HRM : Ethics and Governance

Fifth Edition

LINDA KLEBE TREVIÑO Distinguished Professor of Organizational Behavior and Ethics

Smeal College of Business

The Pennsylvania State University

KATHERINE A. NELSON Lecturer

Fox School of Business

Temple University

JOHNWILEY & SONS, INC.

MANAGING BUSINESS ETHICS

Straight Talk About How To Do It Right

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Library of Congress Cataloging-in-Publication Data

Treviño, Linda Klebe. Managing business ethics : straight talk about how to do it right / Linda Klebe Treviño, Katherine

A. Nelson. – 5th ed.

p. cm.

Includes index. ISBN 978-0-470-34394-4 (pbk.)

1. Business ethics. 2. Business ethics–Case studies. I. Nelson, Katherine A. II. Title.

HF5387.T734 2010

1740.4–dc22 2010020659

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

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BRIEF CONTENTS

SECTION I INTRODUCTION

CHAPTER 1 INTRODUCING STRAIGHT TALK ABOUT MANAGING BUSINESS ETHICS: WHERE WE’RE GOING AND WHY 2

SECTION II ETHICS AND THE INDIVIDUAL

CHAPTER 2 DECIDING WHAT’S RIGHT: A PRESCRIPTIVE APPROACH 38

CHAPTER 3 DECIDING WHAT’S RIGHT: A PSYCHOLOGICAL APPROACH 71

CHAPTER 4 ADDRESSING INDIVIDUALS’ COMMON ETHICAL PROBLEMS 111

SECTION III MANAGING ETHICS IN THE ORGANIZATION

CHAPTER 5 ETHICS AS ORGANIZATIONAL CULTURE 150

CHAPTER 6 MANAGING ETHICS AND LEGAL COMPLIANCE 207

CHAPTER 7 MANAGING FOR ETHICAL CONDUCT 255

CHAPTER 8 ETHICAL PROBLEMS OF MANAGERS 292

SECTION IV ORGANIZATIONAL ETHICS AND SOCIAL RESPONSIBILITY

CHAPTER 9 CORPORATE SOCIAL RESPONSIBILITY 322

CHAPTER 10 ETHICAL PROBLEMS OF ORGANIZATIONS 354

CHAPTER 11 MANAGING FOR ETHICS AND SOCIAL RESPONSIBILITY IN A GLOBAL BUSINESS ENVIRONMENT 399

INDEX 449

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CONTENTS

PREFACE XIII

SECTION I

INTRODUCTION

CHAPTER 1 INTRODUCING STRAIGHT TALK ABOUT MANAGING BUSINESS ETHICS: WHERE WE’RE GOING AND WHY 2

Introduction 2

The Financial Disaster of 2008 4

Borrowing Was Cheap 4

Real Estate Became the Investment of Choice 5

Mortgage Originators Peddled ‘‘Liar Loans’’ 5

Banks Securitized the Poison and Spread It Around 6

Those Who Were Supposed to Protect Us Didn’t 7

Moving Beyond Cynicism 9

Can Business Ethics Be Taught 13

Aren’t Bad Apples the Cause of Ethical Problems in Organizations? 13

Shouldn’t Employees Already Know the Difference between Right and Wrong? 15

Aren’t Adults’ Ethics Fully Formed and Unchangeable? 16

This Book is about Managing Ethics in Business 19

Ethics and the Law 20

Why Be Ethical? Why Bother? Who Cares? 21

Individuals Care about Ethics: The Motivation to be Ethical 21

Employees Care about Ethics Employee Attraction and Commitment 23

Managers Care about Ethics 23

Executive Leaders Care about Ethics 24

Industries Care about Ethics 26

Society Cares about Ethics: Business and Social Responsibility 27

The Importance of Trust 27

The Importance of Values 29

How the Book is Structured 30

Conclusion 32

Discussion Questions 32

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Exercise: Your Cynicism Quotient 33

Notes 34

SECTION II

ETHICS AND THE INDIVIDUAL

CHAPTER 2 DECIDING WHAT’S RIGHT: A PRESCRIPTIVE APPROACH 38

Introduction 38

Ethical Dilemmas 38

Prescriptive Approaches to Ethical Decision Making in Business 39

Focus on Consequences (Consequentialist Theories) 40

Focus on Duties, Obligations, and Principles (Deontological Theories) 42

Focus on Integrity (Virtue Ethics) 46

Eight Steps to Sound Ethical Decision Making in Business 52

Step One: Gather the Facts 52

Step Two: Define the Ethical Issues 52

Step Three: Identify the Affected Parties (the Stakeholders) 53

Step Four: Identify the Consequences 54

Step Five: Identify the Obligations 56

Step Six: Consider Your Character and Integrity 56

Step Seven: Think Creatively about Potential Actions 57

Step Eight: Check Your Gut 58

Practical Preventive Medicine 58

Doing Your Homework 58

When You’re Asked to Make a Snap Decision 59

Conclusion 61

Discussion Questions 62

Exercise: Clarifying Your Values 63

Case: Pinto Fires 64

Notes 69

CHAPTER 3 DECIDING WHAT’S RIGHT: A PSYCHOLOGICAL APPROACH 71

Introduction 71

Ethical Awareness and Ethical Judgment 71

Individual Differences, Ethical Judgment, and Ethical Behavior 75

Ethical Decision-Making Style 76

Cognitive Moral Development 77

Locus of Control 84

Machiavellianism 85

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Moral Disengagement 86

Facilitators of and Barriers to Good Ethical Judgment 88

Thinking about Fact Gathering 88

Thinking about Consequences 89

Thinking about Integrity 91

Thinking about Your Gut 93

Unconscious Biases 94

Emotions in Ethical Decision Making 95

Toward Ethical Action 97

Revisiting the Pinto Fires Case: Script Processing and Cost-Benefit Analysis 102

Cost-Benefit Analysis 103

Conclusion 105

Exercise: Understanding Cognitive Moral Development 105

Discussion Questions 106

Notes 107

CHAPTER 4 ADDRESSING INDIVIDUALS’ COMMON ETHICAL PROBLEMS 111

Introduction 111

Identifying Your Values—and Voicing Them 112

People Issues 114

Discrimination 115

Harassment, Sexual and Otherwise 119

Conflicts of Interest 122

What Is It? 123

How We Can Think about This Issue 125

Why Is It an Ethical Problem? 126

Costs 126

Customer Confidence Issues 127

What Is It? 127

How We Can Think about This Issue 131

Why Is It an Ethical Problem? 131

Costs 131

Use of Corporate Resources 132

What Is It? 132

How We Can Think about This Issue 136

Why Is It an Ethical Problem? 136

Costs 136

When All Else Fails: Blowing the Whistle 137

When Do You Blow the Whistle? 139

How to Blow the Whistle 140

Conclusion 145

Discussion Questions 145

Notes 147

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SECTION III

MANAGING ETHICS IN THE ORGANIZATION

CHAPTER 5 ETHICS AS ORGANIZATIONAL CULTURE 150

Introduction 150

Organizational Ethics as Culture 151

What Is Culture? 151

Strong versus Weak Cultures 151

How Culture Influences Behavior: Socialization and Internalization 152

Ethical Culture: A Multisystem Framework 153

Alignment of Ethical Culture Systems 154

Ethical Leadership 156

Executive Leaders Create Culture 156

Leaders Maintain or Change Organizational Culture 157

Other Formal Cultural Systems 166

Selection Systems 166

Values and Mission Statements 168

Policies and Codes 169

Orientation and Training Programs 171

Performance Management Systems 172

Organizational Authority Structure 175

Decision-Making Processes 178

Informal Cultural Systems 180

Role Models and Heroes 180

Norms: ‘‘The Way We Do Things around Here’’ 182

Rituals 182

Myths and Stories 183

Language 185

Organizational Climates: Fairness, Benevolence, Self-Interest, Principles 187

Developing and Changing the Ethical Culture 188

How an Ethical Culture Can Become an Unethical Culture 189

Becoming a More Ethical Culture 190

A Cultural Approach to Changing Organizational Ethics 192

Audit of the Ethical Culture 193

A Cultural Systems View 193

A Long-Term View 194

Assumptions about People 194

Diagnosis: The Ethical Culture Audit 194

Ethical Culture Change Intervention 196

The Ethics of Managing Organizational Ethics 198

Conclusion 198

Discussion Questions 198

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Case: Culture Change at Texaco 199

Case: An Unethical Culture in Need of Change: Tap Pharmaceuticals 201

Notes 203

CHAPTER 6 MANAGING ETHICS AND LEGAL COMPLIANCE 207

Introduction 207

Structuring Ethics Management 208

Making Ethics Comprehensive and Holistic 210

Managing Ethics: The Corporate Ethics Office 211

Ethics and Compliance Officers 212

The Ethics Infrastructure 214

The Corporate Ethics Committee 215

Communicating Ethics 215

Basic Communications Principles 216

Evaluating the Current State of Ethics Communications 219

Multiple Communication Channels for Formal Ethics Communication 220

Interactive Approaches to Ethics Communication at USAA 222

Mission or Values Statements 224

Organizational Policy 226

Codes of Conduct 227

Communicating Senior Management Commitment to Ethics 227

Formal and Informal Systems to Resolve Questions and Report Ethical Concerns 235

Using the Reward System to Reinforce the Ethics Message 238

Evaluating the Ethics Program 239

Surveys 240

Values or Compliance Approaches 242

Globalizing An Ethics Program 243

Conclusion 245

Discussion Questions 245

Case: Improving an Ethical Culture at Georgia-Pacific 247

Appendix: How Fines Are Determined under the U.S. Sentencing Guidelines 252

Notes 253

CHAPTER 7 MANAGING FOR ETHICAL CONDUCT 255

Introduction 255

In Business, Ethics Is about Behavior 255

Practical Advice for Managers: Ethical Behavior 256

Our Multiple Ethical Selves 256

The Kenneth Lay Example 257

The Dennis Levine Example 259

Practical Advice for Managers: Multiple Ethical Selves 259

Rewards and Discipline 260

People Do What’s Rewarded and Avoid Doing What’s Punished 260

People Will Go the Extra Mile to Achieve Goals Set by Managers 261

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How Goals Combined with Rewards Can Encourage Unethical Behavior 262

Practical Advice for Managers: Goals, Rewards and Discipline 263

Recognize the Power of Indirect Rewards and Punishments 264

Can Managers Really Reward Ethical Behavior? 266

What about the Role of Discipline? 267

Practical Advice for Managers: Discipline 269

‘‘Everyone’s Doing It’’ 270

People Follow Group Norms 270

Rationalizing Unethical Behavior 270

Pressure to Go Along 271

Practical Advice for Managers: Group Norms 271

People Fulfill Assigned Roles 272

The Zimbardo Prison Experiment 273

Roles at Work 274

Conflicting Roles Can Lead to Unethical Behavior 275

Roles Can Also Support Ethical Behavior 275

Practical Advice for Managers: Roles 276

People Do What They’re Told 276

The Milgram Experiments 277

Obedience to Authority at Work 279

Practical Advice for Managers: Obedience to Authority 279

Responsibility Is Diffused in Organizations 279

‘‘Don’t Worry—We’re Taking Care of Everything’’ 280

Diffusing Responsibility in Groups 280

Diffusing Responsibility by Dividing Responsibility 281

Diffusing Responsibility by Creating Psychological Distance 282

Practical Advice for Managers: Personal Responsibility 283

Conclusion 284

Discussion Questions 285

Case: Sears, Roebuck, and Co.: The Auto Center Scandal 285

Notes 289

CHAPTER 8 ETHICAL PROBLEMS OF MANAGERS 292

Introduction 292

Managers and Employee Engagement 292

Managing the ‘‘Basics’’ 295

Hiring and Work Assignments 295

Performance Evaluation 296

Discipline 299

Terminations 301

Why Are These Ethical Problems? 303

Costs 303

Managing a Diverse Workforce 304

Diversity 305

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Harassment 306

Family and Personal Issues 307

Why Are These Ethical Problems? 309

Costs 309

The Manager as a Lens 310

The Buck Stops with Managers 310

Managers Are Role Models 313

Managing Up and Across 314

Honesty Is Rule One 315

Standards Go Both Ways 315

Conclusion 316

Discussion Questions 317

Notes 318

SECTION IV

ORGANIZATIONAL ETHICS AND SOCIAL RESPONSIBILITY

CHAPTER 9 CORPORATE SOCIAL RESPONSIBILITY 322

Introduction 322

Why Corporate Social Responsibility? 322

Types of Corporate Social Responsibility 329

Economic Responsibilities 329

Legal Responsibilities 330

Ethical Responsibilities 330

Philanthropic Responsibilities 331

Triple Bottom Line and Environmental Sustainability 334

Is Socially Responsible Business Good Business? 337

The Benefit of a Good Reputation 338

Socially Responsible Investors Reward Social Responsibility 338

The Cost of Illegal Conduct 339

The Cost of Government Regulation 340

What the Research Says about Social Responsibility and Firm Performance 343

Being Socially Responsible Because It’s the Right Thing to Do 346

Conclusion 348

Discussion Questions 348

Case: Merck and River Blindness 349

Notes 351

CHAPTER 10 ETHICAL PROBLEMS OF ORGANIZATIONS 354

Introduction 354

Managing Stakeholders 355

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Ethics and Consumers 356

Conflicts of Interest 357

Product Safety 365

Advertising 369

Ethics and Employees 373

Employee Safety 374

Employee Downsizings 378

Ethics and Shareholders 381

Ethics and the Community 386

Why Are These Ethical Issues 388

Costs 388

Conclusion 389

Discussion Questions 389

Notes 394

CHAPTER 11 MANAGING FOR ETHICS AND SOCIAL RESPONSIBILITY IN A GLOBAL ENVIRONMENT 399

Introduction 399

Focus on the Individual Expatriate Manager 400

The Difficulties of Foreign Business Assignments 400

The Need for Structure, Training, and Guidance 400

Foreign Language Proficiency 401

Learning about the Culture 401

Recognizing the Power of Selective Perception 403

Assumption of Behavioral Consistency 404

Assumption of Cultural Homogeneity 404

Assumption of Similarity 405

Ethics-Related Training and Guidance 405

How Different Are Ethical Standards in Different Cultures—Really? 411

Development of Corporate Guidelines and Policies for Global Business Ethics 413

The Organization in a Global Business Environment 417

Deciding to Do Business in a Foreign Country 417

Development of a Transcultural Corporate Ethic 425

Conclusion 429

Discussion Questions 429

Case: Selling Medical Ultrasound Technology in Asia 431

Case: Google Goes to China 434

Appendix: Caux Round Table Principles for Business 440

Notes 444

INDEX 449

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PREFACE WHY DOES THE WORLD NEED ANOTHER BUSINESS ETHICS TEXT?

The popular business press is replete with feature stories describing ethical melt- downs and how those corporate misdeeds have eroded the public trust of business leaders and their organizations. As most of us learned at our parents’ knees, trust and reputation are built over many years and take but an instant to be destroyed. So here we stand at a crossroads. Is it going to be business as usual for business? Or are busi- nesspeople going to commit to regaining the trust of our peers, our families, and our fellow citizens?

In response to this crisis of trust, universities across the country are scrambling to design new courses that incorporate leadership, communication skills, the basics of human resources management, and ethics. That’s why we wrote this book; we want to make the study of ethics relevant to real-life work situations. We want to help businesspeople regain the trust that’s been squandered in the last few years.

This book is different from other business ethics texts in several key ways: First, it was written by an unusual team. Linda Trevi~no is Distinguished Professor of Orga- nizational Behavior and Ethics in the Management and Organization Department of the Smeal College of Business at the Pennsylvania State University. Her prolific re- search on the management of ethical conduct in organizations is published in the field’s best journals and is internationally known and referenced. She has more than 20 years of experience in teaching students and executives in university and non- university settings, and she also has experience as a corporate consultant and speaker on ethics and management issues. Kate Nelson is a full-time faculty member at the Fox School of Business at Temple University in Philadelphia, where she teaches management, business ethics, and human resources to undergraduates. Before joining Temple’s faculty, Kate worked for more than 30 years in strategic organizational communication and human resources at a variety of companies including Citicorp, Merrill Lynch, and Mercer HR Consulting. She also has worked as a consultant spe- cializing in ethics and strategic employee communications and has designed ethics programs for numerous organizations. We think that bringing together this diverse mix of theory and practice makes the book unique.

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Second, the approach of this book is pragmatic, and that approach is a di- rect response to complaints and suggestions we have heard from students, employees, and corporate executives. ‘‘Make it real,’’ they have said. ‘‘Tell us what we need to know to effectively manage people. Take the mystery out of this subject that seems so murky. Get to the point.’’ This book starts with the assumption that ethics in organizations is about human behavior in those organi- zations. We believe that behavior results from a number of factors, many of which can be influenced by managers and the organizations themselves. As a result, this book is organized into sections about individuals, managing in orga- nizational context, and organizations in their broader environment, the ethical dilemmas managers face, and how they might solve them. It also features philo- sophical and psychological factors of decision making, ethical culture, how man- agers can influence employees’ behavior through ethical leadership, what corporations are doing to encourage ethical behavior and corporate social re- sponsibility, and international business ethics.

Third, we have used a different mix of examples than is found in conventional business ethics texts. Most texts focus on high-level, corporate dilemmas: ‘‘Should senior executives be paid at a particular level? Should this industry do business in China? Should American environmental laws apply to American companies operat- ing overseas?’’

Although these are interesting issues, the vast majority of students and employees will never have to face them. However, they will have to hire, man- age, assess performance, discipline, fire, and provide incentives for staff, as well as produce quality products and services and deal effectively and fairly with customers, vendors, and other stakeholders. As a result, although we do feature some classic corporate ethics cases, many of the cases in this book center on the kinds of problems that most people will encounter during the course of their careers. All of the ‘‘hypothetical’’ cases in this text are based on actual incidents that have happened somewhere—it’s the real stuff that goes on every day in offices across the country.

Fourth, this book was developed with the help of students at a number of universities and with guidance from numerous managers and senior executives from various corporations and organizations. We have incorporated the latest re- search on ethics and organizational behavior into this text, and much of the ma- terial that appears within these pages has been tested in both university and corporate settings.

Fifth, we believe this book is easy to use because it is organized to be flexi- ble. It can be used alone to teach an ethics course, or it can be used as a supple- ment to a more conventional, philosophical text. The sections in this book basically stand alone and can be taught in a different sequence than is presented here, and the book also has many cases and vignettes you can use for class dis- cussion. Wiley will create custom versions of the text with selected chapters if requested to do so. To help teach this course, the instructor’s guide provides resources such as outlines, overheads, discussion questions, and additional cases

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for class discussion; it also supplies references to many other resources that can be used to teach the course.

ANOTE TO STUDENTS

This book was written for you. We have listened to your complaints and your wish lists and have tried to pare this complicated subject down to a di- gestible size. The cases that appear in this book all happened to people just like you, who were not as prepared to deal with the dilemmas as you will be after taking this course. Before you get into this book, we have one suggestion: know that regardless of how large an organization you find yourself in, you’re not some little cog in a giant wheel. You have the power to change not only your own behavior and knowledge of ethics but also the behavior and knowl- edge of the people you work with. Use that power: the job you save may be your own.

We also want to suggest that when interviewing for your next job, you try to make sure that you’re joining an organization that values ethics. Are ethics and val- ues described in the firm’s recruiting materials? Do organizational representatives talk about ethics and values during their interviews with you? When you ask about how their organization demonstrates ethics and values, does your interviewer respond enthusiastically, or does he or she look like a deer caught in headlights so you in- stantly know that he or she has never even considered this question before? It’s much easier to get into an ethical organization in the first place than try to get out of an unethical one later on.

ACKNOWLEDGMENTS

It takes a lot of work by a lot of people to make a project like this come to- gether. We’ll begin with some joint thank-yous. Then, because this process has been so meaningful for each of us, we will separately share our more personal thanks.

We both offer our heartfelt appreciation to current and former executives who helped us with this and previous editions, in particular, Larry Axline, Jef- frey Braun, Jacquelyn Brevard, Earnie Broughton, Steve Church, Frank Daly, Srinivas Dixit, Ray Dravesky, Kent Druyvesteyn, Dennis Jorgensen, John O’Byrne, Joe Paterno, Robert Paul, Jo Pease, Shirley Peterson, Vin Sarni, Carl Skooglund, Nan Stout, Phil Tenney, and George Wratney. All shared their valu- able time and advice, some of them on multiple occasions. Their wisdom can be found throughout this book, but especially in Chapter 6. They helped bring the subject of managing business ethics to life.

We also wish to thank Gary Weaver (University of Delaware) for being our philosophy adviser for the first edition, and Dennis Gioia (Penn State faculty member and dear friend) for sharing his Pinto fire case and especially his reflections.

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John Wiley & Sons, Inc. is a fine publisher with a superb team. These people encouraged, nudged, nudged, and nudged again. We have many Wiley people to thank for helping to make this book a success.

The book’s past and present reviewers also contributed significantly to making this a better book, and we thank them as well. We also thank our students and partic- ularly Penn State undergraduate, MBA, and Executive MBA students who provide us with excellent feedback and advice semester after semester.

SPECIAL ACKNOWLEDGMENTS—FROM LINDA K. TREVIIÑO

I have always wondered what makes people do especially good and bad things. As the child of Holocaust survivors, I have a unique perspective on and curios- ity about such issues. My parents and their families escaped Nazi Germany be- fore Hitler began killing Jews en masse, but not before my maternal grandfather was severely beaten and not before my fraternal grandfather was taken to a con- centration camp (euphemistically referred to as a work camp at the time). My father’s family received papers allowing them to emigrate from Germany to the United States shortly before the war began (in spring 1939), allowing my grand- father to be released from the camp where he was being held. Both families landed in New York, where they survived through sheer grit, perseverance, and belief in the American dream. Although my family never dwelled on their expe- riences in Germany, I grew up with a special sensitivity and concern for equality and fair treatment. I traveled to Germany with my dad and brother about 30 years ago. We visited the tiny towns where Mom and Dad were born and met some wonderful German people who had helped them or at least tried to. I walked through a German village holding hands with the elderly woman who had been my maternal grandmother’s best friend and who urged the family to leave Germany because she anticipated the worst. I met another elderly woman who had cared for my father and aunt when they were children and who tried to take care of their home when they were forced to leave everything behind. These were special people, and the opportunity to connect with them holds a special place in my heart. So my family and background influenced me in ways I can’t fully grasp with my mind but in ways that I feel in my soul. And I know that my quest to understand what makes people do good and bad things has something to do with that influence.

Many special people have helped along the path that brought me to the writing of this book. I’ll begin by thanking my mentors in the doctoral program at Texas A&M University’s management department. Many thanks to Stuart Youngblood (now at Texas Christian University), Don Hellriegel, Richard Woodman, Dick Daft (now at Vanderbilt University), and Mary Zey, who encouraged my early theorizing and re- search in business ethics. They told me to go with my gut and to do what was impor- tant, and they supported my every step. My exceptional colleagues in the

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Management and Organizational Department at Penn State have also been supportive all along the way. They have read my papers and challenged me to think harder and make my work ever better.

My thanks also to the colleagues who have worked with me on ethics-related research over the years and who have been partners in learning about the manage- ment of business ethics: particularly Gail Ball, Michael Brown, Ken Butterfield, James Detert, David Harrison, Laura Hartman, Jennifer Kish Gephart, Don McCabe, Bart Victor, Gary Weaver, and more. This shared learning has contributed to the book in important ways.

Shortly after becoming a faculty member at Penn State, I had the good fortune to meet my friend and coauthor, Kate Nelson. I was intrigued by a brief Wall Street Journal article about Kate’s work at Citibank (you’ll read more about that later). We met and became fast friends, who (believe it or not) loved talking about business ethics. We decided to write an article together, and the rest, as Kate says, is history. Kate brought the real world into this book. She was also willing to tell me when I was getting too academic (not her words exactly). It became clearer and clearer to me that we were supposed to write this book together, and I’m very glad we did. Thanks, Kate!

The article became a book proposal that we first shared with publishers at the Academy of Management meeting in 1992 (almost 20 years ago now). Shortly there- after, Bill Oldsey (formerly publisher at John Wiley & Sons, Inc.) showed up in my office at Penn State. His enthusiasm for the book was immediate and infectious, and he talked us into writing a textbook rather than a trade book. I want to thank Bill for the special part he played.

Over the years, Penn State colleagues, administrators, and donors have contin- ued to support my efforts in the area of business ethics. I am grateful to the Cook family, especially the late Ann Cook, for supporting business ethics at Smeal and the Cook Fellowship that I held for a number of years. My thanks also to Mrs. Mercedes Shoemaker (and her late husband, Albert) for supporting the Shoemaker program in Business Ethics that has brought us wonderful speakers on the topic of business ethics year after year. Finally, I am especially grateful to Dean James Thomas for naming me Distinguished Professor of Organizational Behavior and Ethics.

My association with the Ethics Resource Center Fellows program (see www. ethics.org) has connected me with executives who manage ethics in large business organizations as well as consultants and those in government who are interested in making the business world (and the rest of the world, for that matter) a more ethical place. I appreciate the relationships and the learning that have come from this associ- ation as well as the time these executives have shared with me. In particular, I appre- ciate the funding that this group has provided for research that has found its way into this book, especially research on executive ethical leadership.

My heartfelt thanks also go to family members, colleagues, and many dear friends not only for cheering me on (as usual) but also for their many contributions to this book. They have served as readers and interviewees. They have provided clip- ping services, helped me make contacts, and offered ideas for cases. They were there

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when I was overwhelmed. I can’t thank them enough. Finally, I thank the light of my life, Dan, for the inspiration, love, and support he provides every day of my life and for being one of the most ethical human beings I know.

SPECIAL ACKNOWLEDGMENTS—FROM KATHERINE A. NELSON

I began to learn about ethics and integrity as a very young child in a family where ‘‘doing it right’’ was the only option. I was blessed to grow up hearing about how your reputation is priceless and you must always guard it and act in ways that enhance that reputation. As a result, my biggest debt is to my parents, the late Harry R. and Bernadette Prendergast Nelson (formerly of New Hartford, New York), and my brother, James V. Nelson of Pasadena, California. My parents worked tirelessly to set Jim and me on the right path, and Jim’s generosity and enthusiastic support encouraged me not only to teach ethics but also to write this book. (Jim proved to me that one can be an investment banker and have high ethical standards, and I’m very proud of him.) I’m also grateful to Jim’s wife, Susan, for her many encouraging words of support and for giving our family its two most precious additions, Conor Vincent and James Patrick Nelson. Thanks to my dearest friends, for their friendship, love, and support: Rose Ciotta, Elizabeth Dow, Carol Dygert, Ann Frazier Hedberg, and Gail Martin. Thanks also to the educational institutions that provided me with a sound footing in values: Utica Catholic Academy in Utica, New York, and the Col- lege of Mount St. Vincent in Riverdale, New York.

If I had ever known how much fun it is to teach, I might have made the transition to academia much earlier. Many thanks to the deans at the Fox School of Business at Temple University—including Moshe Porat, Rajan Chandran, and Diana Breslin Knudson, who took a chance on my teaching ability—and thanks to my many students past and present, who have enriched my life in ways I could not have imagined. Sincere thanks also to my many colleagues at Temple, who were so welcoming to this corporate refugee and who made me feel so much a part of this wonderful institution, especially: Norm Baglini, Gary Blau, Debbie Campbell, Kathleen Davis, Arlene Dowd, Deanna Geddes, Terry Hal- bert, John McClendon, and Don Wargo.

Thanks go to the many managers who, each in his or her own way, taught me that business ethics need not be an oxymoron: Christopher York, Don Armi- ger, Peter Thorp, Judith Fullmer, Jerry Lieberman, and Jane Shannon—all for- merly with Citicorp in New York City; and Debra Besch, Charlie Scott, and Lea Peterson, all currently or formerly with Mercer HR Consulting in Philadel- phia and Boston. And thank you to Allan Kennedy, the coauthor of the ground- breaking book from the late 1970s, Corporate Cultures. While working at Citicorp as a McKinsey consultant back in 1985, Allan was the very first person who encouraged me to go into ethics by helping me germinate the idea of de- signing an ethics game for Citicorp.

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The most important thank-you goes to my wonderful husband, Stephen J. Morgan—an honorable man if there ever was one—who inspires and loves me every day. This book and my teaching would not be possible without his support, wisdom, and encouragement.

Of course, a final thank-you goes to my coauthor, Linda Trevi~no, for her dear, dear friendship and for working with me to produce this book in what, in comparison to accounts from other writing teams, was an almost painless experience.

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SECT ION I INTRODUCTION

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CHAPTER1 INTRODUCING STRAIGHT TALK ABOUT MANAGING BUSINESS ETHICS: WHERE WE’RE GOING AND WHY

INTRODUCTION

Back in 1993, when we sat down to write the first edition of this book, people won- dered if business ethics was just a fad. At that point, companies were just beginning to introduce ethics into orientations and management training programs. In academia, business ethics was just beginning to gain traction as a subject for serious academic study and some business schools were going so far as to require a business ethics course to graduate.

Back then there was still the feeling among many experts that business ethics— like time management, quality circles, and other management buzzwords of the day—would soon become a footnote in texts that described business fads of the late twentieth century. Despite multiple waves of scandal over the years, these have often been portrayed as temporary blips. For example, one prominent business writer for Fortune Magazine wrote an article in 2007 entitled ‘‘Business is Back!’’ Here’s a choice excerpt . . . ‘‘It must be said: The shaming is over. The 51/2 year humiliation of American business following the tech bubble’s burst and the Lay-Skilling-Fastow- Ebbers-Kozlowski-Scrushy perp walks that will forever define an era has run its course. After the pounding and the ridicule, penance has finally been done. No longer despised by the public, increasingly speaking up and taking stands, beloved again by investors, chastened and much changed—business is back.’’1 Could he have been more wrong? Business managed to outdo itself on the shame index yet again just about a year later. We’ve seen these ethical debacles occur regularly for the past 25 years. As a result, we’re convinced that business ethics is far from a fad. It’s an ongoing phenomenon that must be better understood and managed and for which business professionals must be better prepared.

We tell our students that serious ethical scandals often result from multiple parties contributing in their own small or large ways to the creation of a catastrophe. As you’ll

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read later on in this book, Enron’s collapse in 2001 was not just the failure of Enron executives and employees, but also the failure of Enron’s auditors, the bankers who loaned the company money, and the lawyers who never blew the whistle on Enron’s shenanigans. However, no scandal of recent years—not even Enron—matches the financial industry debacle in 2008. The crisis was unparalleled in its scope and has fueled public outrage like no other business disaster in our lifetime. The aftermath has people around the world angry and mistrustful of companies, governments, regulators, rating agencies, and the people who work in them. If there was ever a crisis of trust and confidence, this is it. It is also a textbook-perfect example of how numerous people’s actions (and inactions) can conspire to spawn an almost unimaginable calamity.

Recent business history has proven beyond any doubt that divorcing business from ethics and values runs huge risks. Rushworth Kidder,2 the highly regarded ethics writer and thinker, recently wrote about the financial debacle and the resulting public anger. He eloquently described how free marketers cite Adam Smith’s Wealth of Nations to justify a breed of capitalism that abhors regulation and focuses on short- term profits over long-term stewardship. Kidder wisely noted that 17 years before his more famous book, Smith wrote another one entitled The Theory of Moral Senti- ments. Smith’s first book deserves more attention because he always presumed that the messages from these two books would go hand in hand. Smith’s ‘‘moral senti- ments’’ work rests on the assumption that human beings are empathetic; they care about others, and they derive the most joy from human love and friendship. His book opened with the following statement: ‘‘How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others. . . . ’’3 Smith believed that a good life derives from the expression of ‘‘benefi- cence,’’ not from material wealth. He acknowledged that self-love (which he also acknowledged) can spur the individual to better his own condition by besting com- petitors. But he argued that this must be done in a just manner and in the spirit of fair play as judged by an informed, ethical, and impartial spectator. We care what others think of us because we are first and foremost social beings. But we also are moral beings who want to do the right thing because it is the right thing to do (not just to win the praise of others). According to Smith, virtuous persons balance prudence (mature self-love), strict justice, and benevolence, and ideal societies are comprised of such persons. Finally, a flourishing and happy society is built upon a foundation of justice and rules of conduct that create social order. Smith was confident that human- kind would progress toward this positive ethical state; he called on leaders to avoid the arrogance of power and, instead, to be virtuous statesmen. Kidder’s point was that capitalism will succeed only when firmly tethered to a moral base, and he reminds us that Adam Smith—that hero of free marketers—knew that better than anyone.

We completely agree. We began this book almost 20 years ago with the firm belief that business isn’t just ‘‘better’’ when companies and businesspeople are ethi- cal, but rather that good ethics is absolutely essential for effective business practice. This is not just empty rhetoric. Work is essential to life, and most people work for a business of some kind. How we work and the standards we uphold while we are working affect much more than just commerce. Our business behavior also affects

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our personal and company reputations, politics, society at large, and even national reputation. For example, the 2008 financial crisis, while global in scope, had its roots in the United States, and the nation’s reputation has suffered because of the behavior of individuals and companies. Similarly, China’s reputation has suffered because of contaminants found in Chinese exports such as infant formula, drywall (used in construction), and children’s toys. So, corporate misbehavior does not happen in a vacuum, and it’s not just corporate reputations that suffer as a result. These scandals cast long shadows, and they often affect entire industries and countries. In this com- plex and increasingly transparent world, where reputation influences everything from who wants to hire you or trade with you to who buys your products to who finances your debt—and much more—unethical behavior in business is a very big deal indeed. So, let’s take a closer look at the elephant in the room: the near collapse of the financial markets in 2008 and what it has to do with business ethics.

THE FINANCIAL DISASTER OF 2008

The implosion of the financial markets in 2008 was largely not the result of illegal behavior. For the most part, the activities that brought down the U.S. economy and others around the world were not against the law, at least not yet (government regula- tors and the legal system often play catch-up after ethical debacles in business). Many of those activities, however, were unethical in that they ultimately produced great harm and were contrary to a number of ethical principles such as responsibility, transparency, and fairness. Let’s start with some of the factors that laid the ground- work for the disaster in the United States.

BorrowingWas Cheap

First, borrowing money became really cheap. In 2000, stocks in high-technology com- panies had soared to unsustainable heights and that bubble finally burst. To soften the effects on the U.S. financial markets, Alan Greenspan, who headed the Federal Reserve at that time, lowered the Fed Funds rate (the rate at which banks borrow money from the Federal Reserve) to almost zero. That move, seemingly innocent at the time, injected huge amounts of money into the U.S. financial system. It made the cost of borrowing so low that it fueled a glut of consumer borrowing. Suddenly, it was amazingly cheap to buy a new car, a wide-screen television, a backyard pool, a larger home, a second home, and all sorts of designer goodies. There was even encourage- ment to indulge. Following the terrorist attacks in September 2001, President George W. Bush told people that if they wanted to help the economy they should go shop- ping. And people did. Household debt levels rose to $13.9 billion in 2008, almost double what households owed in 2000, and savings dipped into negative territory. (Since the financial crisis, household savings have risen to 6.9 percent.4) Responsible borrowers should have thought about what they could afford rather than what bankers would lend to them. And responsible lenders should have established that borrowers could actually afford to pay back the loans before lending them money.

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Real Estate Became the Investment of Choice

Of course, people also want to invest in something safe, and what could be safer than real estate? There had been relatively few instances of real estate values declining, and when they did the declines were generally shallow and short-lived. A point of pride in the United States was the high percentage of Americans who owned their own homes. Investing in a home traditionally had been a very safe investment and one that was slow to appreciate in value. But suddenly in the early 2000s, real estate investing became a real moneymaker. With a backdrop of historically low interest rates, real estate became such a popular way to invest that demand soon outstripped supply and prices soared. The value of homes skyrocketed—homes that were selling for $300,000 in one year sold for $450,000 the next. Prices rose so fast that specula- tion grew tremendously. People bought houses with almost no down payment, remodeled them or waited a few months, and then resold the houses for a quick profit. A number of popular television programs showed viewers how to ‘‘flip’’ real estate properties for profit.

Since the cost of borrowing was so low and home equity had grown so quickly, many consumers borrowed on the equity in their homes and purchased additional real estate or a new car or financed a luxury vacation. For example, suppose someone purchased a house for $500,000 in 2003. By 2005, the home might have been worth $800,000. The home owner refinanced the mortgage—borrowing as much as the entire current worth of the house (because its value could only go up, right?), which resulted in a $300,000 cash infusion for the home owner. This practice was very popular, and it laid the groundwork for a huge disaster when the housing values fell off a cliff in 2008 and 2009. Imagine the home owner who refinanced the home just described. Imagine that he took the $300,000 and purchased a summer home and a sports car and paid for his children’s college educations. Suddenly, home values plummeted and his house lost 30 percent of its value, which was common in mar- kets such as California, Florida, Nevada, or Arizona, where the real estate bubble was particularly inflated. After the real estate bubble burst, his house was worth $560,000. Now suppose he loses his job and needs to sell his house because he can’t afford the mortgage payments. He can’t get $800,000 for his home, which is what he owes on his mortgage. His only choice is to work with the mortgage holder (probably a bank) to refinance (unlikely) or declare bankruptcy and walk away from the house. This is what a lot of home owners have done, and it is one of the factors at the heart of the current financial crisis. Lots of folks were in on this bubble mentality, getting what they could in the short term and not thinking very much about the likelihood (or inevitability) that the bubble would burst.

Mortgage Originators Peddled ‘‘Liar Loans’’

In the early 2000s, as housing investments increased in popularity, more and more people got involved. Congress urged lenders Freddie Mac and Fannie Mae to expand home ownership to lower-income Americans. Mortgage lenders began to rethink the

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old rules of financing home ownership. As recently as the late 1990s, potential home owners not only had to provide solid proof of employment and income to qualify for a mortgage, but they also had to make a cash down payment of between 5 and 20 percent of the estimated value of the home. But real estate was so hot and returns on investment were growing so quickly that mortgage lenders decided to loosen those ‘‘old-fashioned’’ credit restrictions. In the early 2000s, the rules for obtaining a mort- gage became way less restrictive. Suddenly, because real estate values were rising so quickly, borrowers didn’t have to put any money down on a house. They could bor- row the entire estimated worth of the house; this is known as 100-percent financing. Also, borrowers no longer needed to provide proof of employment or income. These were popularly called ‘‘no doc’’ (no documentation) or ‘‘liar loans’’ because banks weren’t bothering to verify the ‘‘truth’’ of what borrowers were claiming on their mortgage applications.

Banks Securitized the Poison and Spread It Around

At about the same time liar loans were becoming popular, another new practice was introduced to mortgage markets. Investors in developing countries were looking to the United States and its seemingly ‘‘safe’’ markets for investment opportunities. Cash poured into the country from abroad—especially from countries like China and Russia, which were awash in cash from manufacturing and oil respectively. Wall Street bankers developed new products to provide investment vehicles for this new cash. One new product involved the securitization of mortgages. (Note: structured finance began in 1984, when a large number of GMAC auto receivables were bundled into a single security by First Boston Corporation, now part of Credit Suisse.) Here’s how it worked: Instead of your bank keeping your mortgage until it matured, as had traditionally been the case, your bank would sell your mortgage— usually to a larger bank that would then combine your mortgage with many others (reducing the bank’s incentive to be sure you would pay it back). Then the bankers sold these mortgage-backed securities to investors, which seemed like a great idea at the time. Real estate was traditionally safe, and ‘‘slicing and dicing’’ mortgages divided the risk into small pieces with different credit ratings and spread the risk around. Of course, the reverse was also true, as the bankers learned to their horror. This method of dividing mortgages into little pieces and spreading them around could also spread the contagion of poor risk. However, starting in 2002 and for several years thereafter, people couldn’t imagine housing values falling. So much money poured into the system, and the demand for these mortgage-backed security products was so great, that bankers demanded more and more mortgages from mortgage originators. That situation encouraged the traditional barriers to getting a home mortgage to fall even farther. These investment vehicles were also based upon extremely complex mathematical formulas (and old numbers) that everyone took on faith and few attempted to understand. It looks like more people should have followed Warren Buffett’s sage advice not to invest in anything you don’t comprehend! Add to that toxic mix the relatively new idea of credit-default swaps

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(CDS). These complex financial instruments were created to mitigate the risk finan- cial firms took when peddling products like securitized mortgages. CDS are insur- ance contracts that protect the holder against an event of default on the part of a debtor. One need not own the loan or debt instrument to own the protection, and the amount of capital tied up in trading CDS is very small compared to trading other debt instruments. That is a very significant part in the increase in popularity at sell-side and buy-side trading desks. The big insurance company, AIG, was a huge player in this market, and so were the large banks. The firms that were coun- terparties to CDS never stepped back from the trading frenzy to imagine what would happen if both the structured finance market and the real estate bubble burst (as all bubbles eventually do) at the same time. Both underwriters and investors would be left holding the bag when the music stopped playing—and the U.S. tax- payer has had to bail out most of the financially-stressed firms to save the entire financial system from collapse. Please note that all of this happened in a part of the market that was virtually unregulated.

ThoseWhoWere Supposed to Protect Us Didn’t

One protection against financial calamity was thought to be the rating agencies such as Standard and Poor’s and Moody’s. They rate the safety or soundness of securities, including those securitized mortgage products. A credit opinion is defined as one which rates the timeliness and ultimate repayment of principal and interest. But, like everyone else, the rating agencies say they didn’t foresee a decline in housing prices; and consequently, they rated the mortgage securities as being AAA—the highest rating possible, which meant that the rating agencies considered these securities to be highly safe. The agencies are the subject of much criticism for their role in the crisis. If they had done a better job analyzing the risk (their responsibility), much of the crisis might have been avoided. But note that these rating agencies are hired and paid by the companies whose products they rate, thus causing a conflict of interest that many believe biased their ratings in a positive direction. So, people who thought they were making responsible investments because they checked the ratings were misled.

Another protection that failed was the network of risk managers and boards of directors of the financial community. How is it that one 400-person business that was part of the formerly successful insurance behemoth, AIG, could invest in such a way that it brought the world’s largest insurance company to its knees? The risk was underestimated all around by those professionals charged with anticipating such problems and by the board of directors that didn’t see the problem coming. The U.S. government (actually taxpayers) ended up bailing out AIG to the tune of $170 billion. The risk managers and boards of other financial firms such as Citigroup, Merrill Lynch, Lehman Brothers, Bear Stearns, and Wachovia were similarly blind.

On Wall Street, there were other contributing factors. First, bank CEOs and other executives were paid huge salaries to keep the price of their firms’ stocks at high levels. If their institutions lost money, their personal payouts would shrink. So, bank executives were paid handsomely to bolster short-term profits. The Wall Street

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traders were similarly compensated—they were paid multimillion-dollar bonuses for taking outsized risks in the market. What seemed to matter most were the short-term profits of the firm and the short-term compensation of those making risky decisions. The traders took risks, the bets were at least temporarily successful, and the bankers walked off with multimillion-dollar bonuses. It didn’t matter that the risk taking was foolish and completely irresponsible in the long run. The bonus had already been paid. Consequently, a short-term mentality took firm root among the nation’s bank- ers, CEOs, and boards of directors.

Finally, we can’t examine the financial crisis without questioning the role of regulatory agencies and legislators. For example, for a decade, investor Harry Markopolos tried on numerous occasions to spur the Securities and Exchange Commission to investigate Bernard L. Madoff. The SEC never did uncover the largest Ponzi scheme in the history of finance. The $65-billion-dollar swindle unraveled only when Madoff admitted the fraud to his sons, who alerted the SEC and the U.S. attorney’s office in New York in December 2008. Others who are culpable in the financial crisis are members of the U.S. Congress, who deregu- lated the financial industry, the source of some of their largest campaign contribu- tions. Among other things, they repealed the Glass-Steagall Act, which had been passed after the U.S. stock market crash in 1929 to protect commercial banking customers from the aggression and extreme risk taking of investment bank cultures. The act created separate institutions for commercial and investment banks, and they stayed separate until the merger of Citicorp and Travelers to form Citigroup in 1998. The two companies petitioned Congress to eliminate Glass-Steagall, claiming that it was an old, restrictive law and that today’s mar- kets were too modern and sophisticated to need such protection. And Congress listened. Those 1930s congressmen knew that if two banking cultures tried to exist in the same company—the staid, conservative culture of commercial bank- ing (our savings and checking accounts) and the razzle-dazzle, high-risk culture of investment banking—the ‘‘eat what you kill’’ investment bank culture would win out. Some said that staid old commercial banks turned into ‘‘casinos.’’ But, interestingly, casinos are highly regulated and are required to keep funds on hand to pay winners. In the coming months, we expect to learn more about the behav- ior that led to this crisis. As we noted earlier, much if not most of it was probably legal because of the lack of regulation in the mortgage and investment banking industries. But look at the outcome! If only ethical antennae had been more sensi- tive, more people might have questioned products they didn’t understand, or spo- ken out or refused to participate in practices that were clearly questionable. As just one tiny example, could anyone have thought it was ethical to sell a product they called a liar loan, knowing that the customer surely would be unable to repay (even if it was legal to do so)?

You’ll read much more about the crisis and its relationship to ethics in subse- quent chapters. Right now, let’s delve into the cynicism this and previous scandals have created and then try to move beyond it so that you can do things differently in the future.

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MOVING BEYOND CYNICISM

After multiple waves of business scandal, some cynicism (a general distrust) about business and its role in society is probably healthy. But cynicism about business has truly become an epidemic in the United States. To be fair, we should note that although the financial industry screwed up royally, at the same time most other main- stream American companies were ‘‘running their companies with strong balance sheets and sensible business models.’’5 Most companies were responsible, profitable, and prudent. Because they had serious cash reserves, many of them have actually managed to weather the recent crisis reasonably well. But the attention has not been on these responsible companies. It’s been on the financial sector and its irresponsibility. How bad is the cynicism? According to the 2009 Edelman Trust Barometer6—a survey of almost 4,500 college-educated people around the world— it’s very bad, especially in the United States. (Edelman is the world’s largest indepen- dent public relations firm with 53 offices around the world. Its business is helping companies build and maintain reputation.) Edelman’s study shows that consumer trust in corporations has declined precipitously. More than half of the respondents stated that they trust business less than they did one year ago (in 2008). The decrease is particularly acute in the United States, where citizens have traditionally had higher opinions of business than they do in Europe. The only part of the world where trust levels have not declined is in the developing world—the so-called BRIC nations (Brazil, Russia, India, China). The study also outlines the business case for trust. Over a one-year period, 91 percent of consumers stated that they purchased a product of service from a company they trust. Conversely, 77 percent of consumers refused to purchase a product or service from a company that they mistrusted. This study suggests that corporate reputation affects consumer buying patterns, and companies risk harming their bottom line when they do not act to protect their good name.

But, consistent with our idea that business ethics is not a fad, neither is public cynicism about business ethics new. We have written about it in every edition of our book (since 1995). Surely, the factor that has contributed the most to cynicism in recent years is the highly visible behavior of some of the nation’s leading corpora- tions and executives, whose activities have garnered so much space in the business press and on the evening news. How do you watch hour after hour of such reporting and not walk away jaded? In the last few years, all you had to do was read about or watch the news to feel cynical, and business school students are no exception. We also note that business is not alone in its scandalous behavior. In recent years, we’ve learned about government employees who stole or misused funds, academics who falsified their research results, ministers who stole from their congregations, priests who abused children, and athletes who took bribes or used performance-enhancing drugs. It seems that no societal sector is immune.

Many of our readers are business school students, the current or future managers of business enterprises. Surveys suggest that many business students are themselves surprisingly cynical about business (given that they’ve chosen it as their future pro- fession). They believe that they’ll be expected to check their ethics at the corporate

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door or that they will be pressured to compromise their own ethical standards in order to succeed.7 Consider this scenario that took place at a large university: A professor asked his class to name management behaviors that are morally repugnant. His class struggled to name one! In another of his classes, the professor asked if the students would dump carcinogens in a river. This time the class agreed that they would do so because if they didn’t, someone else would. When the professor asked if they really wanted to live in such a cynical environment, the class insisted that they already did. The dismayed professor believed that the attitudes of his students were formed long before they landed in his classroom. He agreed with other observers that the problem goes way beyond business and business schools and that our society, with its empha- sis on money and material success, is rearing young people who strive for achieve- ment at any cost. One symptom: cheating is pervasive in many high schools and colleges.8 This scenario is enough to make anyone wonder about today’s business students. But at the same time, we know that students at many colleges and univer- sities, including business schools, are encouraging their own faculty and administra- tors to establish newly invigorated academic integrity policies and honor codes. In an honor code community, students take responsibility for implementing the academic integrity policy and for holding each other accountable to it. They manage study-run judiciaries that mete out serious discipline to their fellow students who tarnish the community by cheating. These efforts, which are gaining real traction at many schools, suggest that at least some students have had enough and are willing turn from cynicism toward a proactive approach to change things.

A 2008 Aspen Institute study of nearly 2,000 MBA students from 15 leading international business schools provides some insight into MBA students’ attitudes, which appear to be moving in a less cynical direction. Similar to the findings of Aspen’s 2002 survey, the 2008 survey of MBA students indicates that they anticipate facing difficult values conflicts in their jobs and suggests some cynicism about ethics in the workplace. However, about 40 percent of these students believe that their busi- ness education is preparing them to manage values conflicts ‘‘a lot,’’ and another 50 percent believe that they’re being prepared somewhat. Also, more than a quarter of the respondents said they are interested in finding a job that gives them the oppor- tunity to contribute to society (compared to only 15 percent in 2002). More than half believe that safe, high-quality products and responsible governance and transparent business practices are very important for a potential employer. In addition, more than half said they would advocate alternative values or approaches in response to values conflicts at work (many more than in 2002).9

The media may be largely responsible for students’ cynical attitudes. Think about the depiction of business and its leaders in movies and on television. The Media Research Center conducted a survey of 863 network TV sitcoms, dramas, and movies in the mid-1990s. Nearly 30 percent of the criminal characters in these pro- grams were business owners or corporate executives. Entrepreneurs were represented as drug dealers, kidnappers, or sellers of defective gear to the military.10Fortune magazine called this ‘‘the rise of corporate villainy in prime time.’’11 Movies have abounded with negative messages about corporate America. Think Wall Street,

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Boiler Room, Civil Action, Glengarry Glen Ross, The Insider, Erin Brockovich, Supersize Me, The Corporation, Enron: The Smartest Guys in the Room, Michael Clayton, The International, Quiz Show, The Insider, and Bowling for Columbine. And there are more such movies every year; we’re sure you can add to the list. A much tougher exercise is to generate a list of movies that actually create a positive ethical impression of business. Can you think of any? Consistent negative representa- tion of business in the media has its effects. Academic research suggests that cyni- cism toward American business increased after study participants viewed the film Roger & Me, which depicted ruthless plant closings and layoffs at General Motors.12

Imagine the cumulative, daunting effect of viewing countless movies and television programs that portray business as corrupt and business leaders as ruthless and unethical.

To counter that media-fueled cynicism at least somewhat, we encourage you to think about your own life and the hundreds of reliable products and services you trust and depend on every day as well as the people and businesses that produce them. These good folks are businesspeople too, but it isn’t nearly as exciting or sexy for the media to portray businesspeople who do the right thing every day. We also encourage you to talk with businesspeople you know, perhaps people in your own family who work for businesses. Do they feel pressured to compromise their ethical standards, or do they see their employer in a more positive light? Interestingly, the Ethics Resource Center’s 2009 National Business Ethics Survey found that only 8 percent of employ- ees of for-profit enterprises report feeling pressured to compromise their ethical stan- dards. That means that more than 90 percent say that they’re not feeling such pressure. Also, nearly two thirds of these employees said that their own company has a strong or strong-leaning ethical culture. What does that mean? To us, it means that most Americans who work in business think that their own company and coworkers are pretty ethical. Still, they read the same media accounts and see the same movies and TV programs as everyone else, and these offerings influence cynicism about American business in general.13

Finally, we won’t leave a discussion of cynicism without talking about the events of September 11, 2001. While the business scandals of 2001–02 left many cynical, the events of September 11, 2001, showed us some of the best in many indi- viduals and businesses. We have read about the care, compassion, and assistance that countless American firms gave to those who were harmed by the terrorist attacks. Few firms were hit as hard as Sandler O’Neill & Partners, a small but profitable Wall Street investment bank that lost 66 of its 171 employees—including two of the firm’s leading partners—on September 11. The firm’s offices had been on the 104th floor of the World Trade Center. Despite its dire financial straits, the firm sent every deceased employee’s family a check in the amount of the employee’s salary through the end of the year and extended health-care benefits for five years. Bank of America quickly donated office space for the firm to use. Competitors sent commissions their way and freely gave the company essential information that was lost with the traders who had died. Larger Wall Street firms took it upon themselves to include Sandler in their deals. The goal was simply to help Sandler earn some money and get back on its

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feet.14 This is only one of the many stories that point to the good that exists in the heart of American business. In this book, we offer a number of positive stories to counterbalance the mostly negative stories portrayed in the media.

The bottom line is this. We’re as frustrated as you are about the media portrayal of business and the very real, unethical behavior that regularly occurs in the business community. But, we also know that the business landscape is a varied one that is actually dominated by good, solid businesses and people who are even heroic and extraordinarily giving at times. So, for our cynical readers, we want to help by doing two things in this book: (1) empowering managers with the tools they need to address ethical problems and manage for ethical behavior, and (2) providing positive exam- ples of people and organizations who are ‘‘doing things right’’ to offset some of the media-fueled negativity. We agree with Coach Joe Paterno, Penn State’s legendary football coach, whose program has always been known for integrity. He said this in response to our questions about cynicism: ‘‘I don’t care what cynical people say. I don’t really pay attention. These are small people who . . . don’t have the confidence or courage to do it the right way. And when they see someone doing it the right way, deep down they feel guilty. They’d rather say that it can’t be done . . . that every- body cheats. I hear that all the time. ‘Fine,’ I say. ‘You think what you want.’ I know what I do. People around me know. You’ve got to just run your organization. You can’t worry about what these cynical people say.’’

Some business school students seem to agree with Joe. In May 2009, something notable and quite positive happened. A group of 20 second-year students at Harvard Business School created The MBA Oath in an attempt to articulate the values they felt their MBA degree ought to stand for:

The MBA Oath

As a business leader I recognize my role in society.

& My purpose is to lead people and manage resources to create value that no single individual can create alone.

& My decisions affect the well-being of individuals inside and outside my enterprise, today and tomorrow.

Therefore I promise:

& I will manage my enterprise with loyalty and care, and will not advance my personal interests at the expense of my enterprise or society.

& I will understand and uphold, in letter and spirit, the laws and contracts governing my conduct and that of my enterprise.

& I will refrain from corruption, unfair competition, or business practices harmful to society.

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& I will protect the human rights and dignity of all people affected by my enterprise, and I will oppose discrimination and exploitation.

& I will protect the right of future generations to advance their stan- dard of living and enjoy a healthy planet.

& I will report the performance and risks of my enterprise accu- rately and honestly.

& I will invest in developing myself and others, helping the man- agement profession continue to advance and create sustainable and inclusive prosperity.

In exercising my professional duties according to these principles, I recognize that my behavior must set an example of integrity, eliciting trust and esteem from those I serve. I will remain accountable to my peers and to society for my actions and for upholding these standards.

This oath I make freely, and upon my honor.

This focus on positive values among business students and business in general received significant publicity and turned into something of a movement. More than 400 graduates of Harvard Business School signed the oath, and they were joined by business students from 119 other colleges and universities globally. For more infor- mation, go to www.mbaoath.org.

CAN BUSINESS ETHICS BE TAUGHT?

Given all that has happened, you may be wondering whether business ethics can be taught. Perhaps all of the bad behavior we outlined earlier results from a relatively few ‘‘bad apples’’ who never learned ethics from their families, clergy, previous schools, or employers.15 If this were so, ethics education would be a waste of time and money, and resources should be devoted to identifying and discarding bad apples, not trying to educate them. We strongly disagree, and the evidence is on our side.

Aren’t Bad Apples the Cause of Ethical Problems in Organizations?

According to the bad apple theory, people are good or bad and organizations are powerless to change these folks. This bad apple idea16 is appealing in part because unethical behavior can then be blamed on a few individuals with poor character. Although it’s unpleasant to fire people, it’s relatively easier for organizations to search for and discard a few bad apples than to search for some organizational problem that caused the apple to rot.

Despite the appeal of the bad apple idea, ‘‘character’’ is a poorly defined con- cept, and when people talk about it, they rarely define what they mean. They’re prob- ably referring to a complex combination of traits that are thought to guide individual

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behavior in ethical dilemma situations. If character guides ethical conduct, training shouldn’t make much difference because character is thought to be relatively stable: it’s difficult to change, persists over time, and guides behavior across different con- texts. Character develops slowly as a result of upbringing and the accumulation of values that are transmitted by schools, families, friends, and religious organizations. Therefore, people come to educational institutions or work organizations with an already defined good or poor character. Good apples will be good and bad apples will be bad.

In fact, people do have predispositions to behave ethically or unethically (we talk about this in Chapter 3). And sociopaths can certainly slip into organizations with the sole intent of helping themselves to the organization’s resources, cheating customers, and feathering their own nests at the expense of others. Famous scoundrels like Bernie Madoff definitely come to mind. Such individuals have little interest in ‘‘doing the right thing,’’ and when this type of individual shows up in your organiza- tion, the best thing to do is discard the bad apple and make an example of the incident to those who remain.

But discarding bad apples generally won’t solve an organization’s problem with unethical behavior. The organization must scrutinize itself to determine if something rotten inside the organization is spoiling the apples. For example, Enron encouraged a kind of devil-may-care, unethical culture that is captured in the film, Enron: The Smartest Guys in the Room. Arthur Andersen’s culture morphed from a focus on the integrity of audits to a consulting culture that focused almost exclusively on feeding the bottom line (you’ll read more about that in Chapter 5). In this book you’ll learn that most people are not guided by a strict internal moral compass. Rather, they look outside themselves—to their environment—for cues about how to think and behave. This was certainly true in the financial crisis when the mantra became ‘‘everyone is doing it’’ (and making a lot of money besides). At work, managers and the organiza- tional culture transmit many cues about how employees should think and act. For example, reward systems play a huge role by rewarding short-term thinking and profits, as they did in the recent financial crisis. In this book, you’ll learn about the importance of these organizational influences and how to harness them to support ethical behavior and avoid unethical behavior.

So, apples often turn bad because they’re spoiled by ‘‘bad barrels’’—bad work environments that not only condone, but may even expect unethical behavior. Most employees are not bad folks to begin with. But their behavior can easily turn bad if they believe that their boss or their organization expects them to behave unethically or if everyone else appears to be engaging in a particular practice. In this view, an organization that’s serious about supporting ethical behavior and preventing mis- conduct must delve deeply into its own management systems and cultural norms and practices to search for systemic causes of unethical behavior. Management must take responsibility for the messages it sends or fails to send about what’s expected. If ethics problems are rooted in the organization’s culture, discarding a few bad apples without changing that culture isn’t going to solve the problem. An effective and last- ing solution will rely on management’s systematic attention to all aspects of the

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organization’s culture and what it is explicitly or implicitly ‘‘teaching’’ organiza- tional members (see Chapter 5).

This question about the source of ethical and unethical behavior reflects the broader ‘‘nature/nurture’’ debate in psychology. Are we more the result of our genes (nature) or our environments (nurture)? Most studies find that behavior results from both nature and nurture. So, when it comes to ethical conduct, the answer is not either/or, but and. Individuals do come to work with predispositions that influence their behavior, and they should take responsibility for their own actions. But the work environment can also have a large impact. In this book, you’ll learn a lot about how that work environment can be managed to produce ethical rather than unethical conduct.

Shouldn’t Employees Already Know the Difference between Right andWrong?

A belief associated with the good/bad apple idea is that any individual of good char- acter should already know right from wrong and can be ethical without special train- ing—that a lifetime of socialization from parents and religious institutions should prepare people to be ethical at work. You probably think of yourself as an individual of good character, but does your life experience to date prepare you to make a com- plex business ethics decision? Did your parents, coaches, and other influential people in your life ever discuss situations like the one that follows? Think about this real dilemma.

You’re the VP of a medium-sized organization that uses chemicals in its produc- tion processes. In good faith, you’ve hired a highly competent scientist to ensure that your company complies with all environmental laws and safety regulations. This individual informs you that a chemical the company now uses in some quantity is not yet on the approved Environmental Protection Agency (EPA) list. However, it has been found to be safe and is scheduled to be placed on the list in about three months. You can’t produce your product without this chemical, yet regulations say that you’re not supposed to use the chemical until it’s officially approved. Waiting for approval would require shutting down the plant for three months, putting hundreds of people out of work, and threatening the company’s very survival. What should you do?

The solution isn’t clear, and good character isn’t enough to guide decision mak- ing in this case. As with all ethical dilemmas, values are in conflict here—obeying the letter of the law versus keeping the plant open and saving jobs. The decision is complicated because the chemical has been found to be safe and is expected to be approved in a matter of months. As in many of today’s business decisions, this com- plex issue requires the development of occupation-specific skills and abilities. For example, some knowledge in the area of chemistry, worker safety, and environmental laws and regulations would be essential. Basic good intentions and a good upbringing aren’t enough.

James Rest, a scholar in the areas of professional ethics and ethics education, argued convincingly that ‘‘to assume that any 20-year-old of good general character

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can function ethically in professional situations is no more warranted than assuming that any logical 20-year-old can function as a lawyer without special education.’’17

Good general character (whatever that means) doesn’t prepare an individual to deal with the special ethical problems that are likely to arise in a career. Individuals must be trained to recognize and solve the unique ethical problems of their particular occu- pation. That’s why many professional schools (business, law, medicine, and others) have added ethics courses to their curricula, and it’s why most large business organi- zations now conduct ethics training for their employees.

So, although individual characteristics are a factor in determining ethical behav- ior, good character alone simply doesn’t prepare people for the special ethical prob- lems they’re likely to face in their jobs or professions. Special training can prepare them to anticipate these problems, recognize ethical dilemmas when they see them, and provide them with frameworks for thinking about ethical issues in the context of their unique jobs and organizations.

Aren’t Adults’ Ethics Fully Formed and Unchangeable?

Another false assumption guiding the view that business ethics can’t be taught is the belief that one’s ethics are fully formed and unchangeable by the time one is old enough to enter college or a job. However, this is definitely not the case. Research has found that through a complex process of social interaction with peers, parents, and other significant persons, children and young adults develop in their ability to make ethical judgments. This development continues at least through young adult- hood. In fact, young adults in their twenties and thirties who attend moral develop- ment educational programs have been found to advance in moral reasoning even more than younger individuals do.18 Given that most people enter professional edu- cation programs and corporations as young adults, the opportunity to influence their moral reasoning clearly exists.

Business school students may need ethics training more than most because research has shown they have ranked lower in moral reasoning than students in philosophy, political science, law, medicine, and dentistry.19 Also, undergraduate business students and those aiming for a business career were found to be more likely to engage in academic cheating (test cheating, plagiarism, etc.) than were students in other majors or those headed toward other careers.20 At a minimum, professional ethics education can direct attention to the ambiguities and ethical gray areas that are easily overlooked without it. Consider this comment from a 27-year-old Harvard stu- dent after a required nine-session module in decision making and ethical values at the beginning of the Harvard MBA program.

Before, [when] I looked at a problem in the business world, I never con- sciously examined the ethical issues in play. It was always subconscious and I hope that I somewhat got it. But that [ethics] was never even a consideration. But now, when I look at a problem, I have to look at the impact. I’m going to put in this new ten-million-dollar project. What’s

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going to be the impact on the people that live in the area and the environ- ment. . . . It’s opened my mind up on those things. It’s also made me more aware of situations where I might be walking down the wrong path and getting in deeper and deeper, to where I can’t pull back.21

In 2004, Harvard’s MBA class of 1979 met for its 25-year reunion. The alumni gave the dean a standing ovation when he said that a new required course on values and leadership was his highest priority and then pledged to ‘‘live my life and lead the school in a way that will earn your trust.’’22

It should be clear from the above arguments that ethics can indeed be taught. Ethical behavior relies on more than good character. Although good upbringing may provide a kind of moral compass that can help the individual determine the right direction and then follow through on a decision to do the right thing, it’s certainly not the only factor determining ethical conduct. In today’s highly complex organiza- tions, individuals need additional guidance. They can be trained to recognize the ethical dilemmas that are likely to arise in their jobs; the rules, laws, and norms that apply in that context; reasoning strategies that can be used to arrive at the best ethical decision; and the complexities of organizational life that can conflict with one’s desire to do the right thing. For example, businesses that do defense-related work are expected to comply with a multitude of laws and regulations that go far beyond what the average person can be expected to know.

The question of whether ethics should be taught remains. Many still believe that ethics is a personal issue best left to individuals. They believe that much like prose- lytizing about religion, teaching ethics involves inappropriate efforts to impose certain values and control behavior. But we believe that employers have a real responsibility to teach employees what they need to know to recognize and deal with ethical issues they are likely to face at work. Failing to help employees recognize the risks in their jobs is like failing to teach a machinist how to operate a machine safely. Both situations can result in harm, and that’s just poor management. Similarly, we believe that, as business educators, we have a responsibility to prepare you for the complex ethical issues you’re going to face and to help you think about what you can do to lead others in an ethical direction.

DEFINING ETHICS Some of the controversy about whether ethics can or should be taught may stem from disagreement about what we mean by ethics. Ethics can be defined as ‘‘a set of moral principles or values’’—a definition that portrays ethics as highly personal and relative. I have my moral principles, you have yours, and neither of us should try to impose our ethics on the other.

But our definition of ethics—‘‘the principles, norms, and standards of conduct governing an individual or group’’—focuses on conduct. We expect employers to establish guidelines for work-related conduct, including what time to arrive and leave the workplace, whether smoking is allowed on the premises, how customers are to be treated, and how quickly work should be done. Guidelines about ethical conduct aren’t much different. Many employers spend a lot of time and money developing

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policies for employee activities that range from how to fill out expense reports to what kinds of client gifts are acceptable to what constitutes a conflict of interest or bribe. If we focus on conduct, ethics becomes an extension of good management. Leaders identify appropriate and inappropriate conduct, and they communicate their expectations to employees through ethics codes, training programs, and other com- munication channels.

In most cases, individual employees agree with their company’s expectations and policies. For example, who would disagree that it’s wrong to steal company property, lie to customers, dump cancerous chemicals in the local stream, or comply with regulations on defense contracts? At times, however, an employee may find the organization’s standards inconsistent with his or her own moral values or principles. For example, a highly religious employee of a health maintenance organization may object to offering abortion as an alternative when providing genetic counseling to pregnant women. Or a highly devoted environmentalist may believe that his or her organization should go beyond the minimum standards of environmental law when making decisions about how much to spend on new technology or on environmental cleanup efforts. These individuals may be able to influence their employers’ policies. Otherwise, the person’s only recourse may be to leave the organization for one that is a better values match.

GOOD CONTROL OR BAD CONTROL? Whether or not we prefer to admit it, our ethical conduct is influenced (and to a large degree controlled) by our environment. In work settings, leaders, managers, and the entire cultural context are an important source of this influence and guidance. If, as managers, we allow employees to drift along without our guidance, we’re unintentionally allowing them to be ‘‘controlled’’ by others. If this happens, we’re contributing to the creation of ‘‘loose cannons’’ who can put the entire organization at risk. Guidance regarding ethical conduct is an im- portant aspect of controlling employee behavior. It can provide essential information about organizational rules and policies, and it can give guidance about behavior that is considered to be appropriate or inappropriate in a variety of situations.

But should organizations be ‘‘controlling’’ their employees in this way? B. F. Skinner,23 the renowned psychologist, argued that it’s all right, even preferable, to intentionally control behavior. He believed that all behavior is controlled, either intentionally or unintentionally. Therefore what was needed was more intentional control, not less. Similarly, ethical and unethical behavior in organizations is already being controlled explicitly or implicitly by the existing organizational culture (see Chapter 5). Thus organizations that neglect to teach their members ‘‘ethical’’ behav- ior may be tacitly encouraging ‘‘unethical behavior’’ through benign neglect. It’s management’s responsibility to provide explicit guidance through direct manage- ment and through the organization’s culture. The supervisor who attempts to influ- ence the ethical behavior of subordinates should be viewed not as a meddler but as a part of the natural management process.

