AUSTIN, Texas–A culture of ethics can be a strong success driver for a credit union, but it requires a lot more than posting some slogans on the lunchroom walls.
Instead, that culture must begin at the top of the credit union with the board in order to really make a measurable difference in the “mood in the middle” of the CU, according to one person.
In remarks to the CUNA CFO Council annual meeting here, Scott Klitsch, a Boise, Idaho-based principal with CliftonLarsonAllen said credit union’s do their best work when decisions are based on five things:
- We serve our members
- We leverage the resources around us
- We embrace our quality systems/policies
- We recognize conflicts and fraud risks
- We consult
What are business ethics? According to Klitsch, it’s the moral principles that guide the way a business behaves. He said those same principles that determine an individual’s actions also apply to a business, and that they help to distinguish between “right” and “wrong” and then making the right choice.
“It’s relatively easy to identify unethical practices; however, it’s not always easy defining ethical practices,” he said. “You hear about companies where the CEO does something wrong, is fired and then walks away with a multi-million-dollar package. They stole and did the wrong things and were rewarded for it, and it can be difficult to have the mindset of doing the right thing.”
Klitsch said he believes having a reputational risk is as dangerous as operational risks for any organization.
Common Ethical Issues
Among the common ethical issues he said any manager in a credit union will encounter include:
- Misrepresenting hours worked
- Lying to supervisors
- Falsifying records
- Sexual harassment
- Theft/misuse of organizational assets
- Conflicts of interest. “These are harder to identify because you don’t always have all the facts. But it’s any time you are going to benefit personally, or family members are going to benefit from a business decision.”
What are the common drivers of unethical behavior? According to Klitsch, they include:
- Fear, such as after having made a mistake
- Greed
- Convenience. “This can be a big one. Have you ever had a stack of reconciliations on your desk that you just start initialing?”
- Groupthink. “When everyone else is doing it.”
- Advancement of career
What Can a Credit Union Do?
So, what can a credit union do to prevent all of the above? By creating a culture of ethics and celebrating ethical behavior within the credit union, said Klitsch. To create that culture, he recommends:
- Create clear expectations
- Model the desired behavior. “This really needs to come from the organization’s leaders. Research has really shown people model the behaviors of those they respect and want to be. They are going to say, ‘This person got to be where they are by behaving in this manner’.”
- Reinforce the behavior you want (not the reverse). “The rewards structures we have can have unintended consequences,” cautioned Klitsch. “You need to reinforce behaviors on a day-to-day basis. It doesn’t always have to be monetary. I think really non-monetary rewards also go a long way. If someone does the right thing, celebrate that. Call out the good behaviors. You don’t want to wait 11 months until their review.”
- Focus on skill-building and problem solving
- Consistent messaging. “All the messages need to be consistent that we want a culture of ethics That doesn’t mean saying it the same way in the same place all the time. The format should be changed up.”
- Provide corrective feedback.
The Pitfalls
All that said, Klitsch acknowledged there can be pitfalls for a credit union in creating such a culture. Among those pitfalls:
- Defining the culture/perception gap. “You go to the branches and they say, ‘I’ve never heard from the CEO. I heard that so and so made a bad decision and nothing ever came of that.’ You have the tone at the top that then pushes the mood in the middle.”
- Instilling the culture throughout the organization
- Extending culture through mergers. “I think this is probably the most difficult thing to do. Maybe the credit union you are acquiring has a better culture. You need to do cultural due diligence. The biggest mistake I see is letting the two organizations be autonomous. When members go in different branches they get completely different experiences.”
- Handling negative personnel. “You can have all the messaging you want, if you have a naysayer in your office, they will tear down any good things you are doing. You need to identify, coach and modify their behavior. And if they won’t modify their behavior, you have to cut your losses.”
- Addressing leadership change. “As leaders retire, this is a very important aspect of continuing that culture of ethics. Are you bringing someone up within the organization who supports that organization. Are you bringing someone in from the outside? Are they a cultural fit for you?”
- Appealing to a cross-generational workforce
An Important Distinction
Klitsch urged credit unions to recognize there is a distinction between ethics and fraud.
“Someone who commits fraud is unethical, but not all unethical behavior is considered committing fraud,” he said.
Where issues can arise, he said, are in:
- Compensation packages (the CEO should not be the one taking his/her own compensation package to the board)
- Reporting fired employee to authorities. “We probably don’t report these people as often as we should,” said Klitsch.
- Focus on growth (especially outside the member base)
- Conflicts of interest (including loans to family members; service contracts; software agreements; investment advisors; real estate appraisals, and making compensation decisions)
The Tone at the Top
How does a credit union build the tone at the top? It begins with the CEO and the board, said Klitsch, using the recent incident in Starbucks at which racial bias was displayed at one store as a good example of how a CEO and organization should respond.
“To be credible, leaders must openly and continually communicate their values, using different platforms and distribution systems,” said Klitsch. “This really starts with the board, as the board’s most important decision is selecting that CEO. Their behavior tells employees what counts what’s rewarded and what’s punished.”
What else can a credit union do?
According to Klitsch, credit unions should consider:
- Developing a code of ethics/conduct
- Ensuring the culture reflects the code the CU develops (does the staff know what’s right?)
- Educating employees.
- Reminding everyone that unethical choices bring reputational risk