What is Your IEQ? Integrity & Ethical Quotient

Released by: Manager@Work, The Edge
Date: 22 September 2008

Why bother with integrity and ethics in the management of your corporation and your country? Well, I could give you a long list of bullet points, but the short answer is this: Ignore it and you will commit corporate or national suicide.

Stakeholders and citizens today are very discerning, not least because of the spate of high-profile corporate scandals such as Enron, WorldCom and closer to home, Transmile. It is not only confined to the corporate world but also the public agencies and government institutions with the high number of corruption and cases of wrong doing being highlighted by the Auditor General and prosecuted by the ACA recently. Enlightened customers, employees, investors, shareholders and citizens nowadays look at the bigger picture and they know they have a powerful say. For corporations and government, short-term personal and institutional gains, though tempting and deceptive, are simply not sustainable in today's open environment. Only myopic and self serving executives would condone or resort to practices that compromise integrity and ethics in the name of service and profitability, while imagining they could get away scot-free through their own arrogance and rationalisation.

On the other hand, individuals, corporations and institutions that observe a strict code of ethics or code of conduct will prosper in the long term despite the additional and considerable efforts and investment they have made in self-regulation, education, corporate governance, research and development, quality control, compliance and corporate social responsibility to build up their "Moral Value Capital" or MVC. These people follow the philosophy that ethical business is truly profitable, good long term and sustainable business.

But what drives integrity and ethics, or causes the lack of those attributes? Surely it is not external rules and regulations because these are at best merely temporary restraining forces, whereas the true consistent driving force of one's integrity and ethics comes from an individual's core self - our own moral values and what one is really made up of internally.

Conflict between Moral and Economic natures

The American Heritage Dictionary defines the term "ethics" as "the study of the general nature of morals and of the specific moral choices to be made by a person; moral philosophy", and the term "integrity" as "steadfast adherence to a strict moral or ethical code". In short, ethics and morals are interrelated whereas integrity is the glue that ensures we stick to our ethical or moral values and behaviour.

Human beings are basically endowed with good moral values. In general, people are decent and want to do the right and proper thing because each of us has an innate sense of righteousness, justice and fairness. As such, a human is a moral and ethical being by nature.

At the same time, humans are also economic beings, especially in this era's increasingly competitive and capitalistic world. Whilst we possess a sense of corporate responsibility that compels us to be accountable to our own business or our employers and shareholders, the ultimate aim of business enterprises is profitability and creating value for stakeholders; however, steep economic demands and the lure of a materialistic, consumptive society might cause people to become more insatiable and less rational. There is an internal competition between the moral and the economic selves. Thus they tend to make expedient choices which might be convenient and practical though not necessarily moral, at the same time rationalising that "everyone else is doing it, so what's wrong with it?" or "take the risk and just don't get caught". And that is how the rot starts.

This is a typical internal conflict that arises inside the ethical moral and economic self of each human being. As you can see from Figure 1, the core of IEQ of ethical and moral self influences and affects the outer circles of corporate governance and corporate, social responsibility. If the IEQ core is weak or absent in the management leaders of a corporation, then corporate governance will be hampered. And if an organisation does not practise good corporate governance, it is unlikely that much can be expected from its external role of fulfilling its genuine and generous corporate, social responsibility. That is why the quality of corporate governance and corporate, social responsibility can somehow be traced back to the corporate members' IEQ: their intrapersonal ethical and moral selves.

The New IQ

James H. Quigley, CEO of Deloitte & Touche points out that, "Ethical behaviour will shape your actions. The idea that you will not be caught is fatally flawed, because you will. Don't give up your self-esteem by acting unethically. Integrity matters." He believes that IQ - intelligence quotient - which has been so highly lauded by many employers should now be replaced with a new IQ - integrity quotient.

The Other EQ

While Daniel Goleman is right about the importance of emotional intelligence or high emotional quotient (EQ) to become top-performing corporate leaders, what would now further differentiate one emotionally mature talent from the other would be the other EQ - ethical quotient. According to the Ethisphere Council of the Ethisphere Institute (www.ethisphere.com) which is dedicated to the research, creation and sharing of best practices in ethics, compliance and corporate governance among its member companies, the definition of Ethical Business Leadership is "Good Smart Business Profit", as follows:

GOOD - Companies that proactively engage with the communities they serve, impact or operate in.

