Reference no: EM131292396

IMPROVING AN ETHICAL CULTURE AT GEORGIA-PACIFIC

When privately held Koch Industries acquired Georgia-Pacific-a large consumer products, building products, and packaging company-in 2005, the job of transitioning the company to the Koch compliance and ethics focus was led by Tom Butz, one of a small number of executives Koch sent to the newly acquired company. Butz is quick to say that he wasn't the key to the transition. Nor was the expert team he assembled to help with the efforts-some team members were brought in from other Koch companies, and some of them were Georgia-Pacific leaders in compliance and ethics who stayed and/or were promoted into key positions. ‘‘The key,'' Butz says, ‘‘was the commitment from leadership across the company to our vision for compliance and to building the desired culture.''

That's in sharp contrast to the historic practices of many companies: first focus only on building the guidelines, training tools, and related efforts for a compliance and ethics program, and then turn to ‘‘rolling out'' all of those pieces to the company. Instead, for Georgia-Pacific, the highest priority was to build understanding of, and commitment to, the vision and necessary culture for compliance and ethics-first among that senior leadership team and then the entire organization. Butz adds, ‘‘Proactively advancing vision and culture in an organization is very difficult. It is a job that is never really done, and since even a single decision can be problematic it is not a guarantee that you'll never have issues. That said, we believe these critical elements are essential to long-term success.''

At Georgia-Pacific and other Koch companies, that focus on compliance and ethics (which includes environmental, health, and safety issues) is fundamental to how the company is run. Few companies integrate compliance and ethics into dayto-day operations and the very culture of the company as Georgia-Pacific has done. The efforts of Georgia-Pacific and other Koch companies stem from the very core of the companies' philosophy-Market-Based Managementj. MBMj is a holistic approach to management that enables organizations to succeed long term by applying the same principles inside the company that allow free societies to prosper. In this philosophy, successful companies create value by providing products or services that customers value more highly than available alternatives, and they do this while consuming fewer resources, leaving more resources available to satisfy other needs in society. Value creation involves making people's lives better. It is contributing to prosperity in society.

In short, MBM focuses not on short-term profit as many other companies are forced to do (although it is considered one strong indicator of success) but on longterm value creation. With that mindset, it is easy to see why compliance and ethics is so integral to Georgia-Pacific and other Koch companies. It is far from just a necessary expense of doing business as other companies might view it. Instead, excellent performance across the range of compliance and ethics is an advantage that actually helps drive greater long-term value for the company and for society. Inside the company, MBM is applied through five dimensions:

Vision: Determining where and how the organization can create the greatest long-term value.

Virtue and Talents: Helping ensure that people with the right values, skills, diverse backgrounds and capabilities are hired, retained, and developed.

Knowledge Processes: Creating, acquiring, sharing, and applying relevant knowledge, challenging the status quo, and measuring and tracking profitability.

Decision Rights: Ensuring the right people are in the right roles with the right authority to make decisions, and holding them accountable.

Incentives: Rewarding people according to the value they create for the organization.
MBM, in turn, requires a culture centered on specific attributes. These attributes set the standards for evaluating policies, practices, and conduct; establishing norms of behavior; and building the shared values that guide individual actions. These MBM Guiding Principles are as follows.

Integrity: Conduct all affairs lawfully and with integrity.

Compliance: Strive for 10,000 percent compliance, with 100 percent of employees fully complying 100 percent of the time. Ensure excellence in environmental, safety, and all other areas of compliance. Stop, think, and ask.

Value Creation: Create real, long-term value by the economic means. Understand, develop, and apply MBM to achieve superior results. Eliminate waste. Principled EntrepreneurshipTM: Demonstrate the sense of urgency, discipline, accountability, judgment, initiative, economic and critical thinking skills, and the risk-taking mentality necessary to generate the greatest contribution to the company and society.

Customer Focus: Understand and develop relationships with customers to profitably anticipate and satisfy their needs.

Knowledge: Seek and use the best knowledge and proactively share your knowledge while embracing a challenge process. Measure profitability wherever practical.

Change: Embrace change. Envision what could be, challenge the status quo, and drive creative destruction.

Humility: Practice humility and intellectual honesty. Constantly seek to understand and constructively deal with reality to create real value and achieve personal improvement.

Respect: Treat others with dignity, respect, honesty, and sensitivity. Appreciate the value of diversity. Encourage and practice teamwork.

Fulfillment: Produce results that create value to realize your full potential and find fulfillment in your work.

Company executives quickly point out the importance of the guiding principles, starting with integrity and compliance. These are considered necessary, but not sufficient, conditions for long-term success (which requires creating true value). In other words, Georgia-Pacific and other Koch companies are not interested in profits or growth obtained without integrity, full compliance, and excellence in all aspects of managing the environment, health, and safety (EHS). Georgia-Pacific and Koch executives readily admit that lots of companies have similar guiding principles. The difference is how those principles are integrated into running the company and the unwavering commitment to those principles.

