Tone at the top refers to the principles and leadership style, commitment to values such as openness, integrity, honesty, fairness, and ethical behavior in the organization, and the enforcement of these principles by the board of directors and management. It also refers to the ethical atmosphere that is created, and sustained, by an organization’s leaders. All of these attributes are often referred to as the corporate culture.
The concept of “tone” plays a key role in the control environment of the organization. While it is set at the top, it should cascade without distortion or gaps throughout the entire organization.
This process begins with the definition and institutionalization of the expected behaviors within the organization. Management should clearly communicate its beliefs and expectations throughout the organization’s programs, processes and business units. These values, beliefs and expectations can be communicated formally through statements of values, codes of conduct, policies, staff meetings, training programs, memos, e-mails or informally during daily activities. These elements play an important role in shaping the organizational culture, operating practices, the setting of priorities and the qualification of goals beyond “what” is expected to “how” these goals should be accomplished.
Congruence between words and actions is pivotal to ensure consistency and prevent the dilution or distortion of the tone set at the top. Management, at all levels, should lead by example. Similarly, if senior manager’s words and actions are in harmony, it is more likely that employees will hold and practice the same values. The concept of tone at the top may then be complemented with the concept of tone from the top.
Communicating the tone begins when employees are hired and should be part of the onboarding process. Organizations should hire competent individuals who have the technical qualifications to perform their duties, but also share the values of the organization.
In some companies onboarding is well-organized, going beyond the signing of a myriad forms and documents, and including sessions covering the organization’s history, values, leadership style, expectations for proper conduct, recourse if unacceptable behaviors are witnessed in the organization, avenues for socialization with colleagues, and career advancement opportunities. In addition, it is a good idea to program onboarding activities throughout the year of hire rather than a short and intensive onboarding period lasting a few days or weeks. The extended approach improves the rate of employee engagement and proper assimilation.
Another important element related to the tone at the top is the creation and support of mechanisms to train employees. Some industries require mandatory training related to ethics, sexual harassment and safety in the workplace. Other training topics that support the creation and helps to cement a strong and healthy tone include:
- Teamwork: It enhances the bond among employees, who will be better equipped to support each other, promote positive peer pressure, treat each other with respect, and acquire a sense of belonging. Promoting teamwork in the context of ethical conduct creates a virtuous cycle.
- Conflict Resolution: This training gives employees and managers the tools needed to address adverse situations positively, handle incidents responsibly and in accordance with corporate values of respectful and fair treatment.
- Critical Thinking and Problem Solving: While these programs typically focus on ways to think in a disciplined way, analyze problems, foster creativity and implement innovative ideas in a practical way, what is sometimes overlooked is that this type of training also promotes transparency, fact-based decision-making, planning and accountability. All of these attributes are essential for a healthy organizational culture.
- Communication: Effective verbal and written communications are essential to promote better relationships and reduce barriers among employees, and with vendors, suppliers and other stakeholders. This will help reduce confusion, misunderstandings and other operational issues.
- Leadership and Management: Organizations perpetuate the existing culture, or transform it if necessary, through the actions of their leaders. Leadership training helps organizations identify, develop and place capable leaders in positions where they can influence the organizations positively. Developing leadership capacity is essential for the organization’s cultural sustainability and the protection of the proper tone and culture.
- Ethics Hotline: Organizations should provide employees who witness unethical behaviors a mechanism to report those incidents. This typically includes an ethics or whistleblowing hotline. Management should explain to employees that they have an obligation to report unethical behavior and reassure them so they feel safe from retaliation while doing so.
Mentoring and coaching are two additional tools that help shape the mindset, decision-making processes and behaviors of managers and employees. By helping to develop others, mentors can share the organization’s values, principles, and preferred operating style as they groom future organizational managers and leaders.
Reward systems also play a key role in promoting and sustaining the desired tone within the organization, since individuals do what is measured and repeat what is rewarded. Consequently, performance monitoring mechanisms should identify, measure and reward ethical conduct.
Tone in the Middle
The tone set a the top of the organization will have a cascading effect on its employees. If the tone promotes ethics, integrity and fair treatment of others, employees will be more likely to support and replicate these same values. However, if the organization’s leaders do not appear interested in ethics, focusing exclusively on revenues, profits and market share, employees won’t focus on ethics either. They will emulate their leaders and also focus on the “profit ends” potentially neglecting the means of achieving those financial results.
Conversations around tone at the top often focus on what the organizations’ board members, CEO and senior managers state in the published statement of values, code of ethics or code of conduct. However, the same tone should exist in the middle, where most business activities occur (e.g. co-worker interactions, customer service, vendor interactions). Also, since most organizations have some employees who don’t come in contact with the senior management team, it is imperative that lower management and employees replicate the same views, beliefs and practices. Otherwise, the ethical messages from the top will be undermined.
Given the number of bad actors who have destroyed organizations, wiped out stockholder investments and squandered taxpayer resources, it is essential that leaders send the message that success is measured as much by what is achieved as by how it is achieved. In the extreme cases, management’s focus, rewards and lack of disciplinary measures could result in fraud being seen as acceptable as long as it makes the organization profitable.
Internal auditors are increasingly being tasked with reviewing the tone at the top in their organizations because it impacts many aspects of the control environment and the performance of internal controls. While auditors can conduct a comprehensive, enterprise-wide tone and culture audit, others find it more advantageous to append these topics to other more traditional assessments.
Tone at the top describes the behavioral, performance and ethical expectations set at the highest levels of the organization. The board and senior management set the tone at the top of the organization and should act diligently to make sure it cascades without distortion from top to bottom. As assurance providers, internal auditors should assess the organization’s infrastructure and practices to determine if priorities and behaviors support stated organizational values and if there is a healthy corporate culture in place. Unethical conduct can be the result of bad apples or bad barrels, and internal auditors can help management avoid both of them.
Interested in learning more about this and other tools and techniques? Join Dr. Murdock when he teaches Lean Six Sigma Skills for Auditors, Internal Audit School, and High-Impact Skills for Developing and Leading Your Audit Team.