Organizational values often seem like abstractions. But if employees are to grasp and live those values every day, leaders need to develop and implement strategies that bring those values to life, that make the abstract visible, even tangible. One of Canada’s leading financial institutions has done just that, and in this article, one of its senior executives describes the strategies and why they have been successful.

Organizations have emerged from an era when integrity was accepted as a given and leadership was assumed to include the highest levels of personal accountability and ethical conduct. Recent examples of business leaders accused of abusing their power and substituting personal interests for the greater good of shareholders, employees and the public at large have shaken that confidence, created confusion and forced everyone to question those assumptions. More specifically, the absence of corporate values and ethical conduct has rattled investor confidence. Stock markets have plummeted and individuals have seen their hard-earned savings evaporate. As well, companies have collapsed into bankruptcy and long-term employees have lost their jobs.

In the wake of these scandals, and in an era characterized by intense scrutiny, businesses can no longer afford to assume that ethical leadership will exist without a conscious, deliberate effort to make it a reality. While there are differences in exactly what went wrong at each of the corporations behind the shocking headlines, they all had one thing in common: In each case, ethical leadership and corporate values went awry.

Corporate values must be made explicit at the top, where the tone is set for the rest of the organization. To foster a corporate culture where values are lived, there need to be in place explicit strategies and mechanisms for embedding those values throughout the organization. Long before the debate over ethical conduct began, some organizations — and BMO Financial Group (BMO) is one — began the process of bringing their corporate values to life. In order for there to be a sea change in corporate values, the tide must flow from the very top and articulate a clear tone for desirable and acceptable behaviour. This article will describe the strategies we employed for achieving this goal.

Strategy 1: Restructuring executive compensation

As a first measure in setting the tone at the top, we have made critical improvements in the way we compensate and reward executive members of BMO Financial Group, particularly when it comes to stock options. Last fiscal year, stock options were reduced by approximately two-thirds from the previous arrangements in favour of other forms of compensation.

Further, we have tied the ability to exercise those options far more tightly to performance and extended the right to exercise over a longer period of time than in the past. Those options that now form a part of an individual’s compensation no longer vest immediately. Rather, those options vest over a period of four years at the rate of 25 per cent a year – a more appropriate pace that we believe leads to meaningful long-term commitment and increased levels of high performance.

In addition, all senior executives can exercise a significant portion of those options only when certain share-price hurdles have been successfully reached; 33 percent of options can only be exercised once the share price has risen 50 per cent and another 34 per cent of options can only be exercised once share prices have increased by 100 percent. These high hurdles encourage executives to hold options for the long haul and to realize their gains only when all the other shareholders are also able to realize their own equally substantial gains.

Similar changes have also been made to the short- and medium-term portions of total compensation. While short-term compensation is mostly in the form of cash, mid-term incentives now consist of performance share units that vest and are paid out at the end of a three-year performance cycle. Moreover, the payout is based on BMO’s total shareholder return relative to other major Canadian banks. Equally important is that the payout can be directed downward, depending on the direction of the results.

But compensation hasn’t been the only issue despoiling the corporate landscape. Auditing firms have come under fire for tighter controls and potential conflict relating to revenue from consulting work. Other practices such as insider trading and analysts personally benefiting from their privileged position have been witnessed. No one in financial services has adopted a more thoughtful response to these very serious issues than BMO Financial Group. We eagerly embraced the new provisions of the Sarbanes-Oxley Act. Almost 30 per cent of our annual revenue flows from the United States, so we also follow the law of that land. Our Chief Executive Officer and Chief Financial Officer were among the first Canadian executives to certify financial information and sign off on it as required by United States law. Providing high-quality financial disclosure is not a new practice for our organization.

Strategy 2: Increased personal accountability

Beyond what’s required BMO has taken matters much further than demanded by Sarbanes-Oxley when it comes to auditing practices and internal controls. Each and every one of the top ten executives at BMO Financial Group signed off on the financial results that appeared in our 2002 and 2003 annual reports. This includes my signature along with the signatures of the other members of the Management Board Executive Committee. When corporate integrity is at stake, nothing can replace executive vigilance and nothing can match personal accountability.

And we didn’t stop there. At BMO Financial Group we’re not just interested in process, we’re proactive as well. Recently, we instituted further checks and balances. Every quarter before our financial results are released, I, along with the members of the Management Board Executive Committee, meet individually with our President and CEO, Tony Comper. He looks each of us in the eye and asks a series of penetrating questions relating to our key duties.

The questions focus on the efficient and effective operation of people, programs and budgets that come under our control. This is no pro forma performance. In fact, by scrutinizing our performance regularly, we are taking personal responsibility for everything we do and certifying the accuracy of everything we oversee professionally before the financial results can be released. In so doing, we are applying the memorable phrase that Ronald Reagan coined in the 1980s, when he was dealing with the former Soviet Union. That cold war adage applies here, too: “Trust but verify.”

