Nothing keeps a business owner up at night like the nagging feeling that ethical time bombs are ticking somewhere in his or her company. Human nature being what it is, no company is immune from problems--from the deliberate frauds and rogue actions of traders gone wild to the gradual erosion of values and ethical standards because “everyone does it.” As the owner, it's your responsibility to sniff out lingering problems before they explode. The good news--such as it is--is this: If there is a time bomb in your company, people know about it. You just need to get them to tell you.

The roadmap to high integrity and vigilant leadership consists of three main avenues:  (1) prevention, (2) detection, and (3) remedy.

An ounce of prevention...

Traditional ethical strategies focus on compliance programs, ethics training, and traditional operational risk assessment. But you should focus instead on:

  • Emphasizing not only “tone at the top” but “tone at the middle.”
  • Creating a culture where people can discuss risk and dubious behavior
  • Popularizing the use of ethical “tests”: for example, “How would we look if this business practice became public?”
  • Encouraging story telling about respected company leaders who overcame moral dilemmas in the past.
  • Ensuring that reward systems don’t create conflicts between business objectives and integrity norms. 

How to learn about problems faster

Traditional tools of detection include hot lines and analysis of compliance data. They're not nearly enough. Newer tools emphasize:

  • Better peripheral vision to detect anomalies sooner and then share
  • Improving how to make sense of weak signals by shifting your frame
  • Scenario planning to amplify weak signals and connect the dots
  • Spotting signs that risks have been normalized (“everyone does it”) e
  • Encouraging whistle blowers instead of shunning or punishing them
  • Creating a centrally accessible data base with risk-relevant information for each employee

For example, KPMG has created a central data base about individual employees that can be used for risk assessment when making new assignments or promotions.

How to fix them when they occur

Traditional approaches emphasize the role of HR, legal and compliance programs. Newer tools emphasize:

  • Encouraging leaders to engage in MBWA (Management by Walking Around) and skip-level sessions with employees lower down.
  • Studying and copying best practices in the industry and beyond
  • Measuring and rewarding enterprise integrity in systematic ways
  • Investing in crisis management, team building and leadership skills
  • Learning how to handle external media, PR and employees internally
  • Discussing relevant lessons from the past for tips and common pitfalls
  • Developing contingency plans and training to help contain damage

But the best solution lies in your attitude. Don't treat ethics as something for your lawyer to worry about, and don't assume that you have done all you need to do by writing rules that comply with ethical guidelines. People break rules, and lawyers are most useful only after the problem has become public. After all, most companies with scandals surging all over the Web  did have top lawyers and did maintain complex compliance programs. You yourself have to set the tone of integrity and keep open the lines of communication that prevent smarmy behavior from festering. It's your company. Its reputation is yours, and preserving it is ultimately your responsibility.

This article was co-authored with Prof Tom Donaldson of the Wharton School.