How do organisations come to be perceived as beacons of trust? Such a reputation doesn’t form overnight. Instead, it is based on organisational character, something that develops over time, aided by a consistent demonstration of ethical behaviour.

Business and government entities face a serious crisis of confidence in society today. A recent spate of political scams has deepened the sense of disillusionment with the government. On the corporate front, misappropriation and accounting scandals involving the likes of Satyam and Reebok have called the ethics of business leaders and the judgement of those responsible for hiring them, into question.

Character Maketh the Organisation

Even though business decisions are made by individuals, their motivation and implications are tied to the entire organisation. Over time, these decisions present a pattern that settles to create distinct organisational character.

An incident from my own consulting experience underscores this theory. Two large companies were faced with an identical ethical dilemma when both realised that the key account managers responsible for some large and imminent business deals were forging bills and siphoning funds from the companies. Their options were to terminate the individuals involved immediately or wait until the deals in question were finalised before doing so.

The two organisations handled the matter very differently. The one decided to wait it out so as not to jeopardise the pending deal. The other immediately terminated the account manager’s services and briefed the prospective customer on the situation, winning the latter’s goodwill and confidence in the process. It also made it clear that its principles were not up for negotiation and that a robust value system lay at the heart of its culture.

The Building Blocks and Cement This process of using a core set of principles to guide ethical decision-making and action – consistently and over extended periods of time – helps in shaping organisational character.

There is another important factor at play here and these are the critical decision points sometimes termed as ‘defining moments’1. For an organisation, such moments may manifest themselves in big and small decisions involving its people, processes or products.

Defining moments shape an organisation because they cut through all the statements about what a company aspires to do and reveal instead what it actually does. They set precedents and create expectations that influence a company for years, or even longer.

An example of a defining moment for several service organisations came during the recent financial crisis when they had to make some tough personnel decisions in order to cut costs. Some laid off employees, others withheld promotions and increments, still others made cuts at the managerial level, or deferred the offers they had recently made to new candidates.

Employees of one organisation, however, opted for a pay freeze that would allow them to retain jobs and honour the offers that had already been extended. This was combined with active employee engagement to keep morale up in the company. Two years later, the company’s recent recruits voted it ‘an employer of choice’ in a survey, citing management’s willingness to make financial sacrifices for the greater good, as well as initiatives that showed the company really ‘cared’ about its employees.

Making it Work

Organisations must create systems that support this type of character development. They will have to pay special attention to personnel decisions, particularly when senior positions and lateral movements are involved. A principle-based selection process is clearly the first step in the direction. Personnel research shows that sound induction and mentoring are both effective in nurturing values and character, apart from the skills required for the job.

Last but not least, it is critical to have incentive systems that drive ethical behaviour. The recent financial crisis illustrated what happens when incentive structures drive a self-serving, get-rich-quick philosophy rather than support the responsibilities of the organisation to its stakeholders.

Since principles are first demonstrated at the individual level before they can de?ine the larger organisation, leaders with a strong sense of personal integrity are vital to the process.

Over time, the principles of the organisation get embedded in its practices, processes and systems and evolve in a way that is independent of its members. This is institutionalisation and it is the key to true organisational character.

Vasanthi Srinivasan is an Associate Professor at IIM-Bangalore in the...