SMART - Companies that invest in innovation, quality and sustainable business practices that reduce resource consumption in the production or use of their products and/or increase consumer health or safety.

BUSINESS - Companies that leverage relative positions of influence to affect positive industry changes.

PROFIT - Companies that look strategically to profit fairly from such ethical leadership business practices, as ultimately only profit ensures continuance of desired institutional behaviour.

The Ethisphere Institute also publishes the globally recognised annual World's Most Ethical Companies RankingÖ which covers many categories, among which are Agriculture, Automotive, Chemicals, Computer Hardware, Computer Software, Consumer Products, Diversified Industries, Financial Services, Food & Beverage, Healthcare, Media & Entertainment, Retail and Transportation & Logistics. The ranking criteria are Corporate Citizenship and Responsibility (20%); Corporate Governance (10%); Internal Systems and Ethics/Compliance Programme (15%); Industry Leadership (5%); Executive Leadership and Tone from the Top (15%); Legal, Regulatory and Reputation Track Record (20%); and Innovation that contributes to Public well-being (15%).

In the World's Most Ethical Companies 2008 ranking, Google was the sole winner in the Internet category, whereas the two winners in the Restaurants & Café category were McDonald's and Starbucks Coffee Co. One of the commonalities in all the recognised companies was their appointment of someone specific to take charge of ethics and compliance; for example, Google and Starbucks have their own Chief Compliance Officer (CCO).

IEQ Model and Formula

Since there is no universally accepted IQ and EQ test yet, I have devised an IEQ (Integrity & Ethical Quotient) model and formula for individuals and organisations to gauge their own integrity ethical practice and culture as below:

Integrity Ethical Quotient Model or Formula

Basically, IEQ may be expressed as the ratio of the Moral Value Capital (MVC) in the organisation to the Corporate and Individual Gains (CIG) stated in terms of its financial gains or benefits derived through unethical practices. The MVC refers to the cumulative propensity and endeavours of individuals and the enterprise as a collective organisation to promote and practise integrity and ethics, as demonstrated in the degree of their individual ethical conduct, corporate governance and corporate, social responsibility initiatives and performance.

The formula demonstrates that if the MVC of a company is low despite and having a high CIG($), then the IEQ of the company is low or poor. Typically, when the CIG($) is high, the MVC culture will suffer or deteriorate. This is because the company is not focusing and building its employees ethical performance, corporate governance and corporate, social responsibility initiatives or capital. On the other hand, if the MVC of an individual or organisation is high relative to its CIG($), the individual or company displays a high or strong IEQ as it is willing to invest in building a culture of strong individual ethical behaviour, corporate governance and corporate, social responsibility. IEQ should at least be equal to 1. If it is greater than 1 then there is a strong ethical and corporate governance practice and culture. If the IEQ is less than 1 or a fraction then the prevalence of an ethical and corporate governance culture is poor or has deteriorated. Hence, the greater the IEQ the stronger and enduring is the MVC of the individual and organisation.

Institutionalising a Corporate Culture of Integrity & Building MVC

Management leaders must not only lead by example but also institutionalise the high level of integrity and ethics which they champion, so that such positive values are not merely confined to a handful of people within the organisation but will be pervasive throughout all levels and all units at the workplace. The following checklist of 12 principles or practices will help you get started.

• Set ethical and integrity tone at the top through management leadership by example.
• Ensure transparency at every level.
• Communicate directly and honestly.
• Create MVC expectations and engage in company's practice of ethical standards, corporate governance and responsibility.
• Empower employees to behave and practice ethical conduct.
• Separate the message from the messenger.
• Follow-up is critical when ethical breaches are reported.
• Keep careful records of incidents.
• Employ quarterly reviews of practices and initiatives.
• Publicise sanctions and explain actions taken.
• Employ a system of rewards for good ethical conduct and performance.
• Accept that sometimes bad things happen to good companies.