Published in, The Credit Union Times
By, Stuart R. Levine

A culture based on values and focused on ethical behavior protects reputation and brand.  As an individual, your name is your brand and a trusted brand provides the credibility needed to be effective in your organization.  For an organization, a trusted brand gives the credibility to be effective in the marketplace.  It gives staying power when reputations can be ruined overnight in our hyper-fast world of social networks.  Reputation is built on the beliefs and actions of its leaders and employees. Reputation is fragile, however, and it is difficult to resurrect it after a serious misstep. Leadership’s focus on organizational values will attract and retain talent with character and good independent judgment.  These qualities will help organizations succeed during this time of heightened scrutiny.

Many executives intuitively believe that they can achieve better financial returns by commitment to ethical values that establish and protect reputation. This intuition is confirmed by data from numerous studies including those by the Harvard Business School and The Economist Intelligence Unit, which show that the quality of an organization’s reputation is strongly correlated with financial performance.  Ethics pays and reputation is key.

The CEO, the board and senior management must ensure a culture of ethics that protects reputation.  McKinsey & Company provides a case study of what can happen when the actions of a few shake a firm’s reputation. The name of this global firm, with 1,400 partners and 18,500 employees, was tarnished after two partners were criminally convicted in securities related cases. The New York Times recent article, “In Scandal’s Wake, McKinsey Seeks Culture Shift”, reported how McKinsey’s CEO and its board implemented new rigorous policies to restore its reputation in the marketplace.

Dominic Barton, global managing director of McKinsey, was determined to change the culture of the firm as a result of these two convictions.  McKinsey had prided itself as having a culture based on values and trust, which included putting the clients’ interests above the firm’s and keeping confidences. Mr. Barton decided that the honor-driven, values-based system was not enough to protect McKinsey’s reputation after the arrest and guilty plea of one of their senior partners on insider trading charges in 2009 and 2010.  Adding to the crisis, a former partner was criminally charged in 2010 and convicted in 2011 (currently under appeal) for sharing confidential information from a board meeting.

The stringent changes, which went well beyond what other consulting firms required, included new policies about trading in the securities of any of the firm’s clients for both employees and household members.   Additionally, he mandated computerized educational training on sensitive subjects like investing, regardless of rank.  McKinsey’s reputation was deemed at stake, however, and the new policies were meant to show that the firm was serious about its ethical values. The consultants voted overwhelmingly in favor of adoption, and the Shareholders Council, effectively McKinsey’s board, approved the new investment policy.

McKinsey’s “alumni” network of former partners, who are well positioned to recommend the firm to clients, were extremely troubled by the reputational harm.  They supported Mr. Barton’s measures.

McKinsey’s very public effort to elevate the focus on ethics as central to its culture demonstrates the lengths that firms must go to repair reputation. An organization must be vigilant to protect reputation and avoid the need for difficult repair.  Employees at all levels should be trained on ethical behaviors and what ethical actions should look and feel like.  An organization’s ethical code should be based on organizational values, and ethics policies should be reviewed with independent counsel on an annual basis.  Importantly, the Board and the CEO must assure that values based ethical conduct is in the DNA of the culture.

Dan Ariely’s book, Predictably Irrational, provides interesting context around the subject of dishonesty and what can be done about it.   He found that internal honesty monitoring is active only on larger transgressions – like stealing a box of pens, rather than stealing a single pen, which did not seem to matter.  When a moral benchmark was provided that encouraged honesty, students were significantly more inclined to change their behaviors by thinking twice about their actions and whether they were ethical.  In an experiment conducted at MIT, those who signed an MIT honor code statement (that didn’t even exist), did not cheat, but 85% of those who didn’t review the honor code statement actually did cheat.   A corporate strategy of driving home values to an organization and keeping these values in front of people, truly matters.