To summarize, we believe that educational institutions and work organizations should teach people about ethics and guide them in an ethical direction. Adults are

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open to, and generally welcome, this type of guidance. Ethical problems are not caused entirely by bad apples. They’re also the product of bad barrels—work envi- ronments that either encourage unethical behavior or merely allow it to occur. Making ethical decisions in today’s complex organizations isn’t easy. Good inten- tions and a good upbringing aren’t enough. The special knowledge and skill required to make good ethical decisions in a particular job and organizational setting may be different from what’s needed to resolve personal ethical dilemmas, and this knowledge and skill must be taught and cultivated.

THIS BOOK IS ABOUTMANAGING ETHICS IN BUSINESS

This book offers a somewhat unique approach to teaching business ethics. Instead of the traditional philosophical or legalistic approach, we take a managerial approach. Between us, we have many years of experience in management, in consulting, and in management teaching and research. Based on this experience, we begin with the assumption that business ethics is essentially about human behavior. We believe that by understanding human behavior in an organizational context, we can better under- stand and manage our own and others’ ethical conduct. Kent Druyvesteyn was vice president for ethics at General Dynamics from 1985 to 1993 and one of the first ‘‘ethics officers’’ in an American company. He made a clear distinction between philosophy and management in his many talks with students and executives over the years. As he put it, ‘‘I am not a philosopher and I am not here to talk about philoso- phy. Ethics is about conduct.’’

We agree with Mr. Druyvesteyn. After years of study and experience, we’re con- vinced that a management approach to organizational ethics is needed. As with any other management problem, managers need to understand why people behave the way they do so that they can influence this behavior. Most managers want the people they work with to be productive, to produce high-quality products, to treat customers well, and to do all of this in a highly ethical manner. They also want and need help accomplishing these goals.

Therefore we rely on a managerial approach to understanding business ethics. We introduce concepts that can be used to guide managers who want to understand their own ethical behavior and the behavior of others in the organization. And we provide practical guidance to those who wish to lead their department or organization in an ethical direction.

We define ethical behavior in business as ‘‘behavior that is consistent with the principles, norms, and standards of business practice that have been agreed upon by society.’’ Although some disagreement exists about what these principles, norms, and standards should be, we believe there is more agreement than disagreement. Many of the standards have been codified into law. Others can be found in company and industry codes of conduct and international trade agreements.

Importantly, we treat the decisions of people in work organizations as being influenced by characteristics of individuals and organizations. We also recognize

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that work organizations operate within a broad and complex global business context. We will cover individual decision making, group and organizational influences, and the social and global environment of business. The first part of this perspective, the influences on individual decision making, is represented in Figure 1.1.

ETHICS AND THE LAW

It’s important to think about the relationship between the law and business ethics because if one could just follow the law, a business ethics book wouldn’t be neces- sary. Perhaps the easiest way to visualize the relationship between business ethics and the law is in terms of a Venn diagram (Figure 1.2). If we think of the law as reflecting society’s minimum norms and standards of business conduct, we can see a great deal of overlap between what’s legal and what’s ethical. Therefore most people believe that law-abiding behavior is also ethical behavior. But many standards of conduct are agreed upon by society and not codified in law. For example, some con- flicts of interest may be legal, but they are generally considered unethical in our society and are commonly prohibited in codes of ethics. Having an affair with some- one who reports to you may be legal, but it is considered unethical in most corporate contexts. As we said earlier, much of the behavior leading to the 2008 financial crisis was legal, but unethical. So the domain of ethics includes the law but extends well beyond it to include ethical standards and issues that the law does not address. Finally, there are times when you might encounter a law that you believe is unethical. For example, racial discrimination was legal in the United States for a long time. But racial discrimination was and is highly unethical. Similarly, many companies do business in developing countries with few, if any, laws regulating environmental pollution or labor conditions. They can ‘‘legally’’ pollute the air and water in these countries. Such companies have to choose between adhering to ethical standards that are higher than the legal standards in those countries and deciding that it’s okay to

CHARACTERISTICS OF INDIVIDUALS Individual differences Cognitive biases

Group and organizational pressures Organizational culture

CHARACTERISTICS OF ORGANIZATIONS

ETHICAL AWARENESS

ETHICAL BEHAVIOR

ETHICAL JUDGMENT

Process of Individual Ethical Decision Making

FIGURE 1.1 The Ethical Decision-Making Process

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harm the well-being of these people and communities. So the legal and ethical do- mains certainly overlap, but the overlap is far from complete.

WHY BE ETHICAL? WHY BOTHER?WHO CARES?

Assuming that you ‘‘buy’’ the notion that business ethics can be taught, and that as current or future managers you have a role to play in creating an environment sup- portive of ethical conduct, you may still wonder why you should care about being ethical. As workers, we should care about ethics because most of us prefer to work for ethical organizations. We want to feel good about ourselves and the work we do. As responsible citizens, we must care about the millions of people who lost retire- ment savings because of the greed of those at AIG, Citigroup, Lehman Brothers, Merrill Lynch, and other financial firms that brought down the global economy in 2008. These people are our parents, spouses, siblings, children, and friends—they’re us! We live in a world community, and we’re all inextricably connected to each other and to the environment that surrounds us. Our future depends on our caring enough. Above all, it is the right thing to do.

Individuals Care about Ethics: TheMotivation To Be Ethical

Classical economists assume that practically all human behavior, including altruism, is motivated solely by self-interest—that humans are purely rational economic actors who make choices solely on the basis of cold cost-benefit analyses. But a new group of economists who call themselves behavioral economists have found that people are not only less rational than classical economists assumed, but more moral. Much evi- dence suggests that people act for altruistic or moral purposes that seemingly have little to do with cost-benefit analyses.24 For example, people will mail back lost wal- lets to strangers, cash and all; help strangers in distress; and donate blood marrow for strangers or a kidney to a family member. Also, the large majority of people will refrain from stealing even if it’s easy to do so.

Ethics

Law

FIGURE 1.2 Relationship between Ethics and Law

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In his book The Moral Dimension, Amitai Etzioni25 cited many more examples and research evidence to document his claim that human action has two distinct sour- ces: the pursuit of self-interest and moral commitments. Accordingly, most human decisions are based on ethical and emotional considerations as well as rational eco- nomic self-interest. People are motivated by both economic and moral concerns.

In a typical behavioral economics experiment called ‘‘the ultimatum game,’’ subject A in the experiment receives 10 one-dollar bills and can give subject B any number of them. Subject B can choose to accept or reject A’s offer. If B accepts, they each get what was offered. If B rejects the offer, each gets nothing. From a pure economics perspective, A would do best offering B one dollar and keeping the rest. B should accept that offer because, in economic terms, getting one dollar is better than nothing. But most A subjects offer B close to half the total, an average of about four dollars. B subjects who are offered one or two dollars generally reject the offer. Economists can’t explain this result based upon rational self-interest. People’s sense of fairness seems to be driving both subjects’ behavior. Interestingly, when people play the game with a machine, they are more likely to play as classical economics would predict because they don’t expect a machine to be ‘‘fair.’’ Autistic A players (whose autism means that they don’t take others’ feelings into account) also play as the theory would predict. So most people expect fair play in their interactions with other human beings, and they will even forgo economic benefits in order to maintain a fair system.

Neuroscience is also beginning to substantiate the moral sense that develops in humans. New imaging technologies have allowed scientists to locate a unique type of neuron in the brain—spindle cells—that light up when people perceive unfairness or deception. Only humans and African apes have these cells. But an adult human has over 82,000 of them, whereas a gorilla has around 16,000 (perhaps explaining why a gorilla might save a human child). A chimp has less than 2,000. In humans, these cells appear at around 4 months of age and gradually increase with moral development.26

In 2003, neuroscientists looked inside the brains of people playing the ultimatum game using functional magnetic resonance imaging (fMRI) scans. They found that unfair offers were associated with heightened activity in parts of the brain associated with strong negative emotions as well as in other parts of the brain associated with long-term planning. Those who rejected the unfair offers had more activity in the emotional part of the brain, which is the part that usually wins out.27

Given these research findings, we begin this book with an important assump- tion—that, as human beings and members of society, all of us are hardwired with a moral and ethical dimension as well as self-interested concerns. People care about ethics for reasons that stem from both of these sources.

Beyond being hardwired for fairness and altruism, employees are also concerned about their personal reputations. In today’s work environment, success depends on an individual’s ability to work effectively with others. Trust greases the wheels of work- ing relationships with peers across departments and on project teams. We disagree with the old adage that ‘‘nice guys (or gals) finish last.’’ If it looks like bad guys (or gals)

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come out ahead, this is generally a short-run result. A reputation for being difficult to work with, dishonest, or mean often catches up with you as coworkers withhold impor- tant information and promotions go to others. Given the importance of relationships to effectiveness in business today, your reputation for integrity is an essential ingredient for success and personal satisfaction. This is even truer in an age of social networking that can send news of bad behavior to a broad audience in seconds.

Employees Care about Ethics: Employee Attraction and Commitment

Organizations are concerned about their ability to hire and retain the best workers. The evidence suggests that employees are more attracted to and more committed to ethical organizations. ‘‘People who know that they are working for something larger with a more noble purpose can be expected to be loyal and dependable, and, at a minimum, more inspired.’’28

Graduating students at nearly 150 colleges and universities now sign or recite the ‘‘Graduation Pledge,’’ in which they promise to ‘‘take into account the social and environmental consequences of any job’’ they consider. They also pledge to ‘‘try to improve these aspects of any organizations’’ where they work. Elite universities such as Harvard and Cornell are participating. Prospective employers should be very inter- ested in these graduates and their concerns that go beyond just making a living.29

(Go to www.graduationpledge.org for more information.) Recent surveys confirm that it may be important to consider how potential and

current employees are affected by an organization’s ethics. In a survey conducted by Working Woman magazine, ‘‘a strong majority of those polled said that they would not work for a company with a history of environmental accidents, insider trading or worker accidents, or a law firm that defends known racketeers.’’30 In another survey conducted by a national opinion research firm, ethical corporate behavior, honest company communications, and respectful treatment ranked among employees’ five top-ranked goals—before good pay, which was 11th on the list, and job security, which ranked 14th. Ethical corporate behavior was ranked so high because ‘‘workers translate the ethics of the company into how they’re personally treated.’’ People ‘‘want to be proud of where they work.’’ They ‘‘don’t want to work for bandits, and when companies get negative publicity for their activities, workers suffer.’’31

Managers Care about Ethics

Managers care about ethics in part because they face the thorny problem of how to prevent and manage unethical behavior in their ranks. Ask any manager for exam- ples, and be prepared to spend the day listening. More than their jobs depend on this concern—managers can be held legally liable for the criminal activities of their sub- ordinates. Further, the U.S. Chamber of Commerce estimates that workplace theft costs U.S. businesses between $20 billion and $40 billion each year, and employees

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are thought to be responsible for much of it.32 In addition to self-interested behavior, employees may engage in unethical behavior because they think (rightly or wrongly) that it’s expected or that their behavior is justified because they’ve been treated un- fairly. Or they simply may not know they are doing something that’s considered to be unethical.33

Whatever its source, subordinates’ unethical behavior is a management problem that won’t go away. It becomes even more of a challenge as restructuring continues to reduce management layers, thus leaving fewer managers to supervise more work- ers. With more workers to supervise, the manager can’t directly observe behavior. Restructuring also increases the number of part-time or contingency workers. These workers are likely to feel less loyalty to the organization and may be more prone to engage in unethical behaviors such as theft.

Furthermore, more workers may cross the line between ethical and unethical be- havior in response to fierce business competition and strict focus on the bottom line. Employees may believe that they can help the company succeed (at least in the short term) by fudging sales figures, abusing competitors, or shortchanging customers. Those who are potential layoff candidates are also more likely to flirt with im- propriety.34 Many perceive the message to be: ‘‘reaching objectives is what matters and how you get there isn’t that important.’’35 Therefore today’s managers may have to work even harder to communicate the idea that ethical conduct is expected, even in the midst of aggressive competition.

Finally, many managers understand the positive long-term benefit a reputation for ethics can bring to business dealings. Carl Skooglund, former ethics officer at Texas Instruments, had this to say:

There are very positive, even competitive, reasons to be ethical. If you walk into a relationship and somebody says, ‘‘I know you, I know your track record, I can trust you,’’ that’s important. Two years ago, in a sur- vey that we sent out to employees, I received an anonymous comment from somebody who said, ‘‘A reputation for ethics which is beyond reproach is a silent partner in all business negotiations.’’ I agree and it works in all personal and business relationships. An unethical company is very difficult to do business with. You can’t trust them. You’re never sure if a commitment’s a commitment. At TI, our customers have told us that they can be sure of one thing: Once TI commits, we’re going to break our tail to make it happen. That’s an easy company to do business with.

Executive Leaders Care about Ethics

Some of us are understandably cynical about CEO ethics after the widely publicized scandals, huge compensation packages, and CEO ‘‘perp walks’’ of recent years. But many business executives do care about ethics in their own organizations and about business’s image in society.

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John Akers, former chairman of the board of IBM, wrote: ‘‘No society anywhere will compete very long or successfully with people stabbing each other in the back; with people trying to steal from each other; with everything requiring notarized con- firmation because you can’t trust the other fellow; with every little squabble ending in litigation; and with government writing reams of regulatory legislation, tying busi- ness hand and foot to keep it honest. . . . There is no escaping this fact; the greater the measure of mutual trust and confidence in the ethics of a society, the greater its economic strength.’’36

Jeffrey Immelt, the CEO of General Electric, spoke powerfully about ethics at Columbia University in October 2008 (available for viewing on YouTube). Immelt described how, above all else, leaders had to consider their organizations and protect their organizations for shareholders, employees, and the greater good. ‘‘I believe that ethical behavior in 2008 starts first and foremost, as always, with a real sense of per- manence, excellence, accountability, and safety, making sure that the enterprise endures no matter how tough the situation becomes.’’

Jamie Dimon, CEO and chairman of JPMorgan Chase, talked about the impor- tance of reputation in a June 2009 talk at Harvard Business School, his alma mater. He said, ‘‘There is a book on each of you. It’s already being written. If I spoke to your teachers, your friends, your professionals, your parents, I would know whether you’re trusted, how hard you work, whether you’re ethical. . . . That book is already grow- ing. Write it the way you want it to be written. . . . When you’re caught in situations that are uncomfortable—you can always make the right decision. It’s your responsi- bility whether you accept to do something or not, and it will be in that book written on you.’’ Later in that same speech, he said, ‘‘Standards are not set by Harvard Busi- ness School or the federal governments of the world; they are set by you. You have to set high standards for performance. . . . You also have to set high standards of integ- rity. At a lot of companies, you’ll hear, ‘‘Don’t worry about it, everyone does it that way.’’ No, they don’t. And that standard’s got to be set across the board at all levels, from little things to big things. I’ve been with kids who lied on T&Es [travel and entertainment expenses]—they shared a cab and both put in 100% of the cab bill. . . . That’s stealing. If I caught you doing that, I’d fire you. And everyone in the com- pany knows that.’’ He also said, ‘‘surround yourself with truth tellers. . . . Every leader needs at least one person around who tells them the truth. One is not enough. If you are a leader and you have seven or eight people reporting to you and one is a truth teller, you have a problem. Every single one of them should be a truth teller. Dimon ended with this: ‘‘You will have awesome power that affects people’s lives. Use it wisely and be just with it. . . . If you want to be a leader, it can’t be about money. And, it can’t be about you. It’s about what you will even- tually leave behind. What would you want on your tombstone? . . . For mine, I just hope they say, ‘‘We miss him, and the world is a better place for him having been here.’’37 Interestingly, Dimon and his team recognized the problems with subprime mortgages early, and JPMorgan Chase ended up virtually alone among the big banks in avoiding the worst fallout from the financial crisis. They exited the business of securitizing mortgages when business was still booming and their

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competitors (e.g., Citigroup, Merrill Lynch) were making bundles of cash. Perhaps those truth tellers had something to do with this wise action. Dimon is known as being vigilant about controlling risk even when that means short-term losses.38 It paid off big this time.

Warren Buffett, the legendary investor and CEO of Berkshire Hathaway, had perhaps the best idea about ethics and integrity when he said, ‘‘Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if they don’t have the first, the other two will kill you. You think about it; it’s true. If you hire somebody without the first, you really want them to be dumb and lazy.’’39

We believe that organizational ethics is a distinct managerial concern that must be addressed by management at all levels of the organization.

Industries Care about Ethics

When companies get bad publicity for ethical scandals, whole industries suffer. So, in some industries, companies have joined together in voluntary efforts to promote ethical conduct among organizations in the industry. Prominent among these efforts is the Defense Industry Initiative. A cynic might say that these initiatives are aimed solely at preventing more intrusive government regulation and that companies in these industries don’t truly ‘‘care’’ about ethics. Certainly, these types of initiatives have generally begun in response to a scandal or crisis. But over the years, they tend to take on a life of their own. Members internalize beliefs about appropriate conduct, hire support staff, and develop structures for enforcement that become institutional- ized among member organizations. The Defense Industry Initiative on Business Con- duct and Ethics (DII) is a major voluntary industry initiative. It is described on the organization’s website (www.dii.org) as ‘‘a consortium of U.S. defense industry con- tractors which subscribes to a set of principles for achieving high standards of busi- ness ethics and conduct.’’ It developed out of the President’s Blue Ribbon Commission on Defense Management (the Packard Commission), which was con- vened after a number of defense-industry scandals in the early 1980s. In 1986, the commission concluded that the industry could be improved by focusing on corporate self-governance. A number of companies voluntarily joined forces to ‘‘embrace and promote ethical business conduct,’’ and their work together continues today. As of July 2009, over 80 companies were signatories; as such, they have agreed to live according to the following obligations:

& Adopt a written code of conduct.

& Conduct employees’ orientation and training with respect to the code.

& Provide employees a mechanism to express concerns about corporate com- pliance with procurement laws and regulations.

& Adopt procedures for voluntary disclosure of violations of federal procure- ment laws.

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& Participate in Best Practices Forums.

& Publish information that shows each signatory’s commitment to the above.

The organization hosts a two-day Best Practices Forum each year, in which the industry’s prime customer, the Department of Defense, participates. It also hosts workshops on specific topics, including an annual one-day workshop to train ethics professionals, and publishes an annual report to the public and government summa- rizing DII activities.

Society Cares about Ethics: Business and Social Responsibility

Business ethics also matters because society cares. From an economic perspective, businesses are powerful. Wal-Mart’s size and profits make it a more powerful eco- nomic force than most countries. Business is learning that it must use its power responsibly or risk losing it. Using power responsibly means being concerned for the interests of multiple stakeholders—parties who are affected by the business and its actions and who have an interest in what the business does and how it performs.40

These stakeholders include many constituencies: shareholders, employees, suppliers, the government, the media, activists, and many more. And these stakeholders have the power to interfere with a firm’s activities. For example, employees can strike, customers can stop buying products, protesters can bring bad publicity, and the gov- ernment can act to regulate a firm’s activities. Consequently, it’s a matter of para- mount importance for organizations to consider all of their various stakeholders and what those stakeholders expect and require before they make decisions that will affect those various audiences. Increased regulation is almost a certain societal response to business scandal, and with new regulation come increased costs and reduced power for business. In addition, organizations that do not act responsibly risk criminal liability and the resulting financial damage. Even without criminal liability, businesses that don’t act responsibly risk their reputations, and a lost reputa- tion is tough to rebuild. As business becomes more global and business practices more transparent, it’s almost impossible to hide bad behavior. There is a growing emphasis worldwide on corporate social responsibility (CSR), and this emphasis and the reasons for it are covered in much more detail in Chapter 9.

THE IMPORTANCE OF TRUST

A more elusive benefit of ethics is trust. Although difficult to document, trust has both economic and moral value. Scientists are beginning to understand the ‘‘biology of trust.’’ In trusting relationships, neuroscientists have found that the brain releases a hormone, oxytocin, that makes cooperation ‘‘feel good.’’

Trust is essential in a service economy, where all a firm has is its reputation for dependability and good service. Individuals and organizations build trust accounts that work something like a bank account.41 You make deposits and build your trust

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reserve by being honest and by keeping commitments. You can draw on this account and even make mistakes as long as the reserve is maintained. Having a trust reserve allows the individual or organization the flexibility and freedom to act without scru- tiny, thus saving a great deal of time and energy in all types of relationships. Imagine a marriage that is based on trust. The partners go about their daily business without feeling any need to check up on each other or to hire private detectives to confirm the other’s whereabouts. The same is true of trust-based business relationships, where a handshake seals a deal and a business partner’s word is considered to be a contract. Corporations also build trust with their customers.

Johnson & Johnson made a huge contribution to its trust account when it recalled all Tylenol from store shelves after the poisoning crisis in 1982 (a situation discussed in more detail in Chapter 10). Despite no recall requirement and huge recall costs, the company put its customers first. Trust may be even more important in efforts at global collaboration and alliances, and in cross-cultural management teams. Trust encourages open exchange of ideas and information, reduces the need for costly con- trols, allows for rapid adjustment to change, and is associated with willingness to work through cultural differences and difficulties.42

Trust accounts are easily overdrawn, however. And when they are, all flexibility disappears. Every word and action is carefully checked and double-checked for signs of dishonesty. In organizations, lawyers are hired, contracts are drawn up and signed, and CYA (cover your you-know-what) memos fly. Recent corporate ethics scandals have created a huge gap in the public’s trust. In an essay for Business Week titled ‘‘Can You Trust Anybody Anymore?’’ Bruce Nussbaum wrote:

There are business scandals that are so vast and so penetrating that they profoundly shock our most deeply held beliefs about the honesty and in- tegrity of our corporate culture. Enron Corp. is one of them. This financial disaster goes far beyond the failure of one big company. This is corrup- tion on a massive scale. Tremendous harm has befallen innocent employ- ees who have seen their retirement savings disappear as a few at the top cashed out. Terrible things have happened to the way business is con- ducted under the cloak of deregulation. Serious damage has been done to ethical codes of conduct held by once-trusted business professionals. . . . Investor confidence is critical to the success of our economic system. . . . People increasingly feel the game is rigged. . . . Who can come to the rescue? The reputations of many of the professionals who were counted on to safeguard the economic system lie in tatters. . . . What’s to be done? . . . The lesson from the Enron debacle should be to restore basic integrity to the bottom line, ethics to business professionals, and clout to overseers that even a deregulated economy need.43

The entire American business system relies on the public’s faith and trust. That trust has been shattered in a manner that could be extremely costly to society. A dec- ade ago, the public considered the debacles at companies such as Enron, Arthur

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Andersen, WorldCom, Tyco, and Adelphia not as an anomaly, but as an example of the workings of a business culture that has lost its way. Although some strides were made to correct that not-very-flattering image of business, the financial crisis of 2008 was truly devastating to public trust in business, government, finance, and the econ- omy. Harris Interactive, a polling company that regularly surveys the public to deter- mine trust levels, uncovered astoundingly low levels of trust following the financial scandals of 2008. In a survey conducted in May 2009, Harris Interactive found that only 4 percent of the respondents said that Wall Street firms are honest and trustwor- thy. The percentage is higher, but still dismal, for banks in general; 25 percent of those surveyed would believe a statement made by someone who works for a bank.44

Unfortunately, all companies have been tainted by the scandals. Blue-chip companies now face even closer scrutiny and skepticism of shareholders as they are being asked to open their books and reveal much more information than has been recent prac- tice.45 Meeting profit projections or beating them by a penny is being viewed suspi- ciously as evidence of accounting chicanery rather than reliability.46 Confidence and trust in the system must be restored, or access to capital (the engine of the entire system) could be cut off. The good news is that many corporations are responding. Boards of directors are replacing inside members with outsiders who are seen as more independent. Stock options are being expensed. CEO compensation packages that are seen as excessive are being cut. And executives are asking their people whether they are living by the ‘‘spirit of the law’’ as well as the letter of the law.47

THE IMPORTANCE OF VALUES

As a theme even broader than trust, you can think of values as a kind of ‘‘glue’’ that guides our thinking across the book. Values are relevant to individuals, to organiza- tions, and to societies. For individuals, values can be defined as ‘‘one’s core beliefs about what is important, what is valued, and how one should behave across a wide variety of situations.’’ For example, most of us agree that honesty, fairness, and re- spect for others are important values. Where individuals differ is in how they priori- tize their values. For example, some people may believe that ambition is more important than other values. Others may feel that helpfulness predominates. Strongly held values influence important decisions such as career choice as well as decisions in particular situations. For example, someone for whom helpfulness is most impor- tant is more likely to choose a ‘‘helping’’ profession such as social work, while some- one for whom ambition is most important may be more likely to choose a business career. In Chapter 2, you’ll have the opportunity to think about your own values and how they influence your ethical decision making.

Values are also relevant at the organizational level. Many of you have seen orga- nizational values statements that aim to create a shared sense of purpose among employees and to convey something about the organization’s identity to outsiders. If you haven’t, just look at company websites and you’ll see that most of them include values statements. Values lists often include respect, integrity, diversity, innovation, teamwork, and the like. Just as individual values guide individual thinking and action,

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organizational values guide organizational thinking and action. And, just as with indi- viduals, the key question is how the organization prioritizes its values. For example, at 3M Corporation, no value is more important and more ingrained in the culture than innovation. Innovation is encouraged in myriad ways and has been ‘‘baked’’ into the culture through the commitment of senior executives, thus creating a culture that rewards collaboration and teamwork and that views mistakes as opportunities to learn.48 You’ll see in Chapter 5 that organizational values undergird the ethical culture of an organization and influence how its managers and employees behave. So an orga- nization that highly values diversity and respect is more likely to make efforts to hire and retain a diverse workforce and to take diversity into consideration when making supplier choices and other decisions. We know of an organization with a strong value for diversity that walked away from business when a customer insisted on dealing only with white males. However, organizations don’t always ‘‘really’’ value what they say they value. That’s why values statements are often the butt of Dilbert jokes. For exam- ple, in Enron’s values statement, the verbiage described an organization where excel- lence and respect and integrity were key values. The scandal at Enron showed that what Enron really cared about—maximizing profits at any cost—was a far cry from what appeared in print on its values statement. For organizational values to work in a positive way, the organization must live those values every day.

Societies and cultures also have shared values, and these are an important part of the business environment and expectations of business and businesspeople. When we talk about cross-cultural values, we often focus on the differences. But, as you’ll see in Chapter 11, values across cultures are often more similar than different. Even in corrupt cultures, if you ask people what they value, they’ll tell you that they would prefer to live in an environment where everyone can be trusted to do business honestly and fairly. We’ll return to a discussion of values again and again as a kind of touchstone for ethical business practice.

HOW THE BOOK IS STRUCTURED

Section II of this book deals with ethics and the individual. Chapter 2 presents the reader with an overview of some basic philosophical theories that have formed the underpinning for the traditional study of individual ethical decision making from a prescriptive viewpoint. Chapter 3 presents a more psychological approach to individ- ual ethical decision making. It provides a kind of ‘‘reality check’’ for Chapter 2 by suggesting that managers need to understand the individual characteristics that can influence employees’ ethical decision making and the human cognitive biases that can interfere with the ideal decision-making process (see Figure 1.1). Chapter 4 cate- gorizes the common ethical problems individuals face at work and provides an opportunity for you to apply learning. Chapter 4 is also about finding your moral voice to raise or report ethical issues or to stand up for what you value. Despite the best of intentions, and the most carefully reasoned ethical judgments, doing the right thing can be difficult.

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Section III of the book focuses on the internal life of organizations, how they develop ethical (or unethical) cultures, and how culture influences employee behav- ior. Chapter 5 focuses on business ethics as a phenomenon of organizational culture. It provides a comprehensive overview of how an organization can build a culture that reflects a concern for ethics, and how it can change its culture to be more supportive of ethical conduct. This chapter also emphasizes the importance of executive ethical leadership in creating a strong ethical culture. Chapter 6 follows with more practical and specific advice on how organizations can design an ethics infrastructure as well as effective communications and training programs. It also includes examples of the programs various companies have implemented to encourage ethical conduct among their employees. Many of these examples resulted from interviews we conducted with top managers in these companies. Chapter 7, ‘‘Managing for Ethical Conduct,’’ introduces management concepts that can help explain the group and organizational pressures that influence people to behave ethically or unethically. We also provide practical advice for managers about how to use these management concepts to encourage ethical conduct and discourage unethical conduct in their employees. Finally, Chapter 8 explores how culture plays out at the manager’s level and features a series of cases to test your knowledge of ethics and management skills.

After considering individuals and organizations, Section IV of this book looks at organizations in the broader social environment (see Figure 1.3). Chapter 9 focuses

FIGURE 1.3 From Individuals to Organizations to Environments

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on corporate social responsibility and discusses the environment that organizations are part of—and what they must do to be considered ‘‘good citizens’’ of the broader world. Chapter 10 examines some of the classical organizational ethics cases using a stakeholder framework. Finally, Chapter 11 extends our discussion of business ethics to the global business environment. Although global examples appear throughout the book, this issue is important enough to warrant its own chapter.

CONCLUSION

This chapter was designed to pique your interest in business ethics. We hope we have done that. We also hope that reading this book gives you a better understanding of ethics from a managerial perspective, and of how you can encourage ethical business behavior in yourself and others. We aim to help you understand how this aspect of the organizational world actually works and what you can do to manage it. We also provide practical decision-making guidance for facing your own ethical decisions and for helping others do the same. It’s critically important that we all understand ethics, because good ethics represents the very essence of a civilized society. Ethics is the bedrock for all of our relationships; it’s about how we relate to our employers, our employees, our coworkers, our customers, our communities, our suppliers, and one another. Ethics is not just about the connection we have to other beings—we are all connected; rather, it’s about the quality of that connection. That’s the real bottom line.

DISCUSSION QUESTIONS

1. Before reading this chapter, did you think of ethics as ‘‘just a fad’’? Why or why not? What do you think now? Why?

2. Have you been cynical about business and its leaders? Why or why not? (See the following cynicism exercise.) How does cynicism affect you, as a business stu- dent or as a manager?

3. Can you think of something that is legal but unethical, or something that is ethi- cal but illegal?

4. Do you think business ethics is important? Why or why not?

5. Identify reasons why a person would be interested in being ethical, and classify those reasons in terms of whether they represent moral motivation or economic motivation.

6. Think about the television programs and films you’ve seen recently that depicted business in some way. How were business and businesspeople portrayed? Is there anything business could or should do to improve its media image? Some businesses try to stay out of the limelight. Why might that be? What do you think of that strategy?

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7. Do you believe that employees are more attracted and committed to ethical orga- nizations? Are you? Why or why not? Make a list of the companies you would prefer to work for, and state the reasons why. Are there also companies that you would refuse to work for? Why? Are there ethically ‘‘neutral’’ companies that don’t belong on either list?

8. Discuss the importance of trust in business. Can you cite examples? What hap- pens when trust is lost?

9. What can we learn about business ethics from the recent financial crisis?

EXERCISE

Your CynicismQuotient

Answer the following questions as honestly as you can. Circle the number between 1 and 5 that best represents your own beliefs about business.

Strongly Disagree

Strongly Agree

1. Financial gain is all that counts in business.

1 2 3 4 5

2. Ethical standards must be compromised in business practice.

1 2 3 4 5

3. The more financially successful the businessperson, the more unethical the behavior.

1 2 3 4 5

4. Moral values are irrelevant in business. 1 2 3 4 5 5. The business world has its own rules. 1 2 3 4 5 6. Businesspeople care only about

making profit. 1 2 3 4 5

7. Business is like a game one plays to win.

1 2 3 4 5

8. In business, people will do anything to further their own interest.

1 2 3 4 5

9. Competition forces business managers to resort to shady practices.

1 2 3 4 5

10. The profit motive pressures managers to compromise their ethical concerns.

1 2 3 4 5

Strongly Disagree

Strongly Agree

Add the total number of points. The maximum is 50 points. Total ___.

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The higher your score, the more cynical you are about ethical business practice. Think about the reasons for your responses. Be prepared to discuss them in class.

NOTES 1. G. Colvin, ‘‘Business Is Back!’’ Fortune, 14 May 2007, 40–48. 2. Rushworth M. Kidder, ‘‘Must Capitalism Be Moral?’’ Commentary on Ethics Newsline, on Institute

for Global Ethics website (www.globalethics.org), May 4, 2009.

3. Adam Smith, The Theory of Moral Sentiments, eds. D. D. Raphael & A. L. Macfie, based on 1790 edition in The Glasgow Edition of the Works and Correspondence of Adam Smith, (Vol. 1), eds. D. D. Raphael and Andrew Skinner (Oxford: Clarendon Press, 1790 [1976]).

4. David Lynch, ‘‘U.S. Debt Shrinking at Glacial Pace,’’ USA Today, 7 July 2009; available at www. usatoday.com.

5. F. Zakariah, ‘‘Greed is good (to a point),’’ Newsweek, 22 June 2009, 41–45. 6. 2009 Edelman Trust Barometer, www.edelman.com.

7. J. A. Wood, J. G. Longenecker, J. A. McKinney, and C. W. Moore, ‘‘Ethical Attitudes of Students

and Business Professionals: A Study of Moral Reasoning,’’ Journal of Business Ethics 7 (1988): 249–57; D. N. DeSalvia and G. R. Gemmill, ‘‘An Exploratory Study of the Personal Value Systems of College Students and Managers,’’ Academy of Management Journal 14 (1971): 227–38; M. S. Lane, D. Schaupp, and B. Parsons, ‘‘Pygmalion Effect,’’ Journal of Business Ethics 7 (1988): 223– 29; R. M. Fulmer, ‘‘Business Ethics: A View from the Campus,’’ Personnel Administrator 45, no. 2 (1968): 31–39; T. M. Jones and F. H. Gautschi, ‘‘Will the Ethics of Business Change? A Survey of

Future Executives,’’ Journal of Business Ethics 7 (1988): 231–48. 8. Michael Skapinker, ‘‘Business Schools Focus on Making Money, Not Martyrs,’’ Financial Times,

5 January 2005, 10. 9. ‘‘Where Will They Lead? 2008 MBA Student Attitudes about Business & Society’’ (Washington,

D.C.: The Aspen Institute Center for Business Education, 2008).

10. L. Elber, ‘‘Bad Guys Wear Business Suits: Businessmen and Women Get a Bad Rap on Television,’’

(State College, PA) Centre Daily Times, 27 June 1997, 22C. 11. ‘‘Villains of Prime Time: Business Is TV’s Newest Bad Guy,’’ Fortune, 7 July 1997, 32. 12. T. S. Bateman, T. Sakano, and M. Fujita, ‘‘Roger, Me, and My Attitude: Film Propaganda and

Cynicism toward Corporate Leadership,’’ Journal of Applied Psychology 77 (1992): 768–71. 13. Ethics Resource Center, 2009 National Business Ethics Survey. 14. K. Brooker, ‘‘Starting Over,’’ Fortune, 21 January 2002, 50–68. 15. L. K. Trevi~no and A. Youngblood, ‘‘Bad Apples in Bad Barrels: A Causal Analysis of Ethical

Decision-Making Behavior,’’ Journal of Applied Psychology 75, no. 4 (1990): 378–85. 16. Ibid.

17. J. R. Rest and S. J. Thoma, ‘‘Educational Programs and Interventions,’’ In Moral Development: Advances in Research and Theory, ed. J. Rest (New York: Praeger, 1986), 59–88.

18. J. R. Rest, ‘‘Moral Judgment: An Interesting Variable for Higher Education Research,’’ Paper for the Annual Convention for the Association for the Study of Higher Education, Baltimore, Maryland,

November 21, 1987.

19. D. McCabe, and L. K. Trevi~no, ‘‘Academic Dishonesty: Honor Codes and Other Situational Influences,’’ Journal of Higher Education 64 (1993): 522–38.

20. D. McCabe and L. K. Trevi~no, ‘‘Cheating among Business Students: A Challenge for Business Leaders and Educators,’’ Journal of Management Education 19, no. 2 (1995): 205–18.

21. T. R. Piper, M. C. Gentile, and S. D. Parks, Can Ethics Be Taught? (Boston: Harvard Business School, 1993).

22. O. Ryan, ‘‘Class of ’79: God and Man at Harvard Business School,’’ Fortune, 1 November 2004, 52. 23. B. F. Skinner, Beyond Freedom and Dignity (New York: Knopf, 1971). 24. A. Etzioni, The Moral Dimension: Toward a New Economics (New York: Free Press, 1988). 25. Ibid.

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26. S. Blakeslee, ‘‘Humanity? Maybe It’s in the Wiring,’’ New York Times, 9 December 2003, D1. 27. J. Lehrer, ‘‘Driven to Market,’’ Nature 443 (2006): 502–04. 28. J. Channon, ‘‘Creating Esprit de Corps,’’ In New Traditions in Business, ed. J. Renesch (San

Francisco: Berrett-Koehler Publishers, 1992), 53–68.

29. ‘‘Get a Job, Save the Planet,’’ Business Week, 6 May 2002, 10. 30. R. Sandroff, ‘‘How Ethical Is American Business?’’Working Woman, September 1990, 113–16. 31. C. Kleiman, ‘‘Heading the List of Worker Wishes Isn’t More Money!’’ (Allentown, PA) Morning

Call, 2 October 1989, B10. 32. R. Zemke, ‘‘Employee Theft: How to Cut Your Losses,’’ Training, May 1986, 74–78. 33. J. Collins, ‘‘Why Bad Things Happen to Good Companies and What Can Be Done,’’ Business

Horizons, November–December 1990, 18–22. 34. B. Hager, ‘‘What’s Behind Business’ Sudden Fervor for Ethics,’’ Business Week, 23 September

1991, 65.

35. K. Labich, ‘‘The New Crisis in Business Ethics,’’ Fortune, 20 April 1992, 167–76. 36. J. F. Akers, ‘‘Ethics and Competitiveness: Putting First Things First,’’ Sloan Management Review,

Winter 1989, 69–71. 37. J. Dimon, ‘‘Leadership Qualities,’’ Speech given at Harvard Business School, June 24, 2009; availa-

ble at http://giveitaway.jpmorgan.com/cm/cs?pagename=JPM_redesign/JPM_Content_C/Generic_

Detail_Page_Template&cid=1159391608440&c=JPM_Content_C.

38. S. Tully, ‘‘Jamie Dimon’s Swat Team,’’ CNNMoney.com, September 2, 2008. 39. Warren Buffett and Bill Gates at Columbia Business School, CNBC, Summer 2009; available at

www.youtube.com/watch?v=tgbZzgyHZgI.

40. E. Freeman, Strategic Management: A Stakeholder Approach (Boston: Pitman/Ballinger, 1984). 41. S. R. Covey, The 7 Habits of Highly Effective People (New York: Simon & Schuster, 1989). 42. J. Child, ‘‘Trust—the Fundamental Bond in Global Collaboration,’’ Organizational Dynamics 29,

no. 4 (2001): 274–88.

43. B. Nussbaum, ‘‘Can You Trust Anybody Anymore?’’ Business Week, 28 January 2002, 31–32. 44. Harris Interactive, ‘‘Ethics Newsline,’’ July 6, 2009; available at http://www.globalethics.org/news-

line/2009/07/06/banks-honesty-poll/.

45. J. A. Byrne, ‘‘How to Fix Corporate Governance,’’ Business Week, 6 May 2002, 69–78. 46. J. Useem, ‘‘In Corporate America, It’s Cleanup Time,’’ Fortune, 16 September 2002, 62–72. 47. Ibid.

48. ‘‘3M’s Seven Pillars of Innovation,’’ Business Week, 10 May 2006.

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SECT ION II ETHICS AND THE INDIVIDUAL

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CHAPTER2 DECIDING WHAT’S RIGHT: A PRESCRIPTIVE APPROACH

INTRODUCTION

This chapter begins the part of the book that focuses on ethical decision making as something that individuals do. Many, if not most ethical decisions in business organi- zations are made by individuals like you. In later chapters, we will address how the organizational context and the broader business environment also affect individual ethical decision making.

There are two ways to think about individual ethical decision making—the pre- scriptive approach and the descriptive approach. This chapter covers the prescriptive approach. It is derived from ethical theories in philosophy and offers decision- making tools (ways of thinking about ethical choices) that help you decide what deci- sion you should make as a ‘‘conscientious moral agent’’ who thinks carefully about ethical choices1 and who wants to make the ethically ‘‘right’’ decision. Our assump- tion is that your intentions are good and that your goal is to do the right thing. So in this chapter we introduce ethical decision-making tools that can help you do just that, and we’ll explain how you can integrate them and use them in a practical way.

We know, however, that people don’t always make the best decision. Prescrip- tions aren’t always followed. So it’s helpful to understand how people’s minds work— how people really make decisions. The descriptive approach, discussed in Chapter 3, relies on psychological research to describe how people actually make ethical decisions (rather than how they should make them). It focuses in particular on individual characteristics that influence how individuals think and on cognitive limi- tations that often keep people from making the best possible ethical decisions. Hope- fully, if we understand both approaches, we can improve our ethical decision making. Now let’s learn about the prescriptive approach.

ETHICAL DILEMMAS

Many ethical choices are clear-cut enough that we can decide what to do rather easily because they pit ‘‘right’’ against ‘‘wrong.’’ Is deciding whether to embezzle corporate funds a tough ethical dilemma? Not really, because embezzling is stealing and it’s

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wrong, period. There’s not much of a ‘‘dilemma’’ there. But things can get pretty murky in situations where two or more important values, rights, or responsibilities conflict and we have to choose between equally unpleasant alternatives. We define an ethical dilemma as a situation where two or more ‘‘right’’ values are in conflict. Consider the following ethical dilemma.

THE LAYOFF

Pat is the plant manager in one of ABC Company’s five plants. She’s worked for the company for 15 years, working her way up from the factory floor after the company sent her to college. Her boss just told her in complete confi- dence that the company will have to lay off 200 workers. Luckily, her job won’t be affected. But a rumor is now circulating in the plant, and one of her workers (an old friend who now works for her) asks the question, ‘‘Well, Pat, what’s the word? Is the plant closing? Am I going to lose my job? The clos- ing on our new house is scheduled for next week. I need to know!’’ What should she say? What would you say?

This is a true ethical dilemma because two values are in conflict. Two ‘‘right’’ values that can create significant conflict are truthfulness and loyalty. As illustrated in the case, telling the truth to your friend would mean being disloyal to the com- pany that has treated you so well. The value of loyalty can even be in conflict with itself as you weigh loyalty to your friend against loyalty to your boss and company. In this chapter, we introduce conceptual tools drawn from philosophical approaches to ethical decision making that are designed to help you think through these tough ethical dilemmas from multiple perspectives. None of the approaches are perfect. In fact, they may lead to different conclusions. The point of using mul- tiple ones is to get you to think carefully and comprehensively about ethical dilem- mas and to avoid falling into a solution by accident. At the very least, you can feel good because you’ve thought about the issue thoroughly, you’ve analyzed it from every available angle, and you can explain your decision-making process to others if asked to do so.

PRESCRIPTIVE APPROACHES TO ETHICAL DECISION MAKING IN BUSINESS

Philosophers have been wrestling with ethical decision making for centuries. We certainly don’t intend to provide a philosophy course here, but we can distill some important and practical principles that can guide you toward making the best ethical decisions. In this section, we outline some of the major contempo- rary approaches that we think can provide you with the most practical assist- ance.2 We then incorporate them into a series of steps that you can use to

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evaluate ethical dilemmas, and along the way, we apply these steps to the short layoff case as well as other examples.

Focus on Consequences (Consequentialist Theories)

One set of philosophical theories is categorized as consequentialist (sometimes referred to as teleological, from the Greek telos). When you’re attempting to decide what’s right or wrong, consequentialist theories focus attention on the results or con- sequences of the decision or action.

Utilitarianism is probably the best-known consequentialist theory. According to the principle of utility, an ethical decision should maximize benefits to society and minimize harms. What matters is the net balance of good consequences over bad for society overall.

A utilitarian would approach an ethical dilemma by systematically identifying the stakeholders in a particular situation as well as the alternative actions and their consequences (harms and/or benefits) for each. A stakeholder is any person or group with a stake in the issue at hand. So who are the stakeholders in the layoff situation? Key stakeholders would include Pat’s friend, her friend’s family, Pat’s boss, Pat, her family, other workers, and the company—quite a list! And, what would be the conse- quences (societal harms and benefits) for each stakeholder of a decision to tell or not tell? The consequentialist approach requires you to do a mental calculation of all the harms and benefits of these consequences, stakeholder by stakeholder. What would be the consequences if Pat tells her friend what she knows about the layoff? What would be the consequences (societal harms and benefits) if Pat doesn’t share what she knows? A potential harm of telling her friend would be that he or she might tell other workers and send the plant into chaos. Perhaps more people would lose their jobs as a result. Another potential harm might be that Pat could lose the trust of her boss (another stakeholder), who provided information to her in confidence. Pat might even lose her job, which has consequences for her family. A potential ben- efit might be that Pat would retain the trust of a valued friend. Another potential benefit might be that her friend could use the information to make a decision about going through with buying the new house. After Pat conducts a thorough analysis that estimates these harms and benefits, the ‘‘best’’ ethical decision is the one that yields the greatest net benefits for society, and the ‘‘worst’’ decision is the one that yields the greatest net harms for society. So if more people would be ultimately hurt than helped if Pat were to inform her friend of the impending layoff, a utilitarian would conclude that Pat shouldn’t tell. Keep in mind that this perspective requires you to think broadly about the consequences for ‘‘society,’’ not just for yourself and those close to you, as we are often inclined to do. When conducting such an analysis, you may want to create a table for yourself like the one below that can help you sort out the complexities by identifying the stakeholders and the anticipated harms and bene- fits. But arriving at a bottom-line conclusion about the action that will serve the greater good of society is easier said than done.

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Consequentialist Analysis

Stakeholder Tell—Harms Tell—Benefits Don’t Tell—Harms Don’t Tell—Benefits

1

2

3

4

etc.

Bottom line: best decision or action is the one that produces the greatest net good and the least net harm for society overall.

In 2005, Mark Felt, also known as ‘‘Deep Throat,’’ revealed his identity as the source who secretly fed information to Washington Post investigative reporters Bob Woodward and Carl Bernstein. The information ultimately led to the 1974 resigna- tion of President Richard Nixon over his involvement in the cover-up of the 1972 burglary at Democratic headquarters in the Watergate building. Woodward and Bern- stein turned the story into a book and later a film, All the President’s Men. We can’t get inside Felt’s head to understand his ethical decision-making process at the time. We will never know his true motivation, because Felt became cognitively impaired in his later years. But we can imagine that, as the number two person at the FBI, he may have weighed the harms and benefits of leaking information about the Watergate break-in and the involvement of Nixon and his aides in criminal wrongdoing. Felt certainly took a huge personal risk and may have considered the costs to others. Sev- eral individuals went to prison as a result of the investigation, and their families suf- fered as a result. A president also resigned in disgrace. If Felt had been discovered, his career would probably have been ruined, and his family would have experienced the rippling effects. But those who believe that he did the right thing would say that Felt’s decision served the long-term greater good of American society and ultimately helped preserve democracy in the United States.

The consequentialist approach can be extremely practical and helpful in thinking through an ethical dilemma. Don’t we generally look at the consequences of our own and others’ actions in trying to decide what’s right? And don’t we consider who will benefit and who will be harmed? When the state decides to build a new highway through your property, aren’t they using a utilitarian rationale when they argue that the benefits to the greater community (increased development and jobs, reduced traf- fic, fewer accidents, etc.) outweigh the harm to the few property holders who will be inconvenienced by an eyesore in their backyard?

However, a challenge involved in using a strictly consequentialist approach is that it is often difficult to obtain the information required to evaluate all of the conse- quences for all stakeholders who may be directly or indirectly affected by an action or decision. In business (or in life for that matter), when do you have all of the facts? Could Deep Throat have known what the outcomes of his decision would be? And even if you have all of the information, it can be extremely cumbersome to calculate

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all of the harms and benefits every time you encounter a new ethical dilemma. Try it. Can you list all of the potential harms and benefits for everyone who may be directly or indirectly involved in the layoff situation described above? It’s relatively easy for Pat to list the potential harms and benefits to herself and those close to her. But can you envision all of the potential harms and benefits to all of the other people who may be involved? If you don’t have a crystal ball that allows you to foretell the future (and most of us don’t), you’re unlikely to arrive at a completely accurate assessment of all future consequences. Nevertheless, with this approach, it’s important to do your best to accurately assess the potential consequences. You have a responsibility to gather and use the best, most up-to-date information available. Remember, according to this approach, the most ethical decision maximizes benefits and minimizes harm to society. The challenge of making the best ethical decision is to step outside of oneself and think as broadly as possible about all of the consequences for all of those affected. Taking this step is guaranteed to widen your decision making lens and allow you to take into account consequences that you otherwise might not consider.

Another difficulty with this type of approach is that the rights of a minority group can easily be sacrificed for the benefit of the majority. For example, slaveholders in the Old South argued that the greatest good for the greatest number would be served by maintaining the system of slavery. But hopefully we all agree that such a system did not respect the rights of the human beings who were enslaved (a deontological perspective we discuss next).

The consequentialist approach remains particularly important to ethical decision making in business for a variety of reasons. First, utilitarian thinking—through its descendant, utility theory—underlies much of the business and economics literature. Second, on the face of it, most of us would admit that considering the consequences of one’s decisions or actions for society is extremely important to good ethical deci- sion making. In fact, studies of ethical decision making in business have found that business managers generally rely on such an approach.3 As we’ll see, though, other kinds of considerations are also important.

Focus on Duties, Obligations, and Principles (Deontological Theories)

The word deontological comes from the Greek deon, meaning ‘‘duty.’’ Rather than focusing on consequences, a deontological approach would ask, ‘‘What is Pat’s ethi- cal duty now that she knows about the layoff?’’ Deontologists base their decisions about what’s right on broad, abstract universal ethical principles or values such as honesty, promise keeping, fairness, loyalty, rights (to safety, privacy, etc.), justice, responsibility, compassion, and respect for human beings and property.

According to some deontological approaches, certain moral principles are binding, regardless of the consequences. Therefore some actions would be consid- ered wrong even if the consequences of the actions were good. In other words, a deontologist focuses on doing what is ‘‘right’’ (based on moral principles or values such as honesty), whereas a consequentialist focuses on doing what will

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maximize societal welfare. An auditor taking a deontological approach would likely insist on telling the truth about a company’s financial difficulties even if doing so might risk putting the company out of business and many people out of work. A consequentialist auditor would weigh the societal harms and benefits before deciding what to do. If convinced that by lying now he or she could save a good company in the long term, the consequentialist auditor would be more will- ing to compromise the truth.

Knowing what values are important to you and how you prioritize them is an important first step toward understanding and applying this approach in your own life (now is a good time to complete the end-of-chapter exercise, ‘‘Clarifying Your Val- ues’’). Which values are most important to you? Which ones are you willing to adhere to consistently, and how do you prioritize them if they conflict? Try to keep your list of values to just a few that you believe are truly the most important ones. In attempting to decide which values are most important to you, it’s helpful to think back to recent ethical dilemmas you have faced. Which ones guided your behavior? Which ones trumped other conflicting values? Think carefully when selecting your ethical values. For example, students often select promise keeping as a value. But what if keeping a promise requires you to breach another more important value such as honesty or jus- tice? If promise keeping is important to you, be careful what you promise. Should you promise to lie to authorities for a friend who has broken the law and harmed others? If you select loyalty, you’ll need to think about ‘‘loyalty to whom,’’ because multiple loyalties can conflict as they do in the layoff situation we’ve been discussing.

Some deontological theories focus on rights rather than duties, values, or princi- ples. The concept of rights goes back to classical Greek notions of ‘‘natural rights’’ that emerge from ‘‘natural law.’’ Rights can be thought of as ‘‘negative rights,’’ such as the limits on government interference with citizens’ right to privacy or the pursuit of happiness. Or rights can be thought of in more positive terms, such as the individ- ual’s rights to health and safety. The rights of one party can conflict with the rights of another party, as when the rights of a company to seek profits for its shareholders conflict with the rights of a community to clean air or water or the rights of a con- sumer to buy a safe product. Furthermore, the rights of one party are generally related to the duties of another. So, if we agreed that communities have the right to clean water, businesses would have the duty to protect that right.

How does a deontologist determine what rule, principle, or right to follow? One way is to rely on moral rules that have their roots in Western biblical tradition. For example, the Golden Rule, a basic moral rule found in every major religion, is famil- iar to most of us and provides an important deontological guide: The most familiar version tells us to ‘‘Do unto others as you would have them do unto you.’’ In our layoff situation, the Golden Rule would suggest that Pat should tell her friend what she knows because she would want her friend to do the same for her if the situation were reversed. But note that the Golden Rule leads you to the best decision only if you’re highly ethical. For example, do you think that the Golden Rule would expect you to lie for a friend who has broken the law because you would want the friend to do that for you? No, because a highly ethical person wouldn’t ask a friend to lie. The

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ethical person would be responsible and would accept the consequences of his or her illegal actions.

The German philosopher Emmanuel Kant provided another useful moral rule with his categorical imperative: ‘‘Act as if the maxim of thy action were to become by thy will a universal law of nature.’’ This rule asks you to consider whether the rationale for your action is suitable to become a universal law or principle for every- one to follow. For example, if you break a promise, the categorical imperative asks, ‘‘Is promise breaking a principle everyone should follow?’’ The answer is no; if everyone did this, promises would become meaningless. In fact, they would cease to exist.

A practical deontological question to ask might be, ‘‘What kind of world would this be if everyone behaved this way or made this kind of decision in this type of situation?’’ What kind of world would this be if everyone broke promises at will? Consider the following example:

A DRUG STUDY

A number of physicians are recruited to participate in a large-scale, multi- center study to investigate the survival rates of breast cancer victims who are being treated with a new drug. Strict rules are developed regarding inclusion of patients in the study. Only those who have had surgery within the last three months can be included. Dr. Smith has a patient who hears about the study and wants very much to participate. Because Dr. Smith thinks the drug could really help this patient, he agrees to include her even though her surgery took place six months ago. He changes the dates on her charts to conform with the study requirements and reasons that this one little change shouldn’t affect the study results.

According to the categorical imperative, we must ask whether the rationale for Dr. Smith’s action (helping his patient by breaking the study rules) is suitable to become a principle for all to follow. The answer is clearly no. What if other doctors did the same thing as Dr. Smith? What if those involved in medical research followed their own preferences or motives rather than the rules guiding the study? Society would be unable to rely on the results of medical research. What kind of a world would it be if researchers were routinely dishonest? It would be one where we simply couldn’t depend on the integrity of scientific research, and most of us would deem that kind of world unacceptable. Interestingly, given the potential for societal harm of a decision to be dishonest and enroll the patient in the study, consequentialist thinking would lead to the same decision. Only the patient would potentially benefit, and society as a whole would be harmed.

Additional moral rules come from the work of the highly regarded American political philosopher John Rawls. Rawls proposed that decision makers use a veil of ignorance exercise to arrive at fundamental principles of justice that should guide ethical decision making. In his approach, imaginary people come together behind a

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hypothetical veil of ignorance. These imaginary people do not know anything about themselves, their identities, or their status. They don’t know if they are male or female, young or old, rich or poor, black or white, the CEO or a janitor, intelligent or mentally retarded, physically fit or disabled, sick or healthy, patient or doctor. According to Rawls, rational people who use this veil of ignorance principle will be more likely to develop ethical rules that do not unfairly advantage or disadvantage any particular group.4 Because humans are fundamentally risk averse and wary of being the worst off, such neutral people would arrive at fair principles that grant all individuals equal rights to basic liberties and equality of opportunity and that benefit the least advantaged in society. This approach was designed to be used as a guide in any ethical decision, but it may be most useful when fairness concerns are central to the decision at hand. It offers yet another way to broaden your view and urges you to consider the needs of those who are less advantaged than yourself. So, following Rawls, if a business needs to downsize, what kind of process would the group of imaginary people behind the veil of ignorance devise for deciding whom to lay off and when to tell employees? How should doctors decide who will be included in drug studies? How should lifesaving prescription drugs be priced? Would sweatshop working conditions ever be acceptable?

A major challenge of deontological approaches is deciding which duty, obliga- tion, right, or principle takes precedence because, as we said earlier, ethical dilem- mas often pit these against each other. What does the deontologist do if one binding moral rule clashes with another? Can it be determined which is the more important right or principle? Because the U.S. Constitution is based on a rights approach, many U.S. public policy debates revolve around questions such as these. For exam- ple, the abortion debate rests on the question of whether the rights of the mother or the fetus should take precedence. In ethical dilemmas at work, loyalty to your boss or organization can easily clash with other strongly held values such as compassion or fairness. What if your boss tells you that you must lay off a subordinate—an excellent performer—because he was hired last, and the principle guiding the layoff is ‘‘the last hired is the first fired’’? But imagine that this subordinate will lose his health insurance with the layoff, and you know that his child is seriously ill. Another subordinate who has been with the company somewhat longer is also a good performer but is single and has no family obligations. What is the most ethical decision here?

Another difficulty of deontological approaches arises when they conflict with consequentialist reasoning. First, what happens when following a rule will have dev- astating consequences? For example, in World War II Germany, telling the truth to the Nazis about whether Jews were hiding in your attic would have devastating consequences—the Jews would be taken and killed. In response to such concerns, some philosophers argue that deontological principles (i.e., truth telling, promise keeping) don’t have to be regarded as absolute. For example, one could violate a rule or principle for a good reason (according to Kant, a reason that you would be willing to accept for anyone in the same position).5 In the Nazi scenario, Kant’s categorical imperative would be helpful because most of us would not want to live in a world

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where people are expected to tell the truth when doing so means the death of an inno- cent human being. Respect for human life trumps honesty.

Consider yet another example of conflict between a consequences and a princi- ples approach. In 2009, the owner of a shipping company had to decide whether to pay ransom to pirates who were holding his ship and its crew hostage and who threat- ened to kill everyone if the ransom were not paid. This business owner acknowledged that paying the ransom would reinforce the pirates’ behavior and would likely lead to more kidnappings and hostage takings, an outcome that is clearly to the detriment of society overall. However, having considered this, he nevertheless concluded that he would pay the ransom because he felt strongly that his primary responsibility as an employer was to his people. His values of respect for human life and compassion for the employees’ families were more important to him in this situation than the poten- tial longer-term broader harm.

Sometimes, a decision with good consequences contradicts an important ethical principle. For example, the state of Virginia developed a method for sentencing crim- inals that incorporates risk of recidivism. Using factors such as gender, age, employ- ment status, and prior criminal record, the state learned that it can predict the likelihood of an individual’s committing another crime. This calculation is designed to protect the public and save taxpayer money, and many felons are being released from jail and returned to the community successfully. The system works; and one could argue, based on consequentialist thinking, that it benefits most people. But some argue, based on principle, that those who commit crime deserve to be punished and that it is unfair to treat offenders who committed the same crime differently. Under the system, a young, unemployed male is more likely to go to jail than an older woman who has a job.6 The consequences are good for society, but is the system fair?

Focus on Integrity (Virtue Ethics)

The virtue ethics approach focuses more on the integrity of the moral actor (the per- son) than on the moral act itself (the decision or behavior). The goal here is to be a good person because that is the type of person you wish to be. Although virtue ethics as a philosophical tradition began with Aristotle, a number of contemporary ethicists (including business ethicists) have returned it to the forefront of ethical thinking.7

A virtue ethics perspective considers the actor’s character, motivations, and intentions (something we didn’t discuss at all under the other two perspectives). According to virtue ethics, it is important that the individual intends to be a good person and exerts effort to develop him or herself as a moral agent, to associate with others who do the same, and to contribute to creating an organizational context that supports ethical behavior.8 This doesn’t mean that principles, rules, or consequences aren’t considered, just that they’re considered in the context of assessing the actor’s character and integrity. One’s character may be assessed in terms of principles such as honesty, in terms of rule following (did this actor follow his profession’s ethics code?) or in terms of consequences (as in the physician’s agreement to, above all, do no harm).

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Motivations and intentions are important to ethical decision making, as the law acknowledges. If a person harms another, society judges that person less harshly if he or she did not intend to do so, if it was an accident. In thinking about Mark Felt’s deci- sion to provide information to Woodward and Bernstein in the Watergate affair, virtue ethics would ask us to think about his intentions and motivation. Was he motivated by revenge because he was passed over for the top job at the FBI (as some have suggested), or was he guided by broader concerns about doing the right thing as a conscientious moral agent who was concerned about sustaining the American system of government?

In virtue ethics, one’s character may be defined by a relevant moral community, a community that holds you to the highest ethical standards. Therefore it’s important to think about the community or communities the decision maker operates within. Mark Felt was an FBI man who was sworn to keep confidences. That makes it hard for some in the FBI community to accept his talking to journalists, even if the long- term consequences contributed to the greater good of the country. But the broader community, the U.S. public at large, likely judges Felt more kindly if they think of him as someone who took a great personal risk to do what he thought was right. Think about yourself. What community or communities do you look to for guidance in deciding whether you acted as a person of integrity? Are you guided by the stan- dards of your professional association, the regulatory community, your religious community, your family, your company’s ethics office, the broader public? Note that unless you work in a highly ethical organizational context, the relevant moral com- munity is not your own work group or your organization. A virtue ethics perspective requires that you look to the community that will hold you to the highest ethical stan- dard and support your intention to be a virtuous person.

A virtue ethics approach is particularly useful for individuals who work within a professional community that has developed high standards of ethical conduct for community members. For example, the accounting profession has developed a code of conduct for professional accountants. Being a virtuous accountant would mean abiding by that code of professional responsibility. The same goes for certified finan- cial consultants, engineers, lawyers, physicians, and psychologists who all agree to abide by their profession’s rules and standards. Such professional codes are generally living documents that evolve with changing times. For example, building on 20 years of thinking about ethics and torture, a committee of the American Psychological Association (APA) developed new standards in 2009, consistent with its ‘‘do no harm’’ principle: without exception, the new APA standards prohibit professional psychologists from participating in torture. Psychologists are required to disobey orders to torture, intervene to stop torture, and report torture if they become aware of it.9 A decision maker can often rely on such relevant community standards to guide decisions and actions. The assumption is that the professional community has already done this type of thinking and has done it carefully.

Consider this fascinating example from the U.S. legal profession. The rule of attorney-client privilege requires criminal defense lawyers to keep information shared by their clients completely confidential. This rule is based on the idea that, in order for defendants to get the best possible defense, they must feel free to be

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completely truthful with their lawyers. The underlying principle of the U.S. system of justice says that everyone deserves a vigorous defense and that defense lawyers must act in the interests of their clients. Then it is up to judges and juries to decide guilt and innocence. That all makes a lot of sense in the abstract. But a recent case in Illinois (profiled on 60 Minutes)10 was particularly challenging for nonlawyers to understand. Here’s what happened. Two criminal defense lawyers went public to share information that their client had committed a murder for which another man, Alton Logan, was erroneously convicted. When the lawyers went public, Logan had already served 26 years in prison for a crime he did not commit! Most observers’ immediate reaction was to say that the lawyers should have spoken up right away because it just isn’t fair for someone to go to jail for a crime he didn’t commit, and they could and should have stopped it. But because of attorney-client privilege, a central ethical principle in the legal profession, the lawyers were not allowed to share this private information. As lawyers, they understand that the larger system of justice depends on that principle, even if some individuals are harmed in the process of upholding it. Interestingly, they also noted that if they had shared the information, it would not have been admissible in court and could not have helped Alton Logan. The lawyers were able to finally come forward only because, years before, they had con- vinced their client to sign an affidavit saying that they could share the information about his admission of guilt after he died. That’s what they did when their client died in prison (where he was serving a life sentence for committing a different crime), and Alton Logan was finally released. Interviews with the lawyers suggested that they understood and were guided by the ethics of the legal profession. However, impor- tantly, they also went beyond professional community expectations when they asked their client to sign the affidavit that ultimately allowed them to share the information. So from a virtue ethics perspective, they followed their community’s guidance. But as thoughtful moral agents who were motivated to do the right thing, they didn’t completely surrender to legal community standards. They used their own thinking to devise a plan that ultimately resulted in Logan’s release (although a deontologist might say that it was 26 years too late).

It’s important to do your own thinking because some professional communities pro- vide limited guidance or none at all. For example, management is not a ‘‘profession’’ with explicit ethical standards and acknowledged responsibilities to society (although some influential thinkers believe and argue that it could and should be).11 In fact, the authors of a 2008Harvard Business Review article12 offer ‘‘A Hippocratic Oath for Man- agers’’ that calls on managers to commit to the following (adapted from the original):

1. Service to the Public and Society. Recognize the manager’s responsibility to serve the public interest by creating sustainable value for society in the long term.

2. Balance Multiple Stakeholders’ Interests. Recognize that managers must balance the often-conflicting needs of many stakeholders to enhance enter- prise value in a way that is consistent with societal well-being. The authors

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note that ‘‘this may not always mean growing or preserving the enterprise and may include such painful actions as its restructuring, discontinuation, or sale if these actions preserve or increase value.’’

3. Acting with Integrity in the Enterprise’s Interest. Put the interests of the enterprise ahead of personal interests while behaving as a person of integ- rity, consistent with personal values, and leading others to do the same. This means avoiding behavior that advances personal ambitions that harm either the business or society. It also means reporting the ethical or legal violations of others.

4. Adherence to the Law. Make a commitment to adhere to the spirit and the letter of the law and contracts in personal and enterprise action.

5. Accurate and Transparent Reporting. Report enterprise performance accu- rately and transparently to all relevant stakeholders (e.g., investors, consum- ers, the public, etc.) so that they can make informed decisions.

6. Respectful and Unbiased Decision Making. Make decisions in an unbiased and respectful manner without considering race, gender, sexual orientation, religion, nationality, politics, or social status. The goal is to protect the inter- ests of the less powerful who are affected by these decisions.

7. Professional Development. Commit to continuous professional develop- ment for the self and others with the goal of always using the best and most current available knowledge to make informed decisions.

8. Responsibility to Protect the Profession. Recognize that being considered a professional has privileges that come with responsibilities to uphold and protect the standards, and continue to develop them in a way that contributes to the trust, respect, and honor associated with them and with the profession.

Interestingly, if you study these principles carefully, you can find evidence of all three ethical decision-making approaches. Can you identify consequentialist think- ing, deontological thinking, or virtue ethics thinking? Do you think management is ready to become a profession that requires its members to adhere to such a code? Should it?

Whether or not your own professional community provides guidance, it remains essential that you think for yourself because a professional community can be wrong. For example, auditors are professional accountants with a fiduciary responsibility to the public. Their audits provide investors with assurance that public companies’ financial statements can be trusted. The American Institute of Certified Public Accountants (AICPA) is the national, professional organization for all certified pub- lic accountants (www.aicpa.org). It has a code of conduct for members and a mission that includes establishing and enforcing conduct standards. But the institute also acts as a lobbying organization. During the 1990s, auditing firms got into the business of providing consulting to their audit clients; this was an ethically dangerous practice

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because of its potential for conflict of interest. However, because consulting was more lucrative than auditing, firms lobbied hard to protect their relationships with these clients and their rights to both consult and provide audit services to the same firms. As a result, the AICPA was blamed for contributing to an environment that led to financial scandals at Enron, WorldCom, and other companies.13 So if you’re look- ing for solid ethical guidance, it’s important to scrutinize the source and make sure that it is free of conflicts of interest.

When a professional community isn’t available, doesn’t provide good guidance, or seems wrong, it can be wise to turn to the broader community and societal stan- dards for guidance. A useful decision-making shortcut based on the broader commu- nity as a guide is known as the disclosure rule. This practical shortcut is widely used by managers and executives. The disclosure rule asks, ‘‘How would you feel if your behavior appeared on ___? You fill in the blank of a particular media outlet. Is it the front page of the New York Times, the Wall Street Journal, your hometown news- paper, 60 Minutes, CNN? The assumption behind the disclosure rule is that commu- nity standards do exist for most situations, and at a gut level, most of us know what those are. If our gut tells us it wouldn’t look good to have our behavior appear in one of these media outlets, we simply shouldn’t be doing it because it means that if we did, we wouldn’t be considered persons of integrity in society’s view.

If your goal is to be considered a person of integrity, another useful question to ask yourself is how your harshest moral critic or ethical role model would advise you. Who serves in that role for you? Is it someone in your family or a respected teacher, coach, or spiritual adviser? Identify your strongest ethical role model or harshest moral critic and consider what this individual would think of the behavior you’re contemplating. Most of us have people in our lives whose integrity we respect and whose moral judgment of us we value.

