Finance leaders' role in preventing toxic corporate culturesRe-route companies away from misconduct and towards ethically sound financial success.
A toxic corporate culture is not always easy to spot from the outside. A company can churn out record profits and espouse ethical business practices to the public while a very different reality plays out inside. And when companies or leaders get caught committing wrongdoing — whether it's fraud, harassment, or other criminal behaviour — it often becomes clear that many within the organisation knew what was going on.
"In order to identify what an open secret is, you first have to look at what's right and wrong," said Jason Hamilton, ACMA, CGMA, director at First River Capital, an advisory firm based in South Africa and the UK. "Right and wrong doesn't always mean what's legal or illegal — it's a question of what fits into an organisation's culture and code of ethics."
Organisational cultures with toxic elements are more likely to enable and sustain harmful corporate behaviour, according to Benjamin van Rooij, professor of Law and Society at the University of Amsterdam. He outlined several elements that can contribute to creating a toxic culture in a 2018 paper he co-authored titled "Toxic Corporate Culture: Assessing Organizational Processes of Deviancy". Those elements include overly ambitious goals; a culture of silence; limited oversight; normalisation of deviancy; blame shifting; deflection or rationalisation of rule breaking; and corporate cognitive dissonance.
Those seven elements can feed into one another, van Rooij said. Unrealistic expectations can lead to the normalisation of deviancy, and a culture of silence offers limited oversight and ample opportunity for corporate cognitive dissonance. Once this cycle of toxicity gets going, it's very difficult to break, he added. For that reason, it's much easier to prevent your company culture from becoming toxic in the first place. If you're hoping to lead your team away from the perils of a toxic corporate culture, try implementing these elements of best practice recommended by experts.
Don't set impossible goals
Ambitious goals are not necessarily a bad thing, but if your employees are striving for the impossible, there's an increased risk they will resort to wrongdoing in order to meet expectations.
"People develop negative emotions because of that strain, and we know from criminology the way to deal with negative emotions is to start breaking rules," van Rooij said.
US-based bank Wells Fargo provides a well-known example. Up until 2016, the bank had a sales target of eight products per customer, when the average rate for banks was two, according to a National Public Radio investigation. Sales employees were under immense pressure to meet this nearly impossible target, and some resorted to creating fraudulent customer accounts in order to reach it. Wells Fargo agreed to a $3 billion settlement with the US Department of Justice and Securities and Exchange Commission to resolve the matter.
To avoid a similar fate, leaders should take a hard look at their expectations and adjust them to fit reality, van Rooij said. And if they're unsure whether goals are realistic, they should consider speaking with employees at all levels and sending out an anonymous survey to gather genuine feedback.
Foster a culture of candour
A steady flow of two-way communication is one of the best deterrents to unethical practices, according to Hamilton. When people at all levels of the organisation feel they can provide leadership with feedback about workplace practices and company goals, there's less chance of wrongdoing going unnoticed or unaddressed.
"If there isn't a culture within the organisation where all information flows up and ends up at board level, only positive information will actually get to the board," Hamilton said.
A culture of candour requires mechanisms for facilitating that flow of information and positive reinforcement when someone has the courage to voice concerns, Hamilton said. Organisations need to make sure there are avenues for feedback and ways to report wrongdoing internally so employees don't have to resort to leaking information to authorities or the press.
Tom Devine, the Washington, D.C.-based legal director of the Government Accountability Project, argues that it's simply bad business to silence the messenger.
"Whistle-blowers play a unique and invaluable role as kind of a human fail-safe when the flow of information through normal channels breaks down," he said. "The flow of information in any organisation is like blood in a human body — if it's not flowing, the organisation is going to be forced to make uninformed decisions."
In addition to installing mechanisms for feedback and communication, you need to make sure your people feel psychologically safe enough to speak up, Hamilton said. Employees need to know their jobs won't be jeopardised if they voice concerns, and those concerns need to be taken seriously by management. Psychological safety extends to the way leadership reacts to bad news and the dynamics between co-workers. Management needs to practise a measured response to mistakes and miscalculations, and tribalism needs to be avoided at all costs.
"Having a trusted environment is crucial," Hamilton said. "Saying you have one isn't the same as actually having one. If you're only receiving good information, that's proof that you haven't implemented effective communication mechanisms."
Eliminate opportunities for deviance
Poor communication can provide opportunities for rule breaking, but so can giving individuals massive decision-making power or having very limited oversight of what happens at lower levels of the organisation.
"When leaders are absent and they don't know what [people lower in the management hierarchy] are doing, or when leaders act on their own and there is no oversight from below, there can be all kinds of opportunities to break rules," van Rooij said.
Hamilton said organisations should have well-documented policies and processes in place, including clear methods for speaking up and reporting problems. Every role and business function should have oversight; look at the power dynamics across the organisation and make sure things are balanced. If one or two people seem to hold an overwhelming amount of control over operations, consider redistributing some of that power or having the board operate as a check on company executives.
