Tales, Myths, Companies and Ethical Intelligence - Ethical Culture Series 1
And Justice for All… How Organizational Justice Affects Ethical Culture– Ethical Culture Series 2
Every company aims for their work environment to be ethical, healthy, and respectful. In order to achieve this goal, compliance programs are carefully planned, policies and procedures created, and countless training sessions are conducted to make sure compliance programs are internalized. However, most of the time all this hard work is not enough to prevent misconduct that can cause companies to pay enormous amounts in fines for breaches of compliance obligations under the law. This crucial problem raises one important question regarding compliance programs: What is the root cause of failure?
As Peter Drucker said: “culture eats strategy for breakfast.” Generally, despite planning every stage and ticking every box in your company’s compliance to-do list, the importance of one element often remains unnoticed: consistent enforcement to build an ethical culture. Even though a compliance program seems perfect on paper, when companies ignore the fact that human behavior shapes the success of the compliance program, things start to go wrong, which brings us to the broken windows theory.
In short, broken windows theory states that any visible signs of crime and civil disorder, such as broken windows or vandalism, create an environment that encourages further crime and disorder. The theory was developed in a study first conducted in 1969 by Philip Zimbardo, a psychologist from Stanford University, and was later introduced by social scientists James Q. Wilson & George L. Kelling in 1982.
Zimbardo tested social behavior in two different neighborhoods by parking cars with their hoods open on the street. In the neighborhood in which crime rates were high, vandals attacked the abandoned car within 10 minutes and removed the radiator and battery. The next day, everything valuable had been stolen from the vehicle. After that, the car's windows were smashed, and children started to use the vehicle as a playground.
However, at the crime-free neighborhood, the car stayed untouched for more than a week. Later, Zimbardo himself smashed the car intentionally, and soon after that other people started to vandalize the car. According to Zimbardo’s observations, those people were well-dressed, Caucasian, seemingly respectable individuals. Thus, we can conclude that anyone can commit a crime regardless of their racial, educational, or cultural background if encouraged by prior crime.
Wilson & Kelling stress this in their 1982 article by stating that “Social psychologists and police officers tend to agree that if a broken window in a building is left unrepaired, all the rest of the windows will soon be broken. This is as true in nice neighborhoods as in rundown ones. Window-breaking does not necessarily occur on a large scale because some areas are inhabited by determined window-breakers whereas others are populated by window-lovers; rather, one unrepaired broken window is a signal that no one cares, and so breaking more windows costs nothing.”
Therefore, monitoring and preventing these circumstances is suggested in order to help reduce crime, violence, and disorder and maintain a lawful atmosphere in which citizens can feel safe and strengthen their sense of justice.
Similarly, even if company values and rules have been clearly stated and communicated to employees, misconduct can still be seen in companies. The reason behind this is that companies often do not take action against small wrongdoings, until a little snowflake grows into a massive snowball and becomes too serious to handle.
For example, if your company strictly prohibits receiving gifts which could cause conflicts of interest, but you tolerate employees accepting small gifts such as game tickets or fancy dinners because you think it’s not that big of a deal, then as time goes by you might find yourself in a position in which your employees are involved in bribery and corruption.
Enforcing impactful policy/procedures and training in the first place is a significant part of preventing any damage from occurring, yet there are more things to be taken into consideration. As we discussed above, people tend to think that crime can be committed if no one cares or is in control. In order to protect your company operations from legal, financial, and reputational risks, conducting monitoring activities on a regular basis is crucially important. If any non-compliance with obligations is identified, it must be prevented immediately, regardless of its size or effect.
However, prevention alone will not have a significant impact. Employees must be informed that a company will take necessary action regarding cracks in its culture, even when they seem insignificant. At first, this may sound like intimidation but on the contrary, it can be a beautiful element of your company culture, similar to the Japanese tradition, Kintsugi.
Kintsugi is the ancient Japanese art of fixing broken pottery with gold, emphasizing the idea that by embracing flaws and imperfections, you can create a unique, stronger, and more beautiful piece of art arising from the cracks.  As the pottery is handed down the generations, heirs are reminded of the history and experiences of the family and live through the lessons of their ancestors. Just as with Kintsugi, companies should teach their employees by always correcting and sharing their mistakes. No mistake must remain unnoticed or unchallenged.
This is also important for organizational justice since employees tend to be more hesitant in reporting misconduct when they think a company does not enact its policy and procedures. When considered companies lose five percent of revenue a year to fraud, providing your employees with a trustworthy environment to speak up by showing them you don’t turn a blind eye to any type of misconduct is going to save your money and reputation.
Also, encouraging employees to do the right thing by managing their behavior will help you to structure an ethical culture within the company. There are several psychological methods that can achieve powerful behavioral change within a company, including “nudge theory” introduced by Richard Thaler, who was awarded the Nobel Memorial Prize in Economic Sciences in 2017.
Nudge theory is based on the fact that the majority of our decisions are the result of humans’ instinctive and unconscious way of thinking. Thus, the theory uses this to encourage certain behavior without restricting people’s freedom of choice.
For example, a behavioral insights team applied a social norms technique to increase tax payments in Guatemala. They sent letters to taxpayers from the Guatemalan Tax Authority stating that 64.5 percent of taxpayers that had already paid a tax. Benchmarking nudges people’s confidence to outperform others. As expected, at the end of the trial, tax payments increased greatly. When applied to employees, this method can support ethical behaviors within the company until they become embedded as the culture.
The experiments in broken windows theory and nudge theory show us that people follow the majority and social environment affects decision making. Compliance officers who would like to build a solid ethical culture can benefit from these social phycology experiments to affect decisions in a positive way. Because a well-equipped compliance professional would know that decisions lead to behaviors, behaviors lead to habits and habits lead to culture.
In order to achieve compliance happily ever after in your company, it should be accepted that enforcement is as important as planning and implementation. If ignored or forgotten, lack of enforcement can encourage employees to think that you don’t pay enough attention to take the necessary action on misconduct and this misunderstanding may drag your company into a very toxic area where people casually commit crime. The broken windows theory shows clearly that companies need to consistently apply their rules even in insignificant cases to prevent them turning into huge issues in time.