This week on EthicalVoices Erica Salmon Byrne, CEO of Ethisphere. She was one of the first people I interviewed when Ethical Voices launched in 2019, and I figured it was time to have her back, particularly because Ethisphere recently released an updated list of the World’s Most Ethical companies.
She discusses a number of important ethics issues, including:
- How does a company become one of the World’s Most Ethical Companies?
- What are the top ethics issues facing companies?
- How can businesses create a more ethical environment?
- What questions should businesses ask about ethics and AI?
- Proof that being ethical is good business
For those that don’t know Ethisphere, why don’t you start off by giving us a brief background on Ethisphere and what it does?
Ethisphere has been working in the ethics and compliance space now for 17 years. We are best known probably for our World’s Most Ethical companies process, but the work we do goes well beyond that, and it is really all structured around our core thesis that strong ethics is good business. We are in the business of trying to help ethics and compliance officers make that case every day inside their organizations that they are not just a cost center, but truly a value add.
What is the methodology that you use to determine what companies are the most ethical?
We’ve been using the same methodology with some evolution for the last 17 years. It has a couple of component pieces. We look at five categories. We look at their culture of ethics – how are they supporting a strong culture where employees are comfortable using their voices? We look at their ethics and compliance program practices, and that breaks out into the traditional seven categories of ethics and compliance program practices as you would see in a lot of the regulatory guidance. We look at their governance practices, which has become incredibly important. I feel like we keep relearning the lessons of the past with some of the scandals of the present.
I don’t think anybody who’s been following Silicon Valley Bank’s meltdown would say that governance is not important. We look at governance practices.
Then we look at your impact on your communities. How are you thinking about your environmental and social impact? And we look at your leadership and reputation.
It all starts with our ethics quotient questionnaire, which at this point has grown to about 210 questions. When we last spoke it was about 180. We’ve added questions on forced labor in the supply chain. We’ve added questions on diversity, equity and inclusion, on mental health at work, a whole host of different things. You fill out the questionnaire and you submit documentation to validate your answers. We don’t just take yourself submitted survey answers, we go through the documentation that you provide as part of the process, and then all of that combines into your score. And then we compare you to peer companies, so that we’re not comparing a US manufacturer to a Japanese pharma company. We compare you to peer companies and then we come up with the companies that are on the list. This year, and we had 135 companies on the list, including six that have made the list every year.
Who are those six companies?
Pepsi has made the list 17 times. Milliken has made the list 17 times. We also have Kao Corporation, which is a health and beauty company out of Japan that not everybody may have heard of that has made the list 17 times. International Paper is a 17th time honoree, Aflac has made the list 17 times, and Ecolab has made the list 17 times. Those are our six 17-time honorees and anybody who’s interested in looking at this year’s class is welcome to go to WorldsMostEthicalCompanies.com and you can see all the honorees there, including the number of times they’ve been recognized by at store.
Which companies are new to a list this year?
We have eight that have made the list for the first time this year. One of the interesting things to me for the brand-new companies that have never made the list before is two things. One, they are so excited for their first-time recognition. It is always a lot of fun to work with a new honoree. And more often than not, they are very familiar with the process because they have been using it as a way of improving their practices over the course of a couple of years. It was great to recognize some companies this year that have really engaged with Ethisphere for a number of years prior to being put on the list, and those would include companies like Clarios, which has been a longtime member of the broader Ethisphere community and was recognized this year for the first time.
Polaris is another one that has been engaging with us for a number of years, as they have built out their program and their practices over time, and it was really fun to be able to engage with them for the first time as an honoree this year as well.
How do you verify the claims to make sure they are ethical and accurate in their applications?
There are a couple of ways that we do that. One is mixed into the survey process itself. We use best practices from a survey design perspective to really make sure that we’re asking questions properly. We ask the same question in a couple of different ways and then we crosscheck those answers. On the backside, the algorithm that we use to score the survey responses weights every question and every answer. If we see inconsistent responses that’s going to have an impact on your score. The second way is with the documentation submission. We ask for documents related to each of the key categories and then we evaluate whether that is substantive information that would agree with the way that they responded to the survey.
The fact of the matter is if you are a large enough company, you are going to have issues. These are not the world’s most perfect companies. We’re not putting together a list of people who have never had problems.