For example, at Georgia-Pacific and Koch companies, adherence to the guiding principles begins at the recruitment and hiring process. Hiring managers are trained on a selection process that focuses on finding people who have the skills and knowledge to do the job and, more importantly, share a set of values and beliefs consistent with the company principles. And it doesn't stop at the hiring process. Performance on those principles is also a key part of every person's performance reviews and compensation. In other words, it's not just what you accomplish but how that matters. What does all this mean?

To use our earlier analogy about bad apples and bad barrels, Georgia-Pacific and Koch companies believe strongly that you need both: a focus on finding and retaining the good apples and building systems, tools, and processes-the good barrels-to make sure these employees can contribute at their fullest potential to create real, long-term value.

At the same time, managers must focus on the inevitable-that there may be a few bad apples who choose to conduct business inconsistent with the company's principles, in spite of best efforts with training and tools provided, and therefore must be dismissed. That, of course is easier said than done.

Early on in the transition with Georgia-Pacific, the new leadership had to deal with a few employees and managers, and even some executives, whose deliberate actions were inconsistent with the company's principles and philosophy. A few ultimately were let go, and the company grapevine became ripe with discussion of dismissals that were not understood. ‘‘Frankly, we got behind in efforts to communicate with senior leaders about these situations and how they were consistent with our philosophy and focus,'' Butz says. Working with the communications team at the company, Butz scheduled a series of meetings with company leaders to better articulate expectations and the desired culture. Butz spoke to each group using real-life examples (without names, of course) to help illustrate the practical application of MBM and the guiding principles. ‘‘We provided a series of SBOs (situations, behaviors and outcomes),'' Butz explains.

Bad decisions, he continues, come from either gaps in knowledge and skills or gaps in values and beliefs. For knowledge and skills gaps, employees may get more training or better tools. For values and beliefs gaps, employees may be dismissed-even top-performing employees. ‘‘When these leaders understood the details in each situation, not only did they agree we were consistently applying our principles, but also believed that we can get real results if we drive behavior consistent with those principles,'' Butz says. ‘‘One manager even told me that after he had to dismiss one of his top-performing employees for making a decision the employee knew was wrong, an example of a values and beliefs gap, the manager had a few sleepless nights wondering if he wanted to stay at the company.

In the end, he decided that this was exactly the kind of company he wanted to work for-one that said integrity was the most important thing and acted that way.'' Truly, compliance with the law, ethical behavior, and superior EHS performance are fundamental expectations of all Georgia-Pacific employees. Leaders must commit to this compliance priority and lead through actions, not just words. The company sets very clear and demanding expectations on leaders. They must use MBM to establish a vision for the compliance and ethics expectations for their group, address gaps to develop the MBM culture, identify and manage risk relevant to their businesses, and work on continuous improvement. Once the culture-as part of the larger MBM culture-begins to take hold, the compliance systems, standards, and programs designed to help leaders and employees achieve and sustain compliance excellence are used to obtain real results, becoming effective perhaps for the first time.

These begin with the Georgia-Pacific Code of Conduct handbook for all employees, but don't end there. The company has more than 50 specific corporate compliance standards that are translated into multiple languages to support employees around the world. These standards address commercial, environmental, and health and safety areas. Each standard is designed as a tool to help employees identify and manage risk and make the right decision. Each standard has an assigned owner who is responsible for a structured process that includes periodic risk assessment, training delivery, implementation and tracking, audits, and self-assessment within the business and functional unit. Taken together, these compliance systems, standards and programs are all tools that help reinforce the culture and support Georgia-Pacific business units in achieving the vision of compliance and ethics excellence. Simply put, they are incorporated into how the company is run.

A comprehensive, strategic communications plan helps drive understanding and commitment to compliance and ethics efforts across the company. Key messages are echoed in town hall meetings, company television broadcasts, intranet videos, e-mails to employees, and newsletter articles. Among other issues, those communications stress that Georgia-Pacific employees who encounter an issue or decision that does not feel right are expected to discuss and challenge the situation-to ‘‘stop, think and ask''-in order to make the right decision that supports the values and principles of the company. Most important, Georgia-Pacific's program strives for continuous improvement through the use of a risk management system that leverages the skills and knowledge of people across the company to improve in all areas.

The process facilitates continuous improvement, through a plan-do-check-adjust model, to achieve the goal of superior performance. Ultimately, the vision, culture development, and management system help Georgia-Pacific employees achieve compliance and ethics excellence. This means the company strives not only to meet legal requirements and company standards but also to go beyond those levels. For example, the Georgia-Pacific code of conduct not only prohibits unethical behaviors but also cautions employees to avoid activities that could have just the appearance of illegal or unethical conduct. These are not easy standards, and they aren't meant to be, but they are standards that Georgia-Pacific and other Koch companies believe are essential to creating real, long-term value for consumers, customers, employees, and the communities where the company operates.

Case Study Questions

1. What behavior do you think a system such as Market-Based Management might drive?

2. The case describes how a number of senior managers were dismissed after the acquisition. How could employees interpret this? Does this help drive ethical culture?

3. What is more challenging to fix: a knowledge gap or a values gap?

4. What could a hiring manager ask a candidate to determine if there's a good fit between the values of the organization and the candidate?

5. What do you think are the strongest benefits of this approach?