Finally, a virtue ethics perspective assumes that your identity as a moral actor is important to you and that you are devoted to continuously developing that aspect of yourself. Being an ethical person is just an important part of who you are. Those of us who have made such a commitment know that life and career present ongoing ethical challenges and opportunities to work on the ethical aspect of ourselves. Are you following an ethical fitness program by practicing good behavior over time and developing good habits? Just as an exercise program challenges your muscles, balance, and coordination, an ethical fitness program challenges your ethical thinking and leads to improvement. Such an ethical fitness program can help you develop your comfort with speaking up on behalf of your values. It can also reinforce your view of yourself as a person of integrity and contribute to improving your ethical fitness over time. Identifying ethical role models in your life, choosing to interact with people of integrity, and choosing to work in an ethical environment can all be ways to support this aspect of your personal development.14

We’ve now considered consequentialist, deontological, and virtue ethics approaches. These are just a few of the philosophical approaches that may be applied in ethical dilemma situations. We’ve introduced the approaches we believe have the most practical benefit to business managers, and, admittedly, we’ve introduced them

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in a rather general way, without many of the nuances developed by philosophers over the years. We’ve suggested that all of the approaches have limitations. No one of them, by itself, provides perfect guidance in every situation. Obviously, if all of the approaches lead to the same solution, the decision is a relatively easy one. The tough ones arise when the approaches conflict. When that happens, it will be up to you to consider the situation as comprehensively as possible and make the best decision you can based upon societal good, your most important values and principles, and consid- erations of what a person of integrity would do. Stuart Youngblood, professor of management at Texas Christian University in Fort Worth, suggested the following example that he has used in his business ethics class:

THE BURNING BUILDING

Assume you approach a burning building and hear voices coming from both ends, each seeking help. Assume the fire is burning so rapidly you only have time to go to one or the other end of the building. Initially, you hear multiple voices at one end and a sole voice at the other end. Which way do you go? Why? Now include some additional information. The sole voice is that of your daughter (father, mother, etc.). Do you still choose to go to the end with multiple voices (to do the greatest good for society)? If not, why not? What has changed? What will the different approaches advise?

We certainly won’t resolve the academic controversies over the ‘‘best’’ philo- sophical approach here. Even so, we believe that the approaches we’ve presented incorporate important factors that should guide ethical business decisions. All of them would have provided excellent ethical guidance to those whose actions contrib- uted to the recent U.S. financial crisis, during which mortgage brokers sold NINJA (no income, no job or assets) loans to people who clearly couldn’t afford the homes they were buying, investment bankers packaged these risky mortgages into securities they touted as safe, and rating agency employees rated the securities AAA (without fully addressing the underlying risks). A consequentialist perspective would have focused attention on the potential harms to multiple stakeholders (customers, society) of these risky mortgages and mortgage-backed securities. A deontological approach would have focused attention on the importance of responsibility, honesty, and trans- parency with customers about these products. A virtue ethics approach would have asked whether a person of integrity would sell mortgages to people with little or no income or rate these securities highly despite the lack of experience with them. A serious consideration of these factors by the actors involved could have averted a systemic crisis that has harmed all of us.

Next, we offer eight steps that aim to integrate the three types of analysis just discussed.15 Before presenting them, we’d like to offer a caveat. The eight steps sug- gest a linear decision-making process that is necessarily inaccurate. Ethical decision making is often not linear. Still, it’s helpful to cover all of these points, even if they don’t always occur in this particular sequence.

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EIGHT STEPS TO SOUND ETHICAL DECISIONMAKING IN BUSINESS

Step One: Gather the Facts

The philosophical approaches don’t tell us explicitly to gather the facts. But they seem to assume that we’ll complete this important step. You might be surprised at how many people jump to solutions without having the facts. Ask yourself, ‘‘How did the situation occur? Are there historical facts that I should know? Are there facts concerning the current situation that I should know?’’16

Fact gathering is often easier said than done. Many ethical choices are particu- larly difficult because of the uncertainty involved in them. Facts may simply be un- available. For example, in our layoff case, Pat may not have good information about the legal requirements on informing workers about layoffs. Also, she may not have enough information to determine how long it would take these 200 workers to find new jobs. It’s important to recognize these limitations as you do your best to assem- ble the facts that are available to you.

In the financial crisis, decision makers not only failed to gather good informa- tion, but it appears that they may have explicitly avoided getting the facts. For exam- ple, mortgage lenders processed mortgages for unemployed people because they required no documentation to prove employment (as lenders had always done in the past). All the person had to do was claim to have a job, and the mortgage would be processed. The mortgage lender earned fees for creating and processing the loan and then sold it off in the secondary mortgage market, where it was packaged with other mortgages and sold to investors. The ‘‘fact’’ that the person with the mortgage was unemployed and would likely not be able to sustain payments was first ignored and then lost as the mortgage made its way through the mortgage market system.

Step Two: Define the Ethical Issues

Many of us have knee-jerk responses to ethical dilemmas. We jump to a solution without really thinking through the ethical issues and the reasons for our response. For example, in the layoff case, one person might say, ‘‘Oh, that’s easy; promise keeping is the ethical issue. Pat has to keep her promise to her boss and protect her job.’’ Another person might say that honesty is the key ethical issue: ‘‘Pat just has to tell the truth to her friend.’’

Don’t jump to solutions without first identifying the ethical issues or points of values conflict in the dilemma. Also recognize that the toughest situations usually involve multiple ethical issues that go back to the philosophical approaches we just discussed. For example, in the layoff case, one ethical issue has to do with the rights of both the workers and the company. How would you define the workers’ right to know about the plant closing in advance? How much advance notice is appropriate? What does the law say? Another ethical issue has to do with the company’s right to

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keep the information private. Furthermore, what is the company’s obligation to its workers in this regard? At a more personal level, there are the ethical issues related to principles such as honesty, loyalty, and promise keeping. Is it more important to be honest with a friend or to keep a promise to one’s boss? Who is owed more loyalty? Think about the situation from a justice or fairness perspective: What would be fair to the company and to those who would be laid off?

Points of ethical conflict may go back to the conflict between consequentialist and deontological approaches. For example, if I tell the truth (consistent with the principle of promise keeping), bad things may happen (negative consequences). A consequentialist would think about the ethical issues in terms of harms or benefits. Who is likely to be harmed? Who is likely to benefit from a particular decision or action? And what is the bottom line for society overall? A virtue ethics approach would suggest thinking about the ethical issues in terms of community standards. Does your relevant moral community (the one that would hold you to the highest ethical standards) identify a particular action as wrong? Why or why not?

Especially when we’re under pressure or in a rush, our inclination is to stop with the first ethical issue that comes to mind. For example, in our layoff case, we might be inclined to stop with the issue of loyalty to a friend. Challenge yourself to think of as many issues as you possibly can. Here’s where talking about the problem with others can help. Present the dilemma to coworkers, to your spouse, or to friends you respect. Ask them whether they see other issues that you may have missed.

Step Three: Identify the Affected Parties (the Stakeholders)

Both consequentialist and deontological thinking involve the ability to identify the parties affected by the decision. The consequentialist will want to identify all those stakeholders who are going to experience harm and benefits. The deontologist might want to know whose rights are involved and who has a duty to act in the situation.

Being able to see the situation through others’ eyes is a key moral reasoning skill. Lawrence Kohlberg, developer of a key theory of moral reasoning, called this skill role taking. It means putting yourself in others’ shoes and being sensitive to their needs and concerns. Rawls’s veil of ignorance exercise asks you to do this as well. Frequently, you have to think beyond the facts provided in a case in order to identify all affected parties. It often helps to begin with the individuals in the case who are immediately affected (e.g., in the layoff case, it would be Pat, the worker, Pat’s boss) and then progressively broaden your thinking to incorporate larger groups. For exam- ple, in this case, you might include the other workers, the rest of the company, the local community, and society in general. As you think of more and more affected parties, additional issues will probably come to mind. For example, think about the local community. If this is a small town with few other employers, fairness to the entire community becomes an important issue. Shouldn’t they have as much time as possible to plan for the impact of this plant closing? Try to put yourself in their shoes. How would they argue their case? How would they feel?

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Earlier, we introduced the concept of stakeholders, all of those individuals or groups who have a stake in the particular decision or action. In the context of ethical decision making in business, we should identify the stakeholders affected by the decision and ask how they are affected. Try to make your thinking as broad as possible here. Some of the stakeholders affected by the decision may not even be born yet. The best concrete example of unborn stakeholders might be ‘‘DES daughters.’’ In the 1940s, DES, a synthetic estrogen, was prescribed for pregnant women who seemed to be in danger of miscarrying. By 1971, it became clear that DES produced a birth defect in the daughters of these women. Because of the birth defect, DES daughters were more likely to develop vaginal cancer, espe- cially between the ages of 15 and 22. They also had a higher than normal rate of cervical cancer.17

Once stakeholders are identified, role-playing can help you see the issue from different stakeholder perspectives. In your classroom or your department, get individ- uals to seriously play the relevant roles. You may be surprised at how perspectives change based on this simple exercise. What decision would you reach if you were someone else in the situation? This step incorporates the Golden Rule to treat others as you would like others to treat you. Imagine yourself as each of the players in a decision situation. What decision would they reach, and why?

Another consideration may be to ask whether you can ‘‘test’’ a potential decision with affected parties before your prospective course of action is made final. The objective is to gauge how various audiences will react, so that you can adjust or fine- tune a decision along the way.18 One question you could ask yourself is, how would this or that stakeholder react if this decision were made public? For example, imagine that ABC Co. (in our layoff case) had another thriving plant in another location. However, in the decision-making process, it was assumed that employees wouldn’t want to relocate because of their ties to the local community. Wouldn’t it be better to ask them their preferences than to assume what they would want to do?

Step Four: Identify the Consequences

After identifying the affected parties, think about the potential consequences for each party. This step is obviously derived from the consequentialist approaches. It isn’t necessary to identify every possible consequence. You should, however, try to identify consequences that have a relatively high probability of occurring and those that would have particularly negative consequences if they did occur (even if the probability of occurrence is low). Who would be harmed by a particular decision or action? For example, in our layoff case, telling the truth to the worker might cause Pat to lose her job, which would have negative consequences for Pat and her entire family (especially if she’s a major breadwinner in her family). However, it would give her worker (and presumably others who would be told) the benefit of more time to look for a new job and perhaps save many families from negative financial consequences. Can you determine which solution would accomplish the most net good and the least net harm for society?

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Think about the drug thalidomide. It was prescribed to women in the late 1950s to treat morning sickness and produced devastating birth defects in 12,000 babies in Europe, Canada, Australia, and Japan (the Food and Drug Administration never approved it for use in the United States). Many of the babies died, but others were left to live with severe deformities. Randy Warren, a Canadian born in 1961, is the founder of the Thalidomide Victims Association of Canada. His mother took just two doses of thalidomide, but Warren is only a little over 3 feet tall and has no thumbs, arms that are 2 inches too short, and stumps for legs. The consequences of this drug when prescribed to pregnant women were obviously devastating; and shortly after Warren was born, the drug was banned in most places. But continued research pro- duced renewed interest in thalidomide as an effective treatment for Hansen’s disease (a painful skin condition associated with leprosy) as well as for ‘‘wasting’’ disease in AIDS patients, arthritis, blindness, leukemia, and other forms of cancer. This drug that had such terrible consequences for so many was being considered for approval because it also had the potential to help many people who were dealing with other devastating illnesses. As Warren put it, ‘‘When I heard . . . that thalidomide takes people out of wheelchairs and I think of myself and others that were put in wheel- chairs . . . tell me we don’t have the moral quandary of the century.’’

In the end, Warren was consulted and became involved in the decision to return the drug to the marketplace. In 1998, the FDA approved the drug to treat Hansen’s disease under the highest level of restriction ever given to a drug. Doctors, pharma- cists, and patients all must be registered with the manufacturer, Celgene. Two forms of birth control are required to prevent the possibility of pregnancy and resulting birth defects. Male patients are required to use condoms. No automatic refills of the drug are allowed. And Warren has become ‘‘something of a company conscience.’’ Although extremely difficult, the decision to market thalidomide in the United States was made with input from those stakeholders most familiar with its potential for both devastating consequences and remarkable benefits. Regulators at the FDA and com- pany officials got to know Randy Warren as a real person who continues to suffer consequences that they might not have been able to imagine just by reading reports and statistics.19

LONG-TERM VERSUS SHORT-TERM CONSEQUENCES In business decisions, it’s particularly important to think about short-term and long-term consequences. Are you confident that your behavior will be considered ethical over a long period of time, even if circumstances or people change? In the layoff case, is the long-term health of the company and the people who will remain employed more important than the short-term consequences to the 200 workers who will be laid off? In the U.S. financial crisis, if people had been thinking about long-term consequences, they would have been much more likely to question behaviors that focused primarily on short-term profits.

SYMBOLIC CONSEQUENCES In business, it’s also extremely important to think about the potential symbolic consequences of an action. Every decision and action

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sends a message; it stands for something. What message will a particular decision or action send? What will it mean if it is misunderstood? For example, if Pat doesn’t tell her worker the truth, and he finds out later that she knew, what will the symbolic message be to this worker and the others who work for Pat—that she’s more inter- ested in saving her own hide than in taking care of them? From a leader’s perspective, what are the symbolic consequences of accepting tickets to a football game from a valued client when your organization has a rule against accepting gifts from clients? Although the leader may see going to the game as important for getting the big sale, the symbolic message it will likely convey to employees is that the rule doesn’t apply to senior leaders. Such a symbolic message can have dire consequences for the orga- nization because employees may then feel that the rule shouldn’t apply to them either.

CONSEQUENCES OF SECRECY If a decision is made in private in order to avoid some negative reaction, think about the potential consequences if the decision were to become public. Think about the disclosure rule here. If you’re inclined to keep it a secret, that should be a clue that something isn’t right. For example, the public has been outraged by the fact that tobacco executives secretly knew about the negative health effects of cigarette smoking and lied about it to the American people in testi- mony before Congress.20

Step Five: Identify the Obligations

Identify the obligations involved and the reasons for each one. For example, in the layoff case, consider Pat’s obligations toward the affected parties. When identifying Pat’s various obligations, be sure to state the reasons why she has this duty or obliga- tion. Think in terms of values, principles, character, or outcomes. For example, if you’re considering Pat’s obligation to keep her promise to her boss, your reasoning might go like this: ‘‘Pat shouldn’t break her promise to her boss. If she does, the trust between them will be broken. Promise keeping and trust are important values in superior-subordinate relationships.’’

The obligations you identify will vary depending on the people involved and the roles they play. For example, our faith in our financial system depends in part on auditors’ obligation to tell the truth about a company’s financial difficulties and our faith in rating agencies to accurately grade financial instruments. Similarly, our faith in science as an institution depends on the integrity of the scientific data and how scien- tists report it. Individuals in these roles have a particularly strong obligation to tell the truth; and if they see themselves as moral actors, they will be motivated to do so.

Step Six: Consider Your Character and Integrity

Here, think about yourself as a person of integrity. Ask yourself what a person of integrity would do in this situation. In attempting to answer this question, you may find it useful to identify the relevant moral community and consider what that com- munity would advise. Begin by identifying the relevant professional or societal

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community. Then, determine how community members would evaluate the decision or action you’re considering.

Remember the disclosure rule. It asks whether you would feel comfortable if your activities were disclosed in the light of day in a public forum like the New York Times or some other news media. In general, if you don’t want to read about it in the New York Times, you shouldn’t be doing it. If you would be uncomfortable telling your parents, children, spouse, clergy, or ethical role model about your decision, you should rethink it.

Boris Yavitz, the former dean of Columbia University’s Graduate School of Business, offered another version of the test for New Yorkers: ‘‘Unless you would do it in Macy’s department store window at high noon, don’t do it.’’ And Thomas Jeffer- son expressed it like this: ‘‘Never suffer a thought to be harbored in your mind which you would not avow openly. When tempted to do anything in secret, ask yourself if you would do it in public. If you would not, be sure it is wrong.’’

This kind of approach can be especially valuable when a decision needs to be made quickly. Suppose someone in your organization asks you to misrepresent the effectiveness of one of your company’s products to a customer. You can immediately imagine how a story reporting the details of your conversation with the customer would appear in tomorrow’s paper. Would you be comfortable having others read the details of that conversation? The ideal is to conduct business in such a way that your activities and conversations could be disclosed without your feeling embarrassed.

Another method might be to ask a question asked by the Seneca people (one of the five original nations of the great Iroquois Confederacy located in the northeastern United States and southeastern Canada) in their guidelines for self-discipline: ‘‘How will I be remembered when I’m gone?’’21 Many people don’t often think about this question, but it’s a good one. Will you be remembered as an individual of integrity? Students often don’t realize how small professional communities can be. This is especially true in today’s world of social networking. Although you’ll likely change jobs and organizations multiple times over the years, many people remain in a single industry where they have developed industry-specific expertise. A reputation for trustworthiness, respectful interaction, and integrity will open doors to new clients and career opportunities. But the opposite is true as well. A stained reputation is extremely difficult to overcome.

Step Seven: Think Creatively about Potential Actions

Perhaps this should be Step One. Before making any decision, be sure that you haven’t unnecessarily forced yourself into a corner. Are you assuming that you have only two choices, either A or B? It’s important to look for creative alternatives. Per- haps if you’ve been focusing on A or B, there’s another answer: C. In our layoff case, perhaps Pat could work with management to devise a fair system for alerting employ- ees sooner; or at least she could advise them that information is forthcoming soon, and they should not make big financial commitments until the announcement is made. As another example, what if you received an extravagant gift from a foreign

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supplier? This situation could easily be conceptualized as an A or B quandary. Should you accept the gift (which is against company policy), or should you refuse it (which could be interpreted as a slap in the face by this important supplier, who is from a culture where gift giving is a valued part of business relationships)? A poten- tial C solution might be to accept the item as a gift to the company that would be displayed in the headquarters entrance, explaining that large personal gifts are against company policy. Obviously, you would have to check with your company about the acceptability of this C solution. The idea here is to think outside the box.

Here is yet another example. In an overseas location, Cummins Engine Company was having difficulty with local children cutting through a wire fence and stealing valuable electronic components. The A or B solution was to arrest or not arrest these young children when they were caught. After involving the community, the managers were able to arrive at a C solution. They discovered that the children were stealing because there weren’t enough classrooms at the local school, thus leaving the chil- dren with little to do but get into trouble. Cummins made classrooms available on their site. The mayor provided accreditation, books, and teachers. This C solution cost the company very little and accomplished a great deal. A total of 350 students were accommodated, the stealing problem disappeared, and Cummins became a valued corporate citizen.

Step Eight: Check Your Gut

The emphasis in these steps has been on using a highly rational fact-gathering and evaluation process once you know that you’re faced with an ethical dilemma. But don’t forget your gut. We are all hardwired to be empathetic and to desire fairness Empathy is an important emotion that can signal awareness that someone might be harmed. And intuition is gaining credibility as a source for good business decision making. We can’t always say exactly why we’re uncomfortable in a situation. But years of socialization have likely made us sensitive to situations where something just doesn’t feel quite right. So if your gut is sending up red flags, give the situation more thought. In fact, this may be your only clue that you’re facing an ethical dilemma to begin with. Pay attention to your gut, but don’t let it make your decision for you. Once you recognize that you’re facing an ethical dilemma, use the rational decision-making tools developed here to help guide your decision making.

PRACTICAL PREVENTIVEMEDICINE

Doing Your Homework

There’s no doubt that you’ll encounter ethical dilemmas—every employee probably encounters hundreds of them during a career; the only thing in doubt is when. Your mission is to be as prepared as possible before you run into a problem. The more informed you are, the more effective you’ll be in protecting yourself and your employer. The best ways to do that are to learn the rules of your organization

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and your profession, and to develop relationships that can help you if and when the need arises.

You can learn the rules in various ways. First, read your company’s code of ethics (if it has one) and policy manual. Since most policy manuals are huge, you obviously can’t memorize one. If you skim the contents, some of the rules will sink in—you may not remember the exact policy, but at least you’ll probably remember that one exists and where to find it.

Second, ask questions. Managers, executives, and peers will admire your initia- tive when you ask what they think is ‘‘important around here.’’ Since many organiza- tional standards are unwritten, and they differ from company to company, the best way to find out about them is by asking. Query your coworkers (including manage- ment) about what kinds of ethical situations are most common in your organization and how your organization generally handles those issues. Ask your manager how to raise ethical issues within your organization. Since he or she will certainly tell you to raise an issue with him or her first, be sure to find out how you raise an issue in your manager’s absence. This not only gives you a road map for raising issues, but it also sends a signal to your manager that ethics are important to you.

Finally, develop relationships with people outside of your chain of command. Get to know people in human resources, legal, audit, and other departments; they might be able to provide information, help you raise an issue or determine if some- thing even is an issue, or vouch for your credibility in a crisis. You might also want to join a professional group or association. Many professions have developed ethical standards apart from those that may exist in your company, and it can be helpful to know other people in your profession who can advise you if a crisis arises in your company. Some may say this is being political, but we think it’s just plain smart to network with people outside of your immediate job and company. It’s the difference between being a victim of circumstance and having the power, the knowledge, and the network to help manage circumstances.

After you’ve done your homework and learned about your company’s standards and values, you may find that your values and your employer’s values are in conflict. If the conflict is substantial, you may have no choice but to look for work in another organization. We’ll be addressing issues of company values and codes more in Chap- ters 5 and 6.

When You’re Asked to Make a Snap Decision

Many businesspeople place value on the ability to make decisions quickly; and, as a result, many of us can feel pressure to make up our minds in a hurry. This can be a particular issue when people are inexperienced for whatever reason—this may be their first job or a new company or industry—and they may feel a need to prove their competence by making decisions quickly. Obviously, that can be dangerous. The ethical decision-making tools described earlier in the chapter assume that you’ll have some time to devote to the decision—to consider multiple sides of the issue and the inherent conflicts with any one course of action. Do your best to get the time to

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assess, think through, and gather more information. Also consider the following guidelines when a quick decision seems called for:

1. Don’t underestimate the importance of a hunch to alert you that you’re facing an ethical dilemma. Your gut is your internal warning system. As one senior executive at a multinational computer company said, ‘‘The gut never lies.’’ When your gut tells you something’s wrong, consider it a warning siren.

2. Ask for time to think it over. Most snap decisions don’t have to be that way. Say something like, ‘‘Let me think about it, and I’ll get back to you soon.’’ Bargaining for time is a smart way to give yourself a break—then you can really think about the decision and consult with others. It’s better to take the time to make a good decision than it is to make a bad decision quickly and have lots of time to regret it. Would you rather be known as cautious or reckless?

3. Find out quickly if your organization has a policy that applies to your decision.

4. Ask your manager or your peers for advice. You should consider your man- ager the first line of defense when you encounter an ethical dilemma. Regardless of your level within the organization, never hesitate to ask for another opinion. This is where a trusted network comes in handy. If you have friends in human resources or the legal department, you can float the issue with them on a casual basis to see if there even is an issue.

5. Use the quick-check New York Times test (the disclosure rule). If you’d be embarrassed to have your decision disclosed in the media or to your family, don’t do it.

SHOULD JORDAN ACCEPT THE PRINTER DISCOUNT?

Jordan is upgrading his department’s data processing capabilities and has just placed an order for four personal computers and two laser printers with a computer company representative. When he mentions that he wishes he had a printer at home like the ones he just ordered, the representative tells him that because of his large order, she can give him a 50 percent discount on a printer for his home. Jordan feels that this is not quite right, but he’s not sure why and would like some time to think about her offer.

In this case, Jordan could have real doubt about whether or not to accept a 50 percent discount on a printer for his home. Even though he feels funny about the offer, he might be thinking that he does a lot of work at home, so accepting a discount on a personal printer could be justified. And since the computer representative made the offer after the order was placed, there’s no conflict of interest—Jordan’s decision to purchase obviously wasn’t influenced by the offer of a discount.

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But he should listen to his gut, which is feeling that this isn’t quite right. He can first stall the computer representative by telling her he’ll get back to her later in the day or tomorrow. He can find out what his company policy says about making pur- chases. (Many companies would equate the discount with a gift and forbid accepting it unless it’s available to all employees.)

Suppose he finds nothing in the policy manual to prohibit the discount, and other workers have said ‘‘go for it.’’ Then he can use the New York Times test. How would the public react to his decision? Some people would probably think that his order was influenced by the offer of a discount. He knows that’s not true, but it might be difficult to convince other people of that. This is called an appearance of a conflict of interest, an appearance can be as damaging as an actual conflict. If someone could think your judgment has been affected by a relationship—or in this case, a discount—it could be viewed as the appearance of a conflict and should be avoided. Appearances are extremely important in business and may not be accounted for by the philosophical tools provided earlier in the chapter. Whether you appear to be fair may be as important as whether you’re really fair.

Here’s the bottom line: If you think that your decision could be misinterpreted or if someone could think the objectivity of your decision has been compromised, rethink the decision. In the example, Jordan can politely refuse the representative’s offer by saying something like, ‘‘My company doesn’t allow personal discounts,’’ or ‘‘I just don’t feel right about it.’’

If you ever feel that accepting a favor from a vendor will place you under an obligation to the vendor in the future, be very careful. For example, a public relations manager, Mary, described an incident with a printing company (we’ll call it Type Co.) sales representative who was trying to get her business. Type Co. already did business with a number of departments within her company, but Mary was satisfied with her current printer and saw no reason to switch. Just before the holidays, Type Co. sent a popular electronic device (worth about $250) to Mary and to all of its customers in her company. Mary immediately felt that the gift was inappropriate; but to check out her judgment, she called one of Type Co.’s other customers in her com- pany. Mary’s colleague assured her that there was nothing wrong with accepting the gift and that it was simply a token of good will. (If Mary had been friendly with one of her company’s lawyers or human resources managers, she probably would have received very different advice.) Mary listened to her internal warning system, despite what her colleague said. She sent back the gift.

When asked why she returned the gift, Mary said, ‘‘I felt like I was being bribed to do business with Type Co.’’ A reader of the New York Times would probably agree.

CONCLUSION

This chapter has presented a prescriptive approach to individual ethical decision making. When you’re confronted with an ethical dilemma, you should find it helpful to inform your choice by considering the ideas and steps offered in this chapter. The

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end-of-chapter questions and case should give you some practice in applying these ideas and steps to real ethical dilemmas.

DISCUSSION QUESTIONS

1. If you had to choose just one of the philosophical approaches discussed in this chapter to guide your decision making, which would you choose? Why? Or, if you had to rank them from most to least helpful, how would you rank them?

2. Some of the steps in the eight-step model might suggest very different courses of action for resolving your dilemma. How would you choose among these dis- tinct courses of action? Why?

3. Think about situations where your values have been in conflict. How have you resolved those conflicts? Now that you have studied the ethical decision-mak- ing frameworks in this chapter, what should you have done?

4. Think about an ethical dilemma situation that you’ve faced. Apply the three approaches and the eight steps recommended in this chapter. Does it change your thinking about the situation? Would it change your action?

5. Some corporations and other organizations have designed ethical decision- making tests that incorporate some of the principles and systems described in this chapter. For example, Carl Skooglund, former vice president and ethics director at Texas Instruments, outlined the following Ethics Quick Test recom- mended for use by Texas Instrument employees:22

& Is the action legal?

& Does it comply with your best understanding of our values and principles?

& If you do it, will you feel bad?

& How will it look in the newspaper?

& If you know it’s wrong, don’t do it, period!

& If you’re not sure, ask.

& Keep asking until you get an answer.

Think about this list in terms of the decision-making guides discussed in the chapter. Which ones are being used here? Which are not? What recommendations, if any, would you make to alter this list? If you had to make up a list for your company, what would be on it? Why?

Do the same with the Rotary International Four-Way Test:

& Is it the truth?

& Is it fair to all concerned?

& Will it build goodwill and better relationships?

& Will it be beneficial to all concerned?

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The Seneca (one of the five tribes of the Iroquois Nation) people’s guidelines for self- discipline also include these questions:23

& Am I happy in what I’m doing?

& Is what I’m doing adding to the confusion?

& What am I doing to bring about peace and contentment?

& How will I be remembered when I am gone?

Could these tests serve as guides for ethical decision making in business? Why or why not?

6. The last question leads us to a useful exercise. If you had to write your own epitaph, what would it say? How would you like to be remembered? What kind of life do you hope to lead?

7. Albert Schweitzer (the philosopher and mission doctor) said, ‘‘Success is not the key to happiness. Happiness is the key to success. If you love what you are doing, you will be successful.’’ What do you think? How does this relate to the prescriptive approaches discussed in the chapter?

8. What do you think of the proposed Hippocratic oath for managers?24

9. What limitations, if any, can you think of to the prescriptions provided in this chapter? Can you think of reasons why they might not work?

10. If you were to design an ethical fitness program for yourself, what would you include?

EXERCISE

Clarifying Your Values

If you wish to be better prepared to make tough ethical decisions at work or else- where in your life, it can be extremely helpful to clarify your personal ethical values before they’re seriously challenged. Following is a selected list of values (in alphabetical order). Feel free to add one or more if you have a deeply held value that is not represented on this list (it is not meant to be exhaustive). In priority order (with 1 being the most important value), list from three to six val- ues that are most important to you personally in making decisions. That’s the easy part. Next, think seriously about what happens when two or more of these values conflict. For example, what happens if you value both honesty and success and they come into conflict? Are you willing to forgo financial success in order to be completely honest with customers or suppliers? Next, if you’re working, think about the values of your organization and how those are prioritized. Are there serious conflicts between your personal values and the organization’s values? Finally, list those values that you would choose to serve as the basis for business dealings in an ideal society. Be prepared to discuss.

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Action orientation Freedom Altruism Harmony

Responsibility

Authority Helpfulness Risk taking

Compassion Honesty/Integrity Security

Competence Honor Self-discipline

Conformity Humility Status

Creativity Initiative Success

Customer satisfaction Innovation Teamwork

Diversity Moderation Tradition

Equality Novelty Wealth

Excitement Obedience Winning

Experimentation Order Fairness/Justice Power Family well-being Promise keeping Flexibility/adaptability Respect

Introducing the Pinto Fires Case. Next, you’re going to read a case that chronicles an event that took place over 30 years ago. You may ask, why study such an old case? We study this case because it is extremely important in American business history. In 2005, Fortune Magazine called it one of the 20 business decisions that ‘‘helped create the business world as it is today’’25 According to Fortune, the case and ensuing legal battles contributed to the development of consumer activism as well as to the con- sumer protections and class action lawsuits that we now take for granted. We have also seen aspects of the case play out in product safety cases that have arisen more recently, including Ford Explorer rollovers after Firestone tire failures, a case that was settled in 2001.

CASE

PINTO FIRES

by Dennis A. Gioia (used with permission)

On August 10, 1978, three teenage girls died horribly in an automobile accident. Driving a 1973 Ford Pinto to their church volleyball practice in Goshen, Indiana, they were struck from behind by a Chevrolet van. The Pinto’s fuel tank ruptured and the car exploded in flames. Two passengers, Lynn Marie Ulrich, 16, and her cousin, Donna Ulrich, 18, were trapped inside the inferno and burned to death. After three attempts, Lynn Marie’s sister, 18-year-old Judy Ann, was dragged out alive from the driver’s seat, but died in agony hours later in the hospital.

They were merely the latest in a long list of people to burn to death in accidents involving the Pinto, which Ford had begun selling in 1970. By the time of the acci- dent, the car had been the subject of a great deal of public outcry and debate about its

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safety, especially its susceptibility to fire in low-speed rear-end collisions. This par- ticular accident, however, resulted in more media attention than any other auto acci- dent in U.S. history. Why? Because it led to an unprecedented court case in which the prosecution brought charges of reckless homicide against the Ford Motor Co.—the first time that a corporation had been charged with criminal conduct, and the charge was not negligence but murder. At stake was much more than the maximum penalty of $30,000 in fines. Of immediate concern, a guilty verdict could have affected 40 pending civil cases nationwide and resulted in hundreds of millions of dollars in punitive damage awards. Of perhaps greater concern, however, were larger issues involving corporate social responsibility, ethical decision making by individuals within corporations, and ultimately, the proper conduct of business in the modern era.

How did Ford get into this situation? The chronology begins in early 1968 when the decision was made to battle the foreign competition in the small car market, spe- cifically the Germans, but also the growing threat from the Japanese. This decision came after a hard-fought, two-year internal struggle between then-president Semon ‘‘Bunky’’ Knudsen and Lee Iacocca, who had risen quickly within the company because of his success with the Mustang. Iacocca strongly supported fighting the competition at their own game, while Knudsen argued instead for letting them have the small car market so Ford could concentrate on the more profitable medium and large models. The final decision ultimately was in the hands of then-CEO Henry Ford II, who not only agreed with Iacocca but also promoted him to president after Knudsen’s subsequent forced resignation.

Iacocca wanted the Pinto in the showrooms by the 1971 model introductions, which would require the shortest production planning period in automotive history to that time. The typical time span from conception to production of a new car was more than three and a half years; Iacocca, however, wanted to launch the Pinto in just over two years. Under normal conditions, chassis design, styling, product planning, advance engineering, component testing, and so on were all either completed or nearly completed prior to tooling of the production factories. Yet, because tooling had a fixed time frame of about 18 months, some of these other processes were done more or less concurrently. As a consequence, when it was discovered through crash testing that the Pinto’s fuel tank often ruptured during rear-end impact, it was too late (in other words, too costly) to do much about it in terms of redesign.

A closer look at the crash-test reports reveals that Ford was aware of faulty fuel tank design. Eleven Pintos were subjected to rear-end collisions with a barrier at av- erage speeds of 31 miles per hour to determine if any fuel would be lost after impact. All eight of the Pintos equipped with the standard fuel tank failed. The three remain- ing cars, however, survived the test because special measures had been taken to pre- vent tank rupture or fuel leakage. These measures included a plastic baffle placed between the axle housing and the gas tank, a steel plate between the tank and the rear bumper, and a rubber lining in the gas tank.

It should be noted that these tests were done under guidelines established by Federal Motor Vehicle Safety Standard 301, which was proposed in 1968 by the National Highway Traffic Safety Administration (NHTSA), but not officially adopted

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until the 1977 model year. Therefore, at the time of the tests, the Pinto met the required standards. Standard 301 had been strenuously opposed by the auto industry, and specifically Ford Motor Co. In fact, the lobbying efforts were so strong that nego- tiations continued until 1976, despite studies showing that hundreds of thousands of cars burned every year, taking 3,000 lives annually; the adoption of the standard was projected to reduce the death rate by 40 percent. Upon approval of Standard 301 in 1977, all Pintos were provided with a rupture-proof fuel tank design.

But for the Pinto’s 1971 debut, Ford decided to go with its original gas tank design despite the crash-test results. Because the typical Pinto buyer was assumed to be extremely price conscious, Iacocca set an important goal known as ‘‘the limits of 2,000’’: the Pinto could not cost more than $2,000 and could not weigh more than 2,000 pounds. Thus, to be competitive with foreign manufacturers, Ford felt it could not spend any money on improving the gas tank. Besides, during the late 1960s and early 1970s, American consumers demonstrated little concern for safety, so it was not considered good business sense to promote it. Iacocca echoed these sentiments when he said time and time again ‘‘Safety doesn’t sell,’’ a lesson he had learned after a failed attempt to add costly safety features to 1950s Fords.

Ford had experimented with placing the gas tank in different locations, but all alternatives reduced usable trunk space. A design similar to that of the Ford Capri was successful in many crash tests at speeds over 50 miles per hour, but Ford felt that lost trunk space would hurt sales too much. One Ford engineer, when asked about the dangerous gas tank said, ‘‘Safety isn’t the issue, trunk space is. You have no idea how stiff the competition is over trunk space. Do you realize that if we put a Capri-type tank in the Pinto, you could only get one set of golf clubs in the trunk?’’

The last of Ford’s reasons for not making adjustments to the fuel tank design, how- ever, was unquestionably the most controversial. After strong lobbying efforts, Ford and the auto industry in general convinced NHTSA regulators that cost/benefit analysis would be an appropriate basis for determining the feasibility of safety design standards. Such an analysis, however, required the assignment of a value for a human life. A prior study had concluded that every time someone died in an auto accident there was an esti- mated ‘‘cost to society’’ of $200,725 (detailed in Table 1:What’s Your LifeWorth?).1

Having this value in hand, Ford calculated the cost of adding an $11 gas tank improvement versus the benefits of the projected 180 lives that would be saved (via an internal memo entitled ‘‘Fatalities Associated with Crash-Induced Fuel Leakage and Fires’’). This is presented in Table 2: The Cost of Dying in a Pinto.2 As is dem- onstrated, the costs outweigh the benefits by almost three times. Thus, the cost/bene- fit analysis indicated that no improvements to the gas tanks were warranted.

Ford decided to go ahead with normal production plans, but the Pinto’s problems soon surfaced. By early 1973, Ford’s recall coordinator received field reports

1 M. Dowie, ‘‘How Ford Put Two Million Fire Traps on Wheels,’’ Business and Society Review 23 (1977): 51–55.

2 Ibid.

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suggesting that Pintos were susceptible to ‘‘exploding’’ in rear-end collisions at very low speeds (under 25 miles per hour). Reports continued to indicate a similar trend in subsequent years, but no recall was initiated despite the mounting evidence. At every internal review, those responsible decided not to recall the Pinto.

Prior to the Indiana accident, the most publicized case concerning the Pinto’s gas tank was that of Richard Grimshaw. In 1972, Richard, then 13, was riding with a

Table 1 What’s Your Life Worth?

The chart below, from a 1971 study by the National Highway Traffic Safety Administration, is a breakdown of the estimated cost to society every time someone is killed in a car accident. The Ford Motor Company used the $200,725 total figure in its own cost-benefit analysis.

Component 1971 Costs

Future productivity losses

Direct $132,300

Indirect 41,000

Medical costs

Hospital 700

Other 425

Property damage 1,500

Insurance administration 4,700

Legal and court 3,000

Employer losses 1,000

Victim’s pain and suffering 10,000

Funeral 900

Assets (lost consumption) 5,000

Miscellaneous accident cost 200

Total per fatality $200,725

Table 2 The Cost of Dying in a Pinto

These figures are from a FordMotor Co. internal memorandum on the benefits and costs of an $11 safety improvement (applicable to all vehicles with similar gas tank designs) that would have made the Pinto less likely to burn.

Benefits

Savings: 180 burn deaths, 180 serious burn injuries, 2,100 burned vehicles

Unit Cost: $200,000 per death, $67,000 per injury, $700 per vehicle

Total Benefit: (180 ! $200,000) + (180! $67,000) + (2,100! $700) = $49.5 million Costs

Sales: 11 million cars, 1.5 million light trucks

Unit Cost: $11 per car, $11 per truck

Total Cost: (11,000,000 ! $11) + (1,500,000 ! $11) = $137.5 million

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neighbor on a road near San Bernardino, California, when they were hit from the rear. The Pinto’s gas tank ruptured, causing the car to burst into flames. The neighbor was burned to death in a crash that would have been survivable if there had been no fire. Richard suffered third-degree burns over 90 percent of his body and subsequently underwent more than 60 operations, with only limited success. A civil suit was settled in February 1978, when a jury awarded a judgment of over $125 million against Ford, most of which consisted of punitive damages (later reduced to $6 million by a judge who nonetheless accused Ford of ‘‘callous indifference to human life’’). This judgment was based on convincing evidence that Ford chose not to spend the $11 per car to correct the faults in the Pinto gas tanks that its own crash testing had revealed.

The Pinto sold well until the media called special attention to the Pinto fuel tank story. As a consequence, in June 1978, in the face of pressure from the media, the gov- ernment, pending court cases, and the potential loss of future sales, Ford ordered a com- plete recall of all 1.5 million Pintos built between 1970 and 1976. During the 1980 Indiana trial that resulted from the fatal accident of 1978, differing views continued to be expressed about the Pinto fires case. Ford representatives argued that companies must make cost/benefit decisions all the time. They claimed that it is an essential part of busi- ness, and even though everyone knows that some people will die in auto accidents, buy- ers want costs held down; therefore, people implicitly accept risks when buying cars.

In a scathing article accusing Ford of criminally mismanaging the Pinto problem, investigative reporter Mark Dowie framed the case in a different and rather more sensational way, with this often-quoted speculation: ‘‘One wonders how long the Ford Motor Company would continue to market lethal cars were Henry Ford II and Lee Iacocca serving twenty-year terms in Leavenworth for consumer homicide.’’3

Case Questions

1. Put yourself in the role of the recall coordinator for Ford Motor Co. It’s 1973, and field reports have been coming in about rear-end collisions, fires, and fatali- ties. You must decide whether to recall the automobile.

a. Identify the relevant facts.

b. Identify the pertinent ethical issues and points of ethical conflict.

c. Identify the relevant affected parties.

d. Identify the possible consequences of alternative courses of action.

e. Identify relevant obligations.

f. Identify your relevant community standards that should guide you as a person of integrity.

g. Check your gut.

What will you decide?

3 M. Dowie, ‘‘How Ford Put Two Million Fire Traps on Wheels,’’ Business and Society Review 23 (1977): 51–55.

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NOTES 1. J. Rachels, The Elements of Moral Philosophy (New York: McGraw-Hill, 1983). 2. L. Peach, ‘‘An Introduction to Ethical Theory,’’ in Research Ethics: Cases and Materials, ed. R. L.

Penslar (Bloomington: Indiana University Press, 1994).

3. D. J. Fritsche and H. Becke, ‘‘Linking Management Behavior to Ethical Philosophy: An Empirical

Investigation,’’ Academy of Management Journal 27 (1984): 166–75. 4. J. Rawls, A Theory of Justice (Cambridge, MA: Harvard University Press, 1971). 5. Rachels, The Elements of Moral Philosophy. 6. E. Bazelon, ‘‘Sentencing by the Numbers,’’ New York Times Magazine, 2 January 2005, 18. 7. R. C. Solomon, Ethics and Excellence (New York: Oxford University Press, 1988). 8. G. R. Weaver, ‘‘Virtue in Organizations: Moral Identity as a Foundation for Moral Agency,’’ Organi-

zation Studies 17 (2006): 341–68.

SHORT CASES

As a counselor in an outplacement firm, you’ve been working with Irwin for six months to find him a new position. During that time, he has completed extensive assessment work to determine if he’s in an appropriate profession or if he might ben- efit from a career change. The results of the assessment indicate that Irwin has low self-esteem, probably could benefit from psychotherapy, and is most likely ill suited for his current profession. Irwin has been actively interviewing for a position that’s very similar to two others he has held and lost. He desperately wants and needs this job. The company where he’s interviewing happens to be one of your most important clients. You receive a call from the head of human resources at the company, who tells you that Irwin suggested she call you for information about his abilities, inter- ests, and personality style as measured by the assessment process. She also asks you for a reference for Irwin. Since he has, in effect, asked that you share information with this woman, is it okay for you to give her an honest assessment of Irwin? What are your obligations to Irwin, who is your client in this case? Is there a way for you to be honest, yet not hurt Irwin’s chances to obtain this job? Or is that important? What will you do?

You have worked in business for several years and you’re now ready for some further education. You have applied to multiple prestigious MBA programs via a website called ApplyYourself.com that handles the application process for many of these pro- grams. You’re anxiously awaiting replies and expect to receive them in about a month. You’re up late one night and, while surfing the Web, you discover instruc- tions for a ‘‘back door’’ way to take advantage of a technical glitch on the website that would allow you to check the status of your application and find out if you’ve been accepted or rejected. Multiple steps are involved, but the instructions provide clear guidance. Would it be right to take advantage of this information? Why or why not? If you were the admissions director or dean of one of these schools and you learned that some applicants had taken advantage of the glitch, what would be the right thing to do?

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9. ‘‘Saying It Again: Psychologists May Never Participate in Torture,’’ American Psychological Associ- ation (APA) Press Release, 22 April 2009.

10. ‘‘26-Year Secret,’’ CBS News.com (June 16, 2009), at www.cbsnews.com.

11. R. Khurana, From Higher Aims to Hired Hands (Cambridge, MA: Princeton University Press, 2007). 12. R. Khurana and N. Nohria, ‘‘It’s Time to Make Management a True Profession,’’ Harvard Business

Review 86, no. 10 (2008): 1–8. 13. ‘‘Bloodied and Bowed,’’ Business Week, 20 January 2003, 56–57. 14. Weaver, ‘‘Virtue in Organizations.’’

15. M. Bebeau, ‘‘Developing a Well-Reasoned Moral Response to a Moral Problem in Scientific Research Ethics,’’ Paper distributed at the Teaching Research Ethics conference, Poynter Research

Center for the Study of Ethics and American Institutions at Indiana University, Bloomington, Indiana,

May 1994. 16. L. Nash, ‘‘Ethics without the Sermon,’’ in Ethics in Practice, ed. K. R. Andres (Boston: Harvard

Business School Press, 1989).

17. D. E. Larson,Mayo Clinic Family Health Book (New York: William Morrow, 1990). 18. Nash, ‘‘Ethics without the Sermon.’’ 19. S. G. Stolberg, ‘‘Their Devil’s Advocates: Thalidomide Returns with an Unlikely Ally: A Group of

Its Original Victims.’’ New York Times Magazine, 25 January 1998, 20–25. 20. D. M. Messick and B. Bazerman, Ethics for the 21st Century: A Decision Making Perspective.

Unpublished manuscript. 21. B. Steiger, Indian Medicine Power (Atglen, PA: Whitford Press, 1984), 92. 22. C. Skooglund, ‘‘Ethics in the Face of Competitive Pressures,’’ Business Ethics Resource (Fall

1992): 4.

23. Steiger, Indian Medicine Power. 24. Khurana and Nohria, ‘‘It’s Time to Make Management a True Profession.’’

25. J. Useem, K. Bonamici, N. D. Schwartz, and C. Murphy, ‘‘20 That Made History,’’ Fortune, 27 June 2005, 58 (14 pages).

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CHAPTER3 DECIDING WHAT’S RIGHT: A PSYCHOLOGICAL APPROACH

INTRODUCTION

Chapter 2 introduced prescriptive ethical theories, developed by philosophers, that are designed to help individuals decide what they should do in response to ethical dilemmas. But psychology teaches us that people often don’t even recognize the ethical dimensions of the situation at hand. And, when they do, they often don’t think about it in expected ways. So, this chapter is designed to help you understand how people actually think and what people actually do by introducing the psychological factors—the individual differences and mental processes that influence how people think and behave. It also explains some factors that can keep well-intentioned people from making good ethical decisions and suggests some ways to overcome them. Finally, this chapter introduces relevant new neuroscience research and research on the role of emotions in ethical decision making.

ETHICAL AWARENESS AND ETHICAL JUDGMENT

If a decision maker is to engage in ethical judgment processes (like those discussed in Chapter 2) that will eventually lead to ethical action, she or he must first recognize the ethical nature of the situation at hand.

Ethical Awareness ! Ethical Judgment ! Ethical Action

We refer to this initial step in the ethical decision-making process as ethical aware- ness. With ethical awareness, a person recognizes that a situation or issue is one that raises ethical concerns and must be thought about in ethical terms. It is an important step that shouldn’t be taken for granted. Sometimes people are simply unaware that they are facing an issue with ethical overtones. And, if they don’t recognize and label the issue as an ethical one, ethical judgment processes (like those we studied in Chap- ter 2) will not be engaged. In fascinating new research, parts of the brain that are associated with recognizing the ethical nature of an issue were differentiated from those involved in other kinds of thinking. Researchers used functional magnetic

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resonance imaging (fMRI) in a study showing that when Executive MBA students identified ‘‘an important point or issue’’ in scenarios, a different part of the brain was more active when the issue had ethical overtones compared to more neutral issues.1

In a different study, a part of the brain associated with emotional processing was activated when participants viewed morally relevant pictures compared to more neu- tral ones.2 So, it seems that something different happens in our brains when we begin thinking about an issue we recognize as having ethical overtones.

Consider the following ethical awareness example. Students are doing more online research for classroom assignments. The technology makes it easy to find up-to-date information, download it, and cut and paste it right into a paper that then gets submitted to a professor for a grade. Perhaps you have done this without thinking too much about it. However, in this process, students often overlook the fact that they may be plagiarizing—‘‘stealing’’ someone else’s intellectual prop- erty. Intellectual property is protected by copyright and patent laws in the United States. These laws are important because there would simply be no incentive to write a book, publish a magazine, or develop a new product if anyone could sim- ply reproduce it freely without any attention to the rights of the person or com- pany that invested time and resources to create it. The education community has adopted academic integrity rules that guide how students can fairly use intellec- tual property. In keeping with those rules, students are expected to paraphrase and then carefully reference all sources of information. When you’re quoting someone else’s words, these words must be put in quotation marks, and the exact citation to the source must be provided. In the pre-Internet days, this kind of research meant physically going to the library, searching the shelves for information, copy- ing pertinent information by hand, making careful notes about the sources, and then organizing the information into a paper that had to be typed from scratch. Plagiarism actually required conscious effort in those days. Now, information is so accessible and it’s so easy to simply cut and paste that it can be harder to recognize the ethical issues involved. But if your college has an academic integ- rity policy or honor code, your professor takes the time to explain the importance of academic integrity, the role of intellectual property in our society, the defini- tion of plagiarism, and your responsibilities as a member of the higher education community, you should be more aware of the ethical issues involved. Under those circumstances, when you’re tempted to just cut and paste, you’ll be more likely to think about the ethical dimensions of your actions—the rights of the intellectual property owner, and whether your actions would be considered plagiarism by your professor and others in your academic community.

Now for a work-related example.

You’ve just started a new job in the financial services industry. One after- noon, your manager tells you that he has to leave early to attend his son’s softball game, and he asks you to be on the lookout for an important check that his boss wants signed before the end of the day. He tells you to do him a favor—simply sign his name and forward the check to his boss.

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To a naive employee, this may seem like a straightforward and easily accommodated request. But if the company trained you well, you would immediately be aware of the ethical nature of the situation. Your manager has asked you to engage in forgery, a serious ethical lapse, especially in the financial services industry where the validity of signatures is essential to system functioning and trust. Recognizing the ethical nature of the situation would likely lead to some very different thinking about how to respond.

Research has found that people are more likely to be ethically aware, to recog- nize the ethical nature of an issue or decision, if three things happen: (1) if they believe that their peers will consider it to be ethically problematic; (2) if ethical language is used to present the situation to the decision maker; and (3) if the decision is seen as having the potential to produce serious harm to others.3

Let’s take these factors one at a time. First, as we’ll see later, most people look to others in their social environment for guidance in ethical dilemma situations. So, if you believe that your coworkers and others around you are likely to see a decision as ethically problematic, it probably means that the issue has been discussed, perhaps in a company-sponsored ethics training program or informally among coworkers or with your manager. Such discussions prime you to think about situations in a particu- lar way. When a similar situation arises, it triggers memories of the previous ethics- related discussion, and you are more likely to categorize and think about the situation in ethical terms.4 Using the forgery example, perhaps a company training program provided instruction on the importance of signatures in the financial industry and labeled signing for someone else as forgery. Perhaps the company even presented a similar problem to trainees and you all agreed that signing someone else’s name to the check would be wrong. Having participated in such a discussion, you would rec- ognize that signing the check would be ethically problematic and you would be more likely to see your boss’s request as an ethical problem.

Second, situations can be represented or ‘‘framed’’ in different ways—using eth- ical language or more neutral language. Using ethical language (positive words like integrity, honesty, fairness, and propriety, or negative words such as lying, cheating, and stealing) will trigger ethical thinking because these terms are attached to existing cognitive categories that have ethical content. For example, if the manager in the example above had asked you to forge the check for him, the word forge would be more likely to trigger legal or ethics-related concerns than if he simply asked you to sign the check (more neutral language). In response to the term forgery, you would more likely wonder if signing the check was ethically wrong, if anyone was being hurt, and what the consequences would be if you did or didn’t do it. The term plagia- rism would likely trigger similar thinking.

Think about the power of the word genocide. If you’ve seen the film Hotel Rwanda, you know about the horrible killing in 1994 of some 800,000 Tutsi men, women, and children by Hutu extremists while the rest of the world, including the United States, did nothing to help. According to President Clinton’s national security advisor, the administration refused to allow use of the word genocide for six weeks

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because ‘‘if you used the word, then you’re required to take action.’’5 Former Presi- dent Clinton has said that failing to help in Rwanda is one of his ‘‘greatest regrets.’’6

Avoidance of the morally powerful term genocide likely contributed to the adminis- tration’s inaction and the public’s lack of support.

Neutral language can be used to make an unethical action seem less problematic. The use of such euphemistic language can easily keep individuals from thinking about the ethical implications of a decision or action. With euphemistic language, we name or label actions in ways that minimize their ethical overtones. For example, troubled assets don’t seem nearly as problematic as ‘‘toxic’’ assets. And the term no- doc loans (used to describe new high-risk loans that were made to mortgage customers who were not required to provide documentary evidence of their job secu- rity or income) raises ethical antennae much less than does the term liars’ loans. The latter term (actually used by some in the mortgage industry before the meltdown), acknowledges that borrowers were lying about their incomes on their loan applica- tions. The use of euphemistic language may not be intentionally unethical, but it certainly has the effect of allowing us to feel okay about what we’re doing when perhaps we should be thinking much harder about the ethical overtones.

Here is a great business example of euphemistic language. In 2006, Hewlett- Packard’s (HP) then chairwoman of the board of directors, Patricia Dunn, was upset about boardroom leaks to the press about HP’s strategy. In an attempt to learn the leaker’s identity, the company hired investigators who were allowed to misrepresent their identities to the phone company (they lied) in order to obtain cell phone records of board members and a journalist; they referred to this behavior as ‘‘pretexting.’’ When the press learned about it, they (perhaps more properly) used ethically charged language to label the behavior as spying, and a high-profile scandal ensued. Dunn was replaced, along with two other board members and the executive heading the company ethics program (who knew about the investigation). The CEO testified in congressional hearings, and HP (a company that had long claimed privacy as a core value) had to scurry to try to overcome the company’s association with spying, lying, and invasion of privacy.7 If someone involved in approving this investigation had labeled the behavior using ethical language (lying, spying, invasion of privacy) instead of the more neutral-sounding pretexting, red flags would have more likely gone up to stop the investigators’ behavior.

Finally, and perhaps most important, an issue or situation that has the potential to produce serious harm to others is more likely to be seen as an ethical issue. If HP executives could have imagined the potential damage to board members or the jour- nalist, or the resulting scandal and implications for the company’s reputation, they would have been more likely to raise ethical concerns. In the forgery example, if you see that forging the check could result in serious harm to customers, you would more likely see it as a serious issue than if no one would be harmed. Thomas Jones pro- posed that individuals are more likely to recognize the ethical nature of issues that are morally intense.8 The moral intensity of an issue is higher when the consequences for others are potentially large, these consequences are relatively immediate and likely to occur, and the potential victims are psychologically or physically close to

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the decision maker. For example, a decision to allow toxic chemicals to leak into the local water supply is very likely to harm many people in one’s own community. Such a decision is ‘‘morally intense,’’ and therefore the decision maker is more likely to see it as an ethical issue. In contrast, a decision that might require laying off a few individuals in a foreign subsidiary would be less likely to trigger ethical aware- ness. Only a few people will be affected, the consequences will occur in the future, and these individuals are both psychologically and physically distant from the decision maker.

So managers can encourage employees to be ethically aware by providing train- ing and by talking with employees about the types of ethical issues they’re likely to face and why these issues are ethically problematic. They can also encourage employees to have these discussions themselves, to use ethical language in such interactions, and to think about the consequences of their actions and take responsi- bility for the consequences of the decisions they make.

On the other hand, all of us should be on the lookout for situations that are likely to reduce our chances of seeing the ethical overtones in a situation. For example, downloading music from the Internet may seem benign if one doesn’t recognize that the American economy loses an estimated $12.5 billion dollars a year from it. That includes jobs and tax revenues that are lost because of what the industry has termed ‘‘music piracy.’’9 Investment bankers who pay for mutual fund managers to go to the Super Bowl and lavishly entertain clients are not likely to think that they are engaged in ‘‘bribery’’ or that their behavior is anything more than what ‘‘every one else does.’’ Never mind that the average investor is likely disadvantaged by the wining and dining. If we think about issues in ethical terms, the ethical judgment processes we discuss next are more likely to be triggered.

INDIVIDUAL DIFFERENCES, ETHICAL JUDGMENT, AND ETHICAL BEHAVIOR

Once people are aware of the ethical dimensions of a situation or decision, they engage in ethical judgment processes that can contribute to ethical (or unethical) con- duct. By ethical judgment, we mean making a decision about what is the right thing to do. As with ethical awareness, neuroscience (fMRI) research is finding that certain parts of the brain are activated more during ethical decision making compared to when the same individuals are making other kinds of decisions.10 These findings sug- gest that ethical judgment is truly a unique form of decision making.

The next part of this chapter focuses on individual differences that influence ethical judgment and action. Much of this book will focus on situational pushes and pulls. For example, people follow leaders or their peers. They tend to do what’s rewarded. Yet, despite these powerful pushes and pulls, people do bring something of their unique selves to situations. Heroes emerge when you least expect it. People blow the whistle despite fear of retaliation. Others embezzle funds or lie to customers despite all of management’s efforts to support good conduct. One way to explain

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these ethical and unethical behaviors is to focus on characteristics of individuals that differentiate one person from another, making one person more predisposed to think and behave ethically while another is predisposed to think and behave unethically.

Research has uncovered a number of individual differences that influence the way people think and behave in response to ethical dilemma situations. In this sec- tion, we discuss several of these differences and how they influence ethical judgment and/or ethical action. They’re illustrated below:

Individual Differences Ethical decision-making style Cognitive moral development

Locus of control Machiavellianism

Moral disengagement

Ethical Awareness! Ethical Judgment! Ethical Action

Ethical Decision-Making Style

In Chapter 2, we introduced different frameworks for making ethical decisions and advised that individual decision makers should use these in combination if they wish to make the best decisions. But research suggests that individuals have preferences for particular prescriptive ethical theories. Forsyth proposed that we think about these individual preferences in terms of two factors: (1) idealism or the person’s concern for the welfare of others; and (2) relativism or the person’s emphasis on ethical prin- ciples being dependent on the situation rather than being applicable to all situa- tions.11 Idealism is related to what we referred to as thinking about consequences in Chapter 2. For example, individuals high on idealism believe that one should always avoid harming other people in ethical dilemma situations, while non-idealists believe that ‘‘it depends’’ because ‘‘harm is sometimes . . . necessary to produce good’’12

Relativism is more related to deontological theories and our focus on principles in Chapter 2. For example, individuals who are low on relativism believe that all situa- tions are subject to universal ethical principles (such as honesty). On the other hand, individuals who are high on relativism believe that people should weigh the particu- lar circumstances in a situation when making decisions, because there are no univer- sal ethical principles that determine right action in every situation. Research suggests that those high on idealism are more likely to have ethical intentions and to be critical of unethical behavior.13 This is probably because idealists are more concerned about anything they might do that would harm others.14 By contrast, high relativism has been found to be associated with unethical intentions, perhaps because relativists who do not follow clear ethical principles find it easier to rationalize unethical behav- ior.15 You can discover your own style by taking a survey that your professor may make available to you. The relationship between ethical decision style and ethical

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action has not yet been tested, but it seems logical that the way an individual thinks about a situation and that person’s ethical or unethical intentions will influence the action he or she takes. As we did in Chapter 2, we continue to strongly recommend systematically considering ethical dilemma situations from multiple perspectives. Still, it can be useful to understand that you (or the people who work with you or for you) likely have a preference for one approach over another. If so, you may be able to improve your own ethical decision making by forcing yourself to consciously con- sider all angles. You may also be able to influence ethical decision making in discus- sions with others by pointing them to these alternative perspectives.

CognitiveMoral Development

One important explanation for both ethical judgment and action based on individual characteristics comes from the moral reasoning research of Lawrence Kohlberg.16

When people respond to ethical dilemma situations, they must, among other things, decide what course of action is ethically right (as we discussed in Chapter 2), and they must choose the ethically right path over others.17 In other words, if they decide that blowing the whistle is the ethically right path, they must follow through and do it (take the ethical action).

Kohlberg’s moral reasoning theory is a cognitive developmental theory that focuses primarily on how people think about and decide what course of action is ethically right. His research began by following 58 American boys ranging in age from 10 to 16 years old. He interviewed them regularly, asking for their open-ended responses to hypothetical moral dilemmas. Their responses were analyzed and resulted in new understanding of how moral reasoning in human beings gradually develops over time through brain development and life experience.

Kohlberg’s cognitive moral development theory proposes that moral reasoning develops sequentially through three broad levels, each composed of two stages. As individuals move forward through the sequence of stages, they are cognitively capa- ble of comprehending all reasoning at stages below their own, but they cannot com- prehend reasoning more than one stage above their own. Development through the stages results from the cognitive disequilibrium that occurs when an individual perceives a contradiction between his or her own reasoning level and the next higher one. This kind of development can occur through training, but it generally occurs through interaction with peers and life situations that challenge the individual’s current way of thinking. You can think of those conversations parents sometimes have with children at the dinner table as attempts to challenge the child’s thinking and influence moral reasoning and moral development. According to Kohlberg, the actual decision an individual makes isn’t as important as the reasoning process used to arrive at it. However, he argued—and this is an important concept—that the higher the reasoning stage, the more ethical the decision, because the higher stages are more consistent with prescriptive ethical principles of justice and rights (like those dis- cussed in the deontological approach in Chapter 2).

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Kohlberg’s theory has been successfully applied to studies of adults in business settings.18 For example, James Weber interviewed business managers about their responses to the following hypothetical dilemma:

Evelyn worked for an automotive steel casting company. She was part of a small group asked to investigate the cause of an operating problem that had developed in the wheel castings of a new luxury automobile and to make recommendations for its improvement. The problem did not directly create an unsafe condition, but it did lead to irritating sounds. The vice-president of engineering told the group that he was certain that the problem was due to tensile stress in the castings. Evelyn and a lab technician conducted tests and found conclusive evidence that the prob- lem was not tensile stress. As Evelyn began work on other possible explanations of the problem, she was told that the problem had been solved. A report prepared by Evelyn’s boss strongly supported the tensile stress hypothesis. All of the data points from Evelyn’s experiments had been changed to fit the curves, and some of the points that were far from where the theory would predict had been omitted. The report ‘‘proved’’ that tensile stress was responsible for the problem.19

A number of questions were presented to the interviewees. For example, they were asked whether Evelyn should contradict her boss’s report and why. We will use this hypothetical dilemma to understand the theory and how responses to the above question (along with others) help identify an individual’s placement in Kohlberg’s moral reasoning stage framework. Table 3.1 outlines the levels and stages involved.

LEVEL I: PRECONVENTIONAL A level I individual (labeled the preconventional level and including stages 1 and 2) is very self-centered and views ethical rules as imposed from outside the self. Unfortunately, a small percentage of adults never advance beyond this stage, and managers must be ready for that possibility. As you read the following descriptions, see if you know anyone who thinks this way.

Stage 1 individuals are limited to thinking about obedience to authority for its own sake. Avoiding punishment by authority figures is the key consideration. It’s easy to imagine a child thinking, ‘‘I should share my toy because, if I don’t, Mom will yell at me’’ (i.e., I’ll be punished). A stage 1 response to the Evelyn situation might argue that it would be wrong to contradict her boss because she must obey her superiors, and she would certainly be punished if she disobeyed.

At stage 2, concern for personal reward and satisfaction become considerations in addition to a kind of market reciprocity. What is right is judged in terms of a ‘‘you scratch my back, I’ll scratch yours’’ reciprocal relationship. A stage 2 child might think, ‘‘If I share my toy with my brother, he might share his with me later.’’ A stage 2 response in the Evelyn situation might argue that Evelyn should support her boss because he is responsible for her performance appraisals; and, if she lets this one go,

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he might overlook some of her problems from the past. Also, if her boss has been kind or helpful to her in the past, she may consider her obligation to repay the favor.

In general, a level I person can be expected to consider questions like ‘‘What’s in it for me?’’ At stage 1, the questions might be ‘‘Can I get away with it?’’ or ‘‘Will I get caught, punished?’’ At stage 2, the questions might be ‘‘How will I benefit or what will I get in return if I do this?’’

LEVEL II: CONVENTIONAL At level II (labeled the conventional level and includ- ing stages 3 and 4), the individual is still externally focused on others but is less self- centered and has internalized the shared moral norms of society or some segment like a family or work group. What’s ethically right is explained in terms of living up to roles and the expectations of relevant others, fulfilling duties and obligations, and following rules and laws.

At stage 3, what’s right is thought to be that which pleases or helps others or is approved by those close to you. Interpersonal trust and social approval are important.

Table 3.1 Levels of Cognitive Moral Development According to Kohlberg

Stage What Is Considered to Be Right

Level I: Preconventional

Stage 1: Obedience and Punishment Orientation

Obedience to authority for its own sake. Sticking to rules to avoid punishment.

Stage 2: Instrumental Purpose and Exchange

Following rules only when it is in one’s immediate interest. Right is an equal exchange, getting a good deal.

Level II: Conventional

Stage 3: Interpersonal Accord, Conformity, Mutual Expectations

Stereotypical ‘‘good’’ behavior. Living up to what is expected by peers and people close to you.

Stage 4: Social Accord and System Maintenance

Fulfilling duties and obligations of the social system. Upholding laws and rules except in extreme cases where they conflict with social duties.

Level III: Postconventional or Principled

Stage 5: Social Contract and Individual Rights

Upholding rules because they are the social contract if they are consistent with values such as fairness and rights and the greater good (not because of the majority opinion).

Stage 6: Universal Ethical Principles

Following ethical principles of justice and rights. Acting in accord with principles when laws violate principles.

Source: Adapted from L. Kohlberg, ‘‘Moral Stages and Moralization: The Cognitive- Developmental Approach,’’ inMoral Development and Behavior: Theory, Research, and Social Issues, ed. T. Lickona (New York: Holt, Rinehart and Winston), 34–35.

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For example, a stage 3 response to the Evelyn dilemma might say that Evelyn shouldn’t contradict her boss because he would perceive her as disloyal, and she might lose the social approval and trust of her boss and peers. On the other hand, what if Evelyn shares her dilemma with close family members whose opinions are important to her, and they feel strongly that she must contradict her boss? In this case, she would likely reason that she should contradict her boss because the people she trusts and whose approval she values say that it’s the right thing to do.

At stage 4, the perspective broadens to consider society. The individual is con- cerned about fulfilling agreed-upon duties and following rules or laws that are designed to promote the common good. A stage 4 person recognizes that rules and laws often exist for good reason, and she follows them because the social system works better when everyone does that. Therefore, a stage 4 response might say that Evelyn should contradict her boss because of her duty to society. What if the noises do represent a safety problem? She has a responsibility as a good member of society to report it. She would feel particularly strongly about this if she were aware of product safety laws that required her to report the problem.

So, a level II person is looking outside the self for guidance when deciding what to do. A stage 3 person would likely ask, ‘‘What would my peers do?’’ or ‘‘What would my trusted supervisor advise?’’ At stage 4, the considerations would be broader, such as ‘‘What do the rules or laws prescribe?’’ Kohlberg’s research placed most American adults at this conventional level, and Weber’s research found that most managers’ responses to the Evelyn dilemma were at the conventional level as well.

LEVEL III: POSTCONVENTIONAL A level III (postconventional, sometimes called principled reasoning—stages 5 and 6) principled individual has developed beyond identification with others’ expectations, rules, and laws to make decisions more autonomously. Such an individual looks to ethical principles of justice and rights (similar to the deontological principles we discussed in Chapter 2). Note that stage 6 is thought to be a theoretical stage only, so we focus below only on stage 5.

At stage 5, the emphasis is still on rules and laws because these represent the recognized social contract, but stage 5 thinkers are willing to question the law and to consider changing the law for socially useful purposes. A stage 5 individual would take into account moral laws above society’s laws, such as considering what decision would create the greatest societal good. A stage 5 Evelyn might reason that she should contradict her boss because doing so would be consistent with the ethical prin- ciple of the greatest societal good, particularly if she considered safety of the automo- biles to be a potential problem. Her responsibility goes beyond that of a good law- abiding member of society and certainly beyond doing what her boss thinks is right. A stage 5 Evelyn is also responsible to principles of justice and rights. So, even if no law requires her to report what she knows, a stage 5 Evelyn would consider the automobile consumers’ rights to safety as an important reason for her to tell. When deciding what to do, a stage 5 person would likely ask, ‘‘What does the law say?’’ and then ‘‘Is the law consistent with principles of justice and rights? and ‘‘What’s best for society?’’

