s foremost authorities on ethics and organizational culture. His work has helped to transform the fields of organizational and military ethics, and he advises some of the world’s largest private and public organizations.

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