Effective systems and processes are the backbone of an ethical organisation, but leadership also needs to be concerned with how business is being done across the company, and that may require it to connect with employees. Leaders should make a point of talking to employees at all levels and, rather than simply driving targets from above, understand how employees are doing their work and ask them what kind of support they need.
"If you're incentivising someone purely on sales, they're not going to care about how they achieve that," Hamilton said.
And if you find out rules have been broken, van Rooij argued there absolutely must be a response to that. Otherwise, there is a risk that deviance will be normalised within the organisation. When people notice that their colleagues, managers, or leaders are cutting corners and breaking rules, but they don't see any response within the organisation, they might assume that it's simply how the business operates, he said.
"Then more people start to do it, and it becomes the normal way of doing things," van Rooij said.
Take responsibility for mistakes
When leaders shift the blame or argue their actions weren't unethical or fraudulent in the first place, they are tacitly condoning a culture of wrongdoing.
"The people who are responsible for it, or those at the top, don't see it as their responsibility, and they shift blame lower in the organisation," van Rooij said. "This happens in compliance management itself, but it can also happen once the scandal gets out and they get outside pressure."
This is seen when executives of companies involved in wrongdoing testify before regulators and defend their actions by focusing on individual misconduct of employees rather than acknowledging that the overall structure and culture of the company played a large role.
Of course, organisations or leaders implicated in wrongdoing often shift the blame or try to justify their actions to avoid liability. But to create a culture of accountability, van Rooij said, leaders need to express and initiate real support for honesty and transparency, as well as to emphasise long-term over short-term goals.
Leaders can start to build a culture of accountability by publicly taking responsibility for mistakes when they make them and acknowledging any role company culture might play in creating an environment that condones wrongdoing.
Install a strong board that questions leadership
A company's board of directors is in a good position to steer leadership away from unethical practices, but they have to be willing to question even good results.
"Even though you have what looks like a high-performing executive, if there are concerns around their ethics and how they get their results, a good board should be investigating that and not just close their eyes and say, 'This person is delivering, so we'll just pretend nothing happened because they're doing a good job,'" said Cecilia Locati, FCMA, CGMA, the founder of consulting company Internal Control Toolbox.
When the board of directors is strong and interested in understanding what's happening in the company, that by itself decreases the likelihood that large-scale fraud will occur, she added. But perhaps too often, board members are overly familiar with one another or, in some cases, sitting on too many boards and less capable of getting heavily involved.
"Times have changed, and the board should be much more involved in engaging with management on strategy," Hamilton said. "They have to get involved and understand the business in much more detail because the onus is on them to hold leadership accountable."
Leaders who are looking for ways to strengthen company ethics can also use the board to ensure effective checks and balances. For example, Locati worked with a company in the past whose CFO decided it was a good idea to clarify who approved his expenses. At the time, the senior executives had no one approving their expenses, so he figured the CEO should approve his, and the board should approve the CEO's expenses. He then wrote up the policy and promoted it to the board.
"That's not something that every CFO would do, I can assure you," Locati said.
Locati explained that the CFO understood there had to be some rules for the company to function properly, and for fraud to be prevented, and that these rules do not apply to the specific individual, but to the position they hold.
"The day that he's not there anymore, there will be another CFO, and there will need to be controls on that CFO," she said.
Eliminate corporate cognitive dissonance
Corporate cognitive dissonance is when the "tone at the top", or what leaders say, is completely different from what people are seeing within the organisation on a daily basis.
Some might argue that all you need to do is set the right tone at the top, but if leadership is always saying things that are light years away from what is actually happening at the bottom, then at some point employees are not going to believe what they say anymore, van Rooij said.
In other words, your organisational leadership can espouse all the right things and your company can have a mission statement that claims to look out for all stakeholders, but if the day-to-day actions of individuals throughout the organisation contradict those values, your people will likely ignore what is said and follow what is actually done.
Leaders can start to combat corporate cognitive dissonance by walking the talk and being the first to follow company policies.
Locati said that same CFO she worked with on approving expenses was also very good at setting a positive example for the entire organisation through his actions and not just his words. At one point, when the company was trying to cut costs, he decided it was a good move for everyone to start travelling economy instead of business class. And when he said everyone, he included himself and the other C-suite executives.
"He was willing to have clear rules in place, and not only clear rules for other people, but also clear rules for him and the CEO," Locati said. "He was the first one following the rules."
International Code of Ethics for Professional Accountants
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AICPA | CIMA
- "Empowering a Culture of Speaking Up", FM magazine, March 2021
- "Steps to Ethical Leadership", FM magazine, April 2020
- CIMA Training and Development: "Embedding Ethical Values: A Guide for CIMA Partners"
- CIMA research: "Keeping Business Clean: A CGMA Guide to Countering Fraud and Corruption"
- CIMA ethics checklist
Hannah Pitstick is a freelance writer based in the US. To comment on this article or to suggest an idea for another article, contact Drew Adamek, an FM magazine senior editor, at Andrew.Adamek@aicpa-cima.com.