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Students sometimes get confused by this idea of what it means to be principled according to Kohlberg. We’re often asked questions such as, weren’t the 9/11 hijack- ers principled? Although a definitive answer would require probing interviews with the hijackers to determine the reasoning for their behavior (not possible now), the answer is that their thinking likely represented lower-level reasoning (e.g., the leader told me to do it; I did it to receive a reward in heaven; etc.). So, it’s important to note that Kohlberg is quite precise about the kinds of principles that qualify as principled thinking. Broadly defined, level III principles are principles of justice and rights similar to the principles introduced in Chapter 2 under deontological theories. Wrongdoers often appeal to what they call principles, such as when the members of a violent Mexican drug cartel claimed to train its members in ethical principles. But the purpose of these principles (e.g., sobriety) was to keep members in line and obedient to cartel authorities. The ethical trainer in this case is accused of ordering murders and running prostitution rings with young girls; such behavior is not supported by principles of justice and rights.20

Finally, the principle ‘‘I always do what my religion tells me to do because the deity will punish me if I don’t’’ would not qualify as principled thinking. In Kohlberg’s model, this type of thinking actually represents a low level of cognitive moral development because it is based on unquestioning obedience and fear of pun- ishment. Often religious prescriptions such as the golden rule are consistent with theories of justice and rights. To be considered a principled decision maker, an indi- vidual would have to be capable of thinking through the ethical situation on his or her own (reasoning according to principles of justice and rights), and not just blindly follow a particular religious authority.

So don’t be confused just because someone uses the term principled. To be principled in terms of cognitive moral development theory, one must have arrived at the decision autonomously based on principles of justice, rights, and the greater good.

To understand Kohlberg’s theory, you must also remember that it is a cognitive theory. What matters are the reasoning processes and considerations involved in a decision. Although these considerations are likely to affect the decision made, it is the reasoning process that counts.

The cognitive moral development exercise at the end of the chapter will test your understanding of cognitive moral development. You may want to try it now.

ARE WOMEN AND MEN DIFFERENT? In 1982, the psychologist Carol Gilligan published In a Different Voice, a book about women’s cognitive moral development. Gilligan claimed that Kohlberg’s theory was flawed because he had studied only boys. Her research led Gilligan to question the almost exclusive focus on justice in Kohlberg’s higher moral reasoning stages. She argued that females were more likely to use a ‘‘morality of care’’ that emphasized relationships—raising issues related to caring for others, responsibility to others, and the continuity of interdependent relationships.21

Gilligan’s claims received a great deal of attention. But the applicability of her ideas to adults working in business organizations is quite limited. Gilligan’s own

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research comparing the moral reasoning of male and female medical students found no significant difference between the genders, suggesting that both men and women are strongly influenced by the powerful socialization and cultural norms of medical practice.22 Similarly, an interview study of business managers based on Gilligan’s theory found no gender differences.23 All but one of the managers (male and female) who described a moral conflict at work based their moral reasoning on rights, not care. Finally, many cognitive moral development studies based on Kohlberg’s theory have found only trivial, if any, gender differences. Interestingly, when differences have been found, females generally have scored higher than men in justice-based reasoning.24 Business ethics researchers now agree that additional research on the question of gender differences is unnecessary and likely to be fruitless.25

We can now begin to address the second requirement for ethical behavior: doing what’s right, or ethical action. Recall that to behave ethically, people must first decide what course of action is ethically right (probably depending to a large degree on their ethical awareness and ethical judgment (stage of cognitive moral develop- ment). Then they must choose the ethically right path over others.26

LOOKING UP AND LOOKING AROUND One reason understanding cognitive moral development is so important is that most adults are at the conventional level of cognitive moral development (level II). This means they’re highly susceptible to external influences on their judgment about what is ethically right and their subse- quent action. Their decision about what’s ethically right, and therefore their likely action, is inextricably linked with what others think, say, and do. We call this ‘‘look- ing up and looking around’’ for ethical guidance.27

These individuals aren’t autonomous decision makers who strictly follow an internal moral compass. They look up and around to see what their superiors and their peers are doing and saying, and they use these cues as a guide to action. There- fore most people are likely to do what’s expected of them as a result of the reward system, role expectations, authority figure demands, and group norms. That’s why the remainder of this book focuses so heavily on these external influences on ethical action and why it’s so important that managers structure the work environment to support ethical conduct and lead followers in the right direction. The large majority of employees will be looking for guidance, and they’ll do what’s right if guided and supported along those lines by managers and peers.

AUTONOMOUS PRINCIPLED THINKING AND ACTION Higher-stage thinking is more independent of these external influences. The postconventional principled thinker looks to justice and rights-based principles to guide ethical decision making. Research has demonstrated that these people are also more likely to behave consistently with their principle-based decisions—they’re more likely to carry through and do what they think is right. More principled individuals also have been found to be less likely to cheat, more likely to resist pressure from authority figures, more likely to help some- one in need, and more likely to blow the whistle on misconduct.28 So the theory

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suggests that whistle-blowers such as Sherron Watkins, who tried to convince Kenneth Lay (Enron’s CEO) to address the company’s financial shenanigans before it was too late, are likely principled thinkers. But it’s important for managers to remember that level III individuals are in the minority in most organizations. Autonomous decision making based on principles of justice and rights is the exception rather than the rule.

Also keep in mind that cognitive moral development represents a cognitive ‘‘capacity’’ to reason about ethical dilemmas at a particular level and that it is possi- ble to act below one’s capacity. However, cognitive moral development theory argues that this inconsistency would be difficult to sustain over time because of the cognitive strain that would come from thinking at one level and acting at another.29

Such a person might think, ‘‘I know this is wrong—why am I doing it?’’ So a principled-level individual who found himself or herself in a situation that required unethical action would be more likely to try to change that situation or leave.

The bottom line for managers is this: Cognitive moral development theory and research tell us that most of the people you manage are going to be strongly influenced by what you do, say, and reward. They can be thought of as ‘‘good soldiers’’ who are looking up and looking around for guidance from you and their peers, and they’re likely to mimic what they see around them. Therefore, it’s the manager’s responsibil- ity to structure the work environment in a way that supports ethical conduct. If you avoid this responsibility, these people will look elsewhere for guidance, probably to their peers, and the guidance they receive may not support ethical conduct at all.

A small percentage of individuals may never advance beyond preconventional thinking. Such individuals can be thought of as ‘‘loose cannons.’’ They will do what- ever they can get away with. People like this require close supervision and clear dis- cipline when they get out of line.

Those individuals who have reached principled levels of moral reasoning should be singled out to lead key decision-making groups, to manage situations where ethical ambiguities are likely to arise, and to lead organizations. Research on ethical decision making in groups has found that when less-principled individu- als lead a group, the group’s ethical decision-making performance decreases. On the other hand, groups with leaders higher in moral reasoning either improve or stay the same.30 Also, when an organization’s leader is high in cognitive moral development, the entire ethical climate of the organization is stronger. This is par- ticularly true for leaders whose choices are consistent with their ethical reasoning capacity and for leaders who run young organizations that are more open to their influence. Finally, when employees and the organization’s leader are similar in their level of cognitive moral development, the employees are more satisfied and more committed to the organization. Employee satisfaction and commitment are especially negative when the leader’s cognitive moral development is lower than the moral development of employees.31

Cognitive moral development can be assessed by using instruments designed by cognitive moral development researchers. Moral reasoning can also be increased through training. Over the years, Kohlberg and his students and colleagues have designed training approaches based on cognitive moral development theory. In this

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type of training, facilitators give participants hypothetical ethical dilemmas for dis- cussion. The facilitator promotes movement through ethical reasoning stages by chal- lenging participants’ thinking and by exposing individuals to reasoning higher than their own. This approach creates cognitive conflict, leading the participant to ques- tion and eventually revise his or her own reasoning upward. Research has supported the effectiveness of this type of training with adults in dental, medical, and business schools.32 Managers may want to consider incorporating these ideas into their firms’ ethics training.

Locus of Control

Another individual characteristic that has been found to influence ethical action is locus of control.33Locus of control refers to an individual’s perception of how much control he or she exerts over life events. Locus of control can be thought of as a single continuum from a high internal locus of control to a high external locus of control. An individual with a high internal locus of control believes that outcomes are primarily the result of his or her own efforts, whereas an individual with a high external locus of control believes that life events are determined primarily by fate, luck, or powerful others.

External Locus of Control Internal Locus of Control

Locus of control develops over a long period of time through interaction with other people and the social environment. At any particular time, however, locus of control can be thought of as a stable individual characteristic that differentiates peo- ple from each other. Some individuals are more internal and others are more external in their locus of control. In that way, locus of control is similar to a personality trait that characterizes a person’s thinking and action across situations. It does not shift from one situation to another. Therefore it’s not appropriate to say, ‘‘My locus of control was external in this situation because my boss made me fudge the numbers.’’ What has shifted in this situation is the control exerted by the boss, not the employ- ee’s locus of control. An employee with an internal locus of control who has a con- trolling boss will be uncomfortable with the boss’s request to do something inappropriate. So, due to that high internal locus of control, this employee will be more likely to resist the boss’s influence and more likely to look for an opportunity to leave and find a more compatible boss and work situation. An employee with an external locus of control is more likely to see his or her fate in the boss’ hands and simply do what the boss asks. You can test your own locus of control through a survey measure that your professor may make available to you.

A caveat—although locus of control does not shift easily, it can change over time due to strong life interventions or compelling situations. For example, if some- one with a very high internal locus of control became a prisoner of war with little chance of escape, he or she would likely develop a more external locus of control over time.

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RELATIONSHIP TO ETHICAL JUDGMENT AND ACTION How is locus of control related to ethical judgment and action? It likely has a lot to do with taking responsi- bility for one’s behavior. First, in their judgment, individuals with a high internal locus of control see the relationship between their behavior and its outcomes more clearly than do those with an external locus of control. Internals see themselves as being in control of things that happen in their lives. Thus they’re more likely to take responsibility for the consequences of their actions. It would be more difficult for such an individual to say, ‘‘Well, it’s not my responsibility; I just work here,’’ or ‘‘I’m just following orders.’’ If an individual takes personal responsibility for his or her behavior, it seems likely that person will also behave more ethically. For example, studies have found that internals are more likely to help another person, even if there’s a penalty for doing so.34

Internals see themselves as being in charge of their own fates. Therefore, they should also be less willing to be pressured by others to do things they believe to be wrong. One interesting study asked subjects to complete a story in which the main character was pressured to violate a social norm.35 The more internal the subject’s locus of control, the more likely the story completion had the hero resisting the pressure. In an obedience-to-authority experiment (explained in more detail in Chapter 7), externals were more likely than internals to give apparently (but not really) harmful electric shocks to someone if told to do so by the experimenter.36

For managers, it may be helpful to know where you stand and where your work- ers fit on the locus of control continuum. It can help you understand how they think and how they might react in a variety of situations, including ethical situations. For example, workers who constantly blame bad luck and other external factors for per- formance failures or ethical lapses may be doing so because of an external locus of control—that’s the way they view the world. Managers can work with such individu- als to help them see the relationship between their actions and the outcomes by con- sistently holding them responsible and accountable for what they do. As a result, their locus of control may shift over time, and they will take more responsibility for the consequences of their actions.

Machiavellianism

Whereas internal locus of control and more principled thinking are generally associ- ated with ethical action, another individual difference, Machiavellianism, has been associated with unethical action. Perhaps you have heard the term Machiavellian used to describe individuals who act in self-interested, opportunistic, deceptive, and manipulative ways to win no matter what the cost or how it affects other people. The personality trait known as Machiavellianism was named after Niccol!o Machiavelli, a sixteenth-century philosopher, statesman, and political theorist who is associated with promoting a pragmatic leadership style that included amoral, if not clearly un- ethical, behavior with the aim of achieving self-interested outcomes. The idea that ‘‘the ends justify the means’’ is often associated with Machiavelli. In his most famous publication, The Prince, Machiavelli famously said that a ruler should ‘‘do good if he

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can, but . . . commit evil if he must.’’37 Research using a survey that assesses an individual’s Machiavellianism has found that individuals high on Machiavellianism are significantly more likely to have unethical intentions and to engage in unethical action such as lying, cheating, and accepting kickbacks.38 Managers should be on the lookout for employees who they think might be high on Machiavellianism because they are likely to engage in self-interested action that can put the entire organization at risk. Organizations may also want to consider including Machiavellianism among other personality characteristics when assessing job applicants.

Moral Disengagement

The idea behind moral disengagement39 is that most of us behave ethically most of the time because we’ve internalized standards of good conduct and judge our behav- ior against these standards. If we consider behaving unethically, we feel guilty and stop ourselves. All of us probably recognize that process. But research has found that individual people have a higher (or lower) propensity to deactivate that self-control system through eight moral disengagement mechanisms. These moral disengagement mechanisms allow individuals to engage in unethical behavior without feeling bad about it.

Moral disengagement mechanisms can be organized into three categories. One of these categories involves ways of thinking about our behavior that makes bad be- havior seem more acceptable. A mechanism in this category is the use of euphemistic language (discussed earlier in relation to ethical awareness). Another is called moral justification, whereby unethical behavior is thought to be okay because it contributes to some socially valued outcome. For example, mortgage lenders may have believed that it was okay to sell those no-doc loans to people because they were helping indi- viduals who would otherwise not be able to purchase a home to take part in the ‘‘American dream.’’ A related moral disengagement tactic is called advantageous comparison, whereby people compare their own behavior to more reprehensible be- havior and thus make their own behavior seem more okay. For example, the same mortgage lender may feel okay about selling these loans because she counsels clients to be sure to pay the mortgage every month and avoid credit card debt, while col- leagues in her office don’t bother to do any counseling and care only about making their commissions.

A second category of moral disengagement mechanisms has to do with distorting consequences or reducing personal responsibility for bad outcomes. For example, with displacement of responsibility, individuals will reduce personal accountability by thinking of their actions as resulting from an authority figure’s dictates (‘‘my boss made me do it’’). With diffusion of responsibility, individuals will reduce personal accountability by looking to others or the group (‘‘it’s not my job,’’ or ‘‘my team made the decision’’). With distorting consequences, individuals will think of nega- tive consequences as less serious than they are (it’s ‘‘no big deal’’ to fudge the num- bers on my expense report).

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The third category of moral disengagement mechanisms reduces the person’s identification with the victims of unethical behavior. With dehumanization, individu- als make those who would be harmed less worthy of ethical consideration because they’re thought to be different, stupid, or not even human. This mechanism character- izes thinking among those who commit genocide. One can also imagine mortgage lenders thinking that people who took out loans they clearly couldn’t afford were just dumb and not worthy of concern. Attribution of blame lays blame on the victims of harm for a variety of reasons (‘‘it’s their own fault’’).

Some of these mechanisms lend themselves to certain situations more than others. So if you have an authoritarian and unethical boss, displacement of responsibility (‘‘my boss made me do it’’) may be used more than other tactics. Still, research does show that some individuals are more likely to engage in this kind of thinking overall, regardless of the situation. And those individuals with a high propensity to morally disengage have been found to have reduced empathy for other people, to be more cynical, to see their behavior as resulting from chance or fate (more external locus of control), and to have a reduced moral iden- tity relative to their other identities—a weaker sense of themselves as ethical beings. Most important, these individuals are more likely to behave unethically.40

You can test your own propensity to morally disengage with a short survey that your professor may make available to you. And you can reduce that propensity by being on the lookout for certain justifications that come up in your own mind or in discussions with others. When you find yourself thinking the following (or hear something like this in a meeting), ‘‘stop and think’’ about whether what you’re doing is right:

STOP AND THINK

STOP AND THINK

It’s not my responsibility—my boss told me to do it.

It’s not my responsibility—my team decided this.

It’s no big deal.

It’s not as bad as (what someone else) is doing.

They deserve whatever they get.

They brought this on themselves.

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FACILITATORS OF AND BARRIERS TO GOOD ETHICAL JUDGMENT

In the previous section, we discussed characteristics that distinguish individuals from each other. But individual differences aside, as human beings, we all share ways of thinking about the world that can facilitate or interfere with good ethical judgment. The steps offered in Chapter 2 assume a rational and ethical decision-making pro- cess that prescribes how an ethical decision should be made. However, studies have found that actual human decision making doesn’t match this rational ideal. Although people generally intend to be rational in their decision making, they’re often not.

In recent years, psychologists have discovered a number of weaknesses and biases in how human beings make decisions.41 Some of these decision-making weak- nesses have direct implications for ethical decision making in organizations and for the advice given in Chapter 2.42 So think of this part of the chapter as a kind of reality check. If you’re going to manage your own and others’ ethical behavior, you need to understand how people really think in addition to how they should think.

As a backdrop, recognize that the cognitive weaknesses and biases we will be discussing operate primarily because people try to reduce uncertainty and simplify their world. Although uncertainty is a fact of organizational life, businesspeople want very much to deny the uncertainty they face. Therefore they tend to act as if the world is rational and they’re in control. Being ‘‘in charge’’ and able to predict events is a highly valued characteristic, especially in business. But this focus on being in charge is an illusion that can get managers into trouble. What if you really don’t know all of the facts about the risks, the potential affected parties, and all the conse- quences of your decisions? You’ll see below that the best way to avoid decision- making weaknesses and biases is to become aware of them and to incorporate steps into your decision making that are explicitly aimed at reducing their impact.

Thinking about Fact Gathering

In Chapter 2, we advised you to ‘‘get the facts’’ as an important first step in good ethical decision making. Be aware, though, that your thinking about the facts is likely to be biased. Research evidence suggests that you may look for the wrong ones or stop looking too soon because you think you already have all the facts you need.

We know that most people, including business students and business executives, are overconfident about their knowledge of the facts. For example, in research stud- ies, people were asked factual questions. Then they were asked to judge the probable truth of their answers. For example, in response to the question, ‘‘Is Rome or New York farther north?’’ most people chose New York, and they believed that the proba- bility was about 90 percent that they were right. Actually, they were wrong. Rome is slightly north of New York. Being overconfident can make you fail to search for additional facts or for support for the facts you have.43

Even if you gather additional facts or support, another cognitive bias termed the confirmation trap may influence your choice of which facts to gather and where to

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look.44 All of us have the tendency to look for information that will confirm our pre- ferred answer or choice and to neglect to search for evidence that might prove us wrong. If you were an investment banker who wanted to believe that mortgage- backed securities were safe (because they were so profitable at the time), you were more likely to look for supportive information and ask a question like, ‘‘Historically, what percentage of mortgages have defaulted?’’ Given that question, the banker will probably underestimate the risk involved. Because of no-doc loans and other new and riskier subprime mortgages, relying on historical default patterns no longer made sense. The meeting might take a very different turn if the banker were to ask, ‘‘What future problems are possible with this type of new product? What has changed? What haven’t we thought of?’’45

In an attempt to overcome the confirmation trap, it’s important that you con- sciously try to think of ways you could be wrong. Incorporate questions in your indi- vidual and group decision-making processes such as, ‘‘How could I/we be wrong?’’ ‘‘What facts are still missing?’’ and ‘‘What facts exist that might prove me/us to be wrong?’’ You may still miss some important facts, but you’ll miss less of them than if you didn’t ask these questions at all.

Thinking about Consequences

In Chapter 2, we also advised you to think about all the potential consequences of your decision for a wide variety of stakeholders. Who can argue with such sage advice? But psychologists have found a number of problems with how people think about consequences.

REDUCED NUMBER OF CONSEQUENCES One way people simplify their deci- sions and make them more manageable is to reduce the number of consequences they consider. They’re especially likely to ignore consequences that are thought to affect only a few people. But consequences that affect only a few people can be seri- ous. For example, a highly beneficial drug may have positive consequences for many and adverse consequences for only a few people. But what if those few people could die from side effects of the drug?46 Obviously, you wouldn’t want to ignore such serious consequences no matter how few people are affected. In attempting to con- sciously deal with this situation, it helps to consult a broad range of people who have a stake in the decision you’re making. Invite input from all interested parties, espe- cially those who disagree with you and those with the most to lose. Ask them what consequences they’re concerned about and why. Then, incorporate these conse- quences in your decision making.

CONSEQUENCES FOR THE SELF VERSUS CONSEQUENCES FOR OTHERS

Consequentialist theories require us to think about costs and benefits for society—for multiple stakeholders. But psychological research suggests people tend to make deci- sions in a self-interested manner. For example, they’re inclined to give more weight to the consequences of a decision or action for themselves (or those close to them)

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than for others. That may be because consequences to the self are more immediate or more imminent. In addition, when the consequences of multiple alternatives are ambiguous, people tend to choose the alternative they personally prefer rather than the one that is more just. To make matters worse (from an ethics perspective), people underestimate the extent to which they are self-interested and the extent to which they rationalize their own behavior. They just aren’t aware of their own cognitive biases. Again, it can help to consciously consider those outside of yourself who are going to be affected by a decision or action. As a manager, you can ask your people to make a list of those individuals or groups who might be affected and seek their input, or have your employees try to imagine themselves in the shoes of those stake- holders. How would they react?47

CONSEQUENCES AS RISK One way to think about consequences is to think in terms of decision making about risk. Managers are in the business of assessing risk. But, research suggests that people tend to underestimate potential risks because of an illusion of optimism. They overestimate the likelihood of good future events and underestimate the bad. For example, even though around one-half of marriages end in divorce, newlyweds are highly optimistic that their own new marriages will be everlasting. And, although some analysts may knowingly have lied about the future prospects of mortgage-backed securities, it’s likely that many were simply overly optimistic and believed that the housing market would never simultaneously crash everywhere in the country, bringing down an entire market and the U.S. economy with it.

People also generally believe that they’re less susceptible to risks than other people are. This belief is supported by the illusion of control, the general belief that we really are in charge of what happens. And if we think we can control events, we also think bad things are less likely to happen. This illusion of control has been dem- onstrated to exist in MBA students from top U.S. business schools, suggesting that managers are certainly vulnerable.48 Managers whose judgment is influenced by these cognitive biases are likely to underestimate the risk facing the firm as a result of a particular decision. But if managers ignore risks, they’re also ignoring important consequences. So it’s important to recognize this tendency to ignore risk, and design risk analysis into your decision-making processes.

Even if we attend to risks, we still have difficulty thinking about them in a com- pletely rational way. One tendency that can contribute to downplaying risk was already discussed—the tendency to attend to information that will help confirm the decision we would prefer to make (confirmation bias). In the famous space shuttle Challenger disaster that killed all the astronauts on board, everyone knew that risk existed. The question was how much, and was it too much? Many economic and political factors were pushing NASA to launch this shuttle. The media were paying more attention to the launch than they usually would because a schoolteacher was on board. Researchers now believe that confirmation bias may have influenced decision makers to focus on the information that confirmed their preference, which was to launch, and to discount available information about risks that would have supported a delay.49

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CONSEQUENCES OVER TIME: ESCALATION OF COMMITMENT The prescrip- tion to think about consequences also fails to account for the fact that decisions are not isolated choices, but often become part of a series of choices within the context of a larger decision or project. Consider the following scenario:

You finally graduated from college and landed a great job, and you’ve invested most of your savings in the car of your dreams—a used BMW. But in a short time, the car begins having mechanical problems. Every time you bring it to the mechanic, he claims that it is fixed for good; but the problems continue and your bank account is being drained. Should you quit trying to fix the car?

Because you’ve already made the decision to buy the car, and you’ve already in- vested a lot of money in it, your tendency will be to continue your commitment to this previously selected investment. This tendency has been called ‘‘escalation of commitment to a losing course of action’’ or ‘‘throwing good money after bad.’’50 A perfectly rational decision maker would consider the time and expenses already invested as ‘‘sunk costs.’’ They aren’t recoverable and shouldn’t be considered in a decision about what to do. Only future costs and benefits should be considered. But this is difficult. Norms in our society and in our organizations support trying, persist- ing, and sticking with a course of action. Also, if others are involved, we’re likely to feel the need to justify our original decision—whether it was to buy a car, a piece of equipment, or land.

So when you’re in a situation that involves decisions about whether to continue to invest in an ongoing project, be careful! One way to overcome escalation of com- mitment is, as with many biases, to recognize that it exists and try to adjust for it. Ask yourself explicit questions about whether you’re committed to a decision just because failure would make your original decision look bad. Ask yourself, ‘‘If I took over the project today, with no personal investment, would I support the project?’’ Another approach is to bring in outsiders and ask for their opinions, or turn the project over to them completely. That gets your own ego out of the decision-making process.

Thinking about Integrity

In Chapter 2, you were also advised to think about your own character and integrity— to ask yourself what a person of integrity in a highly ethical community would do in the particular situation. But cognitive biases can get in the way here too. First, if your thoughts about yourself are controlled by illusion rather than reality, how can you make a good decision about your integrity? The basic idea here is that individuals are likely to think positively about their own ethics. They will unconsciously filter and distort information in order to maintain a positive self image. Psychologists know that people have an illusion of superiority or illusion of morality. Surveys have found that people tend to think of themselves as more ethical, fair, and honest than most other people.51 It’s obviously an illusion when the large majority of individuals

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claim to be more honest than the average person, or more ethical than their peers. It’s a little like Garrison Keillor’s mythical Lake Wobegon, where all the children are above average. There isn’t a whole lot you can do here except try to be honest with yourself. But this kind of illusion can lead to bad decisions—when physicians take gifts from salespeople because they’re sure they’re ethical and their decisions won’t be affected,52 or when mortgage lenders selling subprime loans convince themselves that what they’re doing is contributing to the American dream.

Second, the virtue ethics approach suggests that you rely on the ethics of your profession (or other relevant moral community) to guide you. But consider the accounting professionals in recent cases, as when Arthur Andersen auditors signed off on audits that misrepresented the finances of companies such as Waste Manage- ment, Enron, and Adelphia Communications.

Certified public accountants are supposed to be guided by the AICPA code of professional ethics. The code says that, as professionals, auditors have a responsibil- ity to act in the public interest to provide objective opinions about the financial state of the organization—be free of conflicts of interest, not misrepresent facts, or subor- dinate professional judgment to others. Given human cognitive limitations, however, this expectation is probably unrealistic. Consider what is likely to go through an audi- tor’s mind when deciding whether to provide a negative audit opinion on the financial statements of a big client. Auditors work closely with their audit clients, often over a long period of time. By contrast, auditors have no personal relationship with the ‘‘public’’ they are supposed to represent. Therefore, as biased information processors, their thinking is likely to emphasize the potential negative consequences of a quali- fied (or negative) audit opinion for themselves and the client—not for the public. The negative consequences for themselves and the client are clearer and more immediate. The auditor who offers a qualified audit may very well lose the client (and the money associated with that client) as well as the personal relationships forged over time. On the other hand, the consequences for the public of a qualified audit opinion are more ambiguous and likely spread over more people and time. It isn’t clear how much specific members of the public will gain or lose, especially if the misrepresentation is deemed to be small or unclear. So auditors can easily rationalize a decision that is consistent with their own and their company’s self-interest and downplay the poten- tial consequences to an ambiguous, unknown public.53

What is a professional organization to do? It is important to recognize that audi- tors (and other professionals) are human beings who are affected by cognitive limita- tions and biases. Given what we know about these biases, here are some potential solutions. First, auditors should be discouraged from developing personal relation- ships or socializing with their clients. Companies should change auditors every few years to avoid forging such personal ties. Second, audit firms should work hard to sensitize auditors to the likely negative consequences of financial misrepresenta- tion for their own firms and the public. The Enron bankruptcy contributed to huge financial losses to its employees and investors and to the ultimate demise of Arthur Andersen. Regular attention to the importance of maintaining the integrity and long- term reputation of the audit firm is essential, as is the leader’s role in creating a strong

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ethical climate. The reward system (discussed more fully in later chapters) can be used to send important signals about what’s expected. For example, auditors who turn down client business or risk losing a client by providing a negative audit opinion should be supported and reinforced for doing so. Those auditors who risk the reputa- tion of the firm should be disciplined.

STOP AND THINK

STOP AND THINK

Given the above discussion, we might suggest other ‘‘red flags’’ for you to be on the lookout for. If you find yourself thinking (or others saying) the follow- ing, consider whether your biases are showing!

The facts support our decision.

Nothing bad will happen.

We’re ethical—we wouldn’t do anything bad.

We’ve already invested so much—we can’t afford to quit now.

Thinking about Your Gut

Our last piece of advice in Chapter 2 was to listen to your gut. But in this chapter, we’ve spent a great deal of time telling you that your gut may well be wrong—led by cognitive limitations and biased thinking.

Yet, your gut can still be useful in alerting you that something might be wrong— that you’re facing an ethical dilemma—in the first place. But once that decision is made, you should temper your gut with careful analysis guided by the knowledge gained in this chapter and the rest of the book. Hopefully, the combination of your gut and an informed brain will help you make better decisions.

YOUR GUT—‘‘AUTOMATIC’’ ETHICAL DECISION MAKING In Chapter 2, we treated ethical decision making mostly as a systematic and rational step-by-step process. Even in this chapter, we have thus far discussed how ethical awareness leads to ethical judgment, which then leads to ethical action in a seemingly systematic and deliberative way. But new research from moral psychology, which is often backed up by neuroscience and brain imaging studies, finds that ethical judgments are often more intuitive, impulsive, and automatic. Jonathan Haidt, a psychologist at the University of Virginia, has argued that much ethical judgment occurs ‘‘quickly,

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effortlessly, and automatically,’’54 often operating below conscious awareness. Haidt has been particularly interested in people’s automatic reactions of disgust. For exam- ple, in his research, he has used a vignette about a family that accidentally runs over and kills the family dog and then reacts by cooking and eating it! Most of us recoil instantly at the thought. It seems disgusting to us and wrong to eat the family dog. When asked why, however, we can’t explain our very strong gut reactions. After all, most of us eat other animals. So, clearly, something besides a purely rational process is at work—something that’s more intuitive and emotional. (You can learn more about Haidt’s research and even participate yourself at www.yourmorals.org).

Even more intriguing is research suggesting that individuals who rely only on more conscious, deliberative approaches to ethical decision making may ar- rive at worse ethical decisions than do those who use moral intuition and who have strong emotional responses to ethical situations.55 Much more research will be required to fully understand these important processes, when they operate, and when they interfere with good ethical decision making rather than actually improve it.

Unconscious Biases

One relatively new research tool that can help us understand the potential (often negative) role of the unconscious in a certain type of ethical thinking is the Implicit Association Test (IAT). Results reveal most people’s preferences for young people over old, straight people over gay, able people over disabled, and a variety of other categories. For example, hundreds of studies with the ‘‘race IAT’’ lead to the conclusion that the large majority of us have an unconscious tendency to value white people more than black people even if we consciously disavow such views and truly believe that we have no racial bias. Here’s how the race IAT works. Participants are asked to press a key on the computer keyboard when they see a black person’s face or a word that has negative connotations (e.g., rot- ten, bad) and to press another key when they see a white person’s face or a word with positive connotations (love, good). Then the task is reversed, and participants are told to press the same keyboard key in response to black faces and pleasant words or white faces and unpleasant words. It turns out that most of us respond more quickly when we’re linking the black faces with negative words and white faces with positive words because such links are cognitively easier for us—they fit with our unconscious, implicit attitudes. Although some have criticized these studies as simply representing higher familiarity with some groups than others, and as unable to predict behavior in real-life situations, research has found that the IAT results can predict troubling behavior in experiments. For example, a per- son with a strong implicit bias against blacks is more likely to be rude in an encounter with a black person, and white physicians with a strong implicit bias against blacks were found to prescribe the latest heart treatment less often for blacks than for whites. Our goal is not to defend or criticize the IAT. Rather, we use it to point out that unconscious attitudes probably influence our behavior

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more than we think. Given the importance of fair treatment in all kinds of ethical decisions at work (hiring, performance appraisal, layoffs, compensation, etc.), understanding the potential impact of such unconscious bias should help us under- stand why we need to put organizational procedures in place that provide less opportunity for these unconscious biases to influence our decisions.56 (To experi- ence the IAT for yourself, go to https://implicit.harvard.edu/implicit/.)

Emotions In Ethical DecisionMaking

Age-old philosophical prescriptions assume cool, rational, ethical decisions. But we are also beginning to understand how important emotions are to the ethical decision- making process.57 Importantly, emotions are not just an interference to good ethical judgment, as many used to believe. Instead, emotions often lead to right action.’’58

For example, when we consider hurting someone, our brain reacts with a visceral negative emotion (‘‘an internal alarm’’) that keeps violence in check.59 And these reactions tend to happen very quickly, before we even have time to engage in rational thought.

Consider two classic philosophical dilemmas. In one, a runaway train is headed for five people who will die if nothing is done. You can save the five by diverting the train to a different track, where it would kill only one person. Should you divert the train?

In the second dilemma, you’re standing next to a stranger on a bridge over the tracks. The only way to save the five people is to push the stranger onto the tracks, where his body would stop the train. Should you push the stranger?

To philosophers, the rational logic in these scenarios is similar; in both cases, you would be intentionally sacrificing one person in order to save five people. But, when asked, most people say that you should divert the train in the first dilemma but not push the stranger onto the tracks in the second. Psychologists now tell us that emotions explain the difference between the scenarios because the second scenario engages emotions more than the first. This hypothesis was supported in an experiment that used brain scans to track brain activity during decision making. In dilemmas like the second one, parts of the brain associated with emotional processing were more active, and those who decided that pushing the stranger would be right took longer to make a decision because emotions slowed down their thought processes.60 Most normal people would find it diffi- cult, if not impossible, to actually take another’s life in such a situation. This reluctance is attributed to the strong feelings of revulsion that come up from just thinking about taking a human life. These reactions are likely hardwired into hu- man beings through evolution because they aid our survival. Interestingly though, people who have damage to the prefrontal cortex of the brain have no such re- action. They are much more likely to simply make the utilitarian analysis and say they would kill one person to save the others.61 (If you want to get a ‘‘feel’’ for this type of exercise, try taking the moral sense test at http://moral.wjh.harvard. edu. It presents complex ethical dilemmas that have no clearly right answer.)

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So emotions are clearly important in ethical decision making, and continuing research will help us more fully understand the process. It seems clear that emo- tions can aid us in doing the right thing when they alert us to ethical concerns, cause us to act to help others in need, or keep us from violent reactions (because of sympathy for another, pangs of guilt, or automatically triggered negative feel- ings).62 Feelings of betrayal or moral outrage can also cause people to act in the interest of fairness.63 For example, people may be more willing to speak up about the unfair treatment of a coworker if they feel moral outrage about it.64 Interest- ingly, research has found that people will even forgo financial benefits if they feel they’re being unfairly treated. In some fascinating experiments, researchers have demonstrated that individuals will punish another individual they perceive to be unethical even if there is nothing for them to gain and something to lose. They will do this even if they don’t know the person who has been offended.65 Accord- ingly, research has shown that the parts of our brains associated with feeling satisfaction are activated when we consider retaliating against someone who has unfairly harmed us.66 The bottom line here is that we often act not because we have coolly and rationally decided on the best course of action, but rather because it ‘‘feels’’ like the right thing to do at the time. Often, such emotions can lead us to act ethically. But emotions can also interfere with good decision mak- ing when they lead to a (perhaps irrational) desire for revenge. For example, when a competitor ‘‘poaches’’ one of your best people, do you try to recruit someone away from the competitor just to get even or to do damage to the com- petitor when you should be focusing more rationally on who is best prepared to do the job?67

Consider how General Motors managers handled a four-year legal battle with VW over their allegation that a 56-year-old GM executive, Jose Lopez, took 20 boxes of GM proprietary documents when he left GM to join Volkswagen in 1993. In 1992, Lopez was GM’s worldwide purchasing czar, known for his ability to cut costs ruth- lessly. The missing documents included information about GM’s suppliers and their prices for auto parts, as well as information about upcoming Opel car models in the GM Europe division. Fortune magazine referred to the four-year legal battle that ensued as a tale of ‘‘betrayal’’ and ‘‘revenge.’’ Lou Hughes, head of GM Europe, was furious that Lopez would take proprietary documents to its fiercest competitor. He insisted that there would be no settlement with VW as long as Lopez remained there. When asked what he hoped to gain from the litigation, Hughes replied, ‘‘Look, this is not a question of business. This is a question of ethics.’’68 Years of investigation yielded no hard evidence to suggest that anyone at VW had actually used the secret GM information. Fortune suggested that at the time, ‘‘one might have expected GM to act pragmatically, find some face-saving exit, and return its attention to the car business.’’69 That might have been the ‘‘rational,’’ coolheaded thing to do. Instead, GM escalated the fight, bringing a racketeering suit that was expected to drag on for years and cost tens of millions of dollars. When pragmatic board members ques- tioned the action, the board chairman insisted that the company had to pursue the suit

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because it ‘‘had been terribly wronged.’’ ‘‘Some things aren’t measured in time and money. They’re just who we are.’’70 Finally, in January 1997, the two companies settled the case. Lopez, who had already resigned from Volkswagen, was barred from doing any work for VW through the year 2000. Volkswagen paid GM $100 million and agreed to buy $1 billion worth of GM parts over seven years. Fortune asked, ‘‘But what, in the end did the long, bitter, and costly struggle accomplish? In the cold light of day, the answer seems simple and shocking: not much.’’71 A huge company devoted years of attention and spent millions of dollars because its managers were morally outraged that their former friend had betrayed them. It was obviously an emotional reaction.

Clearly, anger and other emotions can influence thoughts and actions. Whether that is good or bad depends on whether the emotion leads to ‘‘right’’ or ‘‘wrong’’ action. If empathy or guilt lead you to recognize an ethical issue or think about the consequences of your actions for others, that’s a good thing. If moral outrage leads you to seek justice, that’s good as well. But moral outrage can also lead to a desire for revenge, and that may be the time to bring cooler heads to the decision to deter- mine whether action based upon revenge is a good ethical (and business) decision. Those who are not as emotionally involved in the interpersonal issues may be able to offer a more rational and balanced assessment of the situation. In the GM– Volkswagen case, those pragmatic board members may have been right to support a quick settlement.

TOWARD ETHICAL ACTION

Most of this chapter has focused on ethical awareness and ethical judgment pro- cesses. We’ve seen that these also influence ethical action. For example, those who are higher in ethical awareness are more likely to make ethical choices because they think about the harm they’re doing, they use ethical language to label the situation, or they recognize that others would see an action as ethically problematic. Also, we know that some individuals are more prone to think in ways that make ethical action more likely. Individuals who are higher in cognitive moral development, internal locus of control, and idealistic decision-making style, and those who are lower in Machiavellianism and less prone to use morally disengaged thinking, are all more likely to behave ethically.

But we’ve also seen that, as human beings, we’re all prone to cognitive biases that can get in the way of good thinking and interfere with ethical action. Beyond that, it’s sometimes hard to do what’s right even for those of us with the best thinking and intentions. We may have an unethical boss who insists that we do inappropriate things, we may find ourselves in an unethical culture, or we may fear repercussions for speaking the truth. Next, you’ll read an article that addresses some of these issues: Dennis Gioia’s reflections on his involvement in the Pinto Fires case. In future chap- ters, we’ll focus more on how you can find your moral voice and do what’s right despite the challenges.

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REFLECTIONS ON THE PINTO FIRES CASE (SEE CHAPTER 2)

by Dennis A. Gioia (used with permission)

Chapter 2 ended with the provocative Pinto Fires case, highlighting some of the sordid events in the history of the Pinto fires problem. As the authors indicate later in this chapter, I was involved with this infamous case in the early 1970s. They have asked me to reflect on lessons learned from my experience.

I take this case very personally, even though my name seldom comes up in its many recountings. I was one of those ‘‘faceless bureaucrats’’ who is often portrayed as making decisions without accountability and then walking away from them—even decisions with life-and-death implications. That characterization is, of course, far too stark and superficial. I certainly don’t consider myself faceless, and I have always chafed at the label of bureau- crat as applied to me, even though I have found myself unfairly applying it to others. Furthermore, I have been unable to walk away from my decisions in this case. They have a tendency to haunt—especially when they have such public airings as those involved in the Pinto fires debacle have had.

But why revisit 20-year-old decisions, and why take them so personally? Here’s why: because I was in a position to do something about a serious problem—and didn’t. That simple observation gives me pause for personal reflection and also makes me think about the many difficulties people face in trying to be ethical decision makers in organizations. It also helps me to keep in mind the features of modern business and organizational life that would influ- ence someone like me (me, of all people, who purposefully set out to be an ethical decision maker) to overlook basic moral issues in arriving at decisions that, when viewed retrospec- tively, look absurdly easy to make. But they are not easy to make, and that is perhaps the most important lesson of all.

The Personal Aspect

I would like to reflect on my own experience mainly to emphasize the personal dimensions involved in ethical decision making. Although I recognize that there are strong organizational influences at work as well, I would like to keep the critical lens focused for a moment on me (and you) as individuals. I believe that there are insights and lessons from my experience that can help you think about your own likely involvement in issues with ethical overtones.

First, however, a little personal background. In the late 1960s and early 1970s, I was an engineering/MBA student; I also was an ‘‘activist,’’ engaged in protests of social injustice and the social irresponsibility of business, among other things. I held some pretty strong values that I thought would stand up to virtually any challenge and enable me to ‘‘do the right thing’’ when I took a career job. I suspect that most of you feel that you also have developed a strongly held value system that will enable you to resist organizational inducements to do something unethical. Perhaps. Unfortunately, the challenges do not often come in overt forms that shout the need for resistance or ethical righteousness. They are much more subtle than that, and thus doubly difficult to deal with because they do not make it easy to see that a situation you are confronting might actually involve an ethical dilemma.

After school, I got the job of my dreams with Ford and, predictably enough, ended up on the fast track to promotion. That fast track enabled me to progress quickly into positions of some notable responsibility. Within two years I became Ford’s vehicle recall coordinator,

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with first-level responsibility for tracking field safety problems. It was the most intense, infor- mation-overloaded job you can imagine, frequently dealing with some of the most serious problems in the company. Disasters were a phone call away, and action was the hallmark of the office where I worked. We all knew we were engaged in serious business, and we all took the job seriously. There were no irresponsible bureaucratic ogres there, contrary to popular portrayal.

In this context, I first encountered the neophyte Pinto fires problem in the form of infrequent reports of cars erupting into horrendous fireballs in very low-speed crashes and the shuddering personal experience of inspecting a car that had burned, killing its trapped occupants. Over the space of a year, I had two distinct opportunities to initiate recall activities concerning the fuel tank problems, but on both occasions I voted not to recall, despite my activist history and advocacy of business social responsibility.

The key question is how, in the space of two short years, I could have engaged in a deci- sion process that appeared to violate my own strong values—a decision process whose subse- quent manifestations continue to be cited by many observers as a supposedly definitive study of corporate unethical behavior. I tend to discount the obvious accusations: that my values weren’t really strongly held; that I had turned my back on my values in the interest of loyalty to Ford; that I was somehow intimidated into making decisions in the best interests of the com- pany; that despite my principled statements I had not actually achieved a high stage of moral development, and so on. Instead, I believe a more plausible explanation for my own actions looks to the foibles of normal human information processing.

I would argue that the complexity and intensity of the recall coordinator’s job required that I develop cognitive strategies for simplifying the overwhelming amount of information I had to deal with. The best way to do that is to structure the information into cognitive ‘‘schemas,’’ or more specifically ‘‘script schemas,’’ that guide understanding and action when facing common or repetitive situations. Scripts offer marvelous cognitive shortcuts because they allow you to act virtually unconsciously and automatically, and thus permit handling complicated situations without being paralyzed by needing to think consciously about every little thing. Such scripts enabled me to discern the characteristic hallmarks of problem cases likely to result in recall and to execute a complicated series of steps required to initiate a recall.

All of us structure information all of the time; we could hardly get through the workday without doing so. But there is a penalty to be paid for this wonderful cognitive efficiency: We do not give sufficient attention to important information that requires special treatment, because the general information pattern has surface appearances indicating that automatic processing will suffice. That, I think, is what happened to me. The beginning stages of the Pinto case looked for all the world like a normal sort of problem. Lurking beneath the cognitive veneer, however, was a nasty set of circumstances waiting to conspire into a dangerous situa- tion. Despite the awful nature of the accidents, the Pinto problem did not fit an existing script; the accidents were relatively rare by recall standards, and the accidents were not initially trace- able to a specific component failure. Even when a failure mode suggesting a design flaw was identified, the cars did not perform significantly worse in crash tests than competitor vehicles. One might easily argue that I should have been jolted out of my script by the unusual nature of the accidents (very low speed, otherwise unharmed passengers trapped in a horrific fire), but those facts did not penetrate a script cued for other features. (It also is difficult to convey to the layperson that bad accidents are not a particularly unusual feature of the recall coordinator’s information field. Accident severity is not necessarily a recall cue; frequently repeated patterns and identifiable causes are.)

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The Corporate Milieu

In addition to the personalized scripting of information processing, there is another important influence on the decisions that led to the Pinto fires mess: the fact that decisions are made by individuals working within a corporate context. It has escaped almost no one’s notice that the decisions made by corporate employees tend to be in the best interest of the corporation, even by people who mean to do better. Why? Because socialization processes and the overriding influence of organizational culture provide a strong, if generally subtle, context for defining appropriate ways of seeing and understanding. Because organizational culture can be viewed as a collection of scripts, scripted information processing relates even to organizational-level considerations. Scripts are context bound; they are not free-floating general cognitive struc- tures that apply universally. They are tailored to specific contexts. And there are few more potent contexts than organizational settings.

There is no question that my perspective changed after joining Ford. In retrospect, I would be very surprised if it hadn’t. In my former incarnation as a social activist, I had internalized values for doing what was right, as I understood rightness in grand terms; but I had not inter- nalized a script for applying my values in a pragmatic business context. Ford and the recall coordinator role provided a powerful context for developing scripts—scripts that were inevita- bly and undeniably oriented toward ways of making sense that were influenced by the corpo- rate and industry culture.

I wanted to do a good job, and I wanted to do what was right. Those are not mutually exclusive desires, but the corporate context affects their synthesis. I came to accept the idea that it was not feasible to fix everything that someone might construe as a problem. I therefore shifted to a value of wanting to do the greatest good for the greatest number (an ethical value tempered by the practical constraints of an economic enterprise). Doing the greatest good for the greatest number meant working with intensity and responsibility on those problems that would spare the most people from injury. It also meant developing scripts that responded to typical problems, not odd patterns like those presented by the Pinto.

Another way of noting how the organizational context so strongly affects individuals is to recognize that one’s personal identity becomes heavily influenced by corporate identity. As a student, my identity centered on being a ‘‘good person’’ (with a certain dose of moral righ- teousness associated with it). As recall coordinator, my identity shifted to a more corporate definition. This is an extraordinarily important point, especially for students who have not yet held a permanent job role, and I would like to emphasize it. Before assuming your career role, identity derives mainly from social relationships. Upon putting on the mantle of a profession or a responsible position, identity begins to align with your role. And information processing per- spective follows from that identity.

I remember accepting the portrayal of the auto industry and Ford as ‘‘under attack’’ from many quarters (oil crises, burgeoning government regulation, inflation, litigious customers, etc). As we know, groups under assault develop into more cohesive communities that empha- size commonalities and shared identities. I was by then an insider in the industry and the com- pany, sharing some of their beleaguered perceptions that there were significant forces arrayed against us and that the well-being of the company might be threatened.

What happened to the original perception that Ford was a socially irresponsible giant that needed a comeuppance? Well, it looks different from the inside. Over time, a reasonable value for action against corporate dominance became tempered by another reasonable value that cor- porations serve social needs and are not automatically the villains of society. I saw a need for

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balance among multiple values, and, as a result, my identity shifted in degrees toward a more corporate identity.

The Torch Passes to You

So, given my experiences, what would I recommend to you, as a budding organizational decision maker? I have some strong opinions. First, develop your ethical base now! Too many people do not give serious attention to assessing and articulating their own values. People simply do not know what they stand for because they haven’t thought about it seriously. Even the ethical scenarios presented in classes or executive programs are treated as interesting little games without apparent implications for deciding how you intend to think or act. These exercises should be used to develop a principled, personal code that you will try to live by. Consciously decide your values. If you don’t decide your values now, you are easy prey for others who will gladly decide them for you or influence you implicitly to accept theirs.

Second, recognize that everyone, including you, is an unwitting victim of his or her own cognitive structuring. Many people are surprised and fascinated to learn that they use schemas and scripts to understand and act in the organizational world. The idea that we automatically process so much information so much of the time intrigues us. Indeed, we would all turn into blithering idiots if we did not structure information and expect- ations, but that very structuring hides information that might be important—information that could require you to confront your values. We get lulled into thinking that automatic information processing is great stuff that obviates the necessity for trying to resolve so many frustrating decisional dilemmas.

Actually, I think too much ethical training focuses on supplying standards for contemplat- ing dilemmas. The far greater problem, as I see it, is recognizing that a dilemma exists in the first place. The insidious problem of people not being aware that they are dealing with a situa- tion that might have ethical overtones is another consequence of schema usage. I would ven- ture that scripted routines seldom include ethical dimensions. Is a person behaving unethically if the situation is not even construed as having ethical implications? People are not necessarily stupid, ill-intentioned, or Machiavellian, but they are often unaware. They do indeed spend much of their time cruising on automatic, but the true hallmark of human information process- ing is the ability to switch from automatic to controlled information processing. What we really need to do is to encourage people to recognize cues that build a ‘‘Now Think!’’ step into their scripts—waving red flags at yourself, so to speak—even though you are engaged in essentially automatic cognition and action.

Third, because scripts are context-bound and organizations are potent contexts, be aware of how strongly, yet how subtly, your job role and your organizational culture affect the ways you interpret and make sense of information (and thus affect the ways you develop the scripts that will guide you in unguarded moments). Organizational culture has a much greater effect on individual cognition than you would ever suspect (see Chapter 5).

Last, be prepared to face critical responsibility at a relatively young age, as I did. You need to know what your values are, and you need to know how you think so that you can know how to make a good decision. Before you can do that, you need to articulate and affirm your values now, before you enter the fray. I wasn’t really ready. Are you?

For a more thorough description and analysis of Dennis Gioia’s experiences, see his article, ‘‘Pinto Fires and Personal Ethics: A Script Analysis of Missed Opportunities,’’ Journal of Business Ethics 11, nos. 5, 6 (1992): 379–89.

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Revisiting the Pinto Fires Case: Script Processing and Cost-Benefit Analysis

Dennis Gioia, management scholar and expert on social cognition, has provided us with a rare opportunity to look inside the head of someone who was involved in a widely publicized business ethics situation. He has analyzed his own thoughts and behavior as vehicle recall coordinator at Ford Motor Company shortly after the Ford Pinto was introduced in both an article in the Journal of Business Ethics72 and in his ‘‘Reflections’’ that you just read.

In 1972, Gioia graduated with an MBA. His value system included opposition to the Vietnam War and deep concerns about the ethical conduct of business. ‘‘I culti- vated my social awareness; I held my principles high; I espoused my intention to help a troubled world; and I wore my hair long. By any measure I was a prototypical ‘Child of the ’60s.’’’73 A car enthusiast, Gioia was hired by the Ford Motor Company as a ‘‘problem analyst.’’ Within two years he became Ford’s field recall coordinator, in charge of organizing current recall campaigns and identifying developing problems.

SCRIPT PROCESSING In analyzing his participation in the decision not to recall the Pinto, Gioia suggests that his behavior was highly influenced by script processing. Scripts are cognitive frameworks that guide human thought and action. Although they are generally not written down, scripts contain information about the appropriate sequence of events in routine situations. For example, most of us have a fairly complex script for how to behave in a fancy restaurant, from approaching the maı̂tre d’ to tasting the wine to choosing a fork to use to leaving the appropriate tip. Information processing is made much more efficient because a cognitive script allows the individual to call on an established behavior pattern and act automatically without contemplating every decision or action in great detail. Active thinking is not required, because the situation fits the mental prototype, which in turn triggers the script and the prescribed behaviors. According to Gioia, this is something like ‘‘cruising on automatic pilot.’’ Many of us discover that we have been cruising on automatic pilot when we drive to a familiar destination, but we can’t recall how we got there. We were following an established behavior pattern. The route was so familiar that we didn’t have to think about it any- more. Somehow we were magically there. Similar things happen at work. Behaviors become routine or ‘‘scripted,’’ and we do them pretty much without thinking. Many jobs have scripts associated with them. For example, insurance claims adjusters have a set of criteria they use to make decisions about claims, and emergency medical person- nel have a script for deciding which medical problems require the most immediate attention. If a symptom is not a part of the accepted script, it is likely to be overlooked.

Given the huge information load expected of someone who was simultaneously managing hundreds of files on potential safety problems, scripts provided a great information processing advantage to the Ford recall coordinator. Rather than treating every potential problem situation as unique, Gioia could save time and mental energy by making quick and efficient decisions about problems as they arose. As early reports about the Pinto began to trickle in, they didn’t raise any red flags because

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they fit the scripted criteria for a ‘‘normal’’ accident and didn’t fit the scripted criteria for a recall. Among other criteria, Gioia was taught to look for a large number of cases, a pattern of component failure, and a traceable cause to a design or manufac- turing problem before proposing a recall. Therefore, he filed the claims automatically and gave seemingly more important problems his active attention.

Besides contributing to information processing efficiency, however, script pro- cessing clearly has some disadvantages. Gioia admittedly ‘‘looked right past’’ poten- tial problems because he had seen similar information patterns hundreds of times before. The scripted definition of a crisis case was not met by the information he received, so the Pinto wasn’t singled out for attention. Consistent with research on script processing, he selectively perceived information that was consistent with the script and ignored information that didn’t fit the pattern.

Muffled emotions can also become part of a script. Many jobs require the control of emotions, particularly negative emotions. The recall coordinator’s job fit this cate- gory, as would the job of a health professional in the emergency room or an insurance claims handler who reads constantly about terrible accidents and the disabilities that result. For Gioia to function in his job every day, his emotions had to be squelched to some degree. Even when one event penetrated his script, it didn’t lead to recall of the Pinto. He had received a photograph of a burned Pinto and subsequently saw in person the burned hulk of an actual automobile. These powerful visual images triggered an emotional response and moved him to bring the case before members of the field recall office. However, at the meeting, it became clear that the characteristics of the Pinto problem didn’t meet the group’s shared scripted criteria for a recall. For example, only a few field reports had come in about the Pinto, much fewer than the number that would generally support a recall decision. All members, including Gioia, voted not to recall.

Script processing can be particularly problematic for ethical decision making. First, ethical decision making requires active consideration of the moral dimensions of the situation and a ‘‘custom’’ decision, tailored to the complexities of that particu- lar case. Yet, Gioia argues, in many situations organizational members are not even aware they are dealing with an ethical dilemma. In terms of our previous discussion, they are ethically unaware. They handle situations by following scripts that are likely to exclude ethical considerations. In other words, ethical dilemmas do not lend them- selves to ‘‘automatic pilot’’ decisions. But the realities of our hectic work lives make this sort of default decision making very common.

Cost-Benefit Analysis

Frequently, in addition to the cognitive processing limitations of individual deci- sion makers, institutionalized decision-making processes can powerfully influence the decisions made by individuals or groups. In the Pinto fires case, a controver- sial decision-making process was used to justify the decision not to change the gas tank design. The National Traffic Safety Association had approved the use of cost-benefit analysis to establish automotive safety design standards. This process involved the assignment of a dollar value for a human life—in 1970, the value

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was deemed to be approximately $200,000 (it’s over 3 million dollars today) As an internal memo revealed, Ford had tabulated the costs of altering the tank design (for all similarly designed vehicles) to be $137 million, or $11 per vehicle. The benefits were calculated to be $49,530,000. These included the savings to society that would be accrued by preventing 180 deaths at $200,000 each, plus 180 projected burn injuries at $67,000 per injury and 2,100 burned cars at $700 per car. Using the cost-benefit analysis made the decision seem straightforward. The costs of redesign outweighed the benefits and would therefore not be under- taken. Ethical considerations didn’t figure into the equation.

Attempts to reduce complex decision making to quantitative terms aren’t un- common, especially in a highly competitive business environment. In this way, com- plex decisions can be simplified—apparently, an advantage. Today, insurance companies and many government agencies still assign a value to human life as they attempt to calculate the costs and benefits of new regulations. And those managing relief efforts after the World Trade Center terrorist attack had to decide how much money should be given to families who lost loved ones. What is a life worth? Are some people’s lives ‘‘worth’’ more than others because they would have had more earning potential had they lived? Unfortunately, this kind of decision making is a part of our modern lives. Decisions like this are made in courtrooms and by insurance companies every day. But the potential disadvantages of reducing the value of human life to quantitative terms should be clear. Such simplification can remove moral crite- ria from the decision-making process and reduce ethical awareness.

The Pinto fires example also points to the importance of multiple ethical selves and role behavior that will be discussed further in Chapter 7. Gioia was an idealistic young student, but he admittedly dropped his idealism at the corporation door. In performing his job of recall coordinator, Gioia was heavily influenced by the role expectations and guiding scripts. As he says:

The recall coordinator’s job was serious business. The scripts associated with it influenced me more than I influenced [them]. Before I went to Ford I would have argued strongly that Ford had an ethical obligation to recall. After I left Ford, I now argue and teach that Ford had an ethical obligation to recall. But, while I was there, I perceived no obligation to recall and I remember no strong ethical overtones to the case whatsoever. It was a very straightforward decision, driven by dominant scripts for the time, place, and context.74

Clearly, these processes that individuals and organizations use to simplify complex decisions can have significant implications for the ethical decisions managers make. Although script processing and quantitative decision-making criteria clearly help us do our jobs more efficiently, they can also strip ethical considerations from the deci- sion-making process.

One way to address this problem is to make ethical considerations part of the script. Gioia suggests that this may be possible, although he warns that ‘‘it will take

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substantial concentration on the ethical dimension of the corporate culture (see Chap- ter 5), as well as overt attempts to emphasize ethics in education, training, and deci- sion making before typical organizational scripts are likely to be modified to include the crucial ethical component.’’75 You can help your subordinates by working with them to make the scripts explicit and to analyze them for their ethical components.

You can also require decision-making groups to analyze the ethical aspects of their decisions and to include this analysis in their reports. Just as environmental impact statements are now a routine part of many business decisions, an ethical analysis could require that managers focus on the influence of a particular decision on stakeholders’ rights and consequences for the community or communities affected by the decision. You can also require groups to justify their decision-making process (e.g., decision-making criteria and weighting) in moral as well as quantitative terms.

CONCLUSION

This chapter has introduced you to individual differences that can influence ethical decision making. It has also outlined the cognitive limitations and biases that can interfere with good ethical decision making. Hopefully, knowing about these and how they can be overcome will help you be a better individual decision maker. Chap- ter 4 provides some guidance regarding how you can find your moral voice and actu- ally do what you think is right. Much of the remainder of the book moves beyond the individual focus to look at the group and organizational influences that can have a profound influence on your decisions and actions, sometimes making it difficult to do the right thing.

EXERCISE

Understanding Cognitive Moral Development

Molly has been a local newspaper reporter for over 10 years. She learned that Joe Thompson, a candidate for governor, had been arrested for shoplifting 20 years earlier. She also learned that early in his life, Thompson went through a confused period when he did things he later regretted. The shoplifting was treated as a minor offense and removed from his record. Since then, Thompson has had a distinguished career helping people and leading important community projects. Many people con- sider him to be the best candidate who will likely go on to other important leadership positions. Molly wonders whether she should write a story about Joe’s earlier trou- bles that could ruin his chance to win.

Can you characterize Molly’s thinking in terms of cognitive moral development levels? Which of these questions represents preconventional, conventional, or princi- pled thinking?

& Are there any laws against writing the story?

& Would getting ‘‘the scoop’’ help or hurt my career?

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& If I don’t publish the story, wouldn’t another reporter write the story anyway?

& What action would best serve society in the long term?

& How would my boss react if I wrote, or didn’t write, the story?

& Aren’t reporters expected to report all the news regardless of the circumstances?

& Would Thompson pay me not to write the story?

& Would the election process be more just with or without reporting the story?

DISCUSSION QUESTIONS

Note that these questions apply to Gioia’s ‘‘Reflections’’ as well as the rest of the chapter.

1. Steven F. Goldstone, chairman and CEO of RJR Nabisco (one of the four biggest U.S. cigarette manufacturers), said in a magazine interview, ‘‘I have no moral view of this business . . . I viewed it as a legal business. You shouldn’t be drawing a moral judgment about a business our country says is perfectly legal and is taxed like crazy by it.’’76 Think about Goldstone’s statement in terms of ethical awareness. What might happen if he began thinking about his business in ethical, and not just legal, terms?

2. Evaluate yourself in terms of cognitive moral development, locus of control, ethical decision-making style, moral disengagement, and Machiavellianism. What does this evaluation tell you about your own ethical decision making? Do the same for someone you know well.

3. Can you think of times when you have used morally disengaged thinking?

4. Identify a situation in which you have used script processing in a work or other life situation.

5. Do you believe that scripts can override an individual’s value system?

6. Answer the question posed in Gioia’s ‘‘Reflections’’: Is a person behaving unethically if the situation was not even construed in ethical terms—if there was no ethical awareness?

7. Who should make the decision about taking risks with others’ lives in designing products?

8. Should a person be permitted to place a value on a human life? Should a com- pany? Should the government? If not, how would decisions be made about whether to market certain products (that might be risky for some, but helpful for others), how much those who have lost family members in disasters should be compensated, and so on?

9. How do you feel about the use of cost-benefit analysis where human life is part of the cost calculation? Might the infusion of moral language have changed the

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decision makers’ thinking? For example, what if decision makers had talked about their responsibility for killing 180 human beings?

10. Given that all automobiles are unsafe to some degree, where do you draw the line on product safety? How safe is safe enough—and who decides?

NOTES 1. D. Robertson, J. Snarey, O. Ousley, K. Harenski, F. D. Bowman, and R. Gilkey, ‘‘The Neural Pro-

cessing of Moral Sensitivity to Issues of Justice and Care,’’ Neuropsychologia 45 (2007): 755–66. 2. J. Moll, R. deOliveira-Souza, P. J. Eslinger, I. E. Bramati, J. Mourao-Miranda, P. A. Andreiuolo,

et al., ‘‘The Neural Correlates of Moral Sensitivity: A fMRI Investigation of Basic and Moral Emo-

tions,’’ Journal of Neuroscience 22 (2002): 2730–36; R. Salvador and R. G. Folger, ‘‘Business Ethics and the Brain,’’ Business Ethics Quarterly 19, no. 1 (2009): 1–31.

3. K. Butterfield, L. K. Trevi~no, and G. R. Weaver, ‘‘Moral Awareness in Business Organizations: Influ- ences of Issue-Related and Social Context Factors,’’ Human Relations 53, no. 7 (2000): 981–1018.

4. S. T. Fiske, and S. E. Taylor, Social Cognition, 2nd ed. (New York: McGraw-Hill, 1991). 5. J. Darnton, ‘‘Revisiting Rwanda’s Horrors with a Former National Security Advisor,’’ New York

Times, 20 December 2004, B1. 6. W. J. Clinton,My Life (New York: Knopf, 2004). 7. D. Darlin, ‘‘H.P., Red-Faced but Still Selling,’’ New York Times, 1 October 2006. 8. T. M. Jones, ‘‘Ethical Decision Making by Individuals in Organizations: An Issue-Contingent

Model,’’ Academy of Management Review 16 (1991): 366–95. 9. S. E. Siwek, The True Cost of Sound Recording Piracy to the U.S. Economy (Lewiston, TX: Institute

for Policy Innovation, 2007).

10. S. Rommel, and R. G. Folger, ‘‘Business Ethics and the Brain,’’ Business Ethics Quarterly 19 (2009): 1. 11. D. R. Forsyth, ‘‘A Taxonomy of Ethical Ideologies,’’ Journal of Personality and Social Psychology

39 (1980): 175–84. 12. D. R. Forsyth, ‘‘Judging the Morality of Business Practices: The Influences of Personal Moral Philos-

ophies,’’ Journal of Business Ethics 11, nos. 5, 6 (1992): 461–70. 13. T. Barnett, K. Bass, and G. Brown, ‘‘Ethical Ideology and Ethical Judgment Regarding Ethical Issues

in Business,’’ Journal of Business Ethics 13, no. 6 (1994): 469–80; D. R. Forsyth, ‘‘Individual Differ- ences in Information Integration during Moral Judgment,’’ Journal of Personality and Social Psychology 49 (1985): 264–72.

SHORT CASE

Mary, the director of nursing at a regional blood bank, is concerned about the declin- ing number of blood donors. It’s May, and Mary knows that the approaching summer will mean increased demands for blood and decreased supplies, especially of rare blood types. She is excited, therefore, when a large corporation offers to host a series of blood drives at all of its locations, beginning at corporate headquarters. Soon after Mary and her staff arrive at the corporate site, Mary hears a disturbance. Apparently, a nurse named Peggy was drawing blood from a male donor with a very rare blood type when the donor fondled her breast. Peggy jumped back and began to cry. Joe, a male colleague, sprang to Peggy’s defense and told the donor to leave the premises. To Mary’s horror, the male donor was a senior manager with the corporation. What is the ethical dilemma in this case, and what values are in conflict? How should Mary deal with Peggy, Joe, the donor, and representatives of the corporation?

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14. C. A. Henle, R. A. Giacalone, and C. L. Jurkiewicz, ‘‘The Role of Ethical Ideology in Workplace Deviance,’’ Journal of Business Ethics 56 (2005): 219–30.

15. J. Kish-Gephart, D. Harrison, and L. K. Trevi~no, ‘‘Bad Apples, Bad Cases, and Bad Barrels: Meta- analytic Evidence about Sources of Unethical Decisions at Work,’’ Journal of Applied Psychology 95 (2010): 1–31.

16. L. Kohlberg, ‘‘Stage and Sequence: The Cognitive-Developmental Approach to Socialization,’’ in

Handbook of Socialization Theory and Research, ed. D. A. Goslin (New York: Rand McNally, 1969), 347–80.

17. M. Rest,Moral Development: Advances in Research and Theory (New York: Praeger, 1986). 18. L. K. Trevi~no and S. A. Youngblood, ‘‘Bad Apples in Bad Barrels: A Causal Analysis of Ethical

Decision-Making Behavior,’’ Journal of Applied Psychology 75, no. 4 (1990): 378–85. 19. J. Weber, ‘‘The Relationship between Managerial Value Orientations and Stages of Moral Develop-

ment: Theory Development and Empirical Investigation with Behavioral Implications’’ (Unpublished

dissertation, University of Pittsburgh, 1998).

20. ‘‘Cartel Tells Smugglers to Live ‘Clean’ Life,’’ Yahoo! News, 20 April 2009.

21. C. Gilligan, In a Different Voice (Cambridge, MA: Harvard University Press, 1982). 22. C. Gilligan and J. Attanuci, ‘‘Two Moral Orientations,’’ in Mapping the Moral Domain, eds.

C. Gilligan, J. V. Ward, and J. M. Taylor (Cambridge, MA: Harvard University Press, 1988), 73–86.

23. R. Derry, ‘‘Moral Reasoning in Work-Related Conflicts,’’ Research in Corporate Social Performance and Policy 9 (1987): 25–50.

24. Rest,Moral Development. 25. M. L. Ambrose and M. Schminke, ‘‘Sex Differences in Business Ethics: The Importance of Percep-

tions,’’ Journal of Managerial Issues 11, no. 4 (1999): 454–74; Kish-Gephart et al., ‘‘Bad Apples, Bad Cases.’’

26. Ambrose and Schminke, ‘‘Sex Differences in Business Ethics.’’

27. This phrase was used with different meaning by R. Jackall in Moral Mazes (New York: Oxford University Press, 1988).

28. L. K. Trevi~no, ‘‘Moral Reasoning and Business Ethics,’’ Journal of Business Ethics 11 (1992): 445–59.

29. S. J. Thoma, and J. R. Rest, ‘‘The Relationship between Moral Decision Making and Patterns of

Consolidation and Transition in Moral Judgment Development,’’ Developmental Psychology 35 (1999): 323–34.

