How can we educate, monitor and begin to positively affect ethical behavior in business organizations? Publicly reporting failures, regulating actions and punishing violators may have an impact, but these actions follow ethical lapses. We need prevention, not treatment after failure.

The social sciences have accomplished this. Researchers in this field have identified risk factors that can predict behavioral problems and factors that protect against them. By monitoring the correlated measures, researchers can determine, for example, when juvenile delinquency will rise. We should be able to do the same for organizational ethics. A brief look into social science research offers a compelling example of how we can promote ethical behavior in business.


Social scientists at the Social Development Research Group at the University of Washington have developed the Social Development Strategy for positive youth development. SDRG's research shows a strong correlation between certain community, family, school, peer and individual conditions that increase or decrease the probability of juvenile delinquency.

SDRG contends that certain protective factors insulate and buffer teens from delinquency and promote positive development, health and success. In contrast, if a teen's community has certain elevated risk factors, an increased risk of juvenile delinquency has been shown. Gangs exploit these risk factors by bonding teens to their unhealthy beliefs and standards, thus forming a cycle of delinquency that is difficult to escape.

The Social Development Strategy shows that risk and protective factors correlate - but do not guarantee - negative or positive outcomes among teens.


The Social Development Strategy is a model businesses can relate to. Employees enter a business organization with their individual characteristics. Over time, company boards, managers, HR professionals and existing employees all work to bond the new employee to the organization. They are taught skills to do their work, offered opportunities to contribute in a meaningful way, and are recognized for their contributions. As they bond to the organization, they are typically infused with its beliefs and standards for behavior.

Consider the example of Enron: Top management created a goal for employees that was clear and healthy. Management indoctrinated employees with its beliefs and standards within the organization, community and business world. Staff joined the firm with individual characteristics and were given opportunities to succeed. They were given positive recognition by their families, community and peer groups. As a result, employees were highly bonded to the organization.

The trouble came when the goals became criminal. Just as gangs use the strong ties that teens form to their beliefs and standards to promote their illegal activities, what was once a highly positive, motivated, bonded business organization used its cohesiveness to facilitate months and years of unethical and criminal business practices.


What are the risk and protective factors for unethical behavior in business? If we use the examples of unethical professionals of the past as a guide, we can gather a set of conditions and behaviors that could be longitudinally tested to see if they correlate to unethical behavior in business.

For example, the Committee of Sponsoring Organizations of the Treadway Commission, in its Internal Control over Financial Reporting Guidance for Smaller Public Companies report, offers examples of protective factors that mitigate fraud risk. These factors include certain characteristics of an organization's internal controls, management culture, compensation and incentive structure, and the structure of the organization's board of directors or governing committees.

Being able to predict movement toward an ethical lapse would be highly desirable, as the cost of a lapse can be devastating to an organization, community, family and individual. If protective factors are monitored and reported, all of these factors could provide businesses with valuable insights into when organizational fraud is likely to occur.


How could research into the risk and protective factors of organizational ethical lapses have helped General Electric when, in the summer of 2009, it was accused of fraud by the Securities and Exchange Commission? The SEC complaint alleged that GE met or surpassed analysts' earnings estimates every quarter from 1995 through 2004.

According to the SEC, on four separate occasions from 2002-2003, GE executives signed off on accounting decisions that were not in compliance with the rules for public company financial reporting. The agency claimed that the executives committed outright fraud twice, and twice were negligent. In one instance, the changes allowed GE to avoid falling short of analysts' expectations.

GE seems to be doing all the right things with regard to establishing healthy beliefs and clear standards of behavior. They hire employees with high intelligence, resilience and social competence. GE's employee-training programs are recognized throughout the world for their excellence, and their employees are given opportunities to participate in meaningful ways. GE's recognition and rewards systems are diverse and significant.

However, GE's lapse could be viewed as predictable. If you look at its public reported measures, it is trending negatively on metrics that we would likely correlate to ethics. Its sales and profits are consistent. If it had tested risk and protective factors that were tracked with the same level of importance as the financial measures, it would have been looking for areas of fraud and non-compliance with policies. Also, shareholders and investors would have been monitoring these factors and placing value on these measures, as they will impact the value of the company when a lapse occurs.

How does all this reconcile with an organization that displays strong leadership, good business planning and goal attainment, and achieves success? Wouldn't a strongly led, high-performing and desirable workplace have all the risk factors for ethical lapses? Most assuredly. Such organizations need to communicate ethical beliefs and clear standards, and then monitor them throughout the organization and investment community.

Communication of these risk factors is essential, as many would be hard-pressed to list even a few off the top of one's head. It will take time to educate employees to consider these factors in their day-to-day work. The key to predicting and preventing ethical lapses in companies is to give businesses a set of risk and protective factors that are proven and effective. These can focus attention on movement toward or away from being an ethically healthy and financially sound organization, all of which must be transparent to the employees, the community, the management, its board and investors.

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