At Principia, we help leaders of complex organizations to respond effectively when an ethics crisis hits. We do this by enabling leaders to rapidly diagnose the root causes of ethical failure, remediate them, and drive cultural renewal. In the following article, David Rodin, Founder of Principia, reveals five crucial insights into the ways leaders can navigate and manage ethical crises as they unfold.

What is 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 to Covid protocol breaches and was convicted of laundering money for a Bulgarian drug gang. Over one tumultuous weekend, the 167-year-old bank was forced into a humiliating rescue by its rival, UBS. Despite this, Credit Suisse remained well-capitalized and maintained secure credit until the very end. This was not a traditional liquidity or solvency crisis. It was a crisis of trust in the bank’s underlying culture.

An ethics crisis occurs when misconduct threatens an organization’s stability or very existence by eroding trust. The context can vary from fraud, collusion, price-fixing, cheating, safety breaches, environmental damage, bullying, and racism, to sexual misconduct. The common thread in these crises is the failure of leadership to prevent instances of misconduct from escalating into a broader trust issue. Effective management of a crisis involves creating circuit breakers in this cycle by demonstrating a path to a stronger ethical culture.

 

Effectively responding to an ethics crisis: five key insights

1. 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 “the normalization of deviance”. Not unlike the proverbial boiling frog it is difficult to identify these subtle changes. Often behavioural standards change more broadly within a sector – as with banking before 2008 – making change even harder to spot by insiders.

This means that developing a deliberate approach to identifying early warning signs of ethical risk is essential.  Many organizations build ethical culture questions into their engagement surveys, or run an independent ethical culture assessment at regular intervals. This enables leaders to baseline and benchmark the key drivers ethical culture and identify risk.  If your organization has experienced a near-miss ethics incident, or a peer organization has experienced a significant ethics crisis, this is an indicator to look more closely at ethical culture.

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

Ethical misconduct can damage trust, which is crucial for an organization’s functioning and survival. Therefore, it’s critical to demonstrate a proactive stance when addressing an ethics crisis. Delayed or half-hearted responses, as demonstrated by Credit Suisse, can exacerbate the issue. Effective crisis response involves diagnosing the cause, actively engaging in remediation, and taking longer term action to renew the culture. This work should be led by the CEO and leadership, with substantial support from the Chair. If senior leadership is implicated in the misconduct, board members should lead the process.

An important principle is to base responses on an evidence-based understanding of the root causes of failure. While swift action is vital, acting without understanding can be ineffective at best and damaging at worst.

Additionally, employees often harbour skepticism about the possibility of change, particularly whether powerful figures will be held accountable. Collaborating with external partners for an independent assessment can be highly beneficial in addressing this skepticism. Taking decisive action to gain an external diagnostic bolsters the integrity and credibility of any change initiative.

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

In companies dealing with an ethics crisis, leaders often have a gut read on the cause. Commonly perceived causes include a few bad apples; inadequate compliance oversight; issues in peripheral geographies or functions; and misaligned incentives. But these simple explanations are almost always wrong – or at best incomplete.  More often ethics failures involve systemic causes, even in organizations with highly sophisticated compliance and risk functions.  

Moreover, we often find that senior leaders have a fundamentally different view of dynamics within the firm, to middle managers and more junior personnel. Challenging misleading ‘myths’, albeit difficult and uncomfortable, is vital for progress. A unbiased assessment of the drivers of behaviour is imperative to reach a shared and quantifiable understanding of the causes of the crisis.

4. 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 a baseline of rules and controls, supported by employees with the mindset to apply them responsibly and ethically.

Achieving this involves ensuring the ‘hardware’ of risk and compliance systems is supported and enhanced by the ‘software’ of culture, values, expectations, and employee skills. Empowering individuals and providing incentives, skills, and support often proves more effective and economical than increasing layers of control.

5. Quick actions create momentum, and shifting underlying dynamics creates enduring change.

In crises, quick, visible actions that demonstrate change are crucial. In an ethics crisis, initial actions often involve dismissing responsible individuals and closing or reorganizing underperforming functions.  While accountability is crucial, it should accompany deeper changes to replace problematic cultural dynamics with positive ones.

For example, misconduct is typically undertaken by a small group of individuals but observed by a much larger group. Yet observers often remain silent due to underlying dynamics, regardless of reporting mechanisms. For example, in one former client, we found that people did not trust or understand the appraisal system for promotions. This led them to form strong ‘patronage’ relationships with their managers, which they were hesitant to disrupt by reporting issues. 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 it 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 remediation and cultural renewal process.

Webinar: How to respond to an ethics crisis

Join David Rodin as he shares his insights on how to respond to an ethics crisis with Principia’s Client Engagement Director, Sabrina Bushe.