30. J. Dukerich, M. L. Nichols, D. R. Elm, and D. A. Vollrath, ‘‘Moral Reasoning in Groups: Leaders

Make a Difference,’’ Human Relations 43 (1990): 473–93. 31. M. Schminke, M. L. Ambrose, and D. O. Neubaum, ‘‘The Effect of Moral Development on Ethical

Climate and Employee Attitudes,’’ Organizational Behavior and Human Decision Processes 97 (2005): 135–51.

32. Trevi~no, ‘‘Moral Reasoning and Business Ethics.’’ 33. J. B. Rotter, ‘‘Generalized Expectancies for Internal versus External Control of Reinforcement,’’

Psychological Monographs: General and Applied 80 (1966): 1–28. 34. E. Midlarski, ‘‘Aiding under Stress: The Effects of Competence, Dependency, Visibility, and

Fatalism,’’ Journal of Personality 39 (1971): 132–49; E. Midlarski, and M. Midlarski, ‘‘Some Deter- minants of Aiding under Experimentally Induced Stress,’’ Journal of Personality 41 (1973): 305–27; E. M. Ubbink, and S. W. Sadava, ‘‘Rotter’s Generalized Expectancies as Predictors of Helping

Behavior,’’ Psychological Reports 35 (1974): 865–66. 35. R. C. Johnson, J. M. Ackerman, H. Frank, and A. J. Fionda, ‘‘Resistance to Temptation and Guilt

Following Yielding and Psychotherapy,’’ Journal of Consulting and Clinical Psychology 32 (1968): 169–75.

36. L. R. Propst, ‘‘Effects of Personality and Loss of Anonymity on Aggression: A Re-evaluation of

Deindividuation. Journal of Personality 47 (1979): 531–45. 37. ‘‘Niccolo Machiavelli,’’ Stanford Encyclopedia of Philosophy online (Metaphysics Research Lab,

CSLI, Stanford University); at http://plato.stanford.edu/entries/machiavelli/.

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38. Kish-Gephart et al., ‘‘Bad Apples, Bad Cases’’; W. H. Hegarty and H. P. Sims, ‘‘Organizational Phi- losophy, Policies, and Objectives Related to Unethical Decision Behavior: A Laboratory Experi-

ment,’’ Journal of Applied Psychology 64 (1979): 331–38; S. Flynn, M. Reichard, and S. Slane, ‘‘Cheating as a Function of Task Outcome and Machiavellianism,’’ Journal of Psychology 121 (1987): 423–27; G. E. Jones and M. J. Kavanagh, ‘‘An Experimental Examination of the Effects of Individual and Situational Factors on Unethical Intentions in the Workplace,’’ Journal of Business Ethics 15 (1996): 511–23.

39. A. Bandura, Social Foundations of Thought and Action: A Social Cognitive Theory (Englewood Cliffs, NJ: Prentice Hall, 1986).

40. J. R. Detert, L. K. Trevi~no, and V. L. Sweitzer, ‘‘Moral Disengagement in Ethical Decision Making: A Study of Antecedents and Outcomes,’’ Journal of Applied Psychology 93 (2008): 374–91.

41. M. H. Bazerman, Judgment in Managerial Decision Making (New York: Wiley & Sons, 1994). 42. D. M. Messick and M. Bazerman, ‘‘Ethical Leadership and the Psychology of Decision-Making,’’

Sloan Management Review (Winter 1996): 9–22. 43. Ibid.

44. Bazerman, Judgment in Managerial Decision Making. 45. Messick and Bazerman, ‘‘Ethical Leadership.’’

46. Ibid.

47. G. Loewenstein, ‘‘Behavioral Decision Theory and Business Ethics: Skewed Trade-offs between Self

and Other,’’ in Codes of Conduct: Behavioral Research into Business Ethics, eds. D. M. Messick and A. E. Tenbrunsel (New York: Russell Sage, 1996).

48. Messick and Bazerman, ‘‘Ethical Leadership.’’

49. Ibid.

50. B. M. Staw and I. Ross, ‘‘Understanding Escalation Situations,’’ in Research in Organizational Behavior, Vol. 9, eds. B. M. Staw and L. L. Cummings (Greenwich, CT: JAI Press, 1987).

51. Messick and Bazerman, ‘‘Ethical Leadership.’’

52. R. A. Prentice, ‘‘Ethical Decision Making: More Needed than Good Intentions,’’ Financial Analysts Journal 63, no. 6 (2007): 17–30.

53. Loewenstein, ‘‘Behavioral Decision Theory and Business Ethics.’’

54. J. Haidt, ‘‘The Emotional Dog and Its Rational Tail: A Social Intuitionist Approach to Moral Judg-

ment,’’ Psychological Review 108, no. 4 (2001): 814–34. 55. Rommel and Folger, ‘‘Business Ethics and the Brain.’’

56. B. Bower, ‘‘The Bias Finders,’’ Science News, 22 April 2006, 250–51, 253. 57. N. Eisenberg, ‘‘Emotion, Regulation, and Moral Development,’’ Annual Review of Psychology 51

(2000): 665–97; A. Gaudine and L. Thorne, ‘‘Emotion and Ethical Decision Making in Organiza- tions,’’ Journal of Business Ethics 31, no. 2 (2001): 175–87.

58. S. Rommel, and R. G. Folger, ‘‘Business Ethics and the Brain.’’ Business Ethics Quarterly 19: 1. 59. J. Lehrer, ‘‘Hearts and Minds,’’ Boston Globe, 29 April 2007; available at www.boston.com; Rommel

and Folger, ‘‘Business Ethics and the Brain.’’

60. J. D. Greene, R. B. Sommerville, L. E. Nystrom, J. M. Darley, and J. D. Cohen, ‘‘An fMRI Investiga-

tion of Emotional Engagement in Moral Judgment,’’ Science 293 (2001): 2105–8. 61. R. L. Hotz, ‘‘Scientists Draw Link between Morality and Brain’s Wiring’’ (May 11, 2007), Science

Journal at WallStreetJournal.com; available at http://online.wsj.com/article/SB117884235401499300

.html.

62. Eisenberg, ‘‘Emotion, Regulation, and Moral Development’’; Gaudine and Thorne, ‘‘Emotion and

Ethical Decision Making in Organizations.’’ 63. R. Folger, R. Cropanzano, and B. Goldman, ‘‘What Is the Relationship between Justice and Moral-

ity?’’ in Handbook of Organizational Justice, eds. J. Greenberg and J. A. Colquitt (Mahwah, NJ: Erlbaum, 2005), 215–46.

64. J. Kish-Gephart, J. Detert, L. K. Trevi~no, and A. Edmondson, ‘‘Silenced by Fear: The Nature, Sour- ces, and Consequences of Fear at Work,’’ Research in Organizational Behavior 29 (2010), 163–193.

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65. C. J. Turillo, R. Folger, J. J. Lavelle, E. E. Umphress, and J. O. Gee, ‘‘Is Virtue Its Own Reward? Self-Sacrificial Decisions for the Sake of Fairness,’’ Organizational Behavior and Human Decision Processes 89 (2002): 839–65.

66. J. McGregor, ‘‘Sweet Revenge,’’ Business Week, 22 January 2007, 62–70. 67. Ibid. 68. P. Elkind, ‘‘Blood Feud,’’ Fortune, 14 April 1997, 90–102. 69. Ibid.

70. Ibid.

71. Ibid. 72. D. Gioia, ‘‘Pinto Fires and Personal Ethics: A Script Analysis of Missed Opportunities,’’ Journal of

Business Ethics 11, nos. 5, 6 (1992): 379–89. 73. Ibid. 74. Ibid.

75. Ibid.

76. J. Goldberg, ‘‘Big Tobacco’s Endgame,’’ New York Times Magazine, 21 June 1998, 36–42, 58–60.

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CHAPTER4 ADDRESSING INDIVIDUALS’ COMMON ETHICAL PROBLEMS

INTRODUCTION

Here’s the bad news about business ethics: your career can be irrevocably damaged if you mishandle an ethical issue. But there’s also good news: many ethical issues in business are quite predictable. You can be fairly certain that during the course of your career, you’ll run into myriad ethical problems such as a customer who asks for a special deal or terms in order to make the sale, or questions about the appropriate use of corporate resources, or discrimination of one sort or another. Since many ethical issues are somewhat predictable, you have a better chance of dealing appro- priately with ethical problems if you think about what’s likely to happen before it occurs. And you should now have tools to help you make better decisions.

Before we get into a discussion of ethical issues, however, it’s important to look at the relationship that exists between you and your employer. Although most people don’t sign a written contract on the day they join a company or organization, there is an implied contractual relationship of sorts between workers and employers. Both parties have expectations, and rights, and offer consideration to the other—all are characteristics of a contractual relationship. Your employer pays you in salary and benefits to perform a job, and your organization expects you to behave in a certain way; you have a responsibility to be ‘‘part of the family’’ and exhibit loyalty and other corporate ‘‘virtues’’ and to refrain from other, less desirable behaviors. On the other hand, you expect not only a salary for the work you perform but also a modi- cum of fairness. Most people expect employers to treat them decently and to provide an appropriate work environment. Whenever we discuss the employer-employee con- tract in this chapter, it’s this complicated set of expectations that we’re referring to.

So what are some typical ethical problems individuals face at work? We’ve com- piled some of the more obvious ones and divided them into broad categories, includ- ing human resources issues, conflicts of interest, customer confidence issues, and the use of corporate resources. We address a number of specific topics under each broad category. To make it easy to follow, each topic contains the following information:

& What it is (a definition of the issue)

& Why it is an ethical problem

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& How we can think about the issue

& Professional costs and possible penalties for ethical or legal transgressions

& Special notes and some topics that may include important information related to the topic

Identifying Your Values—and Voicing Them

Before we explore the various types of ethical problems covered in this chapter, we would like you to think again about what’s important to you—in other words, what do you value? In Chapter 2, we discussed the various philosophical approaches to ethics, all of which can help you think through a dilemma. The principle-based approach encouraged you to think about your most cherished values. So, what happens if you think through a situation, figure out what to do based upon those values, and then hesitate to say or do what you believe to be ethical because of pres- sure that you feel from your organization’s reward system or your boss or your peers? Once you’ve determined the right thing, how do you then do it? Well, according to some ethics experts at the Aspen Institute, it helps to practice.1

After World War II, researchers found that many of the people in Europe who had risked their own well-being to help others who were threatened by the Nazis did so because they had ‘‘practiced’’ making ethical decisions earlier in their lives by imagining themselves in hypothetical situations that challenged their values. They not only imagined these situations, but they also discussed their potential actions with others—what they might actually do if they encountered such a situation. Researchers theorize that this was a kind of ‘‘pre-scripting’’ that laid the groundwork for these people’s later heroic actions. It was as if thinking about ethical issues long before they were actually confronted by the issues gave people a sort of head start in the moral courage department. The ‘‘Giving Voice to Values’’ program at the Aspen Institute is rooted in this interesting, worthwhile premise. Mary C. Gentile, the pro- gram director, writes that the approach starts with ‘‘the assumption that we know what we want to do and then figuring out how we might make that happen—and then practicing our voice.’’

The program encourages students of all ages to first consider their values (as we encouraged you to do in Chapter 2). What do you care about? When you think deeply about your life, what are the values that attract you or stir deep feelings within you? Most people, for example, gravitate toward honesty, respect, responsibility, compas- sion, fairness, and other similar values.

In addition to values, we all have a personal narrative, a self-story that can help us when we face tough ethical issues. As you think about your life story, it can be helpful to look back on your life and search for experiences that might provide a source of passion or strength in difficult times. We often think of these as life situa- tions that build character. Many of the best leaders say that difficult life experiences were transformative and provided new meaning and direction to their lives. For exam- ple, surviving a life-threatening illness can make other workplace threats seem much

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less dire. You might say to yourself, ‘‘Speaking up to my boss in a respectful way isn’t going to kill me,’’ so why not? Daniel Vasella, CEO and chairman of the phar- maceutical company Novartis, had his first hospital experience at age 4 as a result of food poisoning. He contracted tuberculosis and then meningitis at age 8 and spent a year in a sanatorium. At age 10, he lost his older sister. These are just a few of the challenges Vasella faced as a boy. He vividly recalls the loneliness and pain of these experiences, but he also remembers the powerful impact of a few special people who treated him with care and compassion and who fueled his desire to help other people, ultimately by becoming a physician. He later decided that by becoming a leader in a health-care business, he could have even more impact and help more people than he could as a single practitioner.2 So think about what your personal narrative is. What aspects of it might help give you the courage to do the right thing in tough situations?

Here’s an abbreviated list of other self-assessment questions students are encour- aged to consider as part of the Giving Voice to Values program:

1. Questions of purpose. What are your personal and professional goals? What do you hope to accomplish? What would make your professional life worthwhile?

2. Questions of risk. What is your risk profile? Are you a risk taker, or are you risk averse? What are the greatest risks you face in your line of work? What levels of risk can you live with, and which ones can’t you live with?

3. Questions of personal communication style or preference. Do you deal well with conflict, or are you nonconfrontational? Do you prefer communicating in person or in writing? Do you think best from the gut and in the moment, or do you need time to reflect on and craft your communication?

4. Questions of loyalty. Do you tend to feel the greatest loyalty to family, work colleagues, your firm/employer, or other stakeholders, such as customers?

5. Questions of self-image. Do you identify yourself as being shrewd or naive? As idealistic or pragmatic? As a learner or as a teacher?

The point of this self-analysis is to first identify your own ‘‘self-story’’ or narrative— we all have one or are able to build one. Then, consider other personal character- istics that will help you find ways of behaving that align with your image of your- self. For example, if your own image of yourself is one of a bold, courageous character, you might be able to find a brave way of reacting to a situation—one that is aligned with the bold person you believe you are. And the converse is also true. If you are risk averse and timid, you may be able to find a way of reacting to a situation that is more ‘‘compliant’’ and that aligns with who you really are. The objective here, as you have probably already guessed, is to make it easier for you to voice your values and beliefs by creating a response and behavior that reflects your unique personality. Evaluating a dilemma through the lens of your own story makes it more likely that you will voice your values, and playing to your strengths makes it more likely that you’ll stand up for what you believe.

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The Giving Voice to Values program also encourages students to understand that values conflicts are absolutely normal. Far from being unusual or rare, ethical dilem- mas happen all the time to everyone. The ethical dilemmas that we face every day test our ability to make good choices. If we anticipate the need to take risks—to make decisions that might turn out to be good ones or not—we will prepare our- selves. We’ll internalize the idea that these situations are normal and survivable and that others are experiencing the same thing. These situations won’t paralyze us.

Another important element of the program is to understand various communica- tion techniques. Voice can mean dialogue or listening or other communication tech- niques such as researching and providing new data, questioning, negotiating, leading by example, identifying allies, and so forth. The point is that voice is not always about sounding off. In fact, it’s more often about analyzing the situation, your audi- ence, your own motivations and style, and then figuring out the best way to get your point across to others. In organizations, it can help greatly to find allies to support your viewpoint instead of being a lone voice, especially if you’re bucking the system. Taking the time to convince allies to stand up with you for what you think is right can increase the chance that your viewpoint will prevail in the end.

The program also addresses the barriers we encounter in making decisions and voicing our beliefs—the reasons and rationalizations that can short-circuit our resolve. This part of the program asks us to identify the arguments that we’re trying to counter, what’s at stake for the various participants in the situation, how we might influence those we disagree with, and what is our most powerful argument. Some of these arguments are likely influenced by the barriers to good ethical judgment we discussed in Chapter 3.

Finally, the Giving Voice to Values program encourages students to consider choice: we all are capable of acting on our values, but sometimes we don’t. The point of thinking about the issue of choice is to ensure that we understand that even the most ethical person may not always do the right thing. We make choices all the time that can reinforce our decision-making patterns or change them. If and when we make a mis- take, we are capable of redefining ourselves the next time. The important point is to be self-aware, to acknowledge mistakes, and to be able to learn from them. To find out more about this impressive program, go to www.aspencbe.org/teaching/gvv/index.html.

Sometimes, voicing your values at work takes significant courage because of the risks involved. We’ll talk later in this chapter about some of the potentially riskiest situations, where whistle-blowing (on your boss or your organization) becomes a possibility.

PEOPLE ISSUES

We use the term people issues to describe the ethical problems that occur when peo- ple work together. They can include privacy, discrimination, sexual and other types of harassment, or simply how people get along.

The word to remember when considering these issues is fairness. When most people think about fairness, they mean equity, reciprocity, and impartiality.3 A

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situation is said to be equitable when something is divided between two people according to the worth and inputs of the two individuals. For example, in a situation where two people have shared responsibility for a project, one might ask: ‘‘Did we work equally hard? Did we receive equal shares? Most people think it’s unfair when two people have performed the same duty but receive a different share of the reward. Another measure of fairness is reciprocity, or the fairness of exchanges: ‘‘You did this for me and I’ll do that for you.’’ Most people perceive a situation as being unfair if one person fails to hold up his or her part of a bargain. A third measure of fairness is impartiality: ‘‘Is the person who’s going to listen to my story biased in some way, or has he or she prejudged the situation?’’ Most people think of fairness as being inconsistent with prejudice and bias.

Most protective legislation and corporate human resources policies also try to incorporate those elements. The goal is to hire, treat, promote, appraise, and lay off or fire employees based on their qualifications and not on factors like sex, race, or age. The goal is to level the playing field and create a fair environment where per- formance is the only factor that counts (equity), where employer-employee expect- ations are understood and met (reciprocity), and where prejudice and bias are not factors (impartiality).

It’s important to remember that, to employees, fairness is not just about the out- comes they receive (pay, promotion, etc.). Employees care at least as much about the fairness of decision-making procedures and about the interpersonal treatment they receive when results are communicated. People are more likely to accept bad news if they believe the decision was made fairly and if the supervisor or organization explains the decision with sensitivity and care. An organization that uses fair proce- dures and treats employees with sensitivity sends a powerful message to all employ- ees that it values them as important members of the community.4

Discrimination

You and Lisa met five years ago when you were hired into the management training program of a large utility. Although you’re now in different parts of the organization, you have managed to stay close over the years. Lisa recently had a baby and plans to take advantage of the full six months of maternity leave the company offers. She told you that she’s definitely coming back to work after her leave and that her department has promised to hold her job for her. Meanwhile, you’ve seen a posting for her job on the company’s website. You run into one of Lisa’s colleagues in the hall and ask about the posting. He says, ‘‘Oh yeah, they’re going to fill that job. But don’t tell Lisa. She’s got five more months to be a happy mom. Besides, they’ll find some- thing for her to do if she decides to come back.’’

Since discrimination by race, religion, national origin, sex, disability, and age is prohibited by federal law in the United States, many companies have defined policies prohibiting any kind of discrimination. Unfortunately, there can be quite a gulf

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between where corporate policy leaves off and reality begins. When people from var- ious backgrounds get together to provide a service or manufacture a product, there surely will be people who have conscious or unconscious biases toward various groups, and there will be others who are simply ignorant of the effect their behavior has on others.

WHAT IS IT? Discrimination occurs whenever something other than qualifications affects how an employee is treated. Unequal treatment, usually unfavorable, can take many forms. Older workers who suddenly find themselves reporting to younger ones can be resentful since they feel younger workers lack experience. Younger employ- ees can be tempted to ignore advice from older workers, who they feel are out of touch. The attitudes toward age will most likely become increasingly important over the next decade as the general population grows older.

Racial, ethnic, religious, or sexual stereotypes can creep into the behavior of even the most sophisticated individuals, even without their conscious awareness. The importance of being able to manage different types of people can’t be overstated. In the United States, ethnic and racial minorities are growing faster than the population as a whole, and the U.S. workforce is becoming increasingly diverse.

In the case involving Lisa, the new mother, her maternity leave could result in discrimination. Although pregnant employees are protected by law (see ‘‘Why Is It an Ethical Problem?’’ which follows), in this case her time away from her job is clearly being viewed as a liability. Of course, employers have the right to replace workers who are on extended leave because of illness, disability, or other reasons such as finishing an education. The problem in Lisa’s case is that her department seems to be doing an end run around her by keeping her in the dark while her job is filled. If Lisa knew what the department’s plans were, she might shorten her leave or arrange a part-time working situation for a few months. But unless you, her col- league, tell her what you have found out, the job she left won’t be the one she comes back to. It seems unfair to keep Lisa in the dark.

Discrimination can be a subtle or not-so-subtle factor not only in working rela- tionships but also in hiring, promotions, and layoff decisions. People who don’t fit a ‘‘corporate profile’’ may be passed over for advancement because they’re female, or a member of a minority group, or too old, or for other reasons that may or may not be covered in protectionist legislation. Surely there are many barriers in the workplace, not just the glass ceiling that refers to barriers to female advancement. There proba- bly are also barriers for people who are over 50 years old, or who have medical prob- lems, or who are short, disabled, overweight, bearded, balding, or homosexual—any quality that varies from the ‘‘norm.’’ And some employers create job requirements that could automatically eliminate certain employees, not because of their qualifica- tions, but because of personal circumstances.

HOW CAN WE THINK ABOUT THIS ISSUE We can use the various theories described in Chapter 2 to analyze the situation. These theories can serve as various ‘‘lenses’’ that we can use in viewing a problem. None of these theories are likely to

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give us the perfect answer, but they’ll help us think through the implications of an issue so that we can make a good decision.

Suppose we look though the consequentialist lens? Who are the stakeholders, and what are the harms and benefits to each? What could we do in this situation that would benefit the most people? If we think about it in that way, we might conclude that it’s better to say nothing to Lisa. We might imagine that more people would benefit (at least in the short term) by Lisa’s manager filling her old job right away. After all, Lisa’s being away could cause problems for her coworkers. However, a longer-term perspective might cause us to ask how other women employees would respond to Lisa’s seemingly unfair treatment. Their dissatisfaction could seriously harm the company. So, what is the best decision for society overall?

Looking through a deonotological lens would cause us to ask whether we have a duty or obligation to Lisa, our employer, or both. What values or principles are involved in this case? Using the Golden Rule, think of how you would want Lisa or your colleague to behave if the situation was reversed. Following Kant’s categorical imperative, what kind of world would it be if employers routinely treated employees in this way? And, using Rawls’s veil of ignorance, how would you make this decision if you had no idea if Lisa was a man or a woman?

Finally, if we think about virtue ethics and our own character, we would consider our intentions and motivations. We would also consider how professional human resources managers would think about this decision. We would ask ourselves how our decision would look to others if it were made public. What would our ethical role model or harshest moral critic think? If you consider your own character and what you value, what decision feels best? We might also consider some of the psychologi- cal issues described in Chapter 3. Are we considering all of the consequences of tell- ing Lisa, or not? What could happen to her and you if you tell, or if you don’t tell?

This situation could test what you as an individual really care about, which is important if you’re going to lead an ethical life. It’s also a way to begin assessing your own values and asking how you can act more consistently with those values, as we suggested earlier in this chapter when discussing the Giving Voice to Values program.

If you decided that the right thing to do was to take action on Lisa’s behalf, how might you go about it? Whom would you approach, and what would you say? Or, would you consider providing Lisa with information so that she could act on her own behalf?

WHY IS IT AN ETHICAL PROBLEM? Discrimination is an ethical issue—beyond any legal protections—because it’s at the core of fairness in the workplace. While concepts of fairness are incorporated in business law around the world, in the United States fairness is considered to be an inalienable right.5 The U.S. government has attempted to ensure fairness and justice; the word trust is on every piece of currency, and the Pledge of Allegiance declares ‘‘with liberty and justice for all.’’ In addition, the entire U.S. legal system has justice and the protection of individual rights as its cornerstone. Consequently, people expect fairness from organizations in general and specifically from their employers.

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COSTS While laws and regulations governing fairness differ around the world, in the United States victims of discrimination can file under Title VII of the Civil Rights Act of 1964 with the Equal Employment Opportunity Commission (EEOC) or bring suit under tort or contract law. This legislation specifically prohibits discrimination based on race, religion, sex, color, and national origin. Groups specifically protected by Title VII include women, African Americans, Hispanics, Native Americans, and Asian Pacific Islanders. (Some states and local communities have added more protec- tions, like sexual orientation and marital status, to that list.) The Pregnancy Discrimi- nation Act of 1978 prohibits discrimination against pregnant women. The 1967 Age Discrimination in Employment Act extends protection to people 40 years of age and older. The 1973 Rehabilitation Act was the first federal legislation to protect disabled Americans against discrimination by federal, state, and local governments, agencies, and contractors. The Americans with Disabilities Act (ADA) of 1990 extended pro- tection to the private sector by requiring all companies with more than 15 employees to make reasonable accommodations to employ workers with disabilities. Although the law doesn’t list conditions or diseases that are protected—since people react dif- ferently to disease, some may be disabled and some may not be—some conditions are specifically included or excluded. HIV infection, for example, is considered a disability; people who have it are protected by the ADA law. Indications of how costly bias suits can be for corporations are evident in several recent judgments: in 2005, UBS (Europe’s largest bank) was ordered to pay damages of $29 million to a single plaintiff—a woman who complained of unequal treatment.6 In other cases, a judge awarded $70 million for gender discrimination to 2,800 female employees of Morgan Stanley who were registered financial advisors,7 and an arbitration panel in New York ordered Merrill Lynch to pay more than $100 million to a group of women who were found to have been discriminated against.8

Discrimination lawsuits can be costly for employers not simply in terms of legal fees and damages and media coverage. The morale of victims certainly suffers as they endure discrimination lawsuits, but the morale of other employees can also suffer. Imagine how the thousands of employees of Texaco must have felt when their company was under siege for a discrimination lawsuit. It’s embarrassing for employ- ees when the company they work for is publicly accused of wrongdoing.

If you’re an individual accused of discriminating against another employee, the least you’ll endure is an investigation. If you’re found guilty, you’ll probably be penalized or even fired. If you’re found innocent, you or your accuser will most likely be counseled about your behavior and its effects, and one or both of you may be transferred to another area. If you manage someone who has been accused of discrimination, expect a lot of questions concerning why you were unaware of it or tolerated it. If you were aware of it and didn’t do anything about it, be prepared for disciplinary action, particularly if a lawsuit results.

SPECIAL NOTE The many programs that train employees to ‘‘value diversity’’ can seem at odds with the efforts to assimilate various groups and especially with the laws and policies that prohibit discrimination. Learning to appreciate differences flies

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in the face of what many of us are taught from the time we’re children—that we should ‘‘fit in.’’ Many of us are taught not only to downplay our own uniqueness in an effort to blend in but also to ignore differences in other people. We usually are taught ‘‘not to notice’’ different colors, religions, accents, ways of dressing, and physical disabilities or abilities. Even sexual differences, which can be hard to ignore, have been played down in the not-too-distant past.

Valuing diversity means treating people equally while incorporating their diverse ideas. Discrimination means treating people unequally because they are, or appear to be, different. Valuing diversity is a positive action, while discrimination is a negative action. Valuing diversity tries to incorporate more fairness into the system, while discrimination incorporates unfairness into the system. The key to valuing diversity is understanding that different doesn’t mean deficient, and it doesn’t mean less. Different means different.

Harassment, Sexual and Otherwise

As women began to enter the workforce in great numbers in the 1970s and 1980s, and as social and business mores began to change, sexual harassment became an issue in the workplace. Forty years later, it is still an issue and many companies have paid huge fines in sexual harassment lawsuits. As a result, the EEOC now requires all organizations with more than 15 employees to have a sexual harassment policy and to train employees in these issues. Another result was a growing apprehension by employees, especially men, toward workers of the opposite sex. Sometimes the line between friendly and offensive is blurry.

One of your coworkers is Joanne, a computer whiz with an offbeat style and a great sense of humor. Two of Joanne’s favorite ‘‘targets’’ are you and Bill, another coworker who tends to be quite standoffish in his business relation- ships. Joanne is the department clown and is forever goading you and Bill; you, because you’re a great audience and clearly think she’s hilarious; Bill, because she likes to try to get him to be more approachable. Joanne frequently alludes to sexual subjects and has called both you and Bill ‘‘little alley cats’’ and ‘‘studs.’’ While Joanne’s behavior doesn’t offend you at all, you’re surprised when Bill approaches you in the men’s room and bitterly complains about Joanne’s constant teasing.

WHAT IS IT? Sexual harassment is defined as unwelcome sexually oriented behav- ior that makes someone feel uncomfortable at work. It usually involves behavior by someone of higher status toward someone of lower status or power. Sexual harass- ment claims are not limited to women either. The EEOC (www.eeoc.gov), reported receiving 11,731 sexual harassment charges in 2008, and almost 16 percent of sexual harassment claims were made by men.

Federal law has defined two types of sexual harassment: quid pro quo and hostile work environment. Quid pro quo harassment means that sexual favors are a

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requirement—or appear to be a requirement—for advancement in the workplace. Hostile work environment means that a worker has been made to feel uncomfortable because of unwelcome actions or comments relating to sexuality. This type of sexual harassment is especially murky because it is like beauty: it’s in the eye of the beholder. What constitutes sexual harassment for one person may not be so for another. Putting an arm around a person’s shoulder may feel like harassment to one individual, and someone else may be comfortable with such a gesture. This type of sexual harassment includes not only physical gestures but also remarks of a sexual nature—even compliments—and displays of sexually provocative material, like nude or revealing photographs, in an office.

In both types of sexual harassment, the decision about whether the behavior con- stitutes harassment is determined from the viewpoint of a ‘‘reasonable’’ person, and the harasser’s intentions aren’t considered. This is why sexual harassment issues can be confusing. Since sexual harassment is determined by the reaction of the victim, you have to consider not what you mean by your comments or actions, but how they might be interpreted by the other person.

Most people will readily agree that patting a coworker on the rear end is sexual harassment. But are you sexually harassing someone if you compliment her appear- ance, or touch his arm, or make jokes of a sexual nature? In Joanne’s case, she hasn’t done a very good job of considering exactly who her audience is and how each of her two coworkers might react to her jokes. While you might think it’s funny to be called a little stud, Joanne probably should think more carefully about how someone like Bill might react to being called a name with sexual connotations. Is Joanne out of line? Is Bill overreacting? According to the law, it doesn’t matter if you and Joanne think Bill is overreacting. The yardstick for determining whether sexual harassment occurred will be how uncomfortable a reasonable person would be with Joanne’s comments, and not what Joanne intended with her remarks. How Bill felt will be considered more than what Joanne intended.

HOWWE CAN THINK ABOUT THIS ISSUE Consider how a consequentialist might think about this situation. Can you identify all of the stakeholders and the harms and benefits to each? What are your options? What action on your part would benefit the most people and harm the least, thus contributing the most to societal good? Now use another lens: Do you have ethical duties or obligations here? What are those and to whom? What ethical principles apply to this situation, and what rules would help you decide what’s right? For example, if the situation was reversed and you were in either Bill’s or Joanne’s shoes, how would you like them to help you?

You might think about the ‘‘reasonable person standard’’ as providing insight into the relevant ethical community. How would a reasonable person assess the situa- tion and determine the right thing to do? How would you feel if Bill spoke to a reporter and this situation appeared in the local newspaper? If you do nothing in this case, would you be chagrined to read about it in the newspaper? Could you proudly describe your actions to your mother or your priest (or minister, rabbi, imam, etc.) without embarrassment?

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Think about your organization’s culture. What values does your organization hold dear? Most companies pride themselves on being places where all employees can feel respected. If you look at your company’s values statement, you’ll likely find verbiage about respect. Given that value of respect, what would your manager and others in positions of authority in your organization want you to do?

If you decide to act on your values, you have quite a few options. One option is to nip this issue in the bud by helping Bill address it with Joanne. Perhaps Joanne is unaware of the effect her comments are having on Bill. You could encourage Bill to talk with her, explain his reaction, and request that she stop. You could role-play Joanne to give Bill the opportunity to practice what he is going to say. What could Bill say to Joanne, and how could he say it in a way that will likely achieve his intended result and allow the parties to continue working together in the future? If Bill is unwilling to do this, what other options do you have? You could report the issue to the organization’s ethics help line, but would it be appropriate to do that without Bill’s permission? Under what circumstances would you report something that affected a coworker without that person’s permission?

WHY IS IT AN ETHICAL PROBLEM? Harassment (sexual or otherwise) is consid- ered to be a form of discrimination. It is therefore an ethical issue because it unfairly focuses job satisfaction, advancement, or retention on a factor other than the employ- ee’s ability to do the job. Most instances of sexual harassment have nothing to do with romance and everything to do with power and fairness.

COSTS Victims of sexual harassment can file under Title VII of the Civil Rights Act of 1964 with the EEOC, or they can bring suit under tort or contract law. An employer can be held liable for an employee’s sexual harassment activities if the employer had knowledge of the conduct and did nothing to correct it. As a result, most companies take a sexual harassment charge very seriously.

Responsible companies will launch an immediate investigation if someone is accused of sexually harassing another employee. If this is a first-time event and the incident that prompted it is not determined to be lewd or violent—think of the scenario featuring Joanne, discussed earlier—the employee may be warned, disci- plined, or transferred to another area. (However, in some major companies a first- time offense is enough to get someone fired.) If the behavior is judged to be lewd or forceful, or if there’s evidence that the employee has demonstrated a pattern of behavior, the employee will most likely be fired—and often very quickly. (One corporation was able to conduct an investigation, find evidence of a pattern, and terminate the harasser in less than 48 hours.) If the accused is found innocent, or if it’s determined that a misunderstanding exists between the two parties, the accused and the accuser will probably be counseled by human resources professionals. If necessary, one of the parties may be transferred to another area. The manager of a sexual harasser can expect a lot of questions. If the manager was aware of harassment and did nothing about it, he or she should be prepared for disciplinary action, particu- larly if a lawsuit results.

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Nearly a third of the claims filed with the EEOC are sexual harassment claims. And sexual harassment lawsuits are very expensive for corporations. Awards to vic- tims have been substantial, as is the toll such charges can take on coworker’s morale and on the firm’s ability to hire qualified candidates. For example, in June 1998, Mitsubishi Motors’ North American division agreed to pay $34 million to settle its sexual harassment case. The settlement was based on charges brought by 350 female factory workers at an Illinois factory. The women alleged that coworkers and super- visors kissed and fondled them, called them ‘‘whores’’ and ‘‘bitches,’’ posted sexual graffiti and pornography, demanded sex, and retaliated if they refused. They also complained that managers did nothing to stop the harassment. Besides paying the fine, Mitsubishi fired 20 workers and disciplined others. The company also agreed to provide mandatory sexual harassment training, revise its sexual harassment policy, and investigate future sexual harassment allegations within three weeks of a complaint.9

A NOTE ABOUT OFFICE ROMANCE Flirtations and office romance are a part of work life. After all, we spend most of our time at work, interacting with people who share our interests, and we have an opportunity to really get to know them. So why not engage in a consensual relationship with a coworker? Well, it’s true that most office romances are benign, and quite a few of them either end quietly or may even lead to happy marriages. But such relationships can also be dangerous; in fact, these are the stories we end up hearing about. For example, if a relationship ends badly, one party may accuse the other of sexual harassment or retaliation, thus requiring the company to get involved after the fact. From an ethics perspec- tive, it’s most important to avoid romance with anyone you supervise or who supervises you because of the conflict of interest involved and the potential for unfair treatment of other direct reports (most companies have antinepotism polic- ies). The supervisor’s judgment is likely to be compromised by the relationship, and others in the work group are likely to lose respect for both parties and be con- cerned about preferential treatment. Honesty is another ethical issue that emerges. Because you don’t know where the relationship is going, it’s tempting to keep it to yourselves at first. Even if you’re discreet, word travels fast in work groups, and others are likely to find out via the grapevine. It’s best to be honest and keep your supervisor in the loop. If you work in the same department, the organization may want to move one of you to avoid any negative repercussions. And finally, remember—if you don’t think your behavior would look good on the front page, it’s best not to engage in it.10

CONFLICTS OF INTEREST

People and corporations are naturally involved in a tangle of relationships, both per- sonal and professional. Your personal reputation and the reputation of your company are inextricably tied to how well you handle relationships with other employees, cus- tomers, consultants, vendors, family, and friends. Your ability to act impartially, and

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look as if you are acting impartially, is key to your fulfilling your end of the employer-employee contract.

Your daughter is applying to a prestigious university. Since admission to the school is difficult, your daughter has planned the process carefully. She has consistently achieved high marks, taken preparatory courses for entrance exams, and participated in various extracurricular activities. When you tell one of your best customers about her activities, he offers to write her a letter of recommendation. He’s an alumnus of the school and is one of its most active fund-raisers. Although he’s a customer, you also regularly play golf together, and your families have socialized together on occasion.

What Is It?

A conflict of interest occurs when your judgment or objectivity is compromised. The appearance of a conflict of interest—when a third party could think your judgment has been compromised—is generally considered just as damaging as an actual conflict.

A recent example of a conflict of interest likely contributed significantly to our financial crisis. Rating agencies such as Standard & Poor’s rated the complex mort- gage-backed securities we described in Chapter 1. A triple-A rating made investors feel secure about buying these securities. As Americans learned the hard way, how- ever, many of these securities were not deserving of anything near such a high rating. Many factors contributed to the debacle (including the fact that rating agencies were using old methods to rate these newfangled products). A major contributor was a serious conflict of interest—the rating agencies are paid by the companies whose securities they rate, thus making it difficult or impossible to assign truly objective and unbiased ratings.

Another example might be of particular interest to college students. In 2007, the University of Texas fired its director of financial aid when it learned that he had finan- cial ties to particular student loan companies that he then touted to students and peers. Students were not steered toward companies that provided the best loans or service, but toward those that provided gifts (including stock) to the director of financial aid.11

If a customer offers to do a favor for you—or your daughter or another family member—here are some of the questions you’ll need to ask yourself: Would your customer’s offer influence your business relationship? Would someone think your business judgment had been compromised by accepting your customer’s offer? Is your relationship more than just a business one, so that accepting an offer could be interpreted as a simple act of friendship?

Some corporations have a policy that permits the acceptance of favors from cus- tomers or vendors if there’s also a ‘‘friendship’’ present; and these companies usually define friendship as a long-standing relationship that’s well known in the community. For example, in small towns where everyone knows everyone else, many of a busi- ness owner’s customers are also his or her friends; it’s unrealistic to expect anything

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else. Other organizations (including government agencies) would discourage accept- ing a favor like this one under any circumstances. Here are some things to consider when making your decision in this case: How long have you been friends with your customer? How well known is the relationship in your community? What is his knowledge of your daughter’s qualifications? Does your customer expect anything in return for his recommendation, or is the letter simply a gesture of friendship with no strings attached? How would others perceive his recommendation?

Almost every business situation can involve conflicts of interest. A conflict can occur when a vendor lavishly entertains you or when you entertain a customer—if the object is influence. Both situations could prompt an observer to think that a special deal or advantageous terms are part of the relationship. Conflicts of interest can occur when people who report to you observe that you have an especially close friendship with one of their coworkers. Conflicts can occur when you’re asked to judge the creditworthiness of your neighbor or if you perform consulting work for your employer’s competitor. They can involve accepting handtooled cowboy boots from an advertising agency, being sponsored for membership in an exclusive private club by a consulting company, or allowing a supplier to give you a discount on equipment for your home when you place an order for your office.

Common conflicts of interest include overt or covert bribes and the trading of influence or privileged information.

OVERT BRIBES OR KICKBACKS Anything that could be considered a bribe or kickback is a clear conflict of interest. It doesn’t matter whether the bribe or kickback is in the form of money or something else of substantial value that is offered in exchange for access to specific products, services, or influence.

SUBTLE ‘‘BRIBES’’ Bribes can be interpreted to include gifts and entertainment. Some organizations have instituted policies that allow no gifts at all, even gifts of nominal value. For example, we know of one teaching hospital that does not allow its employees to accept even a notepad or pen from pharmaceutical company repre- sentatives. They asked themselves, how will patients feel when we write a prescrip- tion for a product with a pen from the manufacturer? Won’t the patient wonder if we’re writing that prescription because it’s really needed or because we’ve accepted such gifts? Many organizations have a policy that allows gifts of small value and places a ceiling of $25 to $100 on the value of gifts employees can accept from, or give to, customers or vendors. Reciprocity is one yardstick often used for determin- ing whether a gift or entertainment is acceptable. If you can’t reciprocate with the same kind of gift or entertainment being offered to you, it’s probably inappropriate to accept it. For example, if a supplier offers you tickets to the Super Bowl, or a weekend of golf, or dinner for four at a $200-per-person restaurant, it’s probably inappropriate for you to accept under any circumstances. The emphasis on reci- procity is to maintain a fair, even playing field for all suppliers, so that you (as a purchaser) will be unbiased when making a decision about a supplier. As mentioned earlier, both reciprocity and impartiality are elements of fairness.

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Accepting discounts on personal items from a vendor will also be interpreted as a conflict. The formula to use when determining whether to accept a discount is simple: if it’s a formal arrangement between your company and a supplier and it’s offered to all employees, it’s probably acceptable; if the discount is being extended only to you, it’s generally not considered acceptable.

INFLUENCE Your relationship with someone in itself can constitute a conflict of interest. For example, if you’re in charge of purchasing corporate advertising and your cousin or neighbor or college friend owns an advertising agency, it will be con- sidered a conflict if you make the decision to hire that firm. That doesn’t preclude the firm from bidding, but it does preclude you from making the decision. If a decision involves anyone you have a personal relationship with, you should recuse yourself from the decision making. Another way to avoid the appearance of a conflict in a situation like this one, which is charged with issues of partiality, is to arrange for a ‘‘blind’’ competition, where the identity of various bidders is known only by some- one not involved in the decision-making process. However, since any decision made by you in such a case will be suspect—even in blind evaluations—you should include other employees in the decision-making process.

PRIVILEGED INFORMATION As an employee, you’re naturally privy to information that would be valuable to your employer’s competitors. That’s why it’s generally con- sidered a conflict of interest if you hold a full-time job for ABC Insurance Company and decide to do some consulting work for XYZ Insurance Company. There are cer- tainly exceptions to this rule of thumb. If you’re a computer programmer at Green’s Restaurant, for example, it probably isn’t a conflict to wait on tables at Red’s Restau- rant. Two factors could make such a situation acceptable: if the work you perform at your second job doesn’t compromise the work you do at your first one, and if both employers are aware of your activities. Transparency is the best policy.

In addition, it can appear as if you’re involved in a conflict if you and a close relative or friend work for competitors, or if one of you works for an organization— such as a media company—that might have a particular interest in your company’s activities. For example, if you work as an investment banker for Goldman Sachs and your sister holds the same position at Morgan Stanley, you both should alert your managers to the situation. These are potential problems that can be defused when your manager knows about the relationship. Full disclosure removes substantial risk.

HowWe Can Think about This Issue

The prescriptive ethical decision-making lenses can be helpful when considering conflicts of interest. For example, using a consequentialist approach encourages us to think about what would benefit the most people. Suppose that your brother owns an advertising agency, and you have to place ads as part of your job at another firm. Will hiring your brother benefit anyone other than your brother? Might it not harm your organization’s reputation if others learn about the relationship? Using the

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deontological approach raises other issues. It’s probably most relevant to consider what’s fair. What decision would place all bidders on a level playing field? What could you do that would make the bidding absolutely fair and unbiased? Isn’t that the kind of world you would most like to live in? In fact, the veil of ignorance would ask you to act as if you didn’t know that the person leading the advertising agency was your brother. What if you were the CEO of a competing advertising firm? Wouldn’t you want a shot at the business? Think about looking at this issue through the lens of virtue ethics. What could you do that you wouldn’t mind reading about in your local newspaper? You probably would want to read about your impartiality as a purchaser and as a representative of your company. You would not want to read that the con- tracts you enter into are rigged to benefit your family and friends.

This is also a good place to think about how you might handle these issues and to discuss your ideas out loud and with others. You will absolutely experience some of these conflicts—everyone does—and just as ‘‘rehearsals’’ helped the World War II rescuers, thinking about these situations in advance could greatly help you when the time comes—as it surely will. Imagine that your brother’s company is experiencing rough times, and he tells you that he expects you to help. Once you have decided that it is unethical to do so, what will you say to him to explain your decision? Do you think you can do it in a way that will preserve your relationship? Here is where com- pany policy can actually help employees a great deal. If you work for a company with a clear policy regarding conflict of interest, you could point to that and explain to your brother that you’re obligated to abide by the policy and remove yourself from the decision making.

Why Is It an Ethical Problem?

The basis of every personal and corporate relationship is trust, and it exists only when individuals and corporations feel they’re being treated fairly, openly, and on the same terms as everyone else. Conflicts of interest erode trust by making it look as if special favors will be extended for special friends; that attitude can enhance one relationship, but at the expense of all others.

Costs

Depending on the offense, myriad federal and state laws cover conflicts of interest. Certain professions, such as banking, accounting, law, religion, and medicine, have special obligations—often spelled out in professional codes of ethics—commonly referred to as fiduciary responsibilities. These professions are widely known as the trust professions, meaning that these practitioners have been entrusted with sensitive, confi- dential information about their clients. Fiduciary responsibilities concern the obligations resulting from relationships that have their basis in faith, trust, and confidence. After the financial debacle of 2008, much attention is being paid to fiduciary responsibilities. A recent survey of private banks and wealth management companies by the accounting firm PricewaterhouseCoopers (PWC) indicated that the ‘‘economic crisis has presented

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client relationship managers with challenges that they have neither the experience nor the skills to deal with.’’ In the survey, only 7 percent of the relationship managers felt they had enough training to meet the highest standards expected of them. The PWC survey noted that the old model for managers, which focused on sales, was being replaced by a model that focuses on fiduciary responsibilities.12

If you’re suspected of a conflict of interest, the least you can expect is an investi- gation by your company. If it determines that your behavior demonstrates a conflict or the appearance of a conflict, you may be warned, disciplined, or even fired depend- ing on the nature of your behavior. If you’ve accepted a bribe or kickback, you could face termination and even arrest. Being involved in a conflict of interest means that your judgment has been compromised, and this can severely damage your profes- sional reputation. Consider that in 2006, the Jeffries Group was fined $5.5 million by the National Association of Securities Dealers (NASD) for conflicts of interest con- cerning Fidelity Investments. A Jeffries trader with a $1.5 million expense account lavished gifts and entertainment on Fidelity traders, including trips to Las Vegas and Palm Beach, cases of wine, and custom golf clubs. Throwing money at Fidelity apparently worked: Jeffries ranked 50th in 2002 in brokerage commissions received from Fidelity. By 2005, Jeffries had moved up to 15th place. As a result of this activ- ity, the Jeffries broker was fired, the firm and the industry were investigated, the firm was fined, and the practice has received reams of negative press.13

CUSTOMER CONFIDENCE ISSUES

We’ve all heard the saying, ‘‘The customer is always right,’’ and companies like L.L. Bean and Sears have benefited by weaving that slogan into the fabric of their corporate cultures. But excellent customer service is more than being able to return a defective refrigerator or having cheerful customer service representatives (although that helps). Excellent customer service also means providing a quality product or service at a fair price, honestly representing the product or service, and protecting the customer’s privacy.

What Is It?

Customer confidence issues include a range of topics such as confidentiality, product safety and effectiveness, truth in advertising, and special fiduciary responsibilities.

You work for a consulting company in Atlanta. Your team has recently com- pleted an analysis of Big Co., including sales projections for the next five years. You’re working late one night when you receive a call from an executive vice president at Big Co. in Los Angeles, who asks you to immediately fax to her a summary of your team’s report. When you locate the report, you discover that your team leader has stamped ‘‘For internal use only’’ on the report cover. Your team leader is on a hiking vacation, and you know it would be impossible to locate him. Big Co. has a long-standing relationship with your company and has paid substantial fees for your company’s services.

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CONFIDENTIALITY Privacy is a basic customer right. Privacy and the obligation to keep customer information in confidence often go beyond protecting sales projec- tions or financial information. It can also mean keeping in strict confidence informa- tion concerning acquisitions, mergers, relocations, layoffs, or an executive’s health or marital problems. In some industries, confidentiality is so important an issue that companies prohibit their employees from publicly acknowledging a customer rela- tionship. In the financial services industry, for example, it’s common practice to refuse to divulge that XYZ Company is even a customer.

In the case involving Big Co., an executive is demanding access to a confiden- tial report. First, are you absolutely certain that the caller is indeed a Big Co. exec- utive? Competitive intelligence work often involves deceptively impersonating a client or someone else. If you have conclusively verified her identity, do you know whether she has clearance from Big Co. to examine your team’s report? If she does have clearance, is your team’s report in a format that your company wants to share with Big Co., or does it need revision? Think about what you read in Chapter 2—how would you feel if your actions in this case were reported on the front page of your local newspaper? Do you think readers would be critical of what you plan to do? What would they say? Whenever you see ‘‘For internal use only,’’ that’s what it means, and it can be enormously risky to release the report to anyone—including the customer—without permission from someone within your company who has responsibility for that client. In a case like this one, you should track down someone who’s in a position of authority in your company—your man- ager’s manager, perhaps—before you override the warning on the report and release any information.

On occasion, third parties may ask for customer information. For example, a reporter or a client may ask you about customer trends. It’s never acceptable to dis- cuss specific companies or individuals with a third party or provide any information that might enable a third party to identify a specific customer. If you want to provide information, you can offer aggregate data from a number of companies, as long as the data doesn’t allow any one customer to be identified.

You’re the head of marketing for a small pharmaceutical company that has just discovered a very promising drug for the treatment of Alzheimer’s dis- ease. You have spent months designing a marketing campaign that contains printed materials and medication sample kits for distribution to almost every family physician and gerontologist in the country. As the materials are being loaded into cartons for delivery to your company’s representatives, your assistant tells you that she has noticed a typographical error in the literature that could mislead physicians and their patients. In the section that discusses side effects, diarrhea and gastrointestinal problems are listed as having a probability of 2 percent. It should have read 20 percent. This error appears on virtually every piece of the literature and kits, and ads containing the mistake are already on press in several consumer magazines.

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PERSONAL RESPONSIBILITY Another basic customer right involves our taking personal honesty and responsibility for the products and services that we offer. There’s probably no issue that will more seriously affect our reputation than a failure of responsibility. Many ethical disasters have started out as small problems that mushroomed. Especially in service businesses, where the ‘‘products’’ are delivered by individuals to other individuals, personal responsibility is a critical issue.

In the case concerning the typographical error about a new drug’s side effects, the head of marketing faces a nasty dilemma. If she reproduces all of the printed material, it could be at a very great cost to this small company, and it may result in a significant delay in getting the drug to physicians. However, since many elderly peo- ple are prone to gastrointestinal upsets and can become very ill and even die as a result, this typo is a significant one. The material cannot go out as is. Certainly the ideal solution would be to redo all of the marketing materials. However, if time and financial considerations prohibit that, there are other solutions. One solution might be to quickly produce a ‘‘correction’’ to be inserted into every kit. Also, a letter could be distributed to every physician to explain the correction as well as emphasize your company’s commitment to quality and full disclosure. This solution will still be costly, but not nearly as costly as doing nothing and letting the kits go out with an error. What do you suppose would be the cost of even one wrongful death lawsuit? How about a class action? How about the accompanying publicity?

TELLING THE TRUTH Many salespeople simply exaggerate their product’s (or service’s) benefits to consumers. Do fast sports cars automatically turn every young man into a James Dean? Will investing in a certain bond ensure you a safe retire- ment? Hype is generally a part of most sales pitches, and most consumers expect a certain amount of hype. In other cases, however, fudging the truth about a product is more than just hype—it’s unfair.

Imagine that your financial firm is offering a new issue—a corporate bond with an expected yield of 7 to 7.5 percent. In the past, offerings like this one have gener- ally been good investments for clients, and you have sold the issue to dozens of large and small clients. You’re leaving on a two-week vacation and have only a few hours left in the office when your firm announces that the yield for the bond has been reduced; the high end will now be no more than 7 percent. The last day of the issue will be next week, while you’re away on vacation. What should you do?

The fact is that your customers have been misled (albeit unintentionally) about the yield on that particular bond, and now you are under an obligation to tell the truth about the instrument before the issue closes. Why? Because another basic consumer right is to be told the truth about the products and services purchased. Failure to tell the truth about a product can be devastating for an organization, and it also can cause big problems for the company employees who are involved in perpetuating the false information.

SPECIAL FIDUCIARY RESPONSIBILITIES As discussed earlier in this chapter, certain professions, such as banking, accounting, law, religion, and medicine, have special obligations to customers. These obligations are commonly referred to as

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fiduciary responsibilities. The law and the judicial system have recognized these spe- cial obligations, and they are spelled out in the codes of ethics for those professions. Fiduciary responsibilities hold these professionals to a high standard, and when they violate those responsibilities, the punishment is often harsh. For example, some employees of Arthur Andersen’s Houston office failed Enron shareholders when they allowed the high-risk accounting practices used by Enron to continue. Although David Duncan, leader of the Andersen auditing team at Enron, warned the Enron board of directors in 1999 that the firm’s accounting practices were ‘‘high risk,’’ he apparently did not take the extra steps that would have been required to get the board to take action (in fact, the board did nothing in response to his warning).14 For exam- ple, Duncan could have threatened to withdraw Andersen’s services or to turn the company in. At the time this would have looked risky because Enron might simply have fired the auditors, and Andersen would have lost a huge client. But in hindsight, exercising appropriate fiduciary responsibility could have saved two companies, thousands of jobs, and a huge amount of shareholder wealth. Al Bows, an accountant who helped open the Arthur Andersen office in Atlanta in 1941, said that the founder of his old company, the original Arthur Andersen, would be ‘‘disgusted with what these guys did to his company.’’ Bows went on to tell a story about a big juice com- pany in Atlanta. He discovered that ‘‘the CEO was starting another juice company on the side to profit for himself. I told him he’d better cut it out or I’d turn him in. He stopped. But he was mad.’’15 Of course, Bows is describing the fiduciary responsibil- ities of accountants—one of which is to ensure the financial integrity of publicly traded companies. When Arthur Andersen employees breached their fiduciary responsibilities in 2001, they contributed to the collapse of a major company.

Here’s another case:

For 12 years, you’ve been the financial advisor for an elderly man in his late 70s who is an active investor of his own portfolio and for a trust that will benefit his two children. In the last few months, you’ve noticed a subtle, yet marked change in his behavior. He has become increasingly forgetful, has become un- characteristically argumentative, and seems to have difficulty understanding some very basic aspects of his transactions. He has asked you to invest a sizable portion of his portfolio and the trust in what you consider to be a very risky bond offering. You are frank about your misgivings. He blasts you and says that if you don’t buy the bonds, he’ll take his business elsewhere.

If you work for a large electronics chain, it’s not your responsibility to assess the mental stability of a customer who’s purchasing a new television. You’re selling; he’s buying. However, individuals in fiduciary professions have a responsibility to protect their customer’s assets—and that entails ‘‘knowing’’ their customers; fre- quently, that can mean assessing behavior and saving customers from themselves. In this case, if a customer wants to make a risky investment against your advice, there’s little you can do but wish him or her well. Who knows? You might be wrong, and the customer might make a fortune. However, if a financial professional sees clear signs

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of incompetence in a longtime customer who’s suddenly interested in making a risky bet, he or she is under some obligation to seek help. The case involving the mental stability of a longtime customer is one of the most common dilemmas encountered by financial advisors. As his advisor, you could try again to dissuade the client from making the investment, or you could involve the firm’s senior management in negoti- ations with the client. You could contact a member of the client’s family—one of the children perhaps—and explain your reservations. You could also possibly contact the client’s lawyer or accountant, who also would be bound by confidentiality constraints because of the fiduciary nature of their professions. However, most financial execu- tives will agree that something must be done to help this long-time customer.

HowWe Can Think about This Issue

It’s hard to imagine that any of us would find encouragement to ignore product safety or fiduciary responsibilities in any of the ethical theories. Producing safe products clearly benefits the most and harms the fewest. Customer confidence is rooted in trust. Trust is very much built slowly, over time, experience by experience. We can’t trust something that we don’t know or that we lack confidence in. Again, this is an area where you will no doubt experience difficulties and conflicts as you go out into the business world. It’s another great area to discuss out loud and ahead of time—to practice making your decisions now, and voicing your arguments aloud, as a way to prepare for challenges you may face in the future.

Why Is It an Ethical Problem?

We use the term customer confidence issues as an umbrella to address the wide range of topics that can affect your relationship with your customer. These are ethical issues because they revolve around fairness, honesty, responsibility, truth, and respect for others. Customer relationships can’t survive without those basics of trust.

Costs

On the organizational level, there are severe penalties for being dishonest in advertis- ing or for misleading the public about the effectiveness or safety of a product or service. While individual failures in the area of trust usually don’t warrant a lot of publicity (although sometimes they do—think about Bernie Madoff), nothing can destroy an individual’s reputation as much as dishonesty. When you’re a student who hasn’t entered the workforce yet, it’s difficult to imagine that the world of work is small, but it is. In some industries—like banking and biotech—it’s a very small world indeed, and your reputation will follow you around like your shadow. Anyone who has been in business for even a few years can regale you with stories of col- leagues who are as ‘‘honest as the day is long’’ or, conversely, ‘‘can’t be trusted as far as you can throw them.’’ Your reputation is built slowly with countless gestures, actions, and conversations over time, but it can be destroyed in an instant by one

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foolish mistake. You need to safeguard your reputation carefully—it is without ques- tion the most valuable thing you have in business.

USE OF CORPORATE RESOURCES

As discussed in the introduction, you and your employer have a special relationship, and each owes the other a modicum of loyalty based on that relationship. In addition, since you’re a corporate representative, you’re considered an ‘‘agent’’ of your com- pany. This means that your actions can be considered as the actions of the corpora- tion. This section of the chapter presents the flip side of the above section on human resources issues—your employer’s responsibilities to you are described in that section, and your responsibilities to your employer are described here.

What Is It?

The use of corporate resources involves your fulfilling your end of the employer- employee ‘‘contract.’’ It means being truthful with your employer and management and being responsible in the use of corporate resources, including its finances and reputation.

A young woman who works for you is moving with her husband to another city, where she’ll be looking for a new job. She’s an excellent worker and when she asks you for a reference, you’re glad to do it for her. She specifi- cally asks for a written recommendation on your corporate letterhead.

USE OF CORPORATE REPUTATION Whenever you identify yourself as an employee of your company, people can infer that you are speaking on behalf of it, which is why you have to be careful how you link yourself to your company. For exam- ple, if you use corporate letterhead to write a recommendation for someone or simply to complain to the telephone company, it can be construed as a ‘‘corporate’’ position. Consequently, corporate letterhead should be used only for corporate business. If, as in the case of the recommendation, you need to identify yourself as an employee, use your personal stationery and attach your business card. The objective is to differentiate between your personal opinions and any official stance of your organization.

Recommendations, in particular, present a challenge for employers and individ- uals. Many companies attempt to check with former employers when hiring some- one. This can present a problem since most companies prohibit their personnel from officially supplying this type of information because of lawsuits that have resulted from employer-supplied recommendations. Today, some social networking sites allow people to write posts about others in their professional network. But be careful, especially if writing about someone you supervise. What if your flattering post online differs from the more critical performance evaluation that’s on file, and what if the employee is subsequently let go? The person’s lawyer could use the post in an unjust termination lawsuit. (To protect themselves, many employers supply only the follow- ing information concerning former employees: name, date of employment, and job

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title. Most employers also require the former employee’s written consent before they supply any salary information to a third party. That raises another ethical issue: If one can’t get good, honest recommendation information about prospective employees from their former employers and supervisors, poor employees can just be passed off to other unsuspecting organizations. Is that right?)

Similarly, if you’re asked to make a speech, write an article, serve on the board of a nonprofit organization, or participate in any activity that would identify you (and your personal opinions) with your company, be sure to get permission from your manager, the legal department, or human resources. You may unwittingly be support- ing a position or organization your company may not wish to be associated with. For example, while it might seem like a great idea for you to serve on the board of your local Society for the Prevention of Cruelty to Animals (SPCA), if you work for a pharmaceutical company that tests drugs on animals, you may be placing your employer in an embarrassing position. Of course, you can serve on the board as a private citizen, but not as an employee of XYZ Drug Company unless you’ve re- ceived corporate authorization. Social networking, blogging, and twittering are all adding complexity to such issues, and more and more organizations are developing policies to guide appropriate employee conduct in these new arenas.

You joined one of the country’s largest retail chains, and already you’ve been promoted to department manager in one of your employer’s largest stores in an upscale shopping mall. Imagine your surprise when you log on to Facebook and see that one of your ‘‘friends’’—a young woman who heads one of the other departments in your store—has posted confidential store sales on her wall and has also posted sexual comments about a young man who reports to her.

Social networking sites and other social media present new and thorny problems. What happens when an employee posts confidential company information on a pubic site? Is it okay to post sexual comments about a coworker or your boss on a public site? This kind of behavior can reflect poorly on an employer as well as make the author of such comments look like an idiot or worse. The scariest part of this scenario is that items posted on the Internet last forever. You can’t just ‘‘erase’’ them and ensure that they’re really obliterated forever. Organizations take this behavior very seriously. One recent college graduate hired into a plum job by a national retailer was fired for posting inappropriate content about his employer on his Facebook wall. Here’s another thorny case:

You’re an employment counselor at a large outplacement firm. Your com- pany is currently negotiating with Black Company to provide outplacement services to 500 employees who are about to lose their jobs as the result of a layoff. Your neighbor and good friend is a reporter for the local newspaper, who mentions to you over coffee one Saturday that she’s writing a story about Black Company. According to her sources, 1,500 employees are about to lose their jobs. You know her numbers are incorrect. Should you tell her?

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Dealing with the press—even when the reporter is a friend or relative—is a tricky business that shouldn’t be attempted by a novice. In a case like the one above, where you may think your friendly reporter might have incorrect numbers, silence is truly the best policy. Her numbers may in fact be correct, and your numbers may represent only the employees who are eligible for outplacement services, not the total number who are losing their jobs.

Another issue that can be confusing to businesspeople is what ‘‘off the record’’ means. For the most part, off the record means that a reporter won’t quote you directly or attribute any remarks to you. You can’t, however, tell a reporter that your remarks are off the record after the fact. The way to tell a reporter that remarks are off the record is to inform him or her before offering your information. But the very best way to make sure something is off the record is to keep your mouth shut in the first place. Reporters with the best of intentions can very innocently get their sources into trouble by providing information that only the source would know, thereby identify- ing the source.

If you are contacted by the press, immediately alert your company’s public rela- tions department. Unless you’re trained to answer press inquiries and receive authori- zation to do it, you should not comment to the press. It’s easy to innocently supply confidential information or cast a negative light on your company when you’re untrained to deal with probing or ambiguous questions posed by a skilled journalist.

You’ve been working very long hours on a special project for the chairman of your company. Your company policy states that employees who work more than 12 hours in one day may be driven home by a company car at company expense. Policy also states that employees who work longer than two hours past the regular end of their day can have a meal delivered to the office at company expense. You and your colleagues who are also working on the project are arriving at the office at 8:00 a.m. and order dinner at 7:00 p.m.; then you enjoy dinner and conversation for an hour and are driven home by company cars. Is this okay?

CORPORATE FINANCIAL RESOURCES In a game entitled ‘‘Where Do You Draw the Line: An Ethics Game,’’ produced by Simile II, players explore the differences between taking $10 worth of pencils from their company and distributing them to poor children, making $10 worth of personal long-distance calls at work, and taking $10 from their company’s petty cash drawer. Do you think these scenarios are differ- ent, or pretty much the same thing? Most people eventually conclude that all of them, regardless of the employee’s intentions, involve stealing $10 worth of corporate resources. The bottom line is that corporate equipment and services should be used only for company business. Whether it involves making personal phone calls, padding expense reports, appropriating office supplies, sending personal mail through the company mail room, or using copy equipment to print a flyer for your scout troop, personal or inappropriate use of corporate resources is unethical and violates most corporate policy.

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In a case like the one above, where you and colleagues are working long hours to complete a special project for the company’s chairman, you are following corporate policy to the letter; so your actions are probably acceptable to most organizations. However, if you and your coworkers are stretching out the last hour of dinner so that you can take a company car home, you’re getting into ethical hot water. Are you also stretching out the work in order to have a free meal? If you would have no problem explaining your actions to the chairman, or if you wouldn’t mind if he or she sat in on one of those dinner hours, then the meals and the cars are perfectly acceptable. The important thing is to treat your company’s resources with as much care as you would your own.

Your manager is being transferred to another division of the company in early January. He calls a meeting in early November and asks that every department head delay processing all invoices until after January 1. He wants to keep expenses low and revenues high so that his last quarter in your area shows maximum revenue.

PROVIDING HONEST INFORMATION Another key issue concerns truth. We dis- cussed truth with customers earlier in this chapter, but now we’re talking about tell- ing the truth within your organization and providing honest information to others within your company. Although everyone will agree that telling the truth is impor- tant, someday you may have a manager who says something like, ‘‘These numbers look too negative—let’s readjust them so it looks better to senior management. We’ll make up the difference in the next quarter.’’ Many managers feel it necessary to put a positive spin on financial reports before submitting them up through the ranks. As a result, some companies have suffered serious financial penalties because their num- bers have been positively spun on so many succeeding levels, they bear no resem- blance to reality by the time they reach the top. ‘‘Fudging’’ numbers can have serious consequences since senior management may make crucial decisions based on flawed data. (Corporations are fined by regulators if inaccurate financial information is sub- mitted to regulators or incorporated into formal financial statements.) If you’re asked to skew any kind of corporate information, you should consult with someone outside your chain of command—such as the legal, human resources, or audit department— and then decide whether it’s time to move on. Serious corporate scandals, sometimes leading to jail terms for those involved, often begin with these ‘‘one-time’’ requests. Once you’re involved, it’s almost impossible to extricate yourself from an almost inevitable downward spiral. Ask employees at HealthSouth and WorldCom; some of them spent years in prison for going along with such requests.

In the case about a manager wishing to delay paying expenses until after he leaves the area, think about it from a consequentialist perspective. Such creative bookkeeping harms not only the person who is taking his place in January, but also the suppliers who are relying on prompt payment of their invoices. It’s grossly unfair to ask suppliers to wait almost 60 extra days before getting paid. One solution might be to approach the other department heads and gain their cooperation in refusing to follow your manager’s

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request. Another course of action would be to relate the incident to the audit depart- ment, which would surely be interested in your manager’s shenanigans.

HowWe Can Think about This Issue

Once again, using the various theoretical approaches can be extremely helpful. Thinking broadly about potential harms and benefits for all stakeholders will inevita- bly lead you to be honest in your dealings. From a deontological perspective, most of us put honesty and integrity at or near the top of our values lists. We would certainly want to be treated that way if the tables were reversed. And that’s certainly the ethical standard we would want to guide our world.

Even more important, however, may be thinking about how to live your values in this particular area. If you seriously consider who you are and what you want to be known for, your decision making in this area will be much easier. For example, if you want to be known as a straight shooter who can be trusted at high levels and with delicate customer accounts, would you ever consider misusing corporate resources or fudging the numbers? What would that say about you, and how would it affect your reputation? It would undermine everything else you were trying to do in your profes- sional life. In this arena, doing the right thing often requires standing up for your values—especially standing up to those at higher levels who might be requesting or even demanding that you go along. In such cases, you’ll need to summon up courage to stand up for what you believe. You have a better chance of doing that if you prac- tice what you’re going to say. Find a coworker who agrees with you and practice. You may be surprised to find that once you get clear about your ethical stance and can express it in a clear and nonaccusatory way, you won’t get such a request again. If you fear for your job because you won’t go along, that’s the time to polish your r!esum!e and begin looking elsewhere.

Why Is It an Ethical Problem?

Your use of corporate resources is an ethical issue because it represents fulfilling your end of the employer-employee contract. Its roots are in fairness and honesty.

Costs

Obviously, if you’ve stolen corporate assets or filed an inflated expense report, you’ll almost certainly be fired—and you may be arrested. If you have divulged confidential information to another corporation (as in supplying a recommendation for a former employee), your company may be placed at risk for a lawsuit. If you’ve posted derog- atory remarks about your boss, coworkers, or company on a social networking site, you may short-circuit your career and cause people around you to mistrust you.

If you fail to uphold your end of the employer-employee loyalty contract, your career at your company can be damaged. Ethical corporate cultures place tremendous importance on honesty, loyalty, and teamwork. Generally, successful corporations

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are communities where a sense of family has been encouraged. Just as family mem- bers try to protect one another and keep family information private, the company community tries to encourage the same behavior. Individuals who violate the corpo- rate ‘‘family’’ trust by squandering resources, being dishonest, or misusing the family reputation are frequently isolated or fired.