When we do the reputation review, we look at a couple of things when an organization we are considering has run into an issue. How did they respond and what have they done to fix the problem that caused it in the first place? We do have some companies on the list who have run into some challenges over the years, but we have looked at the way that they have, as an organization, responded to those challenges, and have elected to leave them on the list anyway because of the strength of the way they responded.
It harks back to our interview in 2019, it doesn’t mean you’re perfect. But when you screw up, you fix it.
That’s exactly right. It’s companies that are interested in identifying the problems, figuring out what happened and fixing it, those are the kinds of organizations that we like to celebrate.
What are some of the top ethics issues you’re seeing facing companies in 2023 and beyond?
The first one that I would call out is culture. We’ve been helping companies measure their ethical culture since 2016. Our data set tells us is about 50% of the employees who have seen something inside the workplace actually chose to say something. That means 50% of the people who saw something chose not to say something. If I’m a compliance officer, that’s the number that keeps me up at night, because I don’t know what’s in that 50%, I don’t know where that 50% is, and I don’t know how to get my arms around the issues that haven’t been brought to my attention.
Our data tells us the linchpin around which all the rest of it spins is your individual managers. If I had to pick one issue that I think companies are focused on right now, and rightfully so, it’s equipping and empowering your leaders at all levels of the organization to lead the way you need them to and to create the kind of right environment where people are comfortable raising their hand.
Part of the process of creating an environment where I’m comfortable raising my hand is if I am comfortable coming to my manager with a conflict of interest concern. That probably means I’m comfortable coming to them with a client issue. It probably means I’m comfortable coming to them with a product idea. It probably means I’m comfortable coming to them with a process change.
All of those things have an impact on the operations of my team, which then ripple out and have an impact on the financial success of my business. If you invest time in making sure that your managers know how to create those kinds of open door environments, that they’re engaged in active listening, that they take the time to nurture their employees that report to them, those are the kinds of companies that we see outperforming their competitors over the long run.
Unfortunately, far too many companies are still promoting people into manager roles because they were good at the job they were doing and not because they’re equipped to lead people.
When it comes to speaking up and reporting, are you finding any gaps based on age?
We sure are. The Gen Z folks that are coming out of college right now, they’re the least likely to raise their hand. The reason for that is they don’t trust the process. If you look at the culture report that we issued in January one of the things you will see in that report is that the youngest employees, even though they’re a smaller percentage of our data set today, because most of them are still in college, are the least likely to speak up. They are the most likely to indicate that they witnessed bullying in the workplace and they’re the least likely to report.
It’s incumbent on us as compliance professionals, as ethical leaders, to help them understand that we see information as a gift and that information is something we can do something with, and we welcome and respect and value them using their voice in the workplace. You must coach some folks to really feel that way.
My ethics class at BU agreed. They weren’t surprised by the findings, because they said they wouldn’t necessarily want to speak up, they wouldn’t feel empowered to do so. Which is interesting because in so many other areas they do feel empowered to speak up, which is a great thing.
How can businesses create a more ethical environment?
It really comes down to three things.
First, be as transparent as you can about the process you’re using when something goes wrong. This is another trick I love to use when I’m talking to leaders about manager empowerment. I ask leaders to take a second and remember the last time something went wrong inside one of their teams, and what was their reaction? On a spectrum from, “Who do I kill,” to, “How do I fix it?” What end of the spectrum was your reaction? That is going to be very telling as to whether or not your people are comfortable coming to you when they’ve messed up. If your people are not comfortable coming to you when they’ve messed up until they absolutely cannot handle it, that it’s such a disaster that somebody has to help them fix it, that is the kind of environment where misconduct goes underreported and you don’t know what’s happening in your business.
Coach managers and create an environment where it’s much more about, “How do we fix it?” and much less about, “Who do I blame?” That’s the kind of environment that we need to be moving ourselves into.
Second, look at the way that you’re talking about discipline and disciplinary calibration. People who don’t speak up tend not to speak up for one of two reasons. “Nothing would happen anyway,” or “Something bad’s going to happen to me as a result.” “Something bad’s going to happen to me as a result,” goes back to manager training.
