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Employee Fraud and Misconduct

The recession has brought more than just layoffs and losses; it is increasing employee fraud and misconduct. Here's what you can do about it.

by Corporate Executive Board
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As senior management teams have focused on reevaluating 2009 by restructuring departments and business units, and in many cases dramatically reducing the size of the company, employees have increasingly become cynical about the ethical culture of the typical corporation. That cynicism has translated directly into a lack of respect for the company and its rules and a rise in fraud and misconduct.

Based on a survey of more than 125,000 employees in 75 countries over the past five quarters, the Corporate Executive Board has seen startling trends in this area, including:

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• A 20% increase in observations of misconduct from the first to the second half of 2008;

• A 5% decline in frontline employee perceptions of senior management's commitment to integrity;

• And an increase in the number of disengaged employees, from one in ten to one in five, causing declines in companywide productivity of up to 5%.

Moreover, the Corporate Executive Board's research shows that business units with the weakest cultures have experienced five times the amount of misconduct as those with the best. In other words, when employees perceive a weak ethical culture, misconduct significantly rises.

How can executives restore a culture of integrity? The key to corporate integrity and reduced misconduct is "organizational justice"—or the belief among employees that the company will not tolerate unethical behavior and that management will respond quickly and consistently to unethical behavior when it occurs. When employees believe their company has strong organizational justice, the company's overall commitment to integrity rises and misconduct drops.

To create a culture of organizational justice, companies should start by following these three simple guidelines:

• Equip managers to deal decisively and consistently with instances of misconduct or unethical behavior;

• Show the whole employee population—using real instances from the company—how the company deals with misconduct; and

• Close the loop with employees who report misconduct, so they know that appropriate actions were taken.