WHENALL ELSE FAILS: BLOWING THEWHISTLE

A section on ethics and the individual wouldn’t be complete without a discussion of what happens when you suspect serious wrongdoing within your organization If your observations are serious and keeping you awake at night, you may have to report the problem—blow the whistle—and you need to proceed with great caution. This also is why understanding what you value and practicing living your values is so important. If you haven’t practiced living your values by the time you get embroiled in a sticky dilemma at work, the situation will be much more difficult for you to handle. With practice (and a bit of luck), you may have been able to stop the problem from devel- oping into a serious one. We hope so. But occasionally you will find yourself with knowledge about serious wrongdoing, and blowing the whistle (either internally or externally) may seem like your only option.

In these really tough situations, voicing your values at work takes significant courage because of the increased risks involved. Kathleen Reardon encourages us to think about courage at work as ‘‘calculated risk taking.’’16 She recommends that you do the following:

1. Ask yourself how strongly you feel about the particular issue. When people are asked, ‘‘where do you draw the ethical line?’’ the most important issues are clearly over the line either because acting in a certain way or not acting at all is likely to cause great harm or breach our most cherished values. According to Reardon, these are ‘‘spear in the sand’’ issues that compel action. So, ask yourself which kind of issue you’re facing.

2. Ask yourself about your intentions. Are you just advancing a personal agenda, or do your goals serve the greater good? If you see a coworker being treated unfairly by an abusive supervisor, what should you do? For example, will rescuing your coworker by reporting the abusive supervisor serve the greater good?

3. Consider power and influence. As we noted above, unless you’re the CEO, you’re rarely in a position to make a decision for the organization. If you feel strongly about something, you’re likely going to have to convince others. So think about how your social network might help convince your manager or organization to do the right thing. This usually isn’t about following the organization chart. Rather, it’s about knowing where the power rests and developing good, trusting relationships with those people. But you can’t do this at the last minute. Trusting relationships are developed

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over time. If you have developed these, you should be able to address the issue before it becomes a whistle-blowing possibility.

4. Weigh the risks and benefits of action. This isn’t quite the same as the conse- quentialist analysis of harms and benefits to multiple stakeholders (discussed in Chapter 2). That analysis is more wide-ranging and focuses on societal good. Here, you’re looking more pragmatically at the people involved, at whether reputations or standing in the organization (yours or others’) will be tarnished by taking action. Perhaps you can reduce the risks and increase the potential benefits by finding a creative way to address the issue. For example, can you report an incident anonymously rather than confronting someone directly? Can you offer apologies for something you have done in the past, in hopes that the person at fault in this situation is inspired to do the same?

5. Think about timing. If the issue isn’t urgent, and especially if it isn’t a spear- in-the-sand issue, ask yourself whether you can put off action a bit to better prepare and to ensure that you’ve reflected on the risks and what you’re con- sidering doing. Have you given yourself the opportunity to practice what you would say in a meeting with your boss, for example?

6. Develop alternatives. In dicey situations, it’s extremely helpful to have alter- natives in mind. What will you do if you don’t get your desired outcome? Do you have an alternative in mind? For a spear-in-the-sand issue, are you willing to either lose your job or leave it, if it comes to that?

Once you decide to blow the whistle, you need to think carefully about how to go about it. How not to blow the whistle might be best illustrated by a case that involves a high-level investment banker who discovered that some of his colleagues were engaged in unethical dealings with several customers. The investment banker brought the situation to the attention of his manager, who told him to forget it. Deter- mined to raise the issue, the banker wrote an irate memo to his company’s CEO outlining the situation and naming names. The banker copied the memo to several other top managers. Even though there were only three levels of management between the banker and the CEO, and even though the banker was right about his colleagues and they were eventually fired, the banker was also fired.

In another large, multinational company, a young trainee in an Asian country felt he was being treated unfairly by his local management. In a fit of anger, he wrote a long message outlining his grievances on his company’s e-mail system (today, he might have posted something on his blog or sent a Twitter message about his situa- tion). Although he addressed his message to the company CEO, president, and head of human resources (all three senior managers were based in New York), he copied everyone else on the system—approximately 30,000 managers worldwide. The trainee was fired not because of the message, but because of how he communicated it. The head of human resources commented, ‘‘He was being groomed for management, and we couldn’t have someone with such poor judgment in that role. If he had complained only to senior management, he would have been heard, he would have been protected,

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and we would have corrected the situation. After copying the world with his complaint, we felt he was a loose cannon and we had no choice but to get him out.’’

Unless you want to be branded as someone with poor judgment, you have to be very careful about how you raise ethical concerns. Usually, the CEO is one of your last resorts, to be approached only after you’ve exhausted every other internal resource. There are exceptions to this guideline. A notable exception occurred at PPG Industries, where former CEO Vince Sarni asked and encouraged employees to contact him directly with issues. A hotline for that purpose sat on his desk, and he personally answered that phone. Warren Buffett, the CEO of Berkshire Hathaway, also used the ‘‘call me’’ approach when he served as a director of Salomon Brothers back in 1991. As the company became embroiled in a bid-rigging scandal (see Chapter 10 for the details), Buffett stepped in as interim CEO. He wrote a letter to Salomon Brothers managers that said, ‘‘Here’s my home phone number in Omaha. If you see anything unethical, give me a call.’’ Managers did call him, and they were able to devise a plan to save Salomon Brothers from Andersen’s fate.17

So how do you blow the whistle? First, let’s talk about when.

A long-time customer approaches you for financing for a new business ven- ture. The customer offers as collateral a piece of property he has purchased in a rural location for the purpose of building a housing development. You send an appraiser to the property, and he accidentally discovers that this property holds toxic waste. You’re sure this customer is unaware of the waste; in fact, the waste is migrating and in a few years will invade the water table under a nearby farmer’s fields. You explain the situation to your manager, who naturally instructs you to refuse to accept the property as collateral, but he also forbids you to mention the toxic waste to the customer. ‘‘Let them find out about it themselves,’’ he says. Do you alert the customer to the toxic waste? Do you alert government regulators?

When Do You Blow theWhistle?

Let’s assume first that your concern involves a serious issue. Reporting toxic materials, for example, is a serious issue, because of the potential for serious harm. Recall that serious harm raises the moral intensity of an issue. So your ethical antennae are likely to be highly sensitized in this situation, and you’re going to feel more compelled to do something. A colleague padding an expense report a bit on one occasion isn’t quite as serious. Once you’ve informed your manager about a fudged expense report, your responsibility is probably fulfilled. However, one colleague fudging an expense report one time is a far cry from a group of employees systematically altering all of their expense reports with their manager’s knowledge. If you suspect something of that magnitude, of course you should report it to someone outside your chain of command, such as the ethics office or your organization’s internal auditor.

Many might disagree with this approach, but few people in business have the time to be ‘‘on patrol.’’ Once a manager is alerted, it’s his or her responsibility to deal with

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issues like expense reports, except in extraordinary circumstances. This could be termed ‘‘picking your battles’’ and responding appropriately to your gut feelings. Obvi- ously, you should use the prescriptive frameworks to help you decide what to do. But let’s also consider a number of simple triggers that can help you determine if an issue is serious.

Some of the triggers to help you determine if an issue is serious enough to be raised beyond your immediate manager include an issue that involves values such as truth, employee or customer (or other stakeholder) rights, trust, fairness, harm, your personal reputation or the reputation of your organization, and whether the law is being broken or compromised. In the toxic dump case, for example, serious harm could certainly result; customer (and other stakeholder) rights are involved; your organiza- tion’s reputation is at risk; a public trust may be violated; and the law may very well be compromised or broken if you keep quiet about toxic wastes under a proposed hous- ing development, because the toxic wastes could ultimately affect the food supply. A situation like this has all the earmarks of a serious ethical dilemma that requires action.

Suppose your manager asks you to supply inaccurate numbers in a financial report to another level of management. That situation involves not only a breach of truth but also potential harm; it could damage your reputation and ultimately your company’s reputation. It’s a serious issue that you’ll probably want to report.

How to Blow theWhistle

Let’s assume that you’re dealing with a serious issue, you’ve assembled the facts, they’re accurate to the best of your knowledge, you’ve asked your peers or your manager for advice, and there’s a law or company policy about to be violated, or one of the other triggers discussed earlier indicates a serious problem. Now what?

1. Approach Your Immediate Manager First. If your manager tells you to ignore a situation or belittles your concern, approach him or her again. The second time you approach your manager, you may want to write a memo and spell out your concerns in black and white so it’s more difficult for your manager to ignore or dismiss them. Writing a memo is frequently enough to convince your manager that this is serious, and so you’ll get a more favor- able response. You should also do some soul searching to make sure your decision to pursue this issue is an objective one, and not based in any feeling of revenge you might have for your manager, coworkers, or company. This is also a good time to rehearse out loud and to others (maybe a trusted cow- orker, your parents, or your spouse) what you want to say. Also, you should find out exactly how your company wants issues raised and if there is a special process for doing it. If there is, follow the process to the letter.18

2. Discuss the Issue with Your Family. Since any whistle-blowing activity can affect your family as well as yourself, it’s imperative that they know what’s going on. It’s also the time to document your activities. Obtain copies of correspondence that relate to the issue and any memos you’ve written in

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an attempt to alert management. Keep a diary to track activities related to the issue and describe any conversations you’ve had concerning the issue.19

3. Take It to the Next Level. If you receive no satisfaction from your man- ager, it’s time to go to the next level of management. The most diplomatic way of going around your manager is to say to your manager something like, ‘‘I feel so strongly about this that I’d like a meeting with you and your man- ager to discuss it.’’ The positive aspect of asking your manager to go with you to the next level is that he or she will be less likely to feel betrayed, and you’ll appear to be a team player. The negative aspect is that your manager may forbid you to approach his or her manager. If that happens, or if you’re still not satisfied after meeting with the next level of management, you’ll need to consider going outside your chain of command.

4. Contact Your Company’s Ethics Officer or Ombudsman. Find out if your state has any special legislation regarding whistle-blowing. Your state may have legislative protection for whistle-blowers, but it may require you to follow certain procedures to protect yourself.20 You may choose to go to these officials first, especially if your manager is part of the problem. As a result of the U.S. Federal Sentencing Commission Guidelines (see Chapter 6) and Sarbanes-Oxley legislation, most large organizations now have reporting systems that allow you to report prob- lems and to do so anonymously.

5. Consider Going Outside Your Chain of Command. If your company has no formal department or process for handling such complaints, think about other areas that would be receptive to your concerns. If your issue is human resources related—if it involves relationships or activities within your company like discrimination or sexual harassment—you may be able to approach your human resources officer or department. If the issue is busi- ness related—if it involves external relationships such as those with custom- ers, suppliers, regulators—you can still approach human resources, but a better choice would probably be the legal department or your company’s internal auditors. Obviously, if the issue involves the law or an actual or potential legal issue, you should contact the legal department. And if the issue concerns a financial matter, it’s probably better to approach your orga- nization’s auditors. Most auditors have a system of internal checks they can trigger that will confirm or refute your suspicions and even protect you. Also, some auditors in some industries have an underground network of sorts; there are relationships that exist among auditors from various organi- zations. They can quietly investigate situations and keep them from blowing out of proportion if that’s indicated and appropriate.

Since the role of human resources, legal, and audit departments is to protect the corporation, they should be receptive to any concerns that could put the company at risk. If, however, the activity you’re concerned about has been approved or condoned by the highest levels of management, these

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internal departments may be inclined to go along with ‘‘business as usual.’’ And since their role is to protect the company, you’re likely to find that their first allegiance is to the company, and not to you.

It’s usually safe to approach these departments, but it’s not completely without risk. You can reduce the risk if you can persuade one or more of your colleagues to join you in the process. Having an ally can encourage lawyers and auditors to take you more seriously. It also may be wise to con- sult your personal lawyer at this point in the process. According to Hoffman and Moore, your attorney can ‘‘help you determine if the wrongdoing violates the law, aid you in documenting information about it, inform you of any laws you might be breaking in documenting it, assist you in deciding to whom to report it, make sure reports are filed on time, and help you protect yourself against retaliation.’’21

Once you’ve approached your management, the ethics or compliance office (if your company has one), and human resources, legal, or audit, you should have received some satisfaction. The vast majority of whistle- blowing cases are resolved at one of those levels. However, if you’re still concerned, the risks to you personally escalate significantly from this point on. Your last resort within your company is your organization’s senior man- agement, including the CEO, president, or board of directors. Obviously, you should contact whoever has a reputation for being most approachable. Understand that your immediate management will most likely be irate if you approach senior management. However, if you’re right about your concerns, you may end up a hero if the issue you’re raising is a localized problem and senior management is unaware of what’s going on.

Before contacting your senior management, be sure to have your facts straight and documented. (This is where a diary and copies of correspondence are useful.) If you’re wrong, few people are going to understand or forgive you. You may be harassed, reprimanded, or penalized, or some pretext may be found to fire you. However, there is evidence that you can contact the CEO and keep your job. For example, Sherron Watkins, vice president of cor- porate development at Enron, still had her job at Enron one year after CEO Ken Lay received her fearful letter about accounting irregularities and months after the executive team resigned. However, she wrote her letter to the CEO and not to the local newspapers.22 Like many other whistle-blowers, Sherron Watkins is now making her living as a public speaker and consultant.

6. Go Outside of the Company. If you’ve raised the concern all the way to the top of your company, still have a job, and are still unsatisfied, your only choice now is to go outside. If your company is part of a regulated industry, like defense contractors and commercial banks, you can contact the regula- tors who are charged with overseeing your industry. Or you can contact the press. However, if you’ve already contacted numerous individuals in your company about the issue, it won’t take a genius to figure out who is talking

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outside of the company. Even if you contact the press or the regulators anon- ymously, your coworkers and management probably will know it’s you.

Recent legislation has made it easier and more lucrative for employees to blow the whistle to regulators when companies are government contractors or when the federal government has somehow been defrauded. Under the False Claims Act, whistle-blowers who report corporate wrongdoing against the government to prosecutors can be awarded 15 to 30 percent of whatever damages the federal government recovers, which are to be three times the damages the government has sustained. Because the government has recov- ered more than $10 billion since the law’s inception, this has become a powerful incentive for some employees to tell all to prosecutors. For exam- ple, Jim Alderson was fired from his accounting job at Quorum Health Group when he refused to go along with the company practice of keeping two sets of books for Medicare reimbursements, one for the government and one marked ‘‘confidential.’’ He filed a wrongful termination lawsuit that developed into False Claims Act lawsuits against his employer and its parent company for overbilling the government. The government recovered almost $2 billion, and Alderson received $20 million. The number of such lawsuits has grown significantly in recent years. In one of the biggest suits ever, TAP Pharmaceuticals paid $875 million to the government for engaging in illegal pricing and marketing practices with a cancer drug (you’ll read more about TAP Pharmaceuticals in the end-of-chapter case for Chapter 5).23

In 2002 Congress passed the Sarbanes-Oxley Act, which, among other things, provides whistle-blowers in publicly traded companies with revolu- tionary new protections if they ‘‘make a disclosure to a supervisor, law- enforcement agency, or congressional investigator that could have a ‘material impact’ on the value of a company’s shares.’’24 Under the law, board commit- tees must set up procedures for hearing whistle-blower concerns; executives who retaliate can be held criminally liable and can go to prison for up to 10 years; the Labor Department can force a company to rehire a whistle- blower who has been fired; and workers who have been fired can request a jury trial after six months. Corporate attorneys are now required to report misconduct to top management and to the board if executives don’t respond. But, unlike the False Claims Act, the new law does not provide for financial incentives. And it does not protect employees at private companies.

For additional guidance about whistle-blowing, several websites can answer myriad questions; just type the keyword whistle-blower in your Internet search engine. Probably the most comprehensive website for whistle-blowers is the National Whistleblower’s Center, a nonprofit, tax- exempt organization that is dedicated to providing educational and advocacy services to whistle-blowers (www.whistleblowers.org).

7. Leave the Company. Some situations might be so disturbing to you that you have no alternative but to quit your job. The toxic dump situation described

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earlier might be one of those situations. Frankly, the stress involved in blowing the whistle is so intense that you might consider quitting your job after step 3 or 4, and you’ll need all of the prescriptive ethical decision-making frameworks to help you decide whether you are ethically obligated to report the problem to someone or whether simply leaving is okay.

Whistle-blowing is so stressful that in one study, one-third of the whistle- blowers surveyed would advise other people not to blow the whistle at all.25

Senator Charles Grassley likened whistle-blowers to ‘‘a skunk at a pic- nic.’’26 Many people, however, would find it extremely difficult—perhaps impossible—to live with certain situations on their conscience. The know- ledge of a toxic dump about to poison private wells would probably be almost impossible for most people to live with without reporting. When knowledge becomes unbearable, blowing the whistle and ultimately quitting your job may be the only solution (or the other way around—quit first and then blow the whistle).

Unfortunately, 2002 provided lots of opportunities for whistle-blowing. Business Week called 2002 the ‘‘Year of the Whistleblower,’’ highlighting the role of Joe Speaker, a manager at Rite-Aid (and son of a former Pennsyl- vania attorney general) who alerted the audit committee of the board to accounting chicanery at the firm. Martin Grass, the former CEO and chair- man, was later found guilty and is serving a jail sentence.27Time magazine named Cynthia Cooper, Coleen Rowley, and Sherron Watkins ‘‘persons of the year’’ for their ‘‘exceptional guts and sense.’’ Watkins was the vice pres- ident at Enron who first brought improper accounting methods to the atten- tion of chairman Kenneth Lay and later testified before Congress where, she says, she ‘‘broke out in a cold sweat.’’ Coleen Rowley is the FBI attorney at the Minneapolis office who alerted FBI Director Robert Mueller to the fact that the FBI had brushed off pleas to investigate Zacarias Moussaoui, now convicted as a September 11 co-conspirator. Cynthia Cooper informed the board at WorldCom about phony bookkeeping and the attempt to cover up $3.8 billion losses. According to Time, ‘‘Democratic capitalism requires that people trust in the integrity of public and private institutions alike. As whistleblowers, these three became fail-safe systems that did not fail. For believing—really believing—that the truth is one thing that must not be moved off the books, and for stepping in to make sure that it wasn’t, they have been chosen by Time as its Persons of the Year for 2002.’’ In its attempt to identify the characteristics these three women shared, Time noted that all three grew up in small towns and all were firstborns. All are married and serve as chief breadwinners in their families. None of this, however, explains why they were willing to risk so much to reveal the truth. At the end of 2002, Watkins left Enron voluntarily to start her own consulting firm. The other two were still employed by their organizations. That doesn’t mean they haven’t paid a price. They claim to be hated by some colleagues, and they laughed when asked if executives at their organizations had thanked

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them. Time quoted Ibsen’s play, An Enemy of the People, in its tribute to the three women: ‘‘A community is like a ship. Everyone ought to be prepared to take the helm.’’ These women ‘‘stepped up to the wheel.’’28

CONCLUSION

This chapter highlights some of the most common ethical problems you might encounter during your career and provides some advice on raising issues if you feel the need. Although ethical problems can be difficult to evaluate, it can be easier to decide what to do when you’ve spent some time thinking about them ahead of time—before they happen. We also strongly believe that identifying what you value, thinking about various ethical situations, and practicing your responses in advance are effective ways to prepare you to live an ethical professional life.

DISCUSSION QUESTIONS

1. What do you value? Can you make a list of the three or four values you would stand up for? How will you explain to others what your values are and why?

2. Have you ever practiced raising an ethical issue to a professor or to your manager? What did you do? What were the results?

3. Have antidiscrimination laws helped or hurt the fair treatment of workers?

4. Is diversity management an ethical issue?

5. Is sexual harassment as important an issue for men as it is for women?

6. What conditions would make accepting a gift from a vendor or a client acceptable?

7. Describe the conditions under which you could hire a college friend.

8. Why do certain professionals—bankers, accountants, lawyers, physicians, clergy—have fiduciary responsibilities?

9. What would you do if a former subordinate asked you to write him or her a letter of reference on corporate letterhead?

10. Do employers have a responsibility to alert other employers to an employee’s wrongdoing by supplying an unfavorable reference? Why or why not? Discuss the conflict between community responsibility and self-protection.

11. What conditions would have to be present for you to blow the whistle about unethical conduct you observed at work? How would you go about it?

12. If Sherron Watkins had blown the whistle to the Houston Chronicle and not to Enron’s CEO Ken Lay, do you think she would have kept her job at Enron?

13. Research a story of whistle-blowing. Relate what ‘‘your’’ whistle-blower did with the seven steps recommended in the chapter. What have you learned from the comparison?

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SHORT CASES

Think about what you most value. For each of the ethical dilemmas below, describe at least two courses of action you might take and state the pros and cons of each course. Describe your actions out loud to someone else in class or to a friend. What can you say or do that would be consistent with your personal values?

VOICING YOUR VALUES

You’re a trader who joined a large investment bank two years ago. Pat, one of your fellow traders, is well known on the Street for being a big risk taker and a big money maker for the firm. Consequently, he is popular among your firm’s senior manage- ment. You see him at a party one night and notice that he surreptitiously used cocaine several times. Several weeks later in the office, you notice that he seems exception- ally high-spirited and that his pupils are extremely dilated—you know that both are signs of drug use. You’re thinking of mentioning something about it to his managing director, Bob, when Pat makes a particularly impressive killing in the market for your firm’s own account. Bob jokes that he doesn’t know how Pat does it, but he doesn’t care. ‘‘However he is pulling this off, it’s great for the firm,’’ Bob laughs. You feel strongly that this is a problem and that it places your firm at risk. You’ve already raised the issue to Pat’s manager, Bob, who ignored the issue. Do you raise it further? How can you voice your values in this case?

PEOPLE ISSUE

Your division has formed a committee of employees to examine suggestions and create a strategy for how to reward good employee ideas. The committee has five members, but you are the only one who is a member of a minority group. You’re pleased to be part of this effort since appointments to committees such as this one are viewed generally as a positive reflection on job performance. At the first meeting, tasks are assigned, and all the other committee members think you should survey minority members for their input. Over the next few weeks, you discover that several committee meetings have been held without your knowledge. When you ask why you weren’t notified, two committee members tell you that survey information wasn’t needed at the meetings and you’d be notified when a general meeting was scheduled. When you visit one committee member in his office, you spot a report on the suggestion program that you’ve never seen before. When you ask about it, he says it’s just a draft he and two others have produced.

CONFLICT OF INTEREST ISSUE

You’ve just cemented a deal between a $100 million pension fund and Green Com- pany, a large regional money manager. You and your staff put in long hours and a lot of effort to close the deal and are feeling very good about it. As you and three of your direct reports are having lunch in a fancy restaurant to celebrate a promotion, the

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NOTES 1. Mary C. Gentile, ‘‘Giving Voice to Values,’’ The Aspen Institute, www.aspencbe.org/teaching/gvv/

index.html. 2. B. George, P. Sims, A. N. McLean, and D. Mayer, ‘‘Discovering Your Authentic Leadership,’’

Harvard Business Review 85, no. 2 (2007): 1–8. 3. J. Q. Wilson, The Moral Sense (New York: Free Press, 1993), 55–78.

waiter brings you a phone. A senior account executive from Green is calling and wants to buy you lunch in gratitude for all your efforts. ‘‘I’ll leave my credit card number with the restaurant owner,’’ he says. ‘‘You and your team have a great time on me.’’

CUSTOMER CONFIDENCE ISSUE

You’re working the breakfast shift at a fast-food restaurant when a delivery of milk, eggs, and other dairy products arrives. There’s a story in the local newspaper about contaminated milk distributed by the dairy that delivers to your restaurant. Upon reading the article more closely, you discover that only a small portion of the dairy’s milk is contaminated, and the newspaper lists the serial numbers of the affected con- tainers. When you point out the article to your manager, he tells you to forget it. ‘‘If you think we’ve got time to go through every carton of milk to check serial numbers, you’re crazy,’’ he says. ‘‘The article says right here that the chances are minuscule that anyone has a contaminated carton.’’ He also explains that he doesn’t have the workers to check the milk, and what’s more, destroying the milk would require him to buy emergency milk supplies at the retail price. So he tells you to get back to work and forget about the milk. He says, ‘‘I don’t have the time or the money to worry about such minor details.’’

USE OF CORPORATE RESOURCES ISSUE

You work for Red Company. You and a colleague, Pat Brown, are asked by your manager to attend a weeklong conference in Los Angeles. At least 25 other employ- ees from Red Co. are attending, as well as many customers and competitors from other institutions. At the conference, you attend every session and see many of the Red Co. people, but you never run into Pat. Although you’ve left several phone mes- sages for her, her schedule doesn’t appear to allow room for a meeting. However, when you get back to the office, the department secretary, who is coordinating expense reports, mentions to you that your dinner in L.A. must have been quite the affair. When you ask, ‘‘What dinner?’’ she describes a dinner with 20 customers and Red Co. employees that Pat paid for at a posh L.A. restaurant. When you explain that you didn’t attend, she shows you the expense report with your name listed as one of the attendees.

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4. E. A. Lind and T. R. Tyler, The Social Psychology of Procedural Justice (New York: Plenum Press, 1988).

5. B. Sheppard, R. Lewicki, and J. W. Minton, Organizational Justice: The Search for Fairness in the Workplace (New York: Lexington Books, 1992).

6. Eduardo Porter, ‘‘UBS Ordered to Pay $29 Million in Sex Bias Lawsuit,’’ New York Times, 7 April 2005, www.nytimes.com.

7. Sprenger & Lang (attorneys), ‘‘Morgan Stanley Sex Discrimination’’ (2008), at www.morganstanley

sexdiscrimination.com.

8. Jenny Anderson, ‘‘After She Sued Merrill, It’s Back on the Job,’’ New York Times, 22 July 2005, www.nytimes.com.

9. E. Warren and N. Millman, ‘‘Abuse on the Line for Years, Women at Mitsubishi Say They’ve

Endured the Degrading Deeds and Words of Co-workers. Now They’re Doing the Talking,’’ February 15 (1998).

10. J. Lever, G. Zellman, and S. J. Hirschfeld, ‘‘Office Romance: Are the Rules Changing?’’ Across the Board, March–April 2006, 33–37.

11. J. D. Glater, ‘‘University of Texas Fires Director of Financial Aid,’’ New York Times, 14 May 2007. 12. Paul Sullivan, ‘‘In Search of Competent (and Honest) Advisers,’’ New York Times, 1 August 2009,

www.nytimes.com.

13. J. Hechinger and S. Craig, ‘‘SEC Tells Fidelity Probe May Yield Civil Complaint,’’ Wall Street Journal, 26 July 2005, A3.

14. J. A. Byrne, ‘‘No Excuses for Enron’s Board,’’ Business Week, 29 July 2002, 50. 15. I. J. Dugan, ‘‘Auditing Old-Timers Recall when Prestige Was the Bottom Line,’’Wall Street Journal,

15 July 2002.

16. K. Reardon, ‘‘Courage as a Skill,’’ Harvard Business Review, January 2007, 2–7. 17. H. Wee, ‘‘Corporate Ethics: Right Makes Might,’’ Business Week, 11 April 2002. 18. R. Webber, ‘‘Whistle Blowing,’’ Executive Excellence, July 1989, 9–10. 19. Ibid. 20. A. Dunkin, ‘‘Blowing the Whistle without Paying the Piper,’’ Business Week, 3 June 1991, 138–39. 21. W. M. Hoffman and J. M. Moore, Business Ethics: Readings and Cases in Corporate Morality (New

York: McGraw-Hill, 1984), 257.

22. F. Pellegrini, ‘‘Person of the Week: ‘Enron Whistleblower’ Sherron Watkins,’’ Time, 18 January 2002.

23. T. Wilkinson, ‘‘After Eight Years, An Insider Gets His Reward Thanks to Whistleblower’s Efforts,

U.S. Government Reaps Largest Single Cash Award Under False Claims Act,’’ Todd Wilkinson Special to the Christian Science Monitor. The Christian Science Monitor. Boston, Mass.: 24 July 2001, 4.

24. P. Dryer, and D. Carney, ‘‘Year of the Whistleblower,’’ Business Week, 16 December 2002, 107–10. 25. K. L. Soeken and D. R. Soeken, ‘‘A Survey of Whistleblowers: Their Stressors and Coping

Strategies,’’ Proceedings of the Hearing on H.R. 25 (Washington, D.C.: U.S. Government Printing Office, 1987), 156–66; M. Miceli and J. Near, Blowing the Whistle (New York: Lexington Books, 1992), 303.

26. Dryer and Carney, ‘‘Year of the Whistleblower.’’ 27. Ibid.

28. R. Lacayo and A. Ripley, ‘‘Persons of the Year 2002: Cynthia Cooper, Coleen Rowley, and Sherron

Watkins,’’ Time, 22 December 2002, www.time.com/time/personoftheyear/2002/.

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SECT ION III MANAGING ETHICS IN THE ORGANIZATION

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CHAPTER5 ETHICS AS ORGANIZATIONAL CULTURE

INTRODUCTION

Thus far, we have discussed business ethics primarily in terms of how individual employees think and respond. But anyone who has ever worked knows that employ- ees are not ‘‘just’’ individuals. They become part of something larger; they’re mem- bers of an organizational culture that affects how they think and behave. Here, we apply this culture concept to organizational ethics. You can think about the ethical culture of an organization as a ‘‘slice’’ of the larger organizational culture that repre- sents the aspects of organizational culture that affect the way employees think and act in ethics-related situations.

In terms of how we’ve been thinking about ethical decision making, you can consider ethical culture to be a significant organizational influence on individuals’ ethical awareness, judgment, and action, along with the individual differences and other influences already discussed in Chapter 3. Recall that most employees are at the conventional level of cognitive moral development, meaning that they are look- ing outside themselves for guidance about how to think and act. Ethical culture is a source of a good bit of that guidance and can influence employees to do either the right thing or the wrong thing.

Individual Differences

Ethical Awareness → Ethical Judgment → Ethical Action

Ethical Culture

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ORGANIZATIONAL ETHICS AS CULTURE

What Is Culture?

Anthropologists define culture as a body of learned beliefs, traditions, and guides for behavior shared among members of a group.1 This idea of culture has been particu- larly useful for understanding and differentiating among work organizations and the behavior of people in them.2 It’s a way of differentiating one organization’s ‘‘person- ality’’ from another. The organizational culture expresses shared assumptions, val- ues, and beliefs3 and is manifested in many ways, including formal rules and policies, norms of daily behavior, physical settings, modes of dress, special language, myths, rituals, heroes, and stories.4 To assess and understand an organization’s culture requires knowledge of the organization’s history and values, along with a systematic analysis of multiple formal and informal organizational systems.

Organizational cultures can vary widely, even within the same industry (consider Wal-Mart, Target, and Costco—all big-box retailers that have very different cul- tures). In the computer industry, IBM was known for many years for its relative for- mality, exemplified by a dress code that mandated dark suits, white shirts, and polished shoes. Apple Computer, on the other hand, was known for its informality. Particularly in its early days, T-shirts, jeans, and tennis shoes were the expected Apple ‘‘costume.’’ Fortune magazine described IBM as ‘‘the sensible, wingtip, Armonk, New York computer company, not part of that sneaker-wearing, tofu-eating Silicon Valley crowd.’’5 Although that characterization was made a long time ago, it’s still pretty applicable today.

Strong versus Weak Cultures

Organizational cultures can be strong or weak.6 In a strong culture, standards and guidelines are widely shared within the organization, providing common direction for day-to-day behavior. This is likely because all cultural systems, formal and informal, are aligned to provide consistent direction and to point behavior in the same direction. In the 1980s, Citicorp’s culture was so strong that when Katherine Nelson, a coauthor of this text and former vice president and head of human resources communications at Citicorp, traveled to the firm’s offices in the Far East to deliver ethics training, she felt right at home (despite huge differences in national culture). ‘‘You could tell that you were in a Citicorp facility,’’ she said, ‘‘whether you were in London, Tokyo, or New York.’’ When Nelson facilitated an ethics training session for Japanese managers, she presented them with a common ethical dilemma—what do you do if you have raised an important ethical issue with your manager and nothing is done? Moreover, the manager discourages you from pursuing the issue. The potential answers included do nothing, go around the manager to the next level, raise the issue in writing to the manager, or take the issue to a staff department such as human resources.

The Japanese managers unanimously gave the ‘‘correct’’ answer according to Citicorp culture and policies at the time. They said they would go around their

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manager and take the issue to the next level. Nelson was surprised at their response, thinking that it conflicted with the wider Japanese culture’s deference to authority and seniority. So she asked these managers, ‘‘Doesn’t this conflict with Japanese cul- ture?’’ To which they responded, ‘‘You forget—we are much more Citicorp than we are Japanese.’’ Citicorp’s culture proved to be so strong that standards and guidelines spanned continents and superseded national culture. (Citicorp merged with Travelers in 1998 to form Citigroup, and its culture has changed significantly since then.) This type of experience has since been verified by some of our international students who worked for U.S.-based multinationals before returning to school for their MBA degree. For example, one student worked for Baxter Healthcare in a country known for corruption and bribery. Baxter’s strong ethical culture didn’t allow such conduct, and employees were proud to be a part of such an organization and happy to comply (even or perhaps especially in the midst of a corrupt business culture).

In a weak organizational culture, strong subcultures exist and guide behavior that differs from one subculture to another. Many large public universities can be thought of as having weak cultures. For example, for faculty, departmental subcultures are often stronger than the overall university culture; the romance languages department differs from the accounting department. Among students at a large state university, the fraternity-sorority subculture coexists with the political activist subculture, the devout Christian subculture, the jock subculture, and many other subcultures, and behavior is quite different within each. It’s important to note that weak doesn’t nec- essarily mean bad. In some situations, weak cultures are desirable. They allow for strong subcultures featuring diversity of thought and action. However, in a weak cul- ture, behavioral consistency across the organization is tough to achieve. Look around your own school or work organization. Would you characterize its culture as strong or weak?

HowCulture Influences Behavior: Socialization and Internalization

Employees are brought into the organization’s culture through a process called encul- turation, or socialization.7 Through socialization, employees learn ‘‘the ropes.’’ Socialization can occur through formal training or mentoring, or through more informal transmission of norms of daily behavior by peers and superiors. New members learn from observing how others behave or through informally transmitted messages. When effectively socialized into a strong culture, employees behave in ways that are consistent with expectations of the culture (or subculture). They know how to dress, what to say, and what to do.

With socialization, people behave in ways that are consistent with the culture because they feel they are expected to do so. Their behavior may have nothing to do with their personal beliefs, but they behave as they are expected to behave in order to fit into the context and to be approved by peers and superiors.8 As an example, the president of a huge financial firm once took a young, high-potential manager out to lunch and walked him right over to Brooks Brothers for a new suit. ‘‘You can’t get

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where you’re going in a cheap suit,’’ the president told the young man, who contin- ued to buy his suits at Brooks Brothers.

But individuals may behave according to the culture for another reason— because they have internalized cultural expectations. With internalization, individu- als have adopted the external cultural standards as their own. Their behavior, though consistent with the culture, also accords with their own beliefs. They may come into the organization sharing its values and expectations, thus making for a very smooth transition. Or, they may internalize cultural expectations over time. In the above example, the young manager may have initially bought the Brooks Brothers suit because he felt compelled to; but over time, he continued to buy those suits perhaps because he had internalized the expectation and wanted to do so.

The concepts of socialization and internalization apply to understanding why employees behave ethically or unethically in an organization. Most people prefer to behave ethically. When they join an organization with a strong ethical culture, the messages about honesty and respect resonate with their personal beliefs and are eas- ily internalized. They act ethically because it’s natural for them to do so and consist- ent with the cultural messages they’re receiving. But unfortunately, most employees can be socialized into behaving unethically, especially if they have little work experi- ence to contrast with the messages being sent by the current unethical culture. If everyone around them is lying to customers, they’re likely to do the same as long as they remain a member of the organization.

ETHICAL CULTURE: AMULTISYSTEM FRAMEWORK

We said earlier that ethical culture can be conceptualized as representing a slice of the organization’s broader culture. Ethical culture is created and maintained through a complex interplay of formal and informal organizational systems (Figure 5.1). For- mally, executive leader communications, selection systems, orientation and training

FORMAL SYSTEMS INFORMAL SYSTEMS

Executive Leadership

Selection system

Policies/Codes

Orientation/Training

Performance management

Authority structure

Decision processes

Role Models/Heroes

Norms

Rituals

Myths/Stories

Language

Ethical and Unethical Behavior

Alignment?

FIGURE 5.1 AMultisystem Ethical Culture Framework

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programs, rules, policies and codes, performance management systems, organiza- tional structures, and formal decision-making processes all contribute to creating and maintaining ethical culture. Informally, heroes and role models; norms of daily behavior; rituals, myths, and stories; and language indicate whether the formal ethics-related systems represent reality or facade. The next section provides exam- ples of each of these important ethical culture systems. Although we discuss these systems separately, keep in mind that they are all interconnected.

Alignment of Ethical Culture Systems

To create a consistent ethical culture message, the formal and informal systems must be aligned (work together) to support ethical behavior. To have a fully aligned ethical culture, the multiple formal and informal systems must all be sending employees consistent messages that point in the direction of ethical behavior. For example, imagine a company whose formal corporate values statement and ethics code tell employees that honesty is highly valued in the organization and that employees should always be truthful with customers and each other. Consistent with that values statement, the selection system does background checks on potential employees, incorporates ethics-related questions in interviews, and highlights the company’s val- ues to recruits. Once hired, new employees are further oriented into the ethical culture by learning about the values of the founder, how the history of the company supports those values, and how the current executive team is carrying on that tradi- tion. They’re also trained in the specific kinds of ethical issues they could face in their jobs and how to handle them ethically. They learn that the performance manage- ment system will assess them on values-related criteria, including honest and trust- worthy interactions, and that these assessments will be important to decisions about compensation and promotion. They are also encouraged to take personal responsibil- ity and speak up about any ethical concerns. On the informal side, they learn that high-level managers routinely tell customers the truth about the company’s ability to meet their needs and that the company celebrates employees of exemplary integrity at an annual awards dinner. Employees in such an organization receive a consistent message about the organization’s commitment to honesty, and their behavior is likely to be honest as well because these formal and informal systems are aligned and sup- porting their ethical behavior.

But opportunities for misalignment abound in these complex systems. For exam- ple, if the same organization touts its honesty in its values statement but regularly deceives customers in order to land a sale, and the organization gives a highly ‘‘suc- cessful’’ but highly deceptive sales representative the firm’s sales award, the organi- zation’s formal and informal systems are out of alignment. The formal statements say one thing while company actions and rituals say quite another. Employees perceive that deceit is what the organization is really about, despite what the ethics code says. Cultures can range from strongly aligned ethical cultures (where all systems are aligned to support ethical behavior) to strongly aligned unethical cultures (where all systems are aligned to support unethical behavior) to those that are misaligned

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because employees get somewhat mixed messages due to conflicts between the for- mal and informal systems.

DOW CORNING: AN ETHICAL CULTURE OUT OF ALIGNMENT? Developing a strongly aligned ethical culture is easier said than done. Managers need to be careful because an organization may easily be lulled into thinking that its ethical house is soundly constructed, only to find that the roof has been leaking and it’s about to cave in. This may be what happened to Dow Corning.

Dow Corning had been recognized as a corporate ethics pioneer. It was among the first, in 1976, to establish an elaborate formal ethics program and structure. Then chairman John S. Ludington set up a Business Conduct Committee comprised of six company executives, each of whom devoted up to six weeks a year to the commit- tee’s work and reported directly to the board of directors. Two of these members were given responsibility for auditing every business operation every three years. In addition, three-hour reviews were held with up to 35 employees who were encour- aged to raise ethical issues. The results of these audits were reported to the Audit and Social Responsibility Committee of the board of directors. John Swanson, manager of corporate internal and management communication at the time, headed this effort and was quoted as saying that the audit approach ‘‘makes it virtually impossible for employees to consciously make an unethical decision.’’9

This apparently impressive formal program failed to help the organization avoid its problem with breast-implant safety, however, despite documented warnings from a company engineer in 1976 that suggested that the implants could rupture and cause medical problems. It isn’t entirely clear why this well-intentioned ethics program failed. It’s likely that, although it was designed to cultivate an overall environment of ethical conduct, aspects of the ethical culture were out of alignment—sending employees different messages.10 ‘‘Layering in a bureaucracy is no substitute for a true corporate culture. Workers have a genius for discovering the real reason for a system and learn quickly how to satisfy its minimum requirements.’’11 The system relied on managers to identify the key ethical issues covered by the auditors. Were these managers likely to alert the auditors to their most serious ethical problems? What would the consequences be? The system also relied on periodic planned audits. Did commitment to ethics peak during the planned audit sessions, only to disappear into the woodwork after the auditors left?12 We don’t know, but a comprehensive multisystem audit of the ethical culture might have provided the answer.

Leaders should be interested in creating a strongly aligned ethical culture because American employees strongly prefer working for such an organization. A 2006 study found that 82 percent of Americans would actually prefer to be paid less but work for an ethical company than be paid more but work for an unethical company. Importantly, more than a third of people say that they’ve left a job because they disagreed with the company’s ethical standards. So having a strong ethical culture is an important way to retain the best employees.13

Another reason leaders need to create and maintain a strongly aligned ethical culture is that the U.S. Sentencing Commission revised its guidelines for sentencing

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organizational defendants in 2004 (see www.ussc.gov and Chapter 6 for more infor- mation about these guidelines). When the U.S. Sentencing Commission (www.ussc. gov) evaluated the effect of the original 1991 guidelines, it noted that many organiza- tions seemed to be engaging in a kind of ‘‘check-off approach’’ to the guidelines. In responding to guideline requirements to qualify for reduced sentencing and fines, these organizations would establish formal ethics and/or legal compliance programs, includ- ing ethics offices, codes of conduct, training programs, and reporting systems. But the commission learned that many of these formal programs were perceived to be only ‘‘window dressing’’ by employees because they were inconsistent with the employees’ day-to-day organizational experiences. The commission subsequently revised its guidelines to call for developing and maintaining a strong ethical culture. As a result, many companies are now assessing their cultures to determine how they’re doing in relation to ethics so if they do get into legal trouble, they can demonstrate that they have been making sincere efforts to guide their employees toward ethical conduct.

ETHICAL LEADERSHIP

Executive Leaders Create Culture

Executive leaders affect culture in both formal and informal ways. Senior leaders can create, maintain, or change formal and informal cultural systems by what they say, do, or support.14 Formally, their communications send a powerful message about what’s important in the organization. They influence a number of other formal cul- ture dimensions by creating and supporting formal policies and programs, and they influence informal culture by role modeling, the language they use, and the norms their messages and actions appear to support.

The founder of a new organization is thought to play a particularly important culture-creating role.15 Often, the founder has a vision for what the new organization should be. He or she often personifies the culture’s values, providing a role model for others to observe and follow, and guides decision making at all organizational levels. For example, Thomas Jefferson founded the University of Virginia. Although he’s long gone, it’s said even today that when the governing board of the university is faced with a difficult decision, they’re still guided by ‘‘what Mr. Jefferson would do.’’ Founders of small businesses frequently play this culture-creating role.

Herb Kelleher is the legendary founder of Southwest Airlines, often cited as the best-run U.S. airline. The no-frills airline started in 1971 and has been growing and flying pretty high ever since, despite many difficulties in its industry. Southwest Airlines has never served a meal, and its planes are in and out of the gate in 20 min- utes. During Kelleher’s tenure as CEO and chairman, other airlines went bankrupt, suffered strikes, or disappeared. But Southwest continued to succeed even after the terrorist attacks of September 11, 2001, that sent the entire industry reeling. The secret is thought to be the company’s culture and an esprit de corps inspired by Kelleher—he believes in serving the needs of employees, who then take great care of

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customers and ultimately provide shareholder returns. The culture combines effi- ciency, a family feeling, and an emphasis on fun. In support of efficiency, pilots have been known to load luggage or even clean planes if necessary. During a fuel crisis, Kelleher asked employees to help by providing money-saving ideas. The response was immediate: within only six weeks after Kelleher’s request, employees had saved the company more than $2 million. In the area of fun, Kelleher has always been known for his crazy antics, jokes, and pranks. He settled business disputes by arm wrestling; and when a fellow airline CEO criticized Southwest’s promotion that fea- tured Shamu, the killer whale, Kelleher sent him a huge bowl of chocolate pudding (meant to resemble whale poop) with a note reading, ‘‘With love, from Shamu.’’16

Employees are encouraged to make flying fun, so that customers leave every South- west flight with a smile, and they’re encouraged to do that in a way that’s spontane- ous, emotional, and from the heart.17 Southwest is seen as a leader in its industry and regularly shows up near the top of Fortune magazine’s most admired companies. It continues to perform well even after Kelleher stepped down as CEO in 2001. In explaining how they have remained so successful, Colleen Barrett (who stepped down as president in 2008) referred to the culture, saying that Southwest does ‘‘everything with passion. We scream at each other and we hug each other . . . we celebrate everything.’’18 The walls at Southwest’s headquarters are literally covered with photos of employees dressed in crazy outfits or with their pets. But the company is also financially conservative and cost conscious, and these cultural attributes con- tribute to their ongoing success.

Leaders Maintain or Change Organizational Culture

Current executive leaders can also influence culture in a number of ways.19 They can help maintain the current culture, or they can change it by articulating a new vision and values; by paying attention to, measuring, and controlling certain things; by making critical policy decisions; by recruiting and hiring personnel who fit their vision of the organization; and by holding people accountable for their actions.

Sometimes new leaders significantly change long-standing corporate culture. Jack Welch, retired CEO of General Electric Company, radically changed the for- merly staid bureaucratic culture of GE into a lean and highly competitive organiza- tion during his leadership tenure. Welch began the culture change effort by clearly articulating his vision that the new GE would be number one or number two in the world in each of its businesses. Businesses that could not measure up would be sold.

Traditional GE employees had been attracted to the job security of the old GE. But Welch wanted to encourage competitiveness, risk taking, creativity, self- confidence, and dynamism. He recruited managers who were interested in doing a great job and then moving on, if GE no longer needed them. Many of the old-line GE employees found themselves unhappy, out of sync—and, frequently, out of a job.

Welch also focused on identifying and eliminating unproductive work in the organization. He told managers to eliminate reports, reviews, and forecasts; to speed decision cycles; and to move information more quickly through the organization by

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eliminating unnecessary bureaucratic layers. All of this contributed to the ‘‘leaner and meaner’’ GE culture he created.

Welch’s successor, Jeff Immelt (who became CEO in 2001), has changed the GE culture yet again. He announced in 2004 that four things would be required to keep the company on top: execution, growth, great people, and virtue. The first three were consistent with the GE everyone knew. However, most people don’t expect the word virtue to be associated with a company that earns billions in revenue. But Immelt had learned that people perceived GE to be ‘‘a laggard’’ on the social responsibility front, and he vowed to change that. He has said that, in a world of business ethics scandals, people don’t admire business as they used to and that the gulf between rich and poor is growing. As a result, he believes that companies are obligated to provide solutions to the world’s problems—not to just make money for shareholders and obey the law. ‘‘Good leaders give back. . . . It’s up to us to use our platform to be a good citi- zen.’’20 In line with this new focus on virtue, Immelt appointed GE’s first vice presi- dent for corporate citizenship and has been publishing corporate citizenship annual reports. The company is committing itself to becoming a leader in environmental cleanup and a catalyst for change. You’re probably familiar with its ‘‘Ecoimagina- tion’’ initiative that focuses on green initiatives and concern about climate change. This initiative even has its own devoted website (www.ecoimagination.com), as does the GE Citizenship initiative more generally (www.ge.com/citizenship). The com- pany also now audits suppliers in developing countries to ensure compliance with labor, environmental, and health and safety standards. And the company has increased its focus on diversity, including granting domestic partner health benefits to employees, and has entered into dialogue with socially responsible mutual funds. In response to a request from African American employees to do more in Africa, GE is working with the public health service in Ghana, where it has provided equipment, water treatment, and leadership training. In the last edition of this book, we noted that GE’s foreign subsidiaries were still doing business with Iran.21 But in 2008, the com- pany decided it would not do business in any of the countries that the U.S. State Department designates as sponsors of terrorism (including Iran). This move suggests that the company is engaged in ongoing evaluations about where it should be doing business, based upon its values and concern about its reputation.

ETHICAL LEADERSHIP AND ETHICAL CULTURE Clearly, employees take their cues from the messages sent by those in formal leadership roles. But most employees don’t know the senior executives of their organization personally. They only know what they can make sense of from afar. Therefore senior executives must develop a ‘‘reputation’’ for ethical leadership by being visible on ethics issues and communicat- ing a strong ethics message. A recent study22 found that such a reputation rests upon dual dimensions that work together: a moral person dimension and a moral manager dimension (see Figures 5.1 and 5.2). In this section, first we explain what each di- mension represents and then we combine these dimensions into a matrix that shows how leaders can develop a reputation for ethical leadership, unethical leadership, hypocritical leadership, or ethically neutral leadership.

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The moral person dimension represents the ‘‘ethical’’ part of the term ethical leadership and is vital to developing a reputation for ethical leadership among employees. As a moral person, the executive is seen first as demonstrating certain individual traits (integrity, honesty, and trustworthiness). For example, one executive described ethical leaders as ‘‘squeaky clean.’’ But probably more important are visi- ble behaviors.

These include doing the right thing, showing concern for people and treating them with dignity and respect, being open and listening, and living a personally moral life. To some extent, senior executives live in glass houses. They are often public figures who are active in their communities. So they need to be particularly careful about their private behavior. Rumors can begin quickly and taint an otherwise solid reputation. Finally, an important contributor to being perceived as a moral per- son is to make decisions in a particular way—decisions that are explicitly based on values, fairness, concern for society, and other ethical decision rules.

But being a moral person is not in itself enough to be perceived as an ethical leader. Being a moral person tells employees how the leader is likely to behave, but it doesn’t tell them how the leader expects them to behave. So to complete the ethical leadership picture, executives must also act as ‘‘moral managers’’—they must focus on the ‘‘leadership’’ part of the term ethical leadership by making ethics and values

Hypocritical leader

Weak Strong

Moral Person

Executive Ethical Leadership Reputation Matrix

Executive Ethical Leadership Is about Reputation, Which Rests

on These Two Pillars

Moral Person

Traits

Behaviors Rewards/Discipline

Decision making Communicating

Tells followers how leader behaves

• Honesty

• Openness

• Values-based • Fair

Sends an “ethics and values” message

Holds people accountable for ethical conduct

• Concern for people • Personal morality

• Integrity • Trust

Role Modeling Takes visible ethical action

Tells followers how they should behave and holds them accountable

Moral Manager

W ea

k M

or al

M an

ag er

St ro

ng

Unethical leader

?

Ethical leader

Ethically neutral leader

FIGURE 5.2 Executive Ethical Leadership

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an important part of their leadership message and by shaping the firm’s ethical cul- ture. They do that by conveying the importance of ethical conduct in a variety of ways. Most of the messages employees receive in business are about bottom-line goals. Therefore, senior executives must make ethics a priority of their leadership if ethics is to get attention from employees. Moral managers do this by being visible role models of ethical conduct, by communicating openly and regularly with employ- ees about ethics and values, and by using the reward system to hold everyone accountable to the standards. This ‘‘moral person/moral manager’’ approach is similar to what executive headhunters Thomas Neff and James Citrin list as their number one strategy (of six) of corporate stars: ‘‘Live with Integrity, Lead by Example.’’ They say, ‘‘Integrity builds the trust in senior management that is critical for high-performing organizations.’’23

James Burke, former CEO of Johnson & Johnson, is probably the best-known example of a highly visible ethical leader. Soon after being appointed CEO in the late 1970s, he challenged his senior managers to revisit and update the company’s age-old credo (discussed later in more detail). He wasn’t willing to have it hanging on the wall unless his senior managers were committed to living it. After much dis- agreement, discussion, and input from J&J sites around the world, the credo was re- vised and its commitment to customers first and foremost was intact. Less than three years later, the Tylenol poisoning occurred (described in Chapter 10), and the credo guided corporate decision making successfully through the crisis. Following that cri- sis, Burke initiated a regular credo survey process in which employees were asked about the company’s performance regarding the credo—and that process continues to this day.24 It was clear to employees that Burke really cared about the credo and the values it represented.

When Paul O’Neill first became CEO at Alcoa, he brought with him a profound concern for worker safety. Although Alcoa already had an enviable safety record at the time based on industry standards, O’Neill created a goal of zero lost work days from accidents—a goal that flabbergasted even the safety director. When O’Neill visited plants, he told employees that the company was no longer going to budget for safety—if a hazard was fixable, they should do it and the company would pay for it, no questions asked. Then he gave the hourly workforce his telephone number at home and told them to call him directly about safety problems. He created an acci- dent reporting system that required reporting within 24 hours of any accident, no matter how small, and he used the reports as an opportunity for learning so that future accidents could be avoided. He also got on an airplane and visited employees who had been seriously hurt, no matter where in the world they were. Safety messages were everywhere, including woven into the carpets at some Alcoa sites. And when employees in the Pittsburgh headquarters crossed the street, they were careful not to jaywalk because it was ‘‘unsafe.’’ Years after O’Neill retired, Alcoa continued to improve until it became the safest company in the world.

In the completely different arena of diversity, O’Neill again stood out for his principled leadership. In his first week on the job, his secretary asked him to sign papers to join a country club. This had been standard procedure in the past because

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CEO membership was required in order for other Alcoa executives to join and use the club. Upon asking for certification that the club did not discriminate, he learned that the club did not have an open membership policy. O’Neill refused to sign the papers and developed a new policy saying that Alcoa would not reimburse any employee expenses at a place that did not allow admission to anyone who wanted it. O’Neill was encouraged not to rock the boat and to wait before making such a huge change. His response was, ‘‘What excuse am I going to use six or twelve months from now? I’ve just discovered my principles? They were on vacation . . . when I first came?’’ He explained that you have to have the courage of your convictions and insist on them all of the time, not just when it’s convenient.25

Similar to business leaders, coaches of college sports are expected to set and enforce ethical standards. Joe Paterno, the legendary Penn State football coach, and Dean Smith, former coach of the University of North Carolina basketball team, are coaches who exemplify moral management. They set high expectations (for performance and ethics), create rules and policies for appropriate behavior, and enforce them.26

Coaches are also held responsible when ethical violations are discovered among players, assistants, and boosters. A number of coaches have lost their jobs or resigned because of such violations.27 When wrongdoing occurs in any type of organization, top managers are frequently held accountable even if they weren’t personally involved. For example, the executives of Arthur Andersen, Enron, WorldCom, Adelphia, Boeing, and AIG Insurance were all replaced soon after ethical scandals came to light.

Coaches and business leaders are subject to immense pressure to win, and it can be tempting to put intense pressure on their people to bend or even break the rules. Ethical leaders maintain their principles through good times and bad. Bill George, retired CEO of Medtronic, a maker of medical devices, recounts a story about the time he had to tell analysts that, despite growing 15 percent for the quarter, the com- pany’s earnings would fall short of analysts’ expectations. The analysts berated him and called him a liar. Such experiences drive some executives to fudge the numbers to meet Wall Street expectations. But true ethical leaders are not dominated by this pressure. They learn to ignore these outside voices and begin to listen more to their own inner voice and values. In George’s case, he learned an important lesson when he visited a doctor who was performing an angioplasty with one of the company’s balloon catheters that literally fell apart during the procedure. The doctor was so angry that he took the blood-covered catheter and threw it at George. What was the lesson for this ethical leader? Medtronic workers don’t make pacemakers to please Wall Street. Their goal is to save lives. According to George, ‘‘the CEO can’t have the shareholder centrally in mind when making decisions. . . . America’s leading corporations became great not by getting their share prices up but by doing what they were set up to do incredibly well.’’28

UNETHICAL LEADERSHIP Unfortunately, unethical leaders can just as strongly influence the development of an unethical culture. In terms of our matrix, unethical

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leaders have reputations as weak moral persons and weak moral managers. In inter- views, senior executives cited Al Dunlap as a senior executive with a reputation for unethical leadership. John Byrne of Business Week wrote a book about Dunlap (Mean Business, 1997) and published excerpts in the magazine. According to Byrne, Dunlap became famous for turning struggling companies around. When hired at Sunbeam, he was considered such a celebrity CEO that the stock price spiked 49 percent in one day. But while at Sunbeam, he was also known for ‘‘emotional abuse’’ of employees—being ‘‘condescending, belligerent and disrespectful.’’ ‘‘At his worst, he became viciously profane, even violent. Executives said he would throw papers or furniture, bang his hands on his desk, and shout so ferociously that a manager’s hair would be blown back by the stream of air that rushed from Dunlap’s mouth.’’ Dunlap also demanded that employees make the numbers at all costs, and he rewarded them handsomely for doing so. As a result, they felt pressure to use questionable account- ing and sales techniques. Dunlap also lied to Wall Street, assuring them that the firm was making its projections and would continue to reach even higher. After just a couple of years, Dunlap couldn’t cover up the real state of affairs, and Sunbeam’s board fired him in 1998. But he left the company crippled.29 In 2002, Dunlap settled a civil suit filed by the Securities and Exchange Commission (SEC). He paid a $500,000 fine and agreed that never again would he be an officer or a director of a public company. Investigators learned that allegations of accounting fraud on Dunlap’s watch go back to the 1970s and follow him through a number of companies.

HYPOCRITICAL LEADERSHIP Perhaps nothing can make us more cynical than a leader who talks incessantly about integrity and ethical values but then engages in unethical conduct, encourages others to do so either explicitly or implicitly, rewards only bottom-line results, and fails to discipline misconduct. This leader is strong on the communication aspect of moral management but clearly isn’t an ethical person— doesn’t ‘‘walk the talk.’’ It’s a ‘‘do as I say, not as I do’’ approach. Al Dunlap made no pretense about ethics. All that mattered was the bottom line, and he didn’t pretend to be a nice guy. But hypocritical leadership is all about ethical pretense. The prob- lem is that by putting the spotlight on integrity, the leader raises expectations and awareness of ethical issues. At the same time, employees realize that they can’t trust anything the leader says. That leads to cynicism, and employees are likely to dis- regard ethical standards themselves if they see the leader doing so.

Jim Bakker remains the best public example of hypocritical leadership. In the late 1970s and early 1980s, Bakker built Praise the Lord (PTL) ministry into one of the world’s biggest religious broadcasting empires. At its peak, Bakker’s television ministry reached more than 10 million homes and had 2,000 employees. Bakker, along with his wife, Tammy Faye, claimed to be doing ‘‘the Lord’s work’’ as he raked in millions of dollars, convincing the faithful to purchase a limited number of lifetime memberships in two hotels he claimed would be built at the PTL’s Heritage USA Christian theme park. The problem was that the 25,000 lifetime memberships (promising a free annual family stay for four days and three nights) in the Heritage Grand Hotel morphed into 66,683 memberships. And, instead of the limited 30,000

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memberships at the proposed Heritage Towers, PTL sold 68,755 memberships. You do the math. It would be impossible to provide promised services to this many peo- ple. On top of that, the second hotel was never completed. The funds donated for these projects were being tapped to support PTL operating expenses, including huge salaries and bonuses for the Bakkers and other top PTL officials. When questioned at times about PTL’s finances, Bakker referred to the organization’s annual audits con- ducted by big auditing firms such as Deloitte and Laventhol. Unfortunately, PTL filed for bankruptcy in 1987, three months after Bakker resigned in disgrace. The IRS revoked PTL’s tax-exempt status, and in 1989 Bakker was convicted on fraud and conspiracy charges. He spent eight years in prison.30

A more recent example of hypocritical leadership is Lord John Browne, formerly the CEO of BP. Under Browne’s leadership, the company launched a $200 million ‘‘Beyond Petroleum’’ campaign to promote its image as a highly socially responsible company that would deliver performance without trading off worker safety or envi- ronmental concerns. But when BP’s Texas City plant exploded (killing 15 workers and injuring many more) and two big oil spills occurred in Alaska, regulators and employees cited cost cutting on safety and negligence in pipeline corrosion preven- tion as causes. It seemed that the Beyond Petroleum campaign was more about words than action. Greenpeace awarded Browne the ‘‘Best Impression of an Environmental- ist’’ award in 2005, and the CEO was finally asked to resign in 2007 after a scandal in his personal life surfaced.31 The lesson is pretty clear. If leaders are going to talk ethics and social responsibility (as they should), they had better ‘‘walk the talk’’ or risk cynicism or worse.

ETHICALLY NEUTRAL OR ‘‘SILENT’’ LEADERSHIP The fact is that many top man- agers are not strong leaders either ethically or unethically. They fall into what employees perceive to be an ethically ‘‘neutral’’ or ethically ‘‘silent’’ leadership zone. They simply don’t provide explicit leadership in the crucial area of ethics. They are perceived to be silent on this issue, and employees aren’t sure what the leaders think about ethics, if anything. This may be because the leader doesn’t realize how important executive ethical leadership is to the organization’s ethical culture, isn’t comfortable with talking about ethics issues, or just doesn’t care that much. On the moral person dimension, the ethically neutral leader is not clearly unethical but is perceived to be more self-centered than people-oriented. On the moral manager di- mension, the ethically neutral leader is thought to focus on the bottom line without setting complementary ethical goals. Little or no ethics message is coming from the top. But it turns out that silence represents an important message. In the context of all the other bottom-line-oriented messages being sent in a highly competitive business environment, employees are likely to interpret silence to mean that the top executive really doesn’t care how business goals are met (only that they are met), and they’ll act on that message.32

Consider Sandy Weill, former charismatic CEO of Citigroup. Well before the current financial crisis, a Fortune magazine article described the firm as a ‘‘block- buster money machine.’’ But the article also recounted scandalous allegations about

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Citigroup and its Salomon Smith Barney unit (now sold off). ‘‘Citi helped Enron hide debt; Salomon peddled worthless WorldCom debt; Star analyst Jack Grubman rec- ommended Winstar as it was heading for bankruptcy; Salomon rewarded telecom execs with hot IPOs,’’ and more.33 In 2004, Japan shut down Citigroup’s private bank in Japan that had made $84 million for the company in 2003. Regulators listed a long series of transgressions including money laundering, sales of unsuitable prod- ucts to customers, and generally sloppy business practices.34 The company spent lots of time and money playing defense with the media, responding to ugly headlines on a regular basis. According to Fortune, Weill eventually became contrite and ‘‘got reli- gion,’’ if a bit late. Weill told his board that . . . his most important job . . . was ‘‘to be sure that Citigroup operates at the highest level of ethics and with the utmost integrity.’’35 However, the article also cited widespread cynicism about that state- ment, noting that Weill was often ‘‘tone deaf’’ on these ethics issues.

At least from the perspective of outside observers, Weill exemplified ‘‘ethically neutral’’ leadership. Being tone deaf on ethics issues is exactly what ethically neutral leadership is about. Weill’s public statement that the ‘‘company is too big to micro- manage’’ applies to his approach to managing ethics. He said a CEO relies on ‘‘very competent people’’ and trusts them to do a good job. In the case of ethics manage- ment, that meant leaving it to the executives running Citi’s various businesses. If the head of a division thought ethics was important, ethics got resources and attention. If the head didn’t promote ethics, attention turned elsewhere, and most likely to financial performance goals. So, with a kind of benign neglect, Weill sat on the sidelines and provided little ethical leadership. And with corporate rewards focused on the bottom line, managers had little motivation to attend to other issues. As a result, employees didn’t know for sure where Weill stood. But the intense focus on the bottom line suggested that profits were most important, and many employees probably acted accordingly. This approach to ethics is in sharp contrast to prior CEO John Reed’s leadership on ethics issues. Reed spent almost his entire career at Citicorp and was its CEO when the huge American financial powerhouse merged with Weill’s Travelers organization to form Citigroup. Reed, who was a banker his entire life, understood in his gut how important reputation is to a financial institution. As a result, he encour- aged and supported the development of a strong, centralized corporate ethics program with global reach. Interestingly, the people associated with that program were quickly gone, and much of the program itself was dismantled after Weill took over.

Weill stepped down in 2003 and handed the CEO reins to Chuck Prince, who continued to address the scandals that Weill left behind—including $8 billion in scandal-related charges that had to be absorbed. Prince fired high-level people involved in scandals, including the chairman of Citigroup International who had been credited with a 30 percent increase in international earnings in 2003. In an interview with Fortune magazine, Prince said:

John Reed [CEO before Weill] told me once that culture is a set of shared, unspoken assumptions. . . . I think the larger the company has become, the more we need to speak about those unspoken assumptions.

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We need to add to our celebration of financial performance a focus on long-term compliance activities, long-term franchise building, being in it for the long term. So one of the things we’re going to put into place, starting in 2005, is a series of activities—training, communications, performance appraisals—that will lend a little more balance to the aggressive financial culture that we have always celebrated, and that I still do.

Short-term growth at the cost of long-term growth is a very bad trade. Some people make that bad trade when they only hear one instru- ment in the orchestra. If they hear the full orchestra, the full panoply of messages, then people have ‘‘no excuses’’—that’s the sign on my desk— no excuses.36

The more Prince scrutinized the organization, the more concerned he became about loose internal controls. He began to add resources to legal compliance. He even moved his office, from next to Weill’s to the floor below, and began consulting more with John Reed.37 But Prince seemed to feel powerless to really change the culture that Weill had planted and that had taken root. Prince once confessed that he knew the bank’s aggressive deal making could mean big trouble if the easy money stopped flowing. ‘‘As long as the music is playing, you’ve got to get up and dance,’’ he told the Financial Times in summer 2007, even as credit markets began to shud- der. ‘‘We’re still dancing.’’38

The firm suffered severe performance problems under Prince’s leadership, and he was replaced by Vikram Pandit in late 2007. Citigroup, along with several other financial institutions considered ‘‘too large to fail,’’ was rescued in the fall 2008 U.S. government bailout of financial institutions. The firm was in trouble because of losses related to risky mortgage-backed securities, which we speculate may have something to do with the laxity around ethical standards created under Weill. Experts conclude that Citigroup failed to integrate its varied businesses and failed in monitoring its risky investments and freewheeling operations. Many point to the repeal of the Glass-Steagall Act, which separated commercial banks from investment banks and insurance, as one of the root causes of the 2008–2009 financial crisis. Weill had championed this deregulation, and it made Citigroup possible. Recently, John Reed expressed regret at his role in urging repeal of Glass-Steagall, but Weill would have none of it. ‘‘When asked about Reed’s apology, Mr. Weill says, ‘I don’t agree at all.’ Such differences, he says, were ‘part of our problem.’’’39

Research has found that executive ethical leadership is critical to employees. Unethical behavior is lower, and employees are more committed to their organiza- tion, more ethically aware, and more likely to engage in positive helping behaviors (including reporting problems to management) in firms that have an ethical culture characterized by top executives who are strong ethical leaders.40 Research has also found evidence that executive ethical leadership flows down through the organiza- tion, affecting supervisors’ ethical leadership behavior and finally employee behavior.41 But interestingly, senior executives are often not aware of how important

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their ethical leadership is. Many believe that being an ethical person who makes eth- ical decisions is enough. But it isn’t enough. Executives must lead on this issue (be moral managers) if it is to register with employees. In a highly competitive environ- ment of intense focus on the bottom line, employees need to know that the executive leaders in their organization care about ethics at least as much as financial perform- ance. An ethical leader makes it clear that strong bottom-line results are expected, but only if they can be delivered in a highly ethical manner. Leaders may talk in terms of reputation or use other language they find comfortable. But the message must be that the firm’s long-term reputation is an asset that everyone must protect.

OTHER FORMAL CULTURAL SYSTEMS

Selection Systems

Selection systems are the formal systems that are in place for recruiting and hiring new employees. Selection systems are vital to hiring people who fit the culture of the firm. For example, all employees at Southwest Airlines (including pilots) are selected based on their personalities (traits that include cheerfulness, optimism, and team spirit) among other credentials. So it’s not surprising to find pilots helping to clean the cabin when time is short, and flight attendants throwing gate parties on Hallow- een and telling jokes to passengers over the plane’s loudspeakers.42

When considering the ethical culture, organizations can avoid ethical problems by recruiting the right people and by building a reputation that precedes the organiza- tion’s representatives wherever they go. Companies can conduct background checks, check references, administer integrity tests, and survey applicants using some of the individual differences discussed in earlier chapters. For example, they might be wary of hiring someone high on Machiavellianism if they’re trying to create a cooperative culture where people help and support each other. Interviewers can also ask ethics- related questions in interviews, for example, by asking candidates about ethical issues they’ve confronted in the past and how they’ve handled them.