“Nothing would happen anyway,” goes to the fact that we have been so cautious about talking about what discipline looks like, that people think that if I don’t get frog marched out the front door with my things in a box, nothing has happened. Anybody who’s been inside an investigation knows that that’s absolutely not the case. There are so many other things that can happen from a disciplinary perspective. You could have your bonus clawed back, you could lose the right to a promotion, you could get coaching, you could get training. We fire a fraction of the people who engage in misconduct inside most of our organizations, and most people don’t know that. Ask yourself, “Can I issue quarterly stats? Can I use anonymized scenarios to tell stories? What mechanisms do I have at my disposal to demystify the investigation process as much as possible and make sure that I am actually calibrating discipline?”
How do you make sure that discipline is the same across the organization? Is it up to the business unit and the HR business partner to decide what discipline looks like? Or are you actually making sure that if I engage in certain behavior, no matter what part of the business I’m in, I get treated the same way? That’s how you get around that George Orwell factor of some of the animals being more equal than others.
Third is to embrace what adult learning has taught us about how people actually retain information and completely blow up your training program where you’re peanut buttering everybody in January with the exact same course and then never talking to them again for the rest of the year. That’s not how people learn and retain information. You’ve got to get it to them as close as possible to the moment where they can use it and repeat it as often as you need to.
That’s a great check the box exercise. You can say, “I trained everybody,” because you trained everybody that was here in January, but it’s not actually going to change behavior, which is what good training is supposed to do.
One of the issues that’s been consuming business are the ethics of AI. Are you looking at the ethical use of AI for future reports?
It’s been a big topic of conversation inside of our community and inside of our broader membership group, which is the Business Ethics Leadership Alliance. We actually have a couple of work streams looking at the way in which companies are disclosing how they’re currently using AI, what data lakes are they relying on to feed their AI algorithms? Are they allowing employees to use it internally in their communications with clients or otherwise? How are they approaching all of those pieces? You are going to start to see that show up in the report and that will be informed by the work we’re doing more broadly with the community inside of BELA, looking at how we set that parameter appropriately.
Because at the end of the day, from my perspective, AI is a great tool, but we still have to use our human brains to make sure that we’re doing it the right way. What it’s going to come down to is, what’s your policy, what’s your disclosure process, what controls do you have around it, and how are you incorporating it as a business and making sure that you’re doing so in a way that ties back to your values and your mission?
You mentioned right one of Ethisphere’s goals is help businesses realize being ethical is good for business. What data do you have to back that up?
We have our ethics premium, which we have been tracking now for 10 years. For the course of the last 10 years, we have been looking at the performance of the publicly traded companies that are on the World’s Most Ethical companies list and comparing that performance to a comparable large cap index. It is a five-year look back every year. We send a partner the list during the blackout period in February. They do the calculations from the moment that we notified companies that they were on the list, but before public disclosure. We’re taking the being on the list factor out of the conversation, and they look back over a five-year period. What we have seen every year we’ve been doing this analysis is our list of companies outperforms.
This year’s ethics premium was 13.6%. The 79 publicly traded companies on this year’s list outperformed a comparable large cap index by 13.6% over the course of the last five years. If you look back over every ethics premium we have released over the course of the last decade, you see some level of outperformance. For the last five years, it’s been double digits.
Is there anything I didn’t ask you that you wanted to highlight?
We are seeing an increasing interest in the harmonization of standards around the ways in which companies engage their communities. I will use the somewhat politicized ESG acronym. It bothers me tremendously that it’s become politicized because at the end of the day, what ESG is your material non-financial risk factors, and I don’t understand why caring about your material non-financial risk factors is such a big deal. I mean, 80% of the average company’s value at this point is intangible assets. And the thing that impacts your intangible assets is your material non-financial risk factors.
Because of that interest in standardization, we are seeing this in this year’s class of World’s Most Ethical Companies, 50% of the honoree group is starting to link their ESG metrics to their financial KPIs. And so, really pulling that thread through to say, “We’re not just doing this because it’s giving us good PR, we’re doing this because it impacts our business.” That’s where the dialogue needs to go, and I’m just delighted to see that the group of companies we honored this year is really pushing that analysis. Because at the end of the day, that’s how we get around the politicization in this country. Europe thinks we’re crazy, by the way, to have politicized any of this, but that’s how we get around the politicization.
Get the full interview, with bonus content, here
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