Every employee follows a thirty-page guide entitled “FirstPrinciples: Our Code of Conduct.” The booklet contains a message from Tony Comper, as well as specifics about the ethical standards to which each employee must adhere. Employees are asked to read the publication once a year to remind them what’s expected, use the case studies to see how ethical practices play out in the workplace, and personally sign a declaration. Employees are then held accountable to these standards.

We teach that asking three key questions is an integral part of decision-making at all levels in BMO Financial Group. The three questions are: “Is it fair? Is it right? Is it legal?” The guide covers issues as diverse as property rights, gender discrimination and the environment from an ethical point of view. High ethical standards and a culture built on a foundation of personal accountability begin with core values. Core values set out the code of conduct which an organization will live by, and these values serve as a moral compass that sets standards for making decisions and individual behaviour. Moreover, they must be living values, not merely abstract ideas.

Strategy 3: Making values matter; measuring their effectiveness

Shared, visible values that are talked about affect performance and impact business. They provide a stable base for guiding employee decisions and actions in an otherwise rapidly changing workplace; they form an integral part of an organization’s value proposition to customers and employees; and they energize people to go the extra mile and be proud of their company. Simply put, values matter and employees care that the organizations they work for and represent are ethical and walk the talk of their values.

Corporate values cannot be brought to life if they are only introduced to the organization’s culture instead of making them part of the organization’s lifeblood. In such circumstances, the values come to be viewed as something apart. Instead, those values must be woven in to the fabric of the organization. From my perspective, the most effective way — and the things we are trying to do to live corporate values — is by making them as visible as you can in all of the organization’s key functions – from hiring to promotions to dismissal, from performance reviews to compensation, and from training to the development and design of employee policies and support programs.

Reading the corporate values is not enough. The corporate code must be a living document, and the values and principles outlined within it must be evident in the actions taken by the leadership. In other words, employees must see: 1) that the boss is willing to accept ethical behaviour as a constraint or cost; 2) that employees who are recognized and/or promoted are so rewarded because they have modeled ethical behaviour; and, 3) that there are consequences for acting unethically. In other words, employees have to know, see or learn that those who have behaved unethically will be held accountable for their actions.

Four years ago, my colleagues and I on BMO’s Management Board Executive Committee had an offsite meeting devoted to articulating our Corporate Values. BMO’s leadership sat down, reflected on our history and agreed on the statements that best reflect the values we have stood for and upon which our organization is built. This is what we came up with:

• We care about customers, shareholders, communities and each other.
• We draw our strength from the diversity of our people and our businesses.
• We insist upon respect for everyone and encourage all to have a voice.
• We keep our promises and stand accountable for our every action.
• We share information, learn and innovate to create consistently superior customer experiences.

These Corporate Values represent BMO’s core beliefs. They stand as our collective commitment to each other, to our customers, to our shareholders and the communities of which we are a part. They live in the way we work, in the solutions we offer, in the employment environment we provide and in the way we partner with the community. Every one of us plays a part.

In embedding values throughout the organization, education plays a fundamental role. In the area of training, our leadership has worked very hard over the last few years to embed the values that we hold as fundamental in our learning systems. Among our many leadership and managerial programs, the skills and traits associated with excellence in leadership are those that include ethical behaviour. Topics such as diversity and workplace equity are also part of the core curriculum. From our Strategic Leadership Program to our Managerial Leadership curriculum, those competencies that have been identified as representing excellence in leadership performance are those that are consistent with our Corporate Values and long-standing First Principles. Topics such as diversity, equity, and accommodation are part of the core curriculum. In addition, our Corporate Values are regularly communicated to employees and referred to in messages from senior leadership.

Clearly, what gets measured gets peoples’ attention. As of last year, we have begun to measure how well our Corporate Values are embedded in our workplace. We’re doing this via our Annual Employee Survey, which asks questions in order to gauge if the values are actually being lived in each area. A values index was created from the answers and sent to all leaders with over ten employees reporting to them. Going forward, we believe this source of employee feedback, coupled with others, will give us a greater understanding of how our Corporate Values and ethical behaviour actually play out in the workplace and where we need to focus.

In summary, if Corporate Canada is to become a leader in responsible and sustainable business practices, all agendas should include explicit strategies for fostering ethical leadership and accountability. Building a corporate culture based on a solid foundation of values and a high standard of personal accountability is not just about mitigating potential risk. It is fundamentally about creating an organization that truly realizes that responsibilities extend beyond maximizing shareholder value, to one that can be a positive force in our society.