In an article entitled, ‘‘Can You Interview for Integrity?’’ William Byham43

offered a series of questions an interviewer concerned about ethics might ask a recruit. Here are adaptations of some of them:

1. We sometimes have to choose between what we think is right and what’s best for the company. Can you give an example of such a time and tell how you handled it?

2. Can you describe your current employer’s ethics? Are there things you feel good about? bad about?

3. Please provide an example of an ethical decision you’ve made at work and tell how you handled it. What factors did you consider?

4. Can you provide an example of some past work behavior that you’ve regretted? How would you behave differently today?

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5. Have you ever felt the need to exaggerate or bend the truth to make a sale?

6. Have you ever observed someone else stretching the rules at work? What did you do, if anything?

7. People are often tempted to make something seem better than it is. Have you ever been in such a situation?

8. Have you ever had to go against company policies in order to accomplish something?

9. Have you ever managed someone who misled a client? How did you handle it?

10. What’s your philosophy of how to think about policies? Are they guidelines, to be followed to the letter?

Our students have been asked similar types of questions in interviews with the best companies. Are you prepared to answer questions like these?

Recruiters can also inform prospective employees about the importance of integ- rity in their organization and what happens to those who break the rules. Companies that are serious about integrity can include statements about their values and expect- ations in recruiting literature, in the scripts recruiters use when interviewing job candidates, in offer letters to candidates, and in new-hire orientation programs.

Coach Joe Paterno was outspoken on this topic in our interview with him. He claimed that the Penn State football program avoids lots of problems faced by other college sports organizations by being absolutely clear up front about its commitment to education for its athletes and to doing things ‘‘by the [NCAA] book’’:

I think our reputation eliminates most problems before we start. Because we do have a reputation. If a kid is looking for some kind of a deal, he generally won’t fool around with us. But, I remember one kid whose dad openly said, ‘‘He can’t live on that. He’s gotta have more money than that.’’ I said, ‘‘That’s all we can do.’’ He said, ‘‘Well, somebody will give it to us.’’ I wished the kid luck and walked out of the house.

Because the Penn State football program has a reputation for integrity, Coach Paterno and his staff rarely face such requests. Those who are looking for money under the table know to look elsewhere. And athletes who break the rules know in advance that they’ll be disciplined.

These days, companies also need to be very selective when recruiting leaders who are being considered for important decision-making roles in the firm. Many recent business scandals have zeroed in on company chief financial officers (CFOs) who played with the numbers to make it look as if profit goals expected by Wall Street had been achieved when, in reality, they had not. Such individuals must dis- play the strongest moral character in order to withstand marketplace pressures to make the numbers look good. Questions about how they would respond to such pressures and how they have handled them in the past can be useful in selecting these key players.

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Values andMission Statements

Once employees are on board, many organizations aim to guide employees’ behavior through formal organizational value statements, mission statements, credos, policies, and formal codes of ethical conduct. Value and mission statements and credos are general statements of guiding beliefs. Most companies have them, but it’s important that the values and mission statement be closely aligned with other dimensions of the culture. According to James Collins, coauthor of Built to Last: Successful Habits of Visionary Companies, ‘‘the words matter far less than how they are brought to life. The mistake most companies make . . . is not setting up procedures to make sure the mission is carried out.’’ If the policies and codes are followed in daily behavior and people are held accountable to them, this is another example of a strong ethical culture in alignment.

In the year 2000, Verizon’s published core values were integrity, respect, imagi- nation, passion, and service. But consider this. Customer service representatives were expected to finish each call with the following question (in precisely these words) to the customer: ‘‘Did I provide you with outstanding service today?’’ During a strike in the fall of 2000, workers cited this disconnect between values and operating proce- dures as a source of stress and cynicism. Asking customer service representatives to follow a specific ‘‘script’’ (that sometimes led to irate customers becoming even more irate) did not respect the individual customer service representative’s ability to serve the customer in a more natural way, and it certainly didn’t allow the employee to use imagination or passion in providing customer service. The script may have been well intentioned, but it conflicted with several of the core values professed by the com- pany and appeared hypocritical to employees. Stated values that are inconsistent with management practice can quickly generate employee cynicism.44 Wouldn’t it be better and more consistent with the value of respect to simply ask service repre- sentatives to end their calls with a question about whether the customer was satisfied with the quality of service, but let the representatives choose their own words?

Probably the most famous example of an effective mission and values statement that is aligned with other cultural systems is the Johnson & Johnson credo, which outlines the pharmaceutical company’s commitments. Probably most important is the statement that the company’s ‘‘first responsibility is to the doctors, nurses and patients, to the mothers and fathers and all others who use our products and ser- vices.’’ Other responsibilities follow, for example, to employees, suppliers, commu- nities, and finally stockholders. Notably, stockholders are listed last under the assumption that if the other responsibilities are taken care of, stockholders will do well. On its website (www.jnj.com), the company includes a video about the credo and ‘‘how it lives in the Johnson & Johnson family,’’:

The values that guide our decision making are spelled out in our Credo. Put simply, Our Credo challenges us to put the needs and well-being of the people we serve first. Robert Wood Johnson [founder] . . . crafted Our Credo himself in 1943. . . . This was long before anyone ever heard

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the term ‘‘corporate social responsibility.’’ Our Credo is more than just a moral compass. We believe it’s a recipe for business success.

Most famously, the corporation drew on its credo for guidance during the Tylenol crises of the 1980s, when the company’s product was adulterated with cya- nide. Company managers and employees made countless decisions (including recalling all Tylenol at huge cost) that were inspired by and consistent with the credo’s guidance. Today, company employees participate in a periodic survey and evaluation of how well the company performs its credo responsibilities. Survey results are then fed back to the senior management, and corrective action is taken to correct any shortcomings. The current CEO, Bill Weldon, also makes a point of visit- ing employees who are moving into leadership positions around the world to discuss real problems and how the credo applies to them. As one recent example, in 2007, the company reported itself to the SEC and Justice Department when it discovered possi- ble violations of the Foreign Corrupt Practices Act (discussed further in Chapter 11).

It takes little for a company to make a formal statement like the J&J Credo, but it takes quite an ongoing commitment to actually follow it.45 Certainly, Johnson & Johnson has had its share of ethical problems. But when you talk to current J&J employees, they talk easily about the credo, its importance in the J&J culture, and how it guides ethical conduct in the organization.

When you are considering joining an organization, look for the organization’s values statement and ask employees for examples of how the organization lives its values (or doesn’t). Such a question can provide useful insight into cultural alignment and misalignment by making clear whether the values statement represents lofty for- mal statements with little basis in reality or ‘‘values in use’’ that represent how peo- ple really behave every day. It’s important to ask yourself whether your own stated values (you should have assessed them in Chapter 2) match up with the organiza- tion’s values. If they do, and you have evidence that this is an organization that lives its values, you’re on your way to a job you’ll find satisfying.

Policies and Codes

Formal ethics policies (often called codes of ethics or codes of conduct) are longer and more detailed than broad values and mission statements. They provide guidance about behavior in multiple specific areas. For example, most ethics codes address issues of respectful treatment of others, conflicts of interest, expense reporting, and the appropriateness of giving and receiving gifts. Policy manuals are even lengthier than codes and include more detailed lists of rules covering a multitude of job situa- tions that are specific to the industry, organization, and type of job. An extended dis- cussion of policies and codes follows in Chapter 6.

Most ethics codes were introduced within the past 30 years. A mid-1990s study of the Fortune 1000 found that 98 percent of these large firms reported addressing ethics and conduct issues in formal documents. Of those 98 percent, 78 percent had codes of ethics.46 In a 2005 Ethics Resource Center study, 86 percent of respondents

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from a wide variety of employers across the United States reported that the private sector, public sector, and not-for-profit organizations they work for have formal ethics policy standards.47 So it’s fair to say that most employers are making an effort to provide formal guidance to their employees regarding ethical and legal conduct. It’s also important to note that these codes are living documents that are revised regu- larly in response to changing conditions. For example, early ethics codes said nothing about Internet privacy or social networking guidelines, but these topics are much more common in today’s codes.

Most companies with codes now distribute them quite widely. A 1995 survey of Fortune 1000 firms found that 75 percent of responding companies reported distrib- uting their code or policy to at least 80 percent of their employees.48 This finding may be a by-product of the U.S. Sentencing Guidelines (discussed in Chapter 6), which specify communication of compliance standards to all employees as a guiding principle. Research has found that when employees are familiar with the code and refer to it for guidance, they are less likely to engage in unethical behavior, more likely to seek advice about ethical issues, and more likely to report ethical rule viola- tions.49 But, to have real influence on behavior, a code must be enforced.50 Other- wise, codes of conduct are more likely to be viewed as mere ‘‘window dressing’’ rather than guides for actual behavior.

Many firms post their codes on their websites. Some firms also distribute their codes beyond their own employees to vendors and suppliers who are explicitly asked to comply. For example, a supermarket company distributed its code to its suppliers along with a letter, signed by the president:

Dear Business Associate:

As the holidays draw near, we are mindful of the mutually satisfying and mutually profitable relationship which exists between our company and our suppliers. We look forward to many more years of successful growth together through our joint efforts to provide our customers with quality products, excellent service and low price.

In recent years, we have found many of our staff members embar- rassed by well-intentioned gifts from those with whom we do business. Our Board of Directors approved the enclosed Code of Ethics which clearly states our policy prohibiting our Associates from accepting gifts from our suppliers and customers. We feel that this policy should apply during the holidays as well as throughout the year.

With so much attention being given to practices which bring the business community’s ethics into question, we urge your support of our efforts to maintain the respect and confidence of the industry for the ob- jectivity of our dealings with suppliers.

Since failure to comply with our policy will result in disqualification from further business dealings with us, we request that you distribute this letter to those in your company who have business dealings with our corporation and its subsidiaries.

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The most significant means of expressing your appreciation to our staff continues to be your efforts to help us grow together by anticipating and meeting the changing consumers’ needs and wants.

If you have any questions regarding this policy, please contact. . . . With our best wishes for happy holidays and a healthy and prosper-

ous New Year.

Companies are also taking more responsibility for the behavior of suppliers, even if those suppliers are in foreign countries. If Nike or Wal-Mart buys shoes or clothes from a factory in Asia, these firms are increasingly aware that the supplier’s actions are their responsibility. As an example, Wal-Mart requires its suppliers to agree to comply with its code of ethical conduct and requires that suppliers post its free 1-800 reporting telephone number at work sites. We’ll discuss this topic further in Chapter 11.

The idea of guiding behavior with codes of conduct extends to higher education institutions, where many colleges have honor codes that apply to academic (e.g., test cheating, plagiarism) and sometimes even nonacademic (job search) behavior. Research on honor codes in colleges and universities suggests that students cheat less in institutions that have honor codes.51 However, students’ perceptions of their peers’ cheating has an even stronger influence on cheating behavior than the existence of a code. In addition, the certainty of being reported and the severity of penalties are important because they support the idea that the code alone is not the most impor- tant influence.52

Managers, especially middle managers, want to have a stated organizational pol- icy or code when it comes to serious ethical matters. Remember, cognitive moral development research tells us that most people are looking outside themselves for guidance, and stated organizational policy can be an important source of that guid- ance. To determine where policy is needed, the organization can survey managers about areas of ethical concern and their perception of the need for policy in each area. In one study, managers made it clear that policy was needed in such areas as expense claims, gifts and bribes, and treatment of competitor information.53

Orientation and Training Programs

Socialization into the ethical culture is often begun through formal orientation pro- grams for new employees and is reinforced through ongoing training. The organiza- tion’s cultural values and guiding principles can be communicated in orientation programs. Employees often receive an introduction to the values and mission state- ments as well as the company’s history and current code of conduct. But new employees are so overwhelmed with information that it’s important to follow up with training programs that offer more specific guidance. An increasing number of firms have added ethics to their list of training programs. Some have done so as a result of the revision of the U.S. Sentencing Commission Guidelines and the Sarbanes-Oxley legislation that requires public companies to conduct compliance

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training at all levels, including senior executives and the board of directors. Most Fortune 1000 firms provide some ethics training,54 and many of them do so annually. In the 2005 Ethics Resource Center study,55 69 percent of people surveyed said that their employers provide ethics training and that this training is generally mandatory. Some companies use online ethics training; others use classroom face-to-face train- ing. In Chapter 6, we’ll present more specifics about how different firms conduct ethics training.

It’s important to note that the ethics training must be consistent with other ethical culture systems, because a training program that is out of alignment with other cul- ture systems is thought of, at best, as a pleasant day away from the office. At its worst, the ethics training is seen as an obstacle to getting ‘‘real’’ work done—or even as a joke. For example, a young man who worked in mortgage lending in 2006 said that his company had provided a high-quality weeklong training program to prepare him for his job. Among other more technical aspects of his job, he was taught to advise clients to be sure that they could afford their payments and to avoid incurring additional credit card debt. He felt that this was smart and caring advice, and he felt good about his new role. But when he returned to the office, his ‘‘mentor’’ (who had been in the job only six months longer than he had) told him that all that mattered was closing the deal and making money for himself and the company, and that ‘‘advising’’ clients was a waste of time. If his ‘‘advisor’’ role had been reinforced by his mentor, the cultural message would have been entirely different. Perhaps the company’s fate would have been different as well—it no longer exists.

PerformanceManagement Systems

Performance management systems involve the formal process of articulating employee goals, identifying performance metrics, and then providing a compensation structure that rewards individual—and frequently team—effort in relation to those goals. Performance management systems also include formal disciplinary systems that are designed to address performance problems when they arise. An effective per- formance management system is a key component of the ethical culture. The system plays an essential role in alignment or misalignment of the ethical culture because people pay attention to what is measured, rewarded, and disciplined. So if employees with integrity are the ones who get ahead, and unethical behavior is disciplined, that process goes a long way toward promoting an ethical culture.

DESIGNING A PERFORMANCE MANAGEMENT PROCESS THAT SUPPORTS

ETHICAL CONDUCT Because people ‘‘do what’s measured and rewarded,’’ the best way for an organization to design a comprehensive performance management system is to spend time identifying which factors drive the results the organization strives to achieve. This type of corporate soul-searching generally results in a list of these factors, both financial and nonfinancial. Just as Fortune magazine considers reputation when designing its famed ‘‘lists’’ of admired companies, many sophisti- cated companies understand that reputation, in many cases, drives long-term financial

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results. However, many companies continue to design performance management pro- grams that consider only financial results. They ignore the nonfinancial drivers that can actually serve as the underpinning of the numbers. These companies focus on what business results are delivered, and they ignore how those results were achieved. That is probably the fastest way for an organization’s ethical culture to get out of alignment.

Here’s how performance management systems can be designed to get great results the right way. First, an organization needs to focus on the mechanics. For example, once an organization understands what is necessary to drive results, it needs to set goals to achieve those desired results and metrics to determine whether the goals are being met. Real success in this area comes when organizations effectively communicate those goals to every employee, helping employees identify how each person can create value for the organization and then rewarding employees fairly for their contribution to achieving those corporate goals. Once the mechanics are in place, the next challenge is to marry the what with the how, and that’s where an organization’s articulated values come in. Those values—probably concerning the importance of people, integrity, diversity, customer service, and so forth—need to be translated into behavior metrics that every employee is held accountable for. When such a process is in place, high fliers who exceed all of their numbers can be held accountable for how they met those numbers because this step is built right into their performance expectations and rewards process. A good example is an account execu- tive with a leading consulting company who managed her firm’s relationship with many of the largest companies in New York City. Her clients generated revenues in the millions for her firm, and that fact alone would ordinarily be enough to ensure that she was named a partner in the firm. However, the senior management team was so upset at how she trounced the firm’s stated value of ‘‘treating people with respect’’—she was extremely abusive to her coworkers—that they repeatedly denied her promotion. Of course, one could argue that she shouldn’t have a job at all. But at least her behavior—the how involved in attaining her huge results—prevented her from being promoted and esteemed as a partner.

American Express has tied its performance appraisal system directly to its values and code of conduct. The values are associated with a culture that focuses on long- term results as well as the desire to be an ‘‘employer of choice.’’ The company’s ethics code states the expectation that leaders will be ethical role models who exhibit the highest standards of integrity, develop employees, communicate the company’s ethical expectations and their own support for those expectations, and create an open environment so that employees feel free to express their concerns. The company’s 360-degree performance management process for senior leaders then identifies a number of leadership competencies, including explicit examples of high performance such as the following:

& Treats others with respect at all times; is fair and objective

& Actively listens and incorporates input from others

& Acts with integrity

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& Inspires the trust of the team, is reliable and consistent

& Talks openly and honestly—says it as it is

Examples of poor performance are also part of the system (e.g., ‘‘breaks promises, is inconsistent, fails to show respect for others’’).

The ratings of these competencies are weighted substantially in promotion and compensation decisions, thus making it difficult to get promoted if one is rated poorly on these ethical leadership competencies and important to be rated highly if an employee wants to advance. Finally, the company is investing resources in providing leaders with the necessary skills so that they can effectively fulfill the company’s expectations consistent with its values.56

Alignment of the goals and rewards with the organization’s values is essential because employees will generally do what’s measured and rewarded, and they’ll assume that the behaviors that are rewarded represent the ‘‘real’’ ethical culture. So, in the American Express example, behavior consistent with the company’s stated values is measured and rewarded with promotions and compensation. This is a great example of ethical culture alignment.

But misalignment of rewards with other aspects of the ethical culture is quite common. For example, imagine an organization where everyone knows that the top sales representative’s sales depend on lying to customers about delivery dates despite an ethics code that talks about customer satisfaction as a key value. Not only does the unethical conduct go undisciplined, but the sales representative receives large bonuses, expensive vacations, and recognition at annual sales meetings. Members of the sales force recognize that information about what is rewarded carries the ‘‘real’’ cultural message, and so the code becomes meaningless—or worse yet, an example of top management’s hypocrisy.

For an ethical culture to be in alignment, poor performance against stated ethical goals must also be addressed quickly and fairly. For example, dishonest or dis- respectful behavior (or any behavior inconsistent with ethical values) should be dis- ciplined using a progressive disciplinary system that employees perceive to be fair. For example, a first offense (unless it is particularly serious) is usually addressed in a constructive manner that gives the employee the opportunity to provide input and to change the behavior. Subsequent misconduct is addressed more severely, and dismis- sal is the ultimate outcome for repeat or serious offenses. It’s also important that employees be disciplined equally across organizational and performance levels. That means the successful star executive as well as the lower-level employee must be dis- ciplined for knowingly breaking the rules. In fact, at that higher level, the discipline should probably be quicker and harsher because the higher in the organization one goes, the more responsibility one holds, and the more one is a role model for others. As a result of recent scandals and increased scrutiny by regulators, companies are taking discipline more seriously. Even the perception of unethical behavior can lead companies to dismiss high-level executives in the current environment.

Penn State football coach Paterno, in our interview with him, was clear about the importance of rules and their enforcement with every player. ‘‘The players know

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what the penalties are. They have a pretty good idea of what’s going to happen to them if they break the rules. . . . If I tell the players we have a rule, we have to enforce it and apply it to everyone. You can’t say this is the rule and it’s for every- body but your top quarterback.’’ Paterno showed how he held players accountable when the Penn State team played its 1998 bowl game without two star players. One had academic problems, and the other had been accused of taking a gift from a sports agent. The team lost, but the program’s integrity was intact. Interestingly, Paterno’s rule enforcement extends to alumni and boosters who have gotten other football pro- grams in big trouble with the NCAA. Penn State regularly sends letters reminding football game ticket holders about their responsibility to uphold the integrity of the football program. And, according to Paterno, some alumni have lost their rights to buy tickets because of past violations.

The bottom line is that performance management systems are important in them- selves because they provide guidance about expected behavior, but they’re particu- larly important in the sense that people look to them to reflect the ‘‘real’’ message about what is valued in the organization. The essential question is whether consist- ency exists between what the organization says (e.g., values statements, codes) and what it actually measures, rewards, and punishes.

Organizational Authority Structure

Ethical cultures should guide individuals to take responsibility for their own behavior, question orders to behave unethically, and report misconduct or problems. A strong ethical culture incorporates a structure that emphasizes and supports individual respon- sibility and accountability at every level. Employees are encouraged to take responsi- bility for their own actions and to question authority figures if they have concerns. And individuals are held accountable for negative consequences when they occur and for reporting problems they observe. One manager we know created the idea of ‘‘Velcro’’ to convey the importance of responsibility to her direct reports. She tells them, if you know about a problem, it’s yours until you address it. It’s stuck to you like Velcro!

Most modern organizations are bureaucratic,57 meaning that they have a hierar- chy of authority, a division of labor or specialization, standardization of activities, and a stress on competence and efficiency. Bureaucracy provides many advantages, and large organizations require a certain amount of bureaucracy in order to function. The bureaucracy can also be used to create a structure that supports ethics, and you’ll learn more about these in Chapter 6. For example, ethics and legal compliance offices in organizations signal to everyone that these are important issues worthy of re- sources, expertise, and staff. However, certain characteristics of bureau-cracy—such as specialization, division of labor, and hierarchy of authority—can present problems for the organization’s ethical culture.

AUTHORITY, RESPONSIBILITY, AND ETHICAL CULTURE With bureaucracy comes the idea of legitimate authority. Look at any organizational chart. It will tell you who supervises whom—who has authority over whom. These authority figures

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serve important bureaucratic roles. They direct work, delegate responsibility, conduct performance appraisals, and make decisions about promotions and raises.58

But the idea of legitimate authority can present problems for the ethical culture. First, as you’ll learn in Chapter 7, people tend to obey authority figures no matter what they are ordered to do.59 This natural tendency toward unquestioning obedience can be a real threat to the organization’s attempt to build individual responsibility into its ethical culture. In attempting to control employee behavior, many firms expect loyalty; and some demand unquestioning obedience from their employees. You might think that’s a good idea—that authority figures have more experience and should know what’s right, and employees should follow their orders. But even the military with its authoritarian structure expects soldiers to question unethical orders. Loyalty is generally a good thing, but you shouldn’t be expected to be loyal or obedi- ent to an unethical boss or organization. Unquestioning obedience to authority means that employees are not expected to think for themselves, to question bad orders, or to take responsibility for problems they observe. Therefore, a ‘‘do as you’re told’’ and ‘‘don’t ask any questions’’ culture that expects unquestioning obedience from employees can become involved in serious ethical problems. Research has found that the more a firm demands unquestioning obedience to authority, the higher the unethical conduct among employees, the lower their tendency to seek advice about ethical issues, and the lower the likelihood that employees would report ethical violations or deliver ‘‘bad news’’ to management.60

Some managers create a structure designed to help them avoid blame.61 Their greatest fear is that when it comes time to blame someone, the finger will point their way, and their job will be at risk. By delegating responsibility to those at lower levels in the organization, the authority figure can often avoid personal blame for mistakes or ethical blunders. When it comes time to blame someone, the finger of blame fre- quently points down. Underlings, in particular, fear becoming the scapegoat for mis- takes made at higher levels. CYA (cover your a—) memos proliferate as managers look to blame someone in a relatively powerless position who is considered to be expendable.

The structure of an organization can also fragment jobs and roles.62 It isn’t nec- essarily that individuals don’t want to take responsibility. But jobs and roles get so divided up that they simply can’t see the big picture.63 We’ll see in Chapter 7 how military bureaucrats passed the buck for responsibility during an investigation of the My Lai massacre in Vietnam. Those involved saw themselves only as cogs in a machine. No one felt responsible for the larger outcomes of their actions.

NEW ORGANIZATIONAL STRUCTURES Organizations today are developing structures designed to remove bureaucratic layers, push responsibility down, and empower individuals to make decisions at every organizational level. Take the exam- ple of office furniture manufacturer Herman Miller, Inc. (HMI), which is committed to the values of ‘‘open communication,’’ ‘‘the dignity of each individual,’’ and ‘‘qual- ity relationships based on mutual trust and integrity.’’ Kevin Knowles, a crew leader for six years, said, ‘‘What always surprises me is that everyone in the company . . . is

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free to talk with anyone in management about whatever they’d like to talk about.’’ Managers at HMI cite workers’ ability to go over their managers’ heads as a major reason for the company’s success. ‘‘There’s no fear of retribution if you call someone three levels above.’’ HMI touts a process its chairman calls ‘‘roving leadership’’ that allows anyone to be a leader on a particular issue.

Here is an example of how roving leadership was tested successfully. An employee with AIDS decided that he should let others know about his illness. A cow- orker took the roving leader responsibility and informed the human resources man- ager. Quickly, the entire plant was informed, and a physician from headquarters flew in with a training videotape and a question-and-answer session. According to the rov- ing leader, what’s important is that HMI’s value system ‘‘allows us to act on our instincts and know the company will support us. Because the value of each individual is important to us, we were able to stop the manufacture of furniture for one day to take care of Peter.’’64 Such a culture likely contributes to the success of a company that was named in 2002 by Forbes magazine as among the 400 best-performing large American corporations. Business Ethics magazine also ranked HMI in the top 10 among the ‘‘100 Best Corporate Citizens.’’

These recent changes in organizational structure have powerful implications for taking responsibility and for ethical decision making, and they increase the impor- tance of having a strongly aligned ethical culture. When individuals are indepen- dently making decisions, with less direct supervision, they need a strongly aligned ethical culture to guide them. An important part of this picture is a structure that supports taking individual responsibility for ethical action.

STRUCTURES TO SUPPORT REPORTING OF PROBLEMS In today’s organiza- tions, fewer employees are directly supervised and organizations rely increasingly on employees to alert them to problems or report misconduct. Yet employees are often reluctant to do so. Therefore most large organizations have set up formal structures and systems for making suggestions and for reporting misconduct internally. These systems use intranets and phone systems to answer employees’ concerns and take complaints and reports about observed wrongdoing.

As we all know, powerful norms exist against reporting on peers or superiors (in- ternal whistle-blowing). The words we use to describe this behavior—tattling, squeal- ing, snitching, informing, and ratting—all have negative connotations. In fact, there isn’t a nice or even a neutral word to describe it. Can you come up with one? As sug- gested in Chapter 4, whistle-blowers frequently suffer retaliation, particularly when they report managerial or organizational misconduct.65 They perceive that they are punished rather than rewarded for doing what they think is right. Therefore employee fear of reporting misconduct is widespread. If an organization claims that it’s attempt- ing to develop a strongly aligned ethical culture, retaliation against a whistle-blower is a powerful example of misalignment. Again, the workers view this ‘‘punishment’’ of the whistle-blower as an example of the organization’s ‘‘real’’ ethical beliefs.

The ethical organization, however, should view an employee who takes respon- sibility for reporting a problem or misconduct as important to an effective control

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system and must find ways to make such activity safe and encouraged. Some organi- zations have even rewarded whistle-blowing. For example, in 1996, Fortune maga- zine published memos from the chairman of a Wall Street financial services firm. The following memo was addressed to senior managing directors, managing direc- tors, and associate directors.

We need your help. Please help us get a message out to every associate. It is essential that once again we stress that we welcome every suspicion or feeling that our co-workers might have about something they see or hear that is going on . . . that might not measure up to our standards of honesty and integrity. . . .

We want people . . . to cry wolf. If the doubt is justified, the reporter will be handsomely rewarded. If the suspicion proves unfounded, the per- son who brought it to our attention will be thanked for their vigilance and told to keep it up.

Forget the chain of command! That is not the way [the company] was built. If you think somebody is doing something off the wall or his/ her decision making stinks, go around the person, and that includes me. . . .

Get these messages out loud and clear. We have had some senior people who resented ‘‘end runs.’’ They

quickly became associated with more conventional firms—you can draw your own conclusions about whether their career change worked out for the best.66

This leader sent a clear message that whistle-blowing was encouraged and rewarded. In the second memo, he shared information about a specific instance in which two administrative assistants detected that fictitious taxicab vouchers were being submitted by an employee. The employee was terminated, and the administra- tive assistants were provided a cash award.

Decision-Making Processes

The organization’s formal decision-making processes are another important part of the ethical culture. In an aligned ethical culture, leaders make ethical concerns a for- mal part of all decision making. This emphasis on ethics in decision making can be reinforced by regularly addressing ethical concerns in meetings and by making them an expected part of managers’ reports regarding new products or new business ven- tures. For example, managers may be asked to consider potential harm to multiple stakeholders when proposing a new product or process. As one example, environ- mental impact is now an expected and routine part of corporate decision making in many firms. Some organizations are also creating special high-level ‘‘ethics’’ com- mittees charged with reviewing major organizational level decisions from an ethical perspective.67 For example, one can imagine a responsible pharmaceutical company

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making such assessments about whether to launch a new drug that has serious side effects even after the FDA has approved it. Others have advocated the implementa- tion of moral quality circles, groups set up to assess the morality of business decisions.68

OVERRELIANCE ON QUANTITATIVE ANALYSIS Decision-making processes can contribute to unethical behavior by relying exclusively on quantitative analysis and focusing only on financial outcomes. For example, in Chapter 3 we discussed the decision-making process that kept the Ford Pinto from being recalled. In that situa- tion, exclusive reliance on a quantitative cost-benefit analysis to the exclusion of ethical considerations had disastrous consequences. In another example, Johns Manville, the former corporate giant and producer of asbestos, was brought down by decision-making processes that focused on the bottom line to the exclusion of worker health. More than 40 years ago, top management began to receive informa- tion implicating asbestos inhalation as a cause of severe lung disease in workers. Managers and medical staff suppressed the research and concealed the information from employees. During testimony, a lawyer reported on a confrontation with the corporate counsel about the failure to share X-ray results with employees. The law- yer reported asking, ‘‘You mean to tell me you would let them work until they dropped dead?’’ The Johns Manville lawyer replied, ‘‘Yes, we save a lot of money that way.’’ It was apparently cheaper to pay workers’ compensation claims than to develop safer working conditions. A New Jersey court found that the company had made a ‘‘conscious, cold-blooded business decision to take no protective or reme- dial action.’’69 Obviously, organizational decision makers must rely on quantitative analysis in making business decisions. But their reliance on numbers, to the exclu- sion of ethical considerations, is problematic and contributes to an unethical cul- ture. Discussions about whether the decision is the ‘‘right’’ thing to do must accompany discussions about the effect of a particular decision on the bottom line. Important decisions should be subjected to a discussion of ethical concerns, espe- cially potential impacts on stakeholders.

BURDEN OF PROOF In 1986, Beech-Nut Nutrition Corporation, the second-largest U.S. baby food manufacturer, pleaded guilty to 215 felony counts and admitted to selling apple products that were a blend of synthetic ingredients. How did this hap- pen? There were many causes, among them the company’s financial difficulties, the belief that other companies were selling fake juice (industry norms), and the belief that the juice was perfectly safe.

A chief cause may also have been the decision-making processes that were used. When Jerome LiCari, director of research and development, recommended changing suppliers in 1981 (because he suspected adulteration), Operations Head John Lavery turned the traditional burden of proof around. Generally, baby food manufacturers would switch suppliers if the supplier couldn’t demonstrate that the product was gen- uine. In this case, Lavery said that if LiCari wanted to go with a more expensive supplier, he would have to prove that the concentrate they were buying was

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adulterated (rather than genuine). Given the technology available at the time, this was difficult, and the supplier was retained.70

A similar decision-making criterion was used in the decision to launch the space shuttle Challenger despite engineers’ concerns about O-ring failure in cold weather. In previous launches, engineers had been required to show evidence that the launch was safe (which would have been difficult, if not impossible). In the case of the Challenger, the burden of proof was changed. Engineers who balked at the impending launch decision were asked to prove that it was unsafe.

These examples suggest that it’s relatively easy to alter decision-making pro- cesses to support whatever decision managers have already made. That’s why it’s extremely important that organizations design formal decision-making processes in good financial times and before a crisis occurs. Then, when trouble strikes, they can rely on these effective decision-making processes to guide them. The space shuttle Challenger might never have been launched if engineers had been required to prove that the launch would be safe, rather than unsafe. Managers must be particularly alert to changes in traditional decision-making criteria, especially in times of crisis.

INFORMAL CULTURAL SYSTEMS

In addition to the formal systems described previously, ethical culture is kept alive informally and symbolically through informal norms, heroes, rituals, myths, and stories. Employees experience the ‘‘real’’ organization through these informal sys- tems, and information about them is carried through informal communication systems such as the grapevine and water cooler gatherings. In this way, people come to know what behaviors are ‘‘really’’ rewarded, how decisions are ‘‘really’’ made, and what organizational leaders ‘‘really’’ care about and expect. If messages from the formal and informal cultural systems differ, the ethical culture is out of alignment. It’s impor- tant to note that employees are more likely to believe the messages carried by the informal system. Recent research has found that employees’ perceptions of informal cultural systems influence their ethics-related behavior more than the formal systems do.71 Therefore management of these informal systems is extremely important.

Role Models and Heroes

Much socialization about ethics is informally conducted by role models and mentors. Role models may be senior managers, immediate superiors, or just more experienced coworkers. Kent Druyvesteyn, former staff vice president of ethics, General Dynam- ics Corporation, made an important point about senior leaders as ethical role models. ‘‘People in leadership need to . . . set the tone by the example of their own conduct. We could have had all the workshops in the world. We could have even had Jesus and Moses and Mohammed and Buddha come and speak at our workshops. But, if after all of that, someone in a leadership position then behaved in a way which was contrary to the standards, that instance of misconduct by a person in a leadership position would teach more than all the experts in the world.’’ By contrast, if senior

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leaders consistently model behavior of the highest integrity, employees learn that the formal messages about ethics are real.

Mentoring occurs at all levels in the organization and is an informal process of socialization whereby a more senior person takes a junior person under wing, provid- ing information, career strategies, rules of the road, and so on. Individuals who are passing through organizational ‘‘boundaries,’’ such as new hires, or those who are transferring from one part of the organization to another are most affected by these socialization influences.72 In an ethical culture, the mentor emphasizes the impor- tance of integrity and resistance to pressure to behave unethically. In an unethical culture, the mentor may indoctrinate the individual into accepted unethical practices, making it difficult for the individual not to go along.73 The new accounting graduate who was told by his superior in a public accounting firm, ‘‘You’re too honest to be an auditor,’’ received a powerful message about ethics (or, actually, the lack thereof) in that organization. When looking for evidence of ethical culture alignment and mis- alignment, ask whether the organization’s role models behave consistently with the organization’s espoused values and codes.

In an ethical culture, heroes should personify the organization’s values.74 Heroes are symbolic figures who set standards of performance by modeling certain behav- iors, and they can be the organization’s formal leaders. Heroes can also be founders who are no longer even present in the organization. As we noted earlier, Thomas Jefferson is still very much alive at the University of Virginia. Stories about the values of these heroes continue to influence decision making. Thus, a hero who champions integrity and stands up for what is right may influence the behavior of many in the organization.

The organization’s hero can also be someone who is not the president or chief executive officer. When asked to identify their organization’s hero, Penn State stu- dents inevitably name football coach Joe Paterno. ‘‘Joepa’’ as he is affectionately known around campus, is not only the formal leader of the football team, but a cul- tural hero as well. His values, including education first for college athletes and win- ning by sticking to the rules of the game,75 are considered by many to extend far beyond the football program to permeate Penn State’s culture. On campus, Joepa and his wife are also known for their philanthropy. For example, they showed their lead- ership in the fund-raising campaign for a much-needed university library addition, now known as the Paterno Library addition. Some say that Penn State is the only university whose sports arena is named after a former president while the library addition is named after its football coach.

Savvy executives understand the role that heroes play in forming or changing a culture. One CEO of a financial services firm was very serious about identifying and rewarding people who lived his organization’s values. He challenged his executives to bring him stories of employees who were doing the right things in the right way, who were models of the culture. He collected these stories and sent personal, hand- written thank-you notes to those model employees. While a phone call might have sufficed, employees were so thrilled with his written recognition and praise that they displayed his notes in their offices. Those framed notes sent a rather loud message to

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other employees about what kind of behavior was valued at high levels. Of course, they also helped spread word of the ‘‘heroes’’ and their deeds. In a similar example, Southwest Airlines publishes letters from customers in its monthly newsletter about employees who provided outstanding customer service. They publish the employees’ pictures in the newsletter and post them on the wall in the headquarters.

Norms: ‘‘TheWayWe Do Things around Here’’

Norms are standards of daily behavior that are accepted as appropriate by members of a group. They exert a powerful influence on individual behavior in organizations, and they can serve to support an ethical or unethical culture. For example, imagine an individual entering a computer software sales job who is told immediately by peers in the sales force that customers should always be dealt with honestly because long- term customer relations are so important to the firm. Here, the norm of honesty with customers supports ethical conduct and an ethical culture. On the other hand, con- sider the individual who begins a new job and is told by his or her colleagues that making the sale is all that counts, even if you have to lie to the customer about the capabilities of the software or delivery dates. This norm supports unethical conduct and contributes to an unethical culture. Either kind of norm (ethical or unethical) can become ‘‘the way we do things around here’’ in the organization.

Formal rules are often inconsistent with the informal norms that develop. For example, the salesperson described previously may have attended a mandatory ethics training session that taught rules of honesty in customer relationships. But if the mes- sage being sent on the job is to make the sale no matter what, the formal rule is over- ridden. Similarly, at a fast-food restaurant, new employees may be told about a rule against eating food without paying for it. However, once on the job, they may see coworkers eating while the supervisor looks the other way. These coworkers may rationalize their behavior because of their low pay or poor working conditions, or because the supervisor doesn’t seem to care or eats food himself or herself. Encour- aged to join in, the new employee is likely to do so, having learned the ‘‘real’’ rules. Thus, despite formal rules, regulations, codes, and credos, informal norms are fre- quently the most influential behavior guides and clues to the culture. When the for- mal messages are consistent with the informal norms, this contributes to an ethical culture in alignment. And when informal norms are inconsistent with formal rules and codes, the culture is clearly out of alignment.

Rituals

Rituals are an important part of an ethical culture. They tell people symbolically what the organization wants them to do and how it expects them to do it.76 Rituals are a way of affirming and communicating culture in a very tangible way.77 Organizations have meetings, parties, banquets, barbecues, and awards ceremonies that all convey messages about what’s valued in the organization, Years ago, General Motors of Canada introduced a new vision and values by asking each manufacturing unit to

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create a small float representing one of the key values. These floats were part of a parade that kicked off a full day of culture-building ritual surrounding the theme ‘‘Customers for Life’’ and the motto ‘‘I Am GM.’’ During the day, the CEO unveiled a large painting of the group vision and told a story about the company’s future. To reinforce the ‘‘I Am GM’’ motto, employees were asked to see themselves as being responsible, at any moment, for the company, its products, and services. The day ended with the ‘‘GM Acceleration Song’’ performed by the 100-person Up With People singing and dancing group. The song had been revised to incorporate the new values created by the leadership team.78

Some companies have annual family picnics and ‘‘bring your child to work days’’ that encourage employees to value time with their families. Some have on-site child care so that having lunch with your preschool child in the company cafeteria becomes a valued daily ritual and symbol of the extent to which the organization values family. Others have awards ceremonies that convey the values of the organi- zation, including awards for exemplary ethical conduct (see the discussion of Lockheed Martin’s Chairman’s Award in Chapter 6). It’s important to ask what val- ues are celebrated at these rituals and ceremonies because they can easily support unethical behavior, such as making the numbers no matter how. For example, sales meetings occur in most organizations. So is success with integrity being touted and celebrated at these meetings, or are only those who make their numbers celebrated at these events? Look for whether the rituals are consistent with the company’s stated values, formal rules, and reward systems to help determine whether the culture is in alignment.

Myths and Stories

Another extremely important way organizational culture is communicated and kept alive is through the informal communication network. People tell stories to give meaning to their world and life.79 Organizational myths and stories explain and give meaning to the organizational culture. They may be anecdotes about a sequence of events drawn from the organization’s history. The story’s characters are employees, perhaps company heroes, and the moral of the story expresses the organization’s values.80

At IBM, a story that has been told and retold describes how a low-level employee denied Tom Watson, then IBM president, entry into a restricted area of the company because Watson was not wearing his IBM identification badge. Watson praised the employee, suggesting the importance of upholding company rules and applying them to everyone.

In Paterno by the Book,81 Joe Paterno recounted a powerful story from the Penn State football program’s history about a leader standing up for what he believes at a critical moment.

The Miami game was a turning point for me. . . . Late that night, as we waited to board our charter plane, I strolled around the terminal replaying

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the joys of our victory when I saw something. . . . I looked again and sure enough two of our best players were standing at a not-too-visible spot of the airport bar, each fingering a glass of beer. . . . ‘‘You’re in trouble,’’ I told them. ‘‘You know that you’re never to be seen standing at a bar.’’ Naturally they protested that they were having only one, that they were coming down after the great game, that nobody around here knew them. ‘‘Never means never,’’ I said. Nobody on the squad could possibly have the faintest doubt about my rule: We don’t want a Penn State football player to drink in a public place. . . . He throws a bad light on the entire team, putting every member under suspicion. Fur- thermore, . . . football players are public figures, watched and talked about. Also they’re role models. I reminded the two guys of the one loop- hole in my rule: You can sit down with your folks privately and have a glass of wine. You can even have a couple of beers on a Saturday night— in private, with personal friends. That won’t make you victims of hear- say. But if I see you standing at a public bar, you’re in trouble.

So now these two kids had forced the decision on me. One of them had previously got himself in a minor jam with the police. It made a men- tion in the paper. ‘‘You’re gone,’’ I said. That meant for good. Off the team. To the other I said, ‘‘This is the first trouble I know about. You get one more chance, but you’re suspended for the next two games.’’ On Monday evening the captains . . . came to see me. The whole squad was meeting at that moment, they said, and had sent the captains to tell me that they felt the penalties were too harsh. They wanted me to take the first guy back and lift the suspension on the second—and they wanted to return to the meeting with my changed decision.

There are moments in the life of a manager when his ability to main- tain control teeters on a hair. He can only manage with the consent of the managed, unless he’s a prison warden. On the other hand, he can only manage by unambiguous assertion of authority. Those are opposites, in a sense. If the manager, who sometimes has to choose in a split second, chooses the wrong one of those two, his effectiveness is finished.

‘‘Go back to your meeting and I’ll be there myself in five minutes,’’ I said. The sentence was harsh, I said to myself, but the rule they had bro- ken was perfectly clear, defensible, and necessary. The morale and sup- port of the entire squad hung in the air. If I backed off, the message was clear as a bell: I’m afraid of you guys. Ignore this rule. Ignore any rule that itches as much as this one does. And if there’s a rule that itches less, try me on that, too.

Five minutes later, that squad room was a tableau of sullen, hard faces. I looked around, eye to eye, then talked. ‘‘A rule that protects us all was broken. The decision I made was the best one for all of us. I have no choice but to stand with it.’’ Faces stayed frozen, waiting. I couldn’t read them. ‘‘If anybody here can’t live with it, go. Right now. If you stay,

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you do it my way, the right way, living by the rules. If you decide to stay and do it that way, we’ll have a great football team. I’m going to walk out of here right now. A minute later I’m coming back in. Whoever’s here, that’s who we’re going to play with.’’

As I walked bravely out of there, imitating John Wayne the best I could, my knees were shaking. In the promised minute, I returned. Every frozen face that was there during my first visit was still there, although still frozen.82

This story represents a critical event in the history of Paterno’s tenure as Penn State’s football coach. It symbolizes the idea that rules are valued and enforced in a culture of high integrity and accountability. To the extent that the story has become a part of the organization’s culture, it serves to reinforce the culture’s emphasis on the value of rules and represents alignment between the informal and formal cultures. Similarly, in other ethical organizations, many of the stories that convey the impor- tance of the ethical culture refer to rule violators being disciplined harshly or fired. Organization members remember these stories, and they serve to reinforce the value of doing the right thing. But note that stories can easily reinforce an unethical culture if they’re about rule violators succeeding despite their unethical behavior.

Organizations can create stories to enhance the ethical culture. Medtronic, a medical technology firm, has embraced storytelling as a way to do just that. At their annual holiday party, the company invites several patients and their doctors to share their stories of how the company’s products helped them. For example, one patient with a long history of Parkinson’s disease told a story about how his life had become uncontrollable until his doctor suggested trying a new Medtronic device for deep- brain stimulation that gave him his life and his smile back. The CEO noted how these stories help reinforce the company’s mission of serving others.83

The best stories are simple ones based on real people and experiences that tap into the company’s values and employees’ pride. Leaders interested in creating an ethical culture should be on the lookout for examples of exemplary ethical behavior to celebrate and find ways to communicate those stories on corporate websites and in newsletters and award ceremonies. If you want to learn about an organization’s cul- ture, ask an employee to tell you a story that exemplifies the culture. Then just sit back and listen.

Language

Cultures develop and use language to communicate values to employees. The old joke that business ethics is an oxymoron suggests the conventional wisdom that the language of ethics is out of place in the business context. But in a strong ethical cul- ture, ethics becomes a natural part of the daily conversation in the organization. Employees feel comfortable talking ethics with each other and with their managers. Organizational values are invoked in decision making. And managers routinely talk ethics with their direct reports. It could be as simple as asking whether the decision is

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the right one, in an ethical as well as a business sense. Is this the ‘‘proper’’ thing to do for customers, suppliers, the community? What is the potential harm to all stakeholders?

The use of ethical language is likely related to decision-making behavior. In one study, individuals who discussed their decision-making using ethical language were more likely to have actually made an ethical decision.84 These people talked about ethics, morals, honesty, integrity, values, and good character. Those who had made the unethical decision were more likely to recount the decision in the more traditional business language of costs and benefits.

But, without cultural support for the use of ethical language, business managers are reluctant to describe their actions in ethical terms even when they are acting for ethical reasons. This reluctance, referred to as moral muteness, can be attributed to the value placed on ‘‘efficient’’ decision making such that ethics talk can be thought of as a distraction as well as to the desire to appear powerful and effective. Ethics talk can also appear overly idealistic and utopian and inconsistent with the expectation that managers can solve their own problems.85

Interestingly, getting managers to talk with their employees about ethics has been likened to parents discussing sex with their children. Although parents agree that sex education is a good thing, they often find it difficult to broach the subject with their children. Similarly, managers may find it difficult to begin a conversation about ethics with other managers or with their subordinates. If these topics are typi- cally not discussed, the manager who brings it up may feel like a goody-goody or a spoilsport.86 But managers who become comfortable talking about ethics will be role models of important behaviors for their subordinates.

Kent Druyvesteyn, one of the first corporate ethics officers, told us an anecdote about the early development of ethics training at General Dynamics.

Early on, at General Dynamics, we declared that our ethics training workshops were to be small and interactive, and that they were to be led by managers. And, we heard some complaints from managers who said, ‘‘We don’t know anything about this.’’ They thought we were going to have them teach Aristotle and Kant, but that’s not what we were trying to do. We also had people in training say, ‘‘We can’t have people in man- agement do this. There won’t be any quality control.’’

At that point I said, ‘‘Let’s consider what it is we’re trying to do here. What we are trying to do is raise awareness, to increase knowl- edge of company standards and stimulate commitment to those stan- dards. That’s the most important thing.’’ Here’s an analogy I’d like you to consider. You have some small children and you decide that you want to teach them about sex. There are a number of ways that you could do this. You could hire an expert—someone who knows all about sex, who knows the right words to use, who knows all the latest terminology, who is pedagogically very skilled. You could hire this person to come into your home, sit down in your living room with

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your children, and teach them about sex. I mean, isn’t that good man- agement technique—to delegate it to someone? On the other hand, you could do it yourself. You may have limitations. You don’t know everything. You might be embarrassed or tongue-tied. In the end though, who do you think would be more effective? To have the expert do it or for you to do it yourself? I have never had a person say that the expert would be more effective.

Top managers can also make ethics an acceptable topic of conversation by sending a message that it’s not only okay, but expected, to talk about one’s ethical concerns. They can do this by leading discussions about ethics, discussing the ethics code and its application in a video that is shown to employees, and otherwise openly discuss- ing ethical problems with managers and employees. Senior managers can also build ‘‘ethical talk’’ into the fabric of the organization by requiring routine discussion of ethical issues when important decisions are made.87

In unethical cultures, ethical language is mostly absent or unethical language may be used (as when employees talk about ‘‘screwing’’ customers). But, as we noted in our discussion of euphemistic language in Chapter 3, organizational lan- guage can also be used to avoid the ethical implications of actions. This can happen either by design or inadvertently. For example, in Nazi Germany, the code names for killing and genocide were final solution, evacuation, and special treatment. This use of euphemisms allowed people to avoid confronting the true meaning of their behavior.88 Similarly, companies use euphemisms to avoid the pain of decisions to lay off employees. Downsizing, rightsizing, restructuring, and targeted outplacement are just a few terms we’ve encountered. It may be easier to impose a targeted outplacement than a layoff, but are the ethical consid- erations as obvious for targeted outplacement as they are for layoffs? Recall from Chapter 3 that using ethical language increases individuals’ ethical aware- ness. So, it’s essential that ethical language become a part of the organization’s ethical culture.

ORGANIZATIONAL CLIMATES: FAIRNESS, BENEVOLENCE, SELF-INTEREST, PRINCIPLES

Beyond these specific systems, we have learned that employees’ perceptions of broad climates within the organization are extremely fundamental and influential. These climates tend to cross cultural systems. For example, when employees think about ethical culture, they tend to think first about the climate for fairness in the organiza- tion. This refers to whether they believe employees are treated fairly every day, in terms of outcomes (pay, promotions, termination), processes (are processes for mak- ing these important decisions about employees fair, nonarbitrary, and unbiased?) and interactions (are employees treated every day with dignity and respect?). It makes sense that it would be hard to talk seriously with employees about their ethical behav- ior if they believe that the organization isn’t behaving fairly toward them. Research

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has demonstrated that these very general perceptions of fair treatment can be as pow- erful an influence on employees’ ethical conduct as just about any of the formal or informal cultural systems just described. Employees appear to reciprocate the organi- zation’s fair treatment with their own ethical behavior.89

Consistent with these findings about fairness climate, employees’ behavior is also influenced by their general perceptions related to whether the organization is characterized by a benevolence climate—meaning the organization is one that ‘‘cares’’ about multiple stakeholders, including employees, customers, and the broader community and public. So employees are much more likely to demonstrate ethical behavior in an organization they see as one that cares.

By contrast, employees in some organizations see their firm as promoting a very instrumental self-interest climate, in which people protect their own interests above all and everyone is essentially out for him or herself. Little attention is given to the social consequences of one’s actions. You can imagine that an organization that focuses exclusively on financial outcomes would create such a climate; and, logi- cally, employee unethical behavior is higher in such organizations.

Finally, in a rule-based climate, employees perceive that the organization is one where employees follow both laws and the organization’s rules when making decisions. One can imagine that organizations in highly regulated industries that take their codes, rules, and policies quite seriously would be rated highly on this climate dimension, which has the largest impact on reducing unethical behavior. This may be because this climate taps into perceptions of ethical culture align- ment. An organization in which employees follow the rules is more likely to be one whose formal (codes, policies) and informal systems (norms of daily behav- ior) are aligned.90

DEVELOPING AND CHANGING THE ETHICAL CULTURE

We can conclude from this cultural analysis that ethics at work is greatly influ- enced by the organization’s ethical culture. Both formal and informal systems and processes channel and reinforce certain kinds of behavior. Each of the sys- tems on its own can support either ethical or unethical conduct. In addition, these multiple systems can work together or at cross purposes, thus leading to an orga- nization that is aligned to support ethical (or unethical) conduct or one that is misaligned and creating mixed messages. Imagine an organization with an ethics code that forbids employees from accepting gifts of any kind, but a senior execu- tive is known to have accepted box seats at the ball game from a client. This ‘‘we say one thing, but do another’’ approach leads to widespread cynicism. The code loses all credibility as workers pay more attention to what’s done than to what’s said. On the other hand, when the organization disciplines that executive, this action visibly reinforces the code and supports the firm’s ethical stance with all workers.

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How an Ethical Culture Can Become an Unethical Culture

The story of Arthur Andersen, the now defunct auditing company, provides a sad example. It demonstrates how a solidly ethical culture can be transformed into an unethical culture and lead to the demise of an 88-year-old firm.

Founder Arthur Andersen created the company when he was in his twenties. As chief executive, the messages he conveyed about ethical conduct were strong, con- sistent, and clear. Andersen’s mantra, ‘‘Think straight—talk straight,’’ guided employee behavior in an organization where ‘‘integrity mattered more than fees.’’ Stories about the founder’s ethics quickly became part of the firm’s mythology and lore. For example, at the age of 28, Andersen confronted a railway executive who insisted that the accounting firm approve his company’s books. Andersen said, ‘‘There’s not enough money in the city of Chicago to induce me to change that report.’’91 Andersen lost the railway company’s business, but when that company later went bankrupt, Arthur Andersen became known as an organization people could trust to be honest and to stand up for what was right. In the 1930s, Arthur Andersen emphasized accountants’ special responsibility to the public. The founder died in 1974; but he was followed by leaders with similar beliefs, and the strong ethical cul- ture continued for decades. The management style Andersen initiated was a central- ized, top-down approach that produced employees who were systematically trained in the ‘‘Andersen Way.’’ Customers around the world knew they could expect quality work and integrity from Andersen employees, who were all carefully socialized to speak the same language and to share ‘‘Android’’ values. Through the 1980s, people were proud to say they worked for Arthur Andersen, which would provide a good career within a respected company.

In the mid-1990s, Arthur Andersen still provided formal ethical standards and ethics training. In 1995 it even established a consulting group, led by Barbara Toffler, to help other businesses manage their ethics. But Toffler quickly became concerned about the ethics of her own employer, which she chronicled in her book Final Accounting: Ambition, Greed, and the Fall of Arthur Andersen.92 Toffler attributes much of the change from ethical culture to unethical culture to the fact that the firm’s profits increasingly came from management consulting rather than auditing. Auditing and consulting are very different undertakings, and the cultural standards that worked so well in auditing were inconsistent with the needs of the consulting business. Under the new business realities, rather than standing for principles of honesty and integrity, consultants were encouraged to keep clients happy and to concentrate on getting return business because only revenues mattered. They were even expected to pad prices or create work to increase profits.

Even the training that had always been so important to Andersen’s culture wasn’t immune from change. Traditionally, new employees (recent college graduates) had been required to attend a three-day enculturation session, but now new consultants (often hired with experience outside the firm) were told not to forgo lucrative client work to attend the training. So Toffler and lots of other consultants never got the cultural training.

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By the time Toffler arrived at Andersen, no one referred to the ethical standards, although they still existed in a big maroon binder. Toffler says, ‘‘When I brought up the subject of internal ethics, I was looked at as if I had teleported in from another world.’’ So Andersen still had ethics policies, and they still talked about ethics in formal documents, but the business had changed dramatically and the approach to ethics management had not kept pace.93

Andersen was convicted of obstruction of justice for shredding documents asso- ciated with its role as Enron’s auditing firm and quickly went out of business. The Supreme Court reversed the decision in 2005, ruling that the jury had not been advised that conviction in a white-collar crime case requires evidence of criminal intent. However, the Supreme Court reversal did not clear Andersen of wrongdoing. In fact, prosecutors provided evidence of criminal intent.94 In the end, even if someone had wanted to, there was no firm left to resurrect.

Was Andersen’s transformation from ethical culture to unethical culture a con- scious process? Did anyone ever say, ‘‘Now we’re going to create an unethical cul- ture at Arthur Andersen’’? We doubt that. But leaders’ lack of attention to the ethical culture as the organization was undergoing a significant business transformation practically guaranteed that the messages sent by the informal culture (revenues, reve- nues, revenues) would begin to contradict those sent by the formal culture (ethics standards) and lead to a culture that was seriously out of alignment as well as one that increasingly sent messages suggesting only the bottom line mattered.

Becoming a More Ethical Culture

What should an organization do if it wants to transform itself into a more ethical culture? Given our multisystem perspective on ethical culture, changing organiza- tional ethics in a positive direction involves simultaneously developing or changing multiple aspects of the organization’s ethical culture. If the effort is to be successful, this ethical culture development or change should involve the alignment of all relevant formal and informal organizational systems to focus on ethics. Obviously, this requires a major commitment from the most senior levels in the organization. Culture change attempted at lower levels is likely to be ineffective unless it is fully supported and modeled by senior management. Unfortunately, some companies (e.g., Arthur Andersen) go out of business before they have this opportunity.

Changing organizational culture is more difficult than developing it. In a new organization, workers are quite open to learning and accepting the culture of their new organizational home, especially if it fits with their own values. However, anthro- pologists and organizational scientists agree that changing an existing culture is an extremely difficult process.95 This view is consistent with an idea basic to all organi- zational change and development efforts—that changing individual and group behav- ior is both difficult and time-consuming. The human tendency to want to conserve the existing culture is referred to as cultural persistence, or inertia. Culture has an addict- ive quality, perhaps because culture members are aware that culture components can- not be altered without affecting other cherished values and institutions.96 Also, an

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unethical culture tends to feed on itself. Why would successful (but unethical) man- agers want to change? They wouldn’t. They would tend to hire people like them- selves and perpetuate the culture that exists.

Most often, pressure for culture change comes from outside—from stockholders, the government, regulators, and other outside stakeholders. The public’s general mis- trust of business executives97 and the threat of increased government regulation may encourage leaders to look more closely at their ethical cultures. In addition, organiza- tions whose members have been ‘‘caught’’ engaging in unethical behavior, or those faced with costly lawsuits, are prime candidates for such ethical culture change attempts. Finally, the government’s sentencing guidelines for corporate crime turned the attention of many organizations to an evaluation of their ethical cultures during the 1990s.

The influence of bad publicity and costly lawsuits extends beyond the targeted organization. Organizations scan the environment for information that is relevant to their concerns. When one organization in an industry is called on the carpet for a legal or ethical violation, other organizations in the industry take notice and act. Arthur Andersen’s indictment for document shredding in the Enron case, as well as its mishandling of multiple audits over a number of years, sullied the reputation of the entire auditing industry. Thus any organization that senses increased vulnerability to external pressure is also more likely to consider the need for attention to the management of its ethical culture.

The pressure to change organizational ethics can also come from within, but it is not likely to occur unless the CEO decides that change is required. Often a new CEO is brought in to lead the charge when serious culture change is needed, because only the CEO has the clout and resources to make such significant changes. John A. Swainson was brought in after a nearly 30-year career at staid and solid IBM to lead Computer Associates (CA) in 2004. CA provides IT management software to large users and generates over $4 billion in annual revenue. According to Swainson, the ‘‘tipping point’’ for the company occurred when its board instituted a new stock option plan for senior executives in the 1990s. Executives had to hit stock price num- bers and keep them up over a period of time if they were to get payouts of more than $1 billion (you read that right—it’s a b). These senior managers started breaching accounting rules in order to adjust revenues, and they started down a slippery slope of accounting malfeasance. Over time, they became desperate to cover themselves and engaged in ever more illegal acts. To make matters even worse, when the government started investigating, the senior managers engaged in a cover-up. The government’s investigation resulted in a huge fine and the firing of more than 15 exec- utives including the CEO, who is now serving a 12-year prison sentence.

Swainson was brought in under a deferred prosecution agreement (DPA) with the government. With a DPA, the government sets aside prosecution because prose- cuting the company would likely put it out of business and its employees (most of them innocent) out of a job. The company accepts a full-time government overseer on the premises and agrees to all sorts of actions aimed at righting the ship. Perhaps the most important requirement was to institute a new ethical ‘‘tone at the top.’’ As

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part of that effort, Swainson held hundreds of town hall meetings and began an inter- nal blog where he communicates with employees about what he’s thinking or what they’re thinking. He also answers ‘‘ask John’’ questions in a question-and-answer forum where employees write him directly and he answers. He hired a highly experi- enced senior-level legal compliance officer with access to the senior executive team, set up an ethics training program and a hotline, and improved investigation capabili- ties. In regard to the basic business, Swainson visited major customers and learned that the sales force needed to be reorganized and their performance management sys- tem changed to support building relationships rather than just making transactions. Also, employees had to be brought into ‘‘a single, cohesive, ethics-based culture.’’ Because CA had grown so rapidly through acquisition, employees identified more with their previous companies than with CA. Employees are now surveyed annually. Morale and trust in management are improving, and just about everyone says they understand the importance of the CA’s core values and ethical behavior. At the end of his talk to students, Swainson said, ‘‘Today we are back on track. Employees are proud of where they work. Customers want to do business with us. . . . Regaining our reputation and our credibility has been a long and arduous process. We can’t and won’t go back.’’98

ACULTURAL APPROACH TO CHANGING ORGANIZATIONAL ETHICS

Hopefully, we have made it very clear that changing the ethical culture requires simultaneous and systematic attention to all cultural systems, with the goal of making changes aimed at aligning all of these systems to support ethical conduct.

This is a huge job, so many companies employ consultants to help them design their ethics initiatives. That may be appropriate, especially if the firm doesn’t have the expertise in-house. But for these initiatives to go beyond superficial cookie-cutter prescriptions, they need to be based on an in-depth analysis of the company and its current ethical culture. Many consultants provide this kind of service. Unfortunately, what firms sometimes receive is an off-the-shelf report with standard prescriptions that could apply to any firm in what has sometimes been referred to as ‘‘spray and pray.’’ ‘‘Consultants sprayed some ethics over [big companies] and prayed that some- thing happened.’’99 These spray-and-pray programs can breed cynicism because they raise employees’ awareness of ethics problems while simultaneously suggesting, in many cases, how little the organization is doing about them. Employees are likely to say, ‘‘We had our ethics-for-a-day training program. Now we’re back to doing things the way we’ve always done them.’’

Companies that are looking for advice from consultants need a unique plan, one designed to fit their firm’s needs and culture. Obviously, a unique plan takes more resources to develop than the off-the-shelf variety. It requires the consultants to get to know the firm, its people, and its operations. They must interview and survey employees, managers, and executives to learn about the current state of affairs. Such

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knowledge will allow the consultants to propose a culture shift that addresses the firm’s unique needs.

Audit of the Ethical Culture

The only way to determine if the culture is aligned to support ethical behavior is to conduct regular, comprehensive audits of all relevant cultural systems, both formal and informal. If the ethical culture audit determines that aspects of the current culture are not aligned to support ethical behavior, and the goal is to produce consistent eth- ical conduct, then the culture must change.

Any attempt to develop or change organizational ethics can benefit from an orga- nizational change approach that includes a system-wide, long-term view. In addition, the approach should be based on the assumption that human beings are essentially good and capable of development and change.

ACultural Systems View

The cultural approach relies on the idea that to be successful, any attempt to develop or change the organization’s ethics must take the entire cultural system into ac- count.100 The change effort must target multiple formal and informal organizational subsystems. All of these subsystems must work together to create clear, consistent messages about what is and is not appropriate behavior in the organization. If subsys- tems conflict, confusion and mixed messages will result. Thus, the entire range of formal and informal subsystems must be analyzed and targeted for development and change.

This complex, multisystem approach to managing organizational ethics argues against any short-term, quick-fix solutions that target only one system. The idea that an organization could solve its ethics problem simply by establishing a code of ethics or by hiring a consultant to deliver a one-hour ethics training program becomes ludi- crous when the complexity of the ethics culture is understood. The management of ethical conduct must be complex because it is influenced by multiple systems, each of them complex in itself. Thus the complexity of the solution must match the com- plexity of the problem. A solution that isn’t sufficiently complex will miss important information, make incomplete diagnoses, and produce overly simple and short- sighted solutions. The organization that creates a code of ethics in response to exter- nal pressure and files it away without making changes in other systems such as the reward system and decision-making processes is more likely making a negative state- ment about organizational ethics rather than a positive one. The informal message is that management is hypocritical and that the code of ethics serves no useful purpose beyond creating a facade. The same can be said of lofty values statements. For exam- ple, many of these statements talk about valuing diversity. But what happens when people look around the organization and see few minority managers? Executives need to understand that when they put a values statement in writing, employees expect a commitment to follow through. The bottom line about systems thinking is

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understanding that if an organization decides to get into the ‘‘ethics business’’ with a values statement, code, or training program, employees expect follow-through in other parts of the organization. A failure to follow through will be interpreted as hypocrisy.

A Long-Term View

The development of organizational culture takes place over a number of years; effec- tive culture change may take even longer, as much as 6 to 15 years.101 It requires alterations in both formal and informal organizational systems that take time to implement and take hold. Resistances must be overcome. New rules and values must be reinforced via training programs, rites and rituals, and reward systems. Although not all organizational change efforts take this long, deep interventions in the organi- zational culture should be considered long-term projects.

Assumptions about People

Mainstream economics rests on the assumption that human beings are driven by self- interest and opportunism and are likely to shirk responsibility.102 Acceptance of this assumption logically leads to change efforts focused almost exclusively on behav- ioral control.

We believe, however, that human beings are essentially good and open to growth and change. Most employees prefer being associated with a fair organization that supports ethical behavior and disciplines unethical behavior. Given this type of envi- ronment, most individuals can be expected to choose ethical behavior. Individuals who engage in unethical behavior should not simply be labeled ‘‘bad’’ people. They are often responding to external pressures or behaving according to organizationally sanctioned definitions of what’s appropriate. Although unethical behaviors must be disciplined, the organization should also treat unethical behavior as a signal to inves- tigate itself and the cultural context in which the behavior occurred. Through culture, the organization can change definitions of what is appropriate and inappropriate and can relieve pressures to behave unethically.

Diagnosis: The Ethical Culture Audit

Formal attempts to develop or change organizational ethics should begin with diag- nosis. Diagnosing culture calls for time-consuming techniques, such as auditing the content of decision making, coding the content of organizational stories and anec- dotes, and holding open-ended interviews with employees at all levels.103 It also re- quires systematic analysis of formal organizational systems, such as the structure and criteria for rewards and promotion.

The framework presented in this chapter can provide guidance for an audit of the organization’s ethical culture.104 The audit should include probes into the formal and informal organizational systems that are maintaining the ethics culture in its current

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state. First, formal organizational systems can be analyzed in a number of ways. Through surveys, interviews, observation at meetings, orientation and training ses- sions, and analysis of organizational documents, perceptions of how formal organiza- tional systems either encourage or discourage ethical behavior can be identified. The kinds of questions that can be asked are listed in Table 5.1.

Auditing informal systems is equally important. In small organizations that don’t have formal policies and decision processes, the informal systems are often more important than the formal ones. The culture can be analyzed to identify the organiza- tion’s heroes as well as the daily behaviors that are reinforced through stories, rituals, and language. This can be accomplished through open-ended interviews, observation of organizational rituals, and analysis of the organization’s stories. Some questions that might be asked in an audit of the informal system are offered in Table 5.2. The questions in Tables 5.1 and 5.2 are designed to suggest the general direction of an ethical culture audit. Specific questions that arise out of the particular system being analyzed must be developed to tap that system’s unique problems and needs. Canned approaches to discovering culture that assume they can identify the relevant dimen- sions in advance are bound to fail.105 In addition, the multisystem nature of organiza- tional culture suggests that responses must be compared within and across systems to

Table 5.1 Selected Questions for Auditing the Formal System

1. Do organizational leaders send a clear ethics message? Is ethics part of their ‘‘leadership’’ agenda?

2. Does the organization incorporate ethics into its selection procedures? Is integrity emphasized in orienting new employees and training existing ones?

3. Does a formal code of ethics and/or values exist? Is it distributed? Howwidely? Is it used? Is it reinforced in other formal systems, such as performance management and decision-making systems?

4. Does the performance management system support ethical conduct? Are only people of integrity promoted? Are ethical means as well as ends important in performance management systems?

5. Is misconduct disciplined swiftly and justly in the organization, no matter what the organizational level?

6. Are workers at all levels encouraged to take responsibility for the consequences of their behavior? To question authority when they are asked to do something that they consider to be wrong? How?

7. Are employees encouraged to report problems, and are formal channels available for them to make their concerns known confidentially?

8. Are ethical concerns incorporated into formal decision-making processes? How? Or, are only financial concerns taken into account?

9. Are managers oriented to the values of the organization in orientation programs? Are they trained in ethical decision making?

10. Are ethical considerations a routine part of planning and policy meetings and new venture reports? Does a formal committee exist high in the organization for considering ethical issues?

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answer the key question of whether formal and informal systems are aligned within themselves and with each other.

As you may have determined by now, a full-fledged ethical culture audit is a complex process that the average manager is probably not prepared to conduct. Many large organizations will have human resources staff with the required exper- tise, and conducting such an audit within the firm can send a powerful message that the firm cares about ethics (assuming that the audit is followed up with action). But other organizations that do not have the expertise in-house will need assistance with these diagnoses and intervention efforts. And in some firms, employees may be more willing to discuss sensitive ethical issues with a trusted outsider.

Understanding the cultural issues addressed in this chapter can help any manager become more sensitive to the complex nature of organizational ethics and the impor- tance of cultural alignment. In fact, with a few changes, the questions in Tables 5.1 and 5.2 could be used to assess the ethics of an organization you’re considering join- ing. You can ask your prospective manager or peers relevant questions and see how they respond. If they welcome such questions, and respond to them easily, that’s a good sign that people in the organization are comfortable talking about ethical issues.

Ethical Culture Change Intervention

Once the audit is complete, the data should be discussed with employees, who can then be enlisted in developing a culture change intervention plan. The plan will be guided by the diagnosis and the cultural, multisystem framework shown earlier in Figure 5.1. Complementary changes in both the formal and informal organizational systems should be a part of any recommended change effort.

Though difficult, changing formal systems is a more straightforward process than changing informal systems. Gaps and problems identified in the diagnosis can

Table 5.2 Selected Questions for Auditing the Informal System

1. Identify the organization’s role models and heroes. What values do they represent? What advice do mentors give?

2. What informal socialization processes exist, and what norms for ethical/unethical behavior do they promote? Are these different for different organizational subgroups?

3. What are some important organizational rituals? How do they encourage or discourage ethical behavior? Who gets the awards—people of integrity who are successful, or individuals who use unethical methods to attain success?

4. What are the messages sent by organizational stories and myths? Do they reveal individuals who stand up for what’s right despite pressure, or is conformity the valued characteristic? Do people get fired or promoted in these stories?

5. Does acceptable language exist for discussing ethical concerns? Is ‘‘ethics talk’’ part of the daily conversation?

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be addressed in a number of ways. Structure can be altered to encourage individuals to take responsibility for their behavior and to discourage unquestioning deference to authority. Codes of ethics can be designed participatively, distributed, and enforced. Performance management systems can be designed with an emphasis on what people do as well as on how they do it. Reporting misconduct can be encouraged by provid- ing formal communication channels and confidentiality.106 Orientation programs can be designed to incorporate the organization’s values, and training programs can be set up to prepare individuals to handle the ethical dilemmas they are most likely to face in their work. Integrity can be emphasized in selection and promotion decisions. Decision-making processes can incorporate attention to ethical issues by devoting time at meetings and space in reports.

It’s more difficult to change the informal systems, particularly those that have been found to maintain unethical behavior in the organization. However, these changes must be undertaken if the total change effort is to be effective. These changes require attention to the ‘‘art’’ rather than the science of management and are consistent with ideas about the importance of ‘‘symbolic management.’’ With symbolic management, organizational leaders and managers are encouraged to create rituals, symbols, and stories that will influence those they manage.107

The organization may have to be ‘‘remythologized’’ by reviving myths and stories of its founding and resurrecting related tales that can guide organizational behavior in the desired direction.108 For example, Alexander Graham Bell’s com- ment, ‘‘Come here, Watson, I need your help,’’ set up Bell’s concept of service that was so important to AT&T’s success for many years. However, myths must also be frequently evaluated for their continuing usefulness. New ones may have to be found or developed to fit the organization’s current needs and goals. Remythologizing should be done carefully and infrequently. Employees generally know what’s ‘‘really going on’’ in the organization. If the revived myth doesn’t fit with organizational reality, it will only increase their cynicism. Also, myths can’t be changed frequently. Their strength and value in the culture come from their stability across time.

ETHICAL CULTURE CHANGE EVALUATION As with any organizational change and development effort, results should be evaluated over an extended period of time. Evaluation, like diagnosis and intervention, should be guided by the multisystem framework. Surveys and interviews can be repeated regularly to determine if norms have changed and to pinpoint potential problem areas. Documents can be analyzed to determine if ethical issues are being consistently considered. Other outcomes, such as number of lawsuits or reports of unethical behavior, can also be tracked. However, interpretation may need to go beyond simply analyzing the numbers. Increased reporting to a hotline, for example, may mean only that ethical sensitivity has been raised and can be viewed as a positive outcome rather than a negative one. This part of culture building is probably the most neglected. Most organizations are unwilling to make the investment in evaluation, and therefore they really can’t calculate the effectiveness of their efforts.

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THE ETHICS OFMANAGING ORGANIZATIONAL ETHICS

An effort aimed at changing organizational ethics requires us to face a particularly knotty ethical dilemma: whose values or ethics are to prevail? We believe that a change effort that involves employees is not manipulative or coercive and is most consistent with a concern for the ethics of the change effort itself. Employees should participate in the problem diagnosis and planning process. They should be aware of what’s hap- pening and should take part in identifying problems and recommending solutions.

CONCLUSION

This chapter has proposed a cultural framework for thinking about ethical and unethical behavior in the organizational context. Although individual character traits may predispose a person to ethical or unethical behavior (as we learned in Chapter 3), the cultural context in the organization also has a powerful influence on the behavior of most employees. An organization that wishes to develop or change its ethical cul- ture must attend to the complex interplay of formal and informal systems that can support either ethical or unethical behavior. Quick-fix solutions are not likely to suc- ceed. A broad, multisystem approach to developing and changing organizational ethics was outlined to guide organizations in diagnosing and, if necessary, changing their ethical culture.

Although most managers are not prepared to conduct a broad culture change effort themselves, we hope this chapter has helped them understand that organiza- tional ethics is a complex cultural phenomenon. With this knowledge, the manager can begin to assess the ethical culture of his or her organization and will know what questions to ask the consultant who is brought in to help with a culture change effort. Individuals can also use these questions to help them assess their own organization and their fit within it.

DISCUSSION QUESTIONS

For the following questions, focus on an organization you are familiar with. If you do not have significant organizational experience, discuss the questions with someone who is currently in a managerial role.

1. Does your organization address ethical issues in a formal, systematic way? How has the organization customized an ethical culture to match its unique needs?

2. To the best of your ability, use Figure 5.1 and the questions in Tables 5.1 and 5.2 to conduct an ethics audit of the formal and informal systems in your organization.

3. Having conducted the ethics audit, identify the formal and informal systems that are in need of attention. Where is the culture out of alignment (if it is)? Design a

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change program to address weaknesses and to align formal and informal systems into a strong ethical culture.

4. How would you change the culture audit questions if you were planning to use them to conduct an ethics culture audit of a firm you were considering joining?

CASE

CULTURE CHANGE AT TEXACO

In 1999, Texaco settled a lawsuit that charged the firm with discriminating against African American employees. Texaco paid $175 million, the largest settlement of this kind ever. The stock had fallen $3 per share after damning audiotapes became available to the public. Peter Bijur, then CEO, decided to stop fighting the lawsuit and settle. Minority employees received $140 million in damages and back pay, and $35 million was used to establish an independent task force to evaluate the firm’s diversity efforts for the next five years.

Apparently, there had been very real problems throughout the Texaco organiza- tion. These included blatant racist language and behavior on the part of Texaco employees and managers, documented lower pay for minority employees (in some cases lower than the minimum for the job category), and comments such as the fol- lowing overheard from a white manager: ‘‘I never thought I’d live to see the day when a black woman had an office at Texaco.’’ Unfortunately for Texaco, and fortu- nately for minority employees, a Texaco official taped meetings about the lawsuit in which executives used racial epithets and discussed disposing of incriminating docu- ments. The tapes were made available to the New York Times and, through it, to the public. To make matters worse for Texaco, a former senior financial analyst, Bari- Ellen Roberts, wrote a book detailing the humiliating experiences faced by many minority employees, including herself. One time, a white official referred to Roberts publicly as a ‘‘little colored girl.’’ She also detailed how the organization regularly ignored grievance claims from minorities.

Bijur’s unusual solution to the problem was to launch a complete culture change effort. During 1998 and early 1999, the company was in difficult financial straits due to low crude oil and natural gas prices. Revenues and earnings dropped precipitously, and the number of employees was reduced from 27,000 to 18,500. At a time like that, another CEO might have put diversity issues aside in favor of a focus on the bottom line. But Bijur took advantage of the opportunity to ‘‘make us a better company.’’ First, as leader, he made it clear that he would simply not tolerate disrespect and that those who didn’t go along with the culture change would be dismissed. He even went outside the company, speaking to groups such as the Urban League, saying that ‘‘a real commitment must be more than a diversity checklist. It must be integrated into a company’s business plan. It must guide our strategies for hiring, developing, promot- ing and retaining a diverse workforce. And it must extend beyond our corporate boundaries—not only to our customers and suppliers, but also to the communities in

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which we work and live.’’109 Bijur hired African Americans in key positions such as director of global business development, general counsel, and head of diversity for the company. All of these individuals said that they agreed to join the company because they were convinced of Bijur’s personal commitment to real culture change. New recruiting systems were set up to increase the pool of minority candidates for every position. Women and minorities were included on all human resources com- mittees. Search firms with success in minority hiring were brought in to help in the effort. For a longer-term solution, the company set up scholarship and internship pro- grams to interest minorities in areas of study of importance to the firm. Next, Bijur set specific diversity goals and timetables and linked managers’ career success and bonus compensation to their implementation of the initiatives. For all supervisors, he instituted 360-degree feedback that included performance on diversity issues in eval- uation criteria. He also established formal mentoring and leadership development programs to ensure that the company was preparing minorities for leadership posi- tions. All employees were required to attend diversity training, and such training is now being incorporated into more general management training. And multiple meth- ods were set up for filing grievances. These included hotlines, an alternative dispute resolution process with independent arbitration and mediation, and a confidential out- side ombudsman. Finally, the company set up a Minority and Women Business Development Program to increase the number of minority wholesalers it works with. This entire change effort is overseen by the independent task force set up as part of the settlement. The task force meets frequently with employee groups and monitors the firm’s progress.

How is Texaco doing? Angela Vallot, director of corporate diversity initiatives, says, ‘‘You’re not going to change the way people think, but you can change the way people behave.’’ Evidence suggests that changes in behavior are real. The new gen- eral counsel has few discrimination lawsuits to work on. In 1999, a total of 44 percent of new hires and 22 percent of promotions went to minorities. The company spent over $1 billion with minority and women-owned vendors in 1997 and 1998 and exceeded a goal set in 1996. Texaco even applied for inclusion in Fortune maga- zine’s 1999 list of America’s 50 Best Companies for minorities. It didn’t make the list, but the application suggests that company officials were feeling pretty good about their progress. Weldon Latham, diversity expert at a Washington, D.C., law firm, says, ‘‘They are absolutely a model for how to approach one of the biggest problems facing this country.’’110 Reports of the monitoring task force were posted on Texaco’s website. In a report, released in July 2000, the task force acknowledged the commitment of Texaco’s leadership. ‘‘Through the values espoused by its leader- ship and its efforts to improve its employment practices, the Company continues to communicate effectively the message that it will not tolerate discrimination, harass- ment, or retaliation in its workplace and that equality and fairness for all employees are central to its mission as a highly competitive business enterprise.’’ The report also cited the ombudsman program as employees’ preferred way to resolve grievances that might otherwise have become serious problems.111 The task force’s subsequent report cited more mixed results. Although the overall percentage of women and

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minority employees increased slightly, the percentage of new hires and promotions in both categories declined, and the representation of women and minorities in execu- tive positions fell slightly as well. Nevertheless, the percentage of promotions in these groups exceeded the percentage represented in the overall Texaco workforce, and this was viewed as a sign of continuing progress.112 These reports noted that there was much more work to be done, particularly after the firm became part of Chevron in 2001. On its website, Chevron says that it values diversity and runs the business ‘‘in a way that respects our employees and the world community.’’ The company has recently received awards for its treatment of women and of gay, les- bian, and transgender employees and was named a 1008 Best Diversity Company by Diversity/Careers in Engineering & Information Technology magazine.

Case Questions

1. Identify the ethical culture problem at Texaco in the mid-1990s.

2. Based on the facts in the case and what you have learned in this chapter, evaluate the culture change effort that is under way. What cultural systems have been tar- geted in the culture change effort? What systems are missing, if any? Does the culture appear to be in alignment? Misalignment? What else might management do that it hasn’t already done to make the culture change successful?

3. How long might such a culture change take?

CASE

AN UNETHICAL CULTURE IN NEED OF CHANGE: TAP PHARMACEUTICALS

In 1995, Douglas Durand was offered the position of vice president for sales at TAP Pharmaceuticals. TAP had been formed 25 years before by Takeda Chemical Indus- tries of Japan and Abbott Laboratories. Durand, 50 years old at the time, had married his high school sweetheart and worked for Merck & Co. for 20 years, during which he moved up in the sales organization to senior regional director. TAP offered him the opportunity to earn 40 percent more per year (in addition to a $50,000 signing bonus) and help the company move from niche player to mass-market purveyor of ulcer and prostate cancer medicine. He took advantage of the opportunity and looked forward to the challenge.

But only a few months after arriving at TAP, he was shocked to find a very dif- ferent culture from the one he had become accustomed to at Merck. Merck has long had a reputation for ethics and social responsibility, and these qualities had been borne out in Durand’s two decades of experience. For example, at Merck, every new marketing campaign was evaluated by a legal and regulatory team before being launched, and drugs were pulled back if necessary. But TAP turned out to be very different. It quickly became clear that this was a culture where only numbers

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mattered. On his very first day on the job, Durand learned that TAP had no in-house legal counsel. The legal counsel was considered a ‘‘sales prevention department.’’ At one point, Durand found himself listening in on a conference call where sales repre- sentatives were openly discussing bribing urologists with an up-front ‘‘administration fee’’ to doctors who prescribed Lupron, the company’s new drug for prostate cancer. TAP sales representatives also gave doctors Lupron samples at a discount or for free; then they encouraged the doctors to charge Medicare full price and keep the differ- ence. Durand overheard doctors boasting about their Lupron purchases of boats and second homes. TAP offered a big-screen TV to every urologist in the coun- try (10,000!), along with offers of office equipment and golf vacations. And reps weren’t accounting for the free samples they gave away—as required by law. Durand knew that failure to account for a single dose can lead to a fine of as much as $1 million. Finally, rather than selling drugs based on good science, TAP held parties for doctors. One such party for a new ulcer drug featured ‘‘Tummy,’’ a giant fire- belching stomach.

Durand soon became frantic and worried about his own guilt by association. Ini- tially, he tried to change the culture. After all, he had been hired as a vice president. But everything he tried was resisted. He was told that he just didn’t understand the culture at TAP. When he talked about the importance of earning physicians’ trust, the sales reps just rolled their eyes. He then tried to influence change ‘‘the TAP way’’ by offering a bonus to reps who kept accurate records of their samples. The program actually worked, but then senior management discontinued the bonus—and, of course, the reps stopped keeping track. Over time, Durand began finding himself excluded from meetings, and he felt trapped. What would happen to him if he left this new job in less than a year? He wouldn’t collect his bonus, and he wondered if anyone else would hire him. What would happen to his family? But he also worried about becoming the corporate scapegoat.

In desperation, Durand turned to an old friend he knew from Merck— Glenna Crooks, now president of Strategic Health Policy International. Appalled by what she heard, Crooks encouraged him to document the abuses he had ob- served and share the information with Elizabeth Ainslie, a Philadelphia attorney. Given the documented fraud against the U.S. government, Ainslie encouraged Durand to sue TAP under the federal whistle-blower program. Armed with doc- uments, he filed the suit and federal prosecutors ran with it. Durand left TAP for Astra Merck in 1996. But under the whistle-blower program, investigations are conducted in secret. Neither TAP nor Astra Merck was supposed to know about it. The investigation took years, and, when called to testify, Durand had to make excuses to take time off from his new job. He was uncomfortable living as a ‘‘double agent.’’ In the end, TAP pleaded guilty to conspiracy to cheat the fed- eral government and agreed to pay a record $875 million fine. In October 2001, Durand collected $77 million ($28 million went to taxes), his 14 percent share of the fine paid under the federal whistle-blower statute. He retired to Florida to be closer to his parents, but he had yet to face the unpleasant task of testifying against six TAP executives, some of whom had worked for him.

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NOTES 1. R. A. Barrett, Culture and Conduct: An Excursion in Anthropology (Belmont, CA: Wadsworth,

1984).

2. T. E. Deal and A. A. Kennedy, Corporate Cultures (Reading, MA: Addison-Wesley, 1982); M. R. Louis, ‘‘A Cultural Perspective on Organizations: The Need for and Consequences of Viewing

Organizations as Culture-Bearing Milieux,’’ Human Systems Management2 (1981): 246–58; J. Martin and C. Siehl, ‘‘Organizational Culture and Counterculture: An Uneasy Symbiosis,’’

Organizational Dynamics (Autumn 1983): 52–64; A. M. Pettigrew, ‘‘On Studying Organizational Cultures,’’ Administrative Science Quarterly 24 (1979): 570–80; E. H. Schein, Organizational Culture and Leadership (San Francisco: Jossey-Bass, 1985); L. Smircich, ‘‘Concepts of Culture and Organizational Analysis,’’ Administrative Science Quarterly 28 (1983): 339–58.

3. Smircich, ‘‘Concepts of Culture and Organizational Analysis.’’

4. Deal and Kennedy, Corporate Cultures. 5. B. Morris, ‘‘He’s Smart. He’s Not Nice. He’s Saving Big Blue,’’ Fortune, 14 April 1997, 68–81. 6. Deal and Kennedy, Corporate Cultures. 7. J. Van Maanen and E. H. Schein, ‘‘Toward a Theory of Organizational Socialization,’’ in Research

in Organizational Behavior (vol. 1), eds. L. Cummings and B. Staw (New York: JAI Press, 1979); C. D. Fisher, ‘‘Organizational Socialization: an Integrative Review,’’ in Research in Personnel and Human Resources Management (vol. 4), eds. K. Rowland and G. Ferris (Greenwich, CT: JAI Press, 1986), 101–45.

8. Barrett, Culture and Conduct. 9. P. Murphy, ‘‘Creating Ethical Corporate Structures,’’ Sloan Management Review 30, no. 2 (1989):

221–27.

10. Ibid.

11. P. Wesslund, ‘‘Ethics Are No Substitute for the Real Thing,’’ Business Week, 27 April 1992, 10. 12. Murphy, ‘‘Creating Ethical Corporate Structures.’’ 13. ‘‘The Business Effect of Ethics on Employee Engagement,’’ LRN Ethics Study, 2006, www.lrn

.com.

14. Schein, Organizational Culture and Leadership. 15. Pettigrew, ‘‘On Studying Organizational Cultures’’; E. H. Schein, ‘‘How Culture Forms, Develops,

and Changes,’’ in Gaining Control of the Corporate Culture, eds. R. H. Kilmann, M. J. Saxtion, and R. Serpa (San Francisco: Jossey-Bass, 1985), 17–43; P. Selznick, Leadership in Administration (New York: Harper & Row, 1957).

16. K. Brooker, ‘‘Can Anyone Replace Herb?’’ Fortune, 17 April 2000, 186–92. 17. J. Guinto, ‘‘Wheels Up,’’ Southwest Airlines Spirit, June 2006, 109–17. 18. A. Sewer, ‘‘Southwest Airlines: The Hottest Thing in the Sky,’’ Fortune, 8 March 2004, 88–89.

Case Questions

1. Analyze the ethical culture at TAP. Does the culture appear to be in alignment? Misalignment?

2. Based on the facts in the case and what you have learned in this chapter, evaluate the culture change effort that Douglas Durand undertook. What cultural systems did he target in the culture change effort? What systems were missing, if any?

3. Why did his culture change effort fail? What would it take for it to succeed?

Source: C. Haddad. and A. Barrett, ‘‘A Whistle-Blower Rocks an Industry,’’ Business Week, 24 June 2002, 126–30.

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19. Schein, ‘‘How Culture Forms, Develops, and Changes’’; Selznick, Leadership in Administration. 20. M. Gunther, ‘‘Money and Morals at GE,’’ Fortune, 15 November 2004, 177–78. 21. Ibid.

22. L. K. Trevi~no, M. Brown, and L. Pincus-Hartman, ‘‘A Qualitative Investigation of Perceived Executive Ethical Leadership: Perceptions from Inside and Outside the Executive Suite,’’ Human Relations 56, no. 1 (2003): 5–37; L. K. Trevi~no, L. P. Hartman, and M. Brown, ‘‘Moral Person and Moral Manager: How Executives Develop a Reputation for Ethical Leadership,’’ California Management Review 42, no. 4 (2000): 128–42.

23. T. J. Neff and J. M. Citrin, Lessons from the Top: The Search for America’s Best Leaders (New York: Doubleday, 1999).

24. Trevi~no et al., ‘‘Moral Person and Moral Manager.’’ 25. P. O’Neill, ‘‘O’Neill on Ethics and Leadership,’’ Speech at the Berg Center for Ethics and

Leadership, Katz Graduate School of Business, University of Pittsburgh, 2002.

26. Joe Paterno, Paterno by the Book (New York: Random House, 1989). 27. R. C. Borden, ‘‘Sherrill’s Termination Released,’’ Bryan College Station Eagle, 3 March 1989, 1; A.

Hamilton, ‘‘Switzer Resigns,’’ (State College, PA) Centre Daily Times, 20 June 1989, D1; ‘‘Status of Sports Investigations on College Campuses,’’ Chronicle of Higher Education, 7 June 1989, A34.

28. B. George, ‘‘Why It’s Hard to Do What’s Right,’’ Fortune, 29 September 2003, 98. 29. J. A. Byrne, ‘‘Chainsaw,’’ Business Week, 18 October 1999, 128–49. 30. G. Tidwell, ‘‘Accounting for the PTL Scandal,’’ Today’s CPA, July–August 1993, 29–32. 31. J. Sonnenfeld, ‘‘The Real Scandal at BP,’’ Business Week, 14 May 2007, 98. 32. L. K. Trevi~no, G. R. Weaver, D. G. Gibson, and B. L. Toffler, ‘‘Managing Ethics and Legal

Compliance: What Works and What Hurts,’’ California Management Review 41, no. 2 (1999): 131–51.

33. C. Loomis, ‘‘Whatever It Takes,’’ Fortune, 25 November 2002, 74–75. 34. C. Loomis, ‘‘Tough Questions for Citigroup’s CEO,’’ Fortune, 29 November 2004, 115–22. 35. Loomis, ‘‘Whatever It Takes,’’ 75. 36. Loomis, ‘‘Tough Questions for Citigroup’s CEO,’’ 118.

37. M. Vickers, ‘‘The Unlikely Revolutionary,’’ Fortune, 6 March 2006, 132–44. 38. Peter S. Goodman, ‘‘Sluggers and Bankers in the Strikeout Era,’’ New York Times, 16 January 2010,

www.nyt.com. 39. Katrina Brooker, ‘‘Citi’s Creator, Alone with His Regrets,’’ New York Times, 3 January 2010,

www.nyt.com.

40. Trevi~no et al., ‘‘Managing Ethics and Legal Compliance.’’ 41. D. Mayer, M. Kuenzi, R. Greenbaum, M. Bardes, and R. Salvador, ‘‘How Does Ethical Leadership

Flow? Test of a Trickle-Down Model,’’ Organizational Behavior and Human Decision Processes 108 (2008): 1–13.

42. Brooker, ‘‘Can Anyone Replace Herb?’’ 43. W. C. Byham, ‘‘Can You Interview for Integrity?’’ Across the Board, March–April 2004, 34–38. 44. J. L. Seglin, ‘‘The Values Statement vs. Corporate Reality,’’ New York Times, 17 September 2000,

www.nytimes.com.

45. G. Colvin and J. Shambora, ‘‘J&J: Secrets of Success,’’ Fortune, 4 May 2009, 117–21. 46. G. R. Weaver, L. K. Trevi~no, and P. L. Cochran, ‘‘Corporate Ethics Practices in the Mid-1990s: An

Empirical Study of the Fortune 1000,’’ Journal of Business Ethics 18, no. 3 (1999): 283–94. 47. 2005 National Business Ethics Survey (Washington, D. C.: Ethics Resource Center, 2005). 48. Weaver et al., ‘‘Corporate Ethics Practices in the Mid-1990s.’’ 49. Trevi~no et al., ‘‘Managing Ethics and Legal Compliance.’’ 50. J. Kish-Gephart, D. Harrison, and L. K. Trevi~no, ‘‘Bad Apples, Bad Cases, and Bad Barrels: Meta-

analytic Evidence about Sources of Unethical Decisions at Work: Understanding Calculated and

Impulsive Pathways,’’ Journal of Applied Psychology 95 (2010):1–31. 51. W. J. Bowers, Student Dishonesty and Its Control in College (New York: Bureau of Applied Social

Research, Columbia University, 1964); W. G. Campbell, A Comparative Investigation of Students

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under an Honor System and a Proctor System in the Same University (Los Angeles: University of Southern California Press, 1935); R. Canning, ‘‘Does an Honor System Reduce Classroom

Cheating? An Experimental Answer,’’ Journal of Experimental Education 24 (1956): 291–96. 52. D. L. McCabe and L. K. Trevi~no, ‘‘Academic Dishonesty: Honor Codes and Other Situational

Influences,’’ Journal of Higher Education 64, no. 5 (1993): 522–28. 53. D. Nel, L. Pitt, and R. Watson, ‘‘Business Ethics: Defining the Twilight Zone,’’ Journal of Business

Ethics 8 (1989): 781–91. 54. Weaver et al., ‘‘Corporate Ethics Practices in the Mid-1990s.’’

55. Ethics Resource Center, 2005 National Business Ethics Survey. 56. G. Weaver, L. K. Trevi~no, and B. Agle, ‘‘Somebody I Look Up To: Ethical Role Models in

Organizations,’’ Organizational Dynamics 34, no. 4 (2005): 313–30. 57. M. Weber, The Theory of Social and Economic Organizations, trans. A. M. Henderson and

T. Parsons (New York: Free Press, 1947).

58. G. Sjoberg, T. R. Vaughan, and N. Williams, ‘‘Bureaucracy as a Moral Issue,’’ Journal of Applied Behavioral Science 20, no. 4 (1984): 441–53.

59. S. Milgram, Obedience to Authority: An Experimental View (New York: Harper & Row, 1974). 60. Trevi~no et al., ‘‘Managing Ethics and Legal Compliance.’’ 61. R. Jackall, Moral Mazes: The World of Corporate Managers (New York: Oxford University Press,

1988).

62. R. M. Kanter, The Changemasters (New York: Simon & Schuster, 1983). 63. H. C. Kelman and V. L. Hamilton, Crimes of Obedience: Toward a Social Psychology of Authority

and Responsibility (New Haven, CT: Yale University, 1989). 64. Joani Nelson-Horchler, ‘‘The Magic of Herman Miller,’’ Industry Week, 18 February 1991, 11–12,

14, 17. 65. M. P. Glazer and P. M. Glazer, ‘‘Whistleblowing,’’ Psychology Today, August 1986, 36. 66. A. C. Greenberg, ‘‘Memos from the Chairman,’’ Fortune, 29 April 1996, 173–75. 67. H. Schwartz and S. M. Davis, ‘‘Matching Corporate Culture and Business Strategy,’’

Organizational Dynamics, Summer 1981, 30–48. 68. L. Tiger, ‘‘Stone Age Provides Model for Instilling Business Ethics,’’ Wall Street Journal,

11 January 1988, 18.

69. S. Gellerman, ‘‘Why ‘Good’ Managers Make Bad Ethical Choices,’’ Harvard Business Review 64, no. 4 (1986): 85–97.

70. C. Welles, ‘‘What Led Beech-Nut Down the Road to Disgrace?’’ Business Week, 22 February 1988, 124–37.

71. Trevi~no et al., ‘‘Managing Ethics and Legal Compliance.’’ 72. Van Maanen and Schein, ‘‘Toward a Theory of Organizational Socialization.’’

73. J. A. Waters, ‘‘Catch 20.5: Corporate Morality as an Organizational Phenomenon,’’ Organizational Dynamics, Spring 1978, 319.

74. Deal and Kennedy, Corporate Cultures. 75. Paterno, Paterno by the Book. 76. Deal and Kennedy, Corporate Cultures. 77. J. M. Beyer and H. M. Trice, ‘‘How an Organization’s Rites Reveal Its Culture,’’ Organizational

Dynamics 15, no. 4 (1987): 524. 78. J. Channon, ‘‘Creating Esprit de Corps,’’ in New Traditions in Business: Spirit and Leadership in

the 21st Century (San Francisco: Berrett-Koehler, 1992) 53–66. 79. I. Mitroff and R. H. Kilmann, ‘‘On Organizational Stories: An Approach to the Design and

Analysis of Organization through Myths and Stories,’’ in The Management of Organization Design: Strategies and Implications, eds. R. Kilmann, L. Pondy, and D. P. Slevin (New York: North-Holland, 1976).

80. J. Martin and C. Siehl, ‘‘Organizational Culture and Counterculture: An Uneasy Symbiosis,’’ Organizational Dynamics, Autumn 1983, 52–64.

81. Paterno, Paterno by the Book.

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82. Ibid. 83. S. Fisher, ‘‘Telling Tales: The Art of Corporate Storytelling,’’ Costco Connection, October 2007,

22–23.

84. L. K. Trevi~no, ‘‘The Influences of Vicarious Learning and Individual Differences on Ethical Decision Making in the Organization: An Experiment,’’ Unpublished doctoral dissertation, Texas A & M University, College Station, Texas.

85. F. B. Bird and J. A. Waters, ‘‘The Moral Muteness of Managers,’’ California Management Review, Fall 1989, 73–88.

86. K. Berney, ‘‘Finding the Ethical Edge,’’ Nation’s Business, August 1987, 18–24. 87. Bird and Waters, ‘‘The Moral Muteness of Managers.’’

88. Kelman and Hamilton, Crimes of Obedience. 89. Trevi~no et al., ‘‘Managing Ethics and Legal Compliance.’’ 90. K. D. Martin and J. B. Cullen, ‘‘Continuities and Extensions of Ethical Climate Theory: A Meta-

analytic Review,’’ Journal of Business Ethics 69 (2006): 175–94. 91. B. Toffler, Final Accounting: Ambition, Greed, and the Fall of Arthur Andersen (New York:

Broadway Books, 2003). 92. Ibid.

93. Toffler, Final Accounting; L. K. Trevi~no and M. E. Brown, ‘‘Managing to Be Ethical: Debunking Five Business Ethics Myths,’’ Academy of Management Executive 18, no. 2 (2004): 69–81.

94. K. Eichenwald, ‘‘Reversal of Andersen Conviction Not a Declaration of Innocence,’’ New York Times, 1 June 2005, C6.

95. Barrett, Culture and Conduct; B. Uttal, ‘‘The Corporate Culture Vultures,’’ Fortune, 17 October 1983, 66–71.

96. Ibid. 97. R. Ricklees, ‘‘Ethics in America Series,’’Wall Street Journal, 31 October–3 November 1983, 33. 98. J. A. Swainson, ‘‘Back from the Brink: Rebuilding a Company after a Near-Fatal Ethics

Breakdown,’’ Raytheon lectureship in Business Ethics at Bentley University, Waltham, MA, 2008. 99. J. Byrne, ‘‘The Best-Laid Ethics Programs,’’ Business Week, 9 March 1992, 67–69. 100. N. Tichy,Managing Strategic Change (New York: Wiley & Sons, 1983). 101. Uttal, ‘‘The Corporate Culture Vultures.’’

102. W. R. Nord, ‘‘OD’s Unfulfilled Visions: Some Lessons from Economics,’’ in Research in Organizational Change and Development, eds. R. W. Woodman and W. A. Pasmore (Greenwich, CT: JAI Press, 1989), 39–60.

103. Uttal, ‘‘The Corporate Culture Vultures.’’

104. A. L. Wilkins, ‘‘The Culture Audit: A Tool for Understanding Organizations,’’ Organizational Dynamics 12 (1983): 24–38.

105. F. Luthans, ‘‘Conversation with Edgar H. Schein,’’ Organizational Dynamics 17, no. 4 (1989): 60–76.

106. J. P. Near and M. P. Miceli, ‘‘Whistleblowers in Organizations: Dissidents or Reformers?’’ in

Research in Organizational Behavior, eds. Cummings and Staw, 321–68. 107. T. Peters, ‘‘Symbols, Patterns, and Settings: An Optimistic Case of Getting Things Done,’’

Organizational Dynamics 7 (1978): 3–23. 108. W. McWhinney and J. Batista, ‘‘How Remythologizing Can Revitalize Organizations,’’

Organizational Dynamics 17, no. 2 (1988): 46–79. 109. ‘‘Texaco Chairman and CEO Tells National Urban League that Diversity Commitment Must Be

Worked on Daily,’’ Press Release (August 4, 1998), Chevron Texaco Corporation. 110. K. Labich, ‘‘No More Crude at Texaco,’’ Fortune, 16 September 1999, 205–12. 111. ‘‘Fourth Annual Report of the Equality and Fairness Task Force for the Year ending June 30,

2001,’’ Chevron Texaco Corporation, 2001.

112. Ibid.

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CHAPTER6 MANAGING ETHICS AND LEGAL COMPLIANCE

INTRODUCTION

Chapter 5 presented ethics as organizational culture. But it may have raised as many questions as it answered, such as ‘‘What are real organizations doing to create and communicate an ethical organizational culture?’’ This chapter is designed to help answer that question by focusing more narrowly on ethics and legal compliance pro- grams in multiple large American corporations. These programs are designed to manage and communicate ethics in a variety of ways.

Whatever your organizational level, you should find the information in this chapter helpful. If you’re at a high organization level, it should give you ideas about how to manage ethics and legal compliance in your firm. If you’re at a lower or middle manage- ment level, it should help you understand your own organization’s approach to ethics management and how it compares to what other organizations are currently doing. If you’re a student, it will help you think about what to look for during the job search.

In preparing this chapter, we spoke with executives from six companies in a variety of industries: Lockheed Martin Corporation (global security); United Tech- nologies (Otis elevators, Carrier air conditioners, Pratt & Whitney engines, Sikorsky helicopters); Merck & Co., Inc. (medicines, vaccines, and consumer health and ani- mal health products); Adelphia (telecommunications/cable); Staples (office sup- plies); and USAA (insurance and financial services). We are grateful to these executives for their time and contributions to this book. These companies range in size and ownership from USAA, an insurance and financial services company with 22,000 employees at four U.S. locations and two overseas offices, to United Technol- ogies, which has over 200,000 employees (more than half outside the United States) and a presence in more than 180 countries. Staples has more than 91,000 associates in 27 countries. Merck has 106,000 employees in 140 countries. Adelphia had 14,000 employees across the United States when its assets were purchased in 2005 by Com- cast and Time Warner. Lockheed Martin has 140,000 employees and operates in 600 locations across all 50 U.S. states and internationally in 75 nations and territories. Think about the challenge of managing ethics and legal compliance in these firms, many with employees at locations around the globe. All of the companies are

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engaged in a variety of efforts, but their approaches differ somewhat due to differ- ences in industries and organizational cultures. For example, some industries (e.g., defense and chemicals) are more highly regulated than others. So compliance with laws and regulations is an important goal, and it must be managed. For many of these companies, ethics and legal compliance are closely tied to maintenance of the firm’s reputation and brand value. In such an environment, integrity becomes a key driver of corporate action.

STRUCTURING ETHICSMANAGEMENT

Many businesses are allocating significant resources to formal ethics and legal com- pliance programs. The increasing attention to formal ethics management programs has come about partially because of media attention to scandals in American business and management’s awareness of the U.S. Sentencing Guidelines (see more about the guidelines at the end of this chapter); because for a number of years, organizations such as the Conference Board have held business ethics conferences at which formal ethics management systems are encouraged; and because some corporate leaders are simply committed to the importance of ethics in their organizations.1

Perhaps nothing, however, has influenced corporate ethics programs in the United States more than the U.S. Sentencing Guidelines, which took effect in the early 1990s. Until the mid-1980s, criminal law focused on the individual defendant rather than the corporation, and fines on corporations were relatively modest. In 1984 Congress created the U.S. Sentencing Commission in response to criticism of judicial discretion in sentencing and perceived disparities between sentences for ‘‘white- collar’’ and other types of crimes. In 1987, the Commission imposed federal sentenc- ing guidelines for individual offenders, and as a result the trend has been toward increasing fines for both individuals and organizations convicted of felony crimes. The guidelines limited judicial sentencing discretion and mandated some incarcera- tion for virtually every felony offender.

In 1991, the Commission issued new sentencing guidelines for organizations convicted of federal crimes. The organization can be convicted even if only one employee is caught breaking the law. The guidelines cover most federal crimes, including fraud, antitrust, securities, tax, bribery, and money-laundering offenses, and they impose a schedule of mandatory fines. ‘‘Virtually without exception, the Guidelines require a convicted organization to make restitution and to pay a substan- tial fine (which is not tax deductible).’’2 The guidelines even include a provision call- ing for a ‘‘corporate death penalty.’’ The provision was used by federal prosecutors in the case of American Precision Components Inc., a Farmingdale, New York, com- pany that sold ordinary nuts and bolts to government contractors as highly tested space components.3 The company agreed to divest all of its assets. Arthur Andersen, the former auditing firm that once ‘‘stood for integrity,’’ put its stamp of approval on a long list of dirty books (e.g., Sunbeam, Waste Management, Enron, Global Cross- ing, Qwest, and WorldCom) and has now become the biggest case ever of corporate capital punishment.4

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The sentencing guidelines were designed to use a ‘‘carrot and stick’’ approach to managing corporate crime. The carrot provides incentives to organizations to develop a strong internal control system to detect and manage illegal behavior. The guidelines list seven requirements (outlined in detail in Table 6.1) for due diligence and an ef- fective compliance program. For example, the guidelines propose that organizations establish and communicate compliance standards and set up communication, moni- toring, reporting, and accountability systems. In this approach, the stick provides for severe punishment for organizations that are convicted of crimes and were not pro- actively managing legal compliance within the organization. Fines and other sanc- tions vary widely depending on prior violations, whether management reports itself and cooperates with investigative authorities, and depending on whether the com- pany has an effective program in place to prevent and detect illegal behavior. The 1991 guidelines listed the following seven specific requirements for an effective legal compliance program.

Therefore, the same crime can be subject to a wide range of penalties. The mini- mum fine under the guidelines is $250, and the maximum is $290 million or even more if the crime meets certain criteria. (For more specific information about how fines are determined, see the appendix, ‘‘How Fines Are Determined under the U.S. Sentencing Guidelines,’’ at the end of this chapter.) The guidelines also provide that a defendant organization that does not have an effective legal compliance program should be put on corporate probation. Some of the recommended conditions of pro- bation include requiring that the organization publicize (at its own expense and as directed by the court) the fact of its conviction and the nature of the punishment;

Table 6.1 Seven Requirements for Due Diligence and an Effective Compliance Program!

1. Establishing compliance standards reasonably capable of preventing criminal conduct

2. Assigning specific high-level individuals with responsibility to oversee those compliance standards

3. Exercising due care to ensure that discretionary authority is not delegated to individuals with a propensity to engage in illegality

4. Taking necessary steps to communicate compliance standards and procedures to all employees, with a special emphasis on training and the dissemination of manuals

5. Taking reasonable steps to achieve compliancewithwritten standards through monitoring, auditing, and other systems designed to detect criminal conduct, including a reporting system free of retribution to employeeswho report criminal conduct

6. Consistently enforcing the organization’s written standards through appropriate disciplinary mechanism, including, as appropriate, discipline of individuals responsible for failure to detect an offense

7. After an offense is detected, taking all reasonable steps to respond and to prevent future similar conduct

!These requirements are from the U.S. Sentencing Guidelines of 1991 (see www.ussc.gov for more information).

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periodically report to the court regarding financial condition and operating results; submit to periodic, unannounced reviews of books and records, and interrogation of employees by court-appointed experts (paid by the organization); and inform the court of any material adverse change in business conditions or prospects.

According to the U.S. Sentencing Commission’s reports (found at www.ussc. gov), more and more firms are being sentenced under the guidelines. Because the guidelines were not applied retroactively, they remained under the radar for a number of years. However, their impact has steadily increased and companies are paying attention. For example, in 1995, Con Edison was convicted of an environmental offense and was subject to probation that included onerous compliance requirements. In 1996, in what has come to be known as the Caremark decision, corporate boards of directors were put on notice to take the guidelines into account as part of their corpo- rate governance responsibilities or face personal liability. In 1999, Hoffman-LaRoche was convicted of antitrust conspiracy charges and was fined $500 million, the largest criminal fine imposed to that point in the United States, and Rhone Poulenc was granted amnesty because it reported the offense. In 2001, TAP Pharmaceuticals received the third largest fine ever imposed to that date under the guidelines—$290 million.5 (See Chapter 5 for a case study about TAP Pharmaceuticals.) A review of sentencing over 10 years found that although the number of organizations sentenced remained stable, fine amounts increased substantially. For example, in 1990, the aver- age fine was $167,214. In 2000, the average fine had risen to $3,225,462.6

In 2004, the U.S. Sentencing Commission released revisions to the guidelines, including the expectation that the board of directors will oversee the compliance and ethics program, that senior management will ensure its effectiveness, and that the com- pliance officer will have adequate authority and access to senior management. In addi- tion, organizations must train employees and conduct risk assessments to identify potential areas of concern. The revision also ensures that organizations cannot just ‘‘check off’’ the list of guidelines (for example, with a code of conduct that just sits on the shelf). Rather, the program in place must be seen as an integral part of the organi- zation’s culture (see Chapter 5 for more on ethical culture). With the Supreme Court’s 2005 United States v. Booker decision, judges are no longer required to follow the guidelines strictly. But the guidelines remain advisory, and federal prosecutors have been told they are expected to take steps to ensure adherence to them. Therefore, most observers now expect that the guidelines will continue to be followed in most cases.7

As you’ll see in the material that follows, most of the elements of the sentencing guidelines have become integral parts of organizational ethics programs throughout the United States. While most companies make a real effort to meet the ‘‘letter’’ of the guidelines, others go much further to incorporate the ‘‘spirit’’ of the guidelines. We discuss some of those efforts in this chapter.

Making Ethics Comprehensive and Holistic

The U.S. Sentencing Guidelines very clearly aim to encourage organizations to create ethics programs that drive integrity and ethical behavior in their business

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operations. As the guidelines have become more refined and sophisticated over time, responsible organizations have found numerous ways of making ethics and values central to how they do business. As we read in the last chapter, values like ethics and integrity become part of an organization’s culture by aligning various elements throughout the organization. Integrating any corporate value into the orga- nizational culture starts with strong executive commitment. Once executives are clearly behind the effort, then the effort must be communicated to every employee and compliance must be measured and rewarded for the value to become part of the culture.

At Staples, the office supply giant, executives tried to capture the sentiment underpinning their ethics program by calling it ‘‘Staples Soul.’’ The Staples Soul pro- gram brings together a number of ethics and social responsibility efforts under one umbrella, including the company’s concern for ethics, the environment, its commu- nity activities, and diversity. The Staples Soul symbol is appropriately a paper clip bent into the shape of a heart. According to company documents, ‘‘Staples Soul reflects our commitment to corporate responsibility. It’s what moves us to embrace diversity, sustain the environment, give back to our communities, and practice sound ethics. Linking all of these values with our global business strategy and operations contributes to our financial success and helps us become a great employer, corporate citizen and neighbor.’’8

Managing Ethics: The Corporate Ethics Office

Some organizations delegate ethics management responsibilities widely, finding that a strong statement of values and a strong ethical culture can keep the ethics manage- ment effort together. This approach may be particularly effective in smaller firms. However, most large firms find that ethics initiatives need to be coordinated from a single office to ensure that all of the program’s pieces fit together and that all of the U.S. Sentencing Guideline requirements are being met.

The corporate ethics office concept can be traced to 1985 and General Dynamics, then the second-largest U.S. defense contractor. The secretary of the Navy, out of concern about the appropriateness of certain indirect expenses that had been billed to the government, directed General Dynamics to establish and enforce a rigorous code of ethics for all employees that included sanctions for violators. The company turned to a nonprofit consulting firm in Washington, D.C., the Ethics Resource Center, for help in developing the code. As part of this process, an ethics office was also set up and an ethics officer was hired.9 In 1986, General Dynamics joined with other defense industry companies in the Defense Industry Initiative (see www.dii.org) to ‘‘embrace and promote ethical business conduct.’’ The companies shared best prac- tices, and these best practices provided much of the foundation for the U.S. Sentenc- ing Commission requirements.

The 1991 U.S. Federal Sentencing Guidelines gave impetus to the move toward establishing formal ethics programs in firms outside the defense industry. The guide- lines also called for the assignment of specific high-level individuals with

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responsibility to oversee legal compliance standards. This requirement led to the development of a brand new role—that of the corporate ethics officer.

Ethics and Compliance Officers

Until the mid-1980s, the title ‘‘ethics and compliance officer’’ didn’t exist in Ameri- can business. Today, with a growing number of ethics and compliance practitioners worldwide, these high-level executives have their own professional organization, the Ethics and Compliance Officer Association (ECOA—see www.theecoa.org). The association’s stated mission is ‘‘to promote ethical business practices, serving as a forum for the exchange of information and strategies.’’ The organization began in 1991 when over 40 ethics and compliance officers met at the Center for Business Ethics at Bentley University in Waltham, Massachusetts. The organization was offi- cially launched later that year and began holding annual meetings in 1993. As of 2009, the ECOA has more than 1,300 members representing more than half of For- tune 100 companies, nonprofits, municipalities, and international members from over 30 countries. The organization holds regular conferences, workshops, and webcasts and provides a variety of classroom and distance learning opportunities for ethics and compliance officers and their staff.

Many firms designate their legal counsel as the ethics officer. Others create a title such as vice president or director of ethics, compliance, or business practices, direc- tor of internal audit, ethics program coordinator, or just plain ethics officer. Most firms locate the ethics officer at the corporate level, and these high-level executives generally report to a senior executive, the CEO, the board of directors, the audit com- mittee of the board, or some combination. These individuals are expected to provide leadership and strategies for ensuring that the firm’s standards of business conduct are communicated and upheld throughout the organization. At the time this book went to press in early 2010, the U.S. Sentencing Commission had just proposed (for public comment) the idea that the compliance officer should report directly to the board of directors. If adopted, such a reporting structure would contribute to mitiga- tion of a firm’s culpability at sentencing even if high-level executives were involved in the illegal conduct.

INSIDERS VERSUS OUTSIDERS An ethics or compliance officer may be an insider or someone brought in from the outside. We talked to past and present ethics officers who represent both categories. It can sometimes be more difficult for an out- sider to achieve credibility in the ethics or compliance role. But someone brought in from outside the company has the advantage of being able to evaluate the situation with a fresh eye. If change is needed, that person may be better able to guide the organization through the change process. Most of those we interviewed believe that, if available, a respected and trusted insider who knows the company’s culture and people is usually the best choice. Results of a 1995 survey support the insider preference.10 Eighty-two percent of the firms responding to the question hired their ethics officer from inside the firm. The very best situation may be when the ethics

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officer is also a part of the senior management team or being groomed for an execu- tive position.

At Lockheed Martin, ethics is taken so seriously that an assignment managing an ethics office is part of the grooming process for executive positions that high- potential employees receive. Lockheed has a vice president of ethics for the entire corporation and five ethics directors—one for each of Lockheed’s five huge business units. These positions report to the senior business and ethics executives in the busi- ness units and are rotational. High-potential executives are recruited into these jobs as a development experience; they serve for two to three years and then go back to the businesses. Other high-potential employees replace them as ethics directors, and the process continues. This is a novel approach to enhancing an ethics program and grooming executives, and it should go a long way toward truly integrating ethics and integrity into how the business is run. Lockheed will soon have a full cadre of execu- tive-level employees who have served the company as ethics officers. One employee involved in this process is Srinivas Dixit, who currently (2010) is the director of ethics and business conduct for Lockheed Martin Electronic Systems in Bethesda, Maryland. Dixit holds an undergraduate degree in engineering and an MBA, and he was working in business operations in Lockheed’s finance area when he was tapped for the ethics director job in late 2008. Now he is managing investigations, overseeing ethics and compliance training, tracking metrics through surveys and other studies, and looking for trends in this area. He is also talking to leaders, work- ing with them to integrate ethics and compliance into the business by creating a ‘‘culture of trust’’ throughout the organization. What has Dixit learned in his new job? ‘‘I’ve learned how seriously Lockheed integrates ethics into the business. Ethics is fundamental to who we are and what we do. Integrity is at the beginning, middle, and end of every message our senior leaders send. This job has shown me how seri- ously we take ethics—how much we respect people, and how much time and care we take in reaching decisions.’’

ETHICS OFFICER BACKGROUND The job of ethics officer has been called ‘‘the newest profession in American business.’’11 Individuals holding this position come from many backgrounds. With insiders, the job is often assigned to someone in a staff function (e.g., someone in the corporate secretary’s office, office of the legal counsel, audit, or human resources). According to past ethics officer surveys, law was the most common background. That is true of most of our interviewees as well. Interest- ingly, some people believe that lawyers shouldn’t be considered for the job, because corporate lawyers are hired to defend the corporation and can’t objectively handle an ethical issue that calls the corporation’s own behavior into question. But the ethics officers we interviewed agreed that the most important thing is earning other employ- ees’ respect as being fair, trustworthy, credible, and discreet. The ethics program co- ordinator at USAA, Earnie Broughton, has training in industrial/organizational psychology and experience as a human resources generalist and line executive. Such a background is less common among ethics officers. But it’s useful in an organization that is committed to making ethics management the responsibility of everyone from

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the CEO down. In fact, as a statement of commitment and accountability that any ethics officer would welcome, USAA’s CEO identifies himself as the chief ethics officer. Broughton’s office oversees the code and conflict of interest policy, ethics training, communication, and support. But at USAA, every executive, manager, and supervisor is assigned responsibility for ethics within his or her own area. Broughton works closely with the ‘‘Ethics Council,’’ a group of senior executives who meet regularly to talk about the ethics program and provide company-wide guidance on ethics issues.

The Ethics Infrastructure

Ethics offices can be centralized, decentralized, or some combination of both. The decision to centralize or decentralize may depend on the overall structure of the firm. For example, if the firm’s other staff functions are highly decentralized, it may be difficult to centralize the ethics function. The structuring decision may also depend on whether different business units have very different ethics management needs. For example, if one division of a firm deals in government contracts and others do not, that division may need a different approach that emphasizes compliance with government contracting regulations. So local ethics offices might better meet the needs of different units that are in different businesses. However, decentralized ethics offices can be difficult to manage effectively because they must communicate with each other constantly to ensure consistency and commitment to the organization’s key values.

Even where different units have different requirements, it’s usually helpful to have a central office that coordinates ethics and compliance activities and ensures manage- ment support for those activities. Most large organizations, such as the ones we talked with, have a headquarters ethics office that functions as the central point of communi- cations for ethics and compliance activities. For example, the corporate ethics office at Lockheed Martin has a staff of approximately nine people, led by Alice Eldridge, the vice president of ethics and business conduct. In addition, each of the four large busi- ness areas and corporate enterprise operations has a full-time ethics director who has responsibility for overseeing ethics and business conduct in his or her business areas. These ethics directors, following a matrix reporting structure, report to Eldridge as well as to an executive vice president for their business area. Eldridge reports directly to the chairman and chief executive officer. In addition, Eldridge reports (in written and oral form) to the Ethics and Corporate Responsibilities Committee of the corporation’s board of directors at certain intervals during the year.

Ethics officers seem to agree that, whatever other reporting relationships exist, the ethics officer should have a direct reporting relationship to the CEO. They were particularly concerned about the ethics function being ‘‘stuck’’ under law, human re- sources, audit, or finance, where it would be just another part of the ‘‘silo mentality’’ that still exists in many organizations. Ethics would then be perceived as audit’s job or HR’s job rather than as part of the total culture. The person who leads the ethics office is in a much better position to ‘‘press the envelope’’ if he or she reports directly

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to the CEO. In fact, as with USAA, the best situation is likely when the CEO thinks those letters stand for the ‘‘chief ethics officer’’ as well as chief executive officer. In that situation the CEO, with assistance from other individuals, takes responsibility for managing ethics.

The Corporate Ethics Committee

In some organizations, ethics is managed by a corporate committee staffed by senior- level managers from a variety of functional areas. This committee is set up to provide ethical oversight and policy guidance for CEO and management decisions.12 It also represents an affirmation that top management really cares about ethics.

At Lockheed Martin, the Ethics and Business Conduct Steering Committee meets once every quarter and has done so since 1995. The committee provides the organization with strategic direction and oversight on matters of ethics and business conduct. Each business area and business unit has also established a steering commit- tee to oversee its ethics and business conduct operations. Members of the corporate committee include the general counsel (committee chairman), executives of large operating entities, and vice presidents from functional areas such as human resources, finance, audit, and communications. The two-way communication between the ethics office and these senior executives is essential. It gives the ethics office information about what concerns senior-level management, and it gives the firm’s leadership information about the types of issues that are coming into the ethics office from employees. The group’s role is viewed as strategic. The steering committees at all levels of the corporation review the ethics awareness training and business conduct compliance training programs, metrics on investigations and requests for guidance, trends, employee survey results, and matters referred by the business areas and busi- ness units.

COMMUNICATING ETHICS

Within the ethics infrastructure, good communication—downward, upward, and two- way—is essential if an organization is to have a strong, aligned ethics culture. The organization must evaluate the current state of ethics communication and initiatives. It must communicate its values, standards, and policies in a variety of formal and informal ways that meet its employees’ needs. These communication efforts should be synergistic, clear, consistent, and credible. They also need to be executed in a variety of media, because people learn things in different ways. In general, the old advice to speechwriters still holds. ‘‘Tell ’em what you’re going to tell ’em, then tell ’em, then tell ’em what you told ’em.’’ In addition to receiving downward communi- cation from management, employees must also have opportunities to communicate their ethical concerns upward. Finally, an open communication environment must be created that says it’s okay to ask questions, and it’s okay to talk about ethics. In the following section, we begin with some corporate communications basics—principles that should guide all ethics communication initiatives.

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A number of the ethics officers we interviewed were sensitive to the negativity sometimes attached to the word ethics. Employees can get defensive when they hear this word. They think to themselves, ‘‘Why are you here talking to me about ethics? Mine are fine.’’ Kent Druyvesteyn, former ethics officer at General Dynamics, put it this way. ‘‘Using the word ‘ethics’ unfortunately implies that somebody has a defi- ciency. So, I would urge you not to use that word at least until you can make clear what you mean by it.’’ This negative reaction to the word ethics may be more of a problem at some organizations than at others. Again, it depends on the culture of the firm. Companies have used the term values or business conduct or business practices successfully. The key is to know your own company and use terminology that sounds authentic within your organization’s culture.

Basic Communications Principles

ALIGN THE FORMAL AND INFORMAL COMMUNICATION SYSTEMS When most people think of a corporate communication system, they think of the obvious— the company newspaper, website, and annual report. However, like culture, a corpo- rate communication system consists of formal and informal components. Formal communications include all formal written and electronic communication—newspa- pers, magazines, memos, recruiting literature, policy manuals, annual reports, web- sites, and advertising—as well as formalized oral communication such as meetings and speeches. But perhaps the most powerful component in a corporation’s commu- nication system is an informal one known as the grapevine.

The grapevine—a continual stream of information among employees about ‘‘what’s really going on’’—exists in every organization. It contains news, rumors, impressions, and perceptions. Surprisingly, research has shown that from 70 to 90 percent of the information that passes through the grapevine is accurate.13 In survey after survey of employees in numerous and varied businesses, the grapevine is where they said they received most of their information about their employer. (In those same surveys, most people said they would rather receive information from their managers.) The grapevine can be examined to shed light on a corporation’s credibil- ity since most employees are plugged into it, it provides information fast and contin- ually, and it contains the ‘‘inside’’ scoop on corporate events.

One way to determine corporate credibility on various issues—especially ethics—is to compare the messages on the formal and informal communications sys- tems. For example, suppose that BIG Company has a policy prohibiting employees from entertaining customers excessively. The policy is spelled out in a manual, and the president of BIG has reinforced the policy in speeches to employees. Now imag- ine that BIG’s head of marketing repeatedly wines and dines clients. The costs of the lavish entertainment are detailed in expense reports that are approved by manage- ment and processed by clerical and financial control employees. In addition, other employees are invited along when the clients are entertained, and still more employ- ees observe the head of marketing entertaining guests in expensive restaurants. Regardless of how strongly BIG’s formal communication system states the official

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policy, the informal communication system—the grapevine—will communicate what’s really going on: BIG is saying one thing and doing another. The company says it prohibits lavish entertainment, yet it condones that forbidden behavior in at least one high-level employee. As a result, BIG’s ethics culture is out of alignment and it has no corporate credibility on the subject of customer entertainment. Further- more, its credibility on other ethical issues is probably suspect.

Now imagine another situation. LITTLE Company has a strongly worded policy regarding sexual harassment. Moreover, LITTLE’s senior executives have frequently stated that sexual harassment will not be tolerated. Suppose a manager, Pat, is accused of sexual harassment. The charge is investigated, found to be accurate, and Pat is fired. The exact details of the incident may not be on the grapevine, but in most cases, just the bare bones of that story will send a strong message. The messages on the grapevine will match what’s said by LITTLE’s formal communication system. Employees will get the word very quickly that LITTLE means business on the issue of sexual harassment, and the corporation will have increased its credibility by ‘‘walking the ethics talk.’’

The importance of informal communications can’t be overstated. Since truth and honesty are at the core of any ethics effort, if a company is saying one thing and doing another—if the messages on its formal communication system and its grape- vine don’t match—it has little or no credibility and probably shouldn’t attempt a for- mal ethics communication effort until it has regained its credibility. How can you compare the formal and informal messages? Ask employees. Employee surveys and focus groups can provide feedback that will serve as the beginning of an effective comparison. How does an organization establish or regain credibility? Designing consistent policies and enforcing those policies are the only route an organization can take to gain credibility on ethics issues. If policies are enforced for only part of the employee population, or if there are different rules and treatment for different employees, there’s little an organization can do to gain credibility until consistency is established.

ANALYZE THE AUDIENCE The first thing to do when designing a communication program is to analyze the needs of your audience. Consider what employees already know, what they need to know, what biases and abilities they have, what the desired and required behaviors look like, when they should be asking questions, and where they can go to report their concerns and to ask for help.

When designing ethics communication for a typical employee population, orga- nizations need to consider three kinds of people. (Because the terms are easy to visu- alize and remember, we use military jargon to describe the three types.)

Good Soldiers Group I includes the ‘‘good soldiers.’’ These people understand and follow the rules and policies of the organization, and they have good ethical com- passes. They have the judgment or experience required to discern the difference between right and wrong, and they have the moral grounding to do the right thing. Be careful to note that these aren’t just soldiers who follow orders, right or wrong.

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They know that good soldiers are expected to question an order they believe to be illegal or morally wrong, and they would do so.

Loose Cannons In Group II are the ‘‘loose cannons’’—these people may have good ethical compasses, but they don’t know their corporation’s policies. They may not even be familiar with general ethical standards in business. Loose cannons may be inexperienced; or they may have transferred from another, unrelated industry with very different norms; or they may never have read a policy manual. Whatever the reason, loose cannons may be well meaning, but they’re naive. Without guidance, loose cannons may not even consider ethics in the business environment.

Grenades People in Group III are ‘‘grenades,’’ and they’re neither ignorant nor benign. These employees may or may not know the rules, but they don’t care either way. They have their own agenda, and they lack any company or professional loyalty. We call them grenades because their activities can blow up suddenly and severely damage the organization.

Although the communication needs of the three groups overlap, the emphasis for each specific group is clear. Good soldiers need support because good people often feel pressured to compromise in order to ‘‘fit in.’’ Good soldiers need to know that their instincts are right and their behavior is not the exception; in fact, it represents the organi- zational model. Loose cannons need to be educated; they need to know and understand basic norms of ethical conduct and specific company policy and standards. Grenades need to know unequivocally that ethical lapses will not be tolerated. They need to see good behavior rewarded and ethical lapses dealt with swiftly, consistently, and firmly.

There are probably only a few grenades in any organization. But they surely exist everywhere, and the system must be prepared to deal with them. Good soldiers may account for a substantial portion of employees, but perhaps not the majority. Since very few employees ever read a policy manual cover to cover, most people learn policy on a need-to-know basis. It’s safest to assume that most employees fit into the loose cannon category. The challenge in designing effective ethics communi- cation programs is meeting the needs of all types of employees.

This focus on the ethics audience assumes that most employees don’t come to the organization perfectly principled and completely prepared to make the right deci- sion in every situation. Recall from earlier chapters that most employees are highly susceptible to influence from outside themselves, so the organization has to provide guidance—and, despite advances, the perfect integrity test hasn’t been invented. Since polygraphs were outlawed for most types of employee screening in the United States, more organizations have turned to paper-and-pencil honesty or integrity tests to screen prospective employees. Most of these tests attempt to predict the prospec- tive employee’s inclination to steal from the organization, although others have a more general focus on workplace deviance. Integrity tests have been evaluated by the American Psychological Association and the government’s Office of Technology Assessment. The two organizations’ reports generally agree that research on integrity

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tests is improving and that evidence supporting the tests’ ability to predict dishonest behavior has increased.14 Nevertheless, many problems remain, and organizations will continue to have imperfect employees who need guidance on ethical issues.

Evaluating the Current State of Ethics Communications

Before beginning the actual design of an ethics communication program, it’s essen- tial to conduct an evaluation that asks the following questions.

WHAT KINDS OF ETHICAL DILEMMAS ARE EMPLOYEES LIKELY TO ENCOUNTER?

In addition to common ethical dilemmas faced by employees everywhere, organiza- tions need to identify the kinds of issues and dilemmas that might be unique to their particular industry. For example, a chemical company needs to pay special attention to environmental and safety dilemmas. A financial firm should pay extremely close atten- tion to fiduciary, confidentiality, and conflict-of-interest issues. A manufacturing com- pany may have to look at the ethical issues involved in worker safety, product quality, product liability, and labor relations. Along with identifying issues specific to their industry, companies need to examine the various jobs within their organization to un- cover what specific professional dilemmas their communication program will have to address. For example, an internal auditor faces one set of dilemmas, whereas a manu- facturing supervisor faces an entirely different set. Once these dilemmas are identified, an organization can develop a program that’s useful for employees—one that shows them how to deal with their own most common dilemmas.

WHAT DON’T EMPLOYEES KNOW? Is the company hiring numerous midcareer hires who may come from other industries with different standards of conduct? Does the company regularly hire large numbers of recent college or business school gradu- ates who may have little knowledge of business standards, much less specific corpo- rate policy or industry standards? The communication program needs to target the specific needs of these different groups.

HOW ARE POLICIES CURRENTLY COMMUNICATED? How is policy communi- cated now? Does the policy manual weigh in at 40 pounds, or is it online and easy to search? When a manager has a policy question, what does he or she do—look it up in the manual, ask human resources, ask a colleague, search online resources, or guess? Is corporate policy ever discussed in orientation or training programs? No one is ever going to memorize a policy manual. Therefore, an ethics communication program needs to take a ‘‘snapshot’’ of key policies and concentrate on communicating them. Organizations also need to send a clear message that employees need to know when to ask questions and that the organization encourages employees to inquire. Compa- nies generally do a very good job of telling new hires how to succeed; what they usually don’t do nearly as well is telling new hires how they’re going to fail or get fired or worse. It’s vital for new employees to understand their employer’s standards. What does the company expect from them?

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WHAT COMMUNICATION CHANNELS EXIST? How do employees receive mes- sages from management? How does management receive messages from employees? Is ‘‘management by walking around’’ a common practice, or is senior management isolated from most employees? Is there a suggestion program? If so, do suggestions get responses? Are employees generally comfortable approaching their managers with problems, concerns, and questions? Is there a grievance process or a whistle- blowing procedure? Do most employees know where to go for help if their managers are unavailable or if their manager is part of the problem? Are human resources, legal, and audit professionals accessible to most employees? Analyzing the answers to these questions will give an organization a good idea of where effective communi- cation channels exist, where they don’t, and where to build new ones.

Multiple Communication Channels for Formal Ethics Communication

The company’s ethics message can and should be communicated in a variety of ways. The most obvious ethics communication channels include a mission or values statement, a code of conduct, policy statements, a formal process for reporting con- cerns or observed misconduct, and communications from leaders. In addition to these channels, the ethics message needs to be reinforced in all formal communication materials, including recruiting and orientation materials, newsletters, magazines, annual reports, and websites. The following are some types of communication mate- rials that can be used to send an ethics message.

WEBSITES The company’s website is an important source of information about the company and its values and policies. Many companies are hesitant to include ethics information on their external website and instead use their firm’s intranet to convey the information. But stakeholders such as investors, potential employees, customers, and suppliers are likely to use the company’s website to gather information about the company. So, if ethics is important to these relationships, it should be included on the external site. For example, Lockheed Martin provides a large amount of information about ethics on its external website (www.lockheedmartin.com): its ethical princi- ples, code of conduct, annual ethics awareness training, information about compli- ance training, information about how the ethics process works, and information for suppliers and other business partners who are asked to be guided by high ethical stan- dards and to respect the restrictions the firm places on its employees with regard to such issues as giving and receiving gifts. The code, ‘‘Setting the Standard,’’ is trans- lated into 21 languages. United Technologies (www.utc.com) also provides informa- tion about ethics on its website, including the code and other brochures in portable document format (PDF). The information is also available in multiple languages.

RECRUITING BROCHURES These can include the mission or values statement, a discussion of corporate values, and a description of how people in the organization succeed and fail. Ethical conduct can be highlighted. Many organizations also have a

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website for those interested in finding out about careers within the firm and applying for jobs.

CAMPUS RECRUITING At Lockheed Martin the ethics office participates with uni- versity relations for on-campus recruiting. Ethics officers travel to college and university campuses across the country to assist in recruiting and to speak about the Lockheed Martin ethics program. In addition, ethics blogs are posted twice a month on the ‘‘LMCampus ConX’’ social networking site to raise awareness about corpo- rate ethics so that students can better understand the importance of business ethics and be better prepared to enter the workforce.

ORIENTATION MEETINGS AND MATERIALS Orientation materials can include the mission or values statement, descriptions of common ethical dilemmas and ad- vice for handling them, explanations of resources to help employees make ethical decisions, and instructions on how to raise an ethical issue or report an ethical con- cern. Organizations should pay particular attention to how their orientation meetings communicate values and expectations. New employees are eager to learn about their new employer, and orientations are a wonderful venue for communicating what an organization stands for and what it expects of employees. How not to introduce val- ues and ethics during an orientation might best be illustrated by the manufacturing company’s general counsel we heard about who, when asked to address new hires on the company’s ethics and compliance program, simply read the code of conduct aloud to a group of new employees. (Yawn.)

NEWSLETTERS AND MAGAZINES These materials can be print based or web based. They may include the mission statement, stories about corporate ‘‘heroes’’— employees who illustrate the corporate values—and features that describe ethical dilemmas and include comments from employees and managers about how they would deal with the problems. Some companies regularly publish lists of the types of ethical or legal violations they have addressed and how they addressed them. For example, the communication may say that, in the last six months, the company dealt with a particular number of reports of Internet pornography, bribery, time reporting, travel charge reporting, lying to customers, or abusive supervision. They may say how many of these resulted in a variety of actions ranging from warnings to termina- tions. Such communication helps keep the ethical culture alive and lets employees know that the company means what it says about the importance of ethics. These kinds of regular communications can also be targeted to specific groups of employees with specific needs.

BOOKLETS These materials can vary given employees’ need for information in particular areas of the business. The brief brochures can also be easily updated or added to, thus making the program adaptable to the dynamic business environment.

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Interactive Approaches to Ethics Communication at USAA

USAA has developed a novel approach to ethics communication based on a ‘‘mini– case study’’ approach. It gives employees an opportunity to learn about ‘‘real’’ ethics cases in an ongoing manner, and it sustains the focus on ethics in the organization.

The ethics office relates an ethics case gleaned from news and media and presents it on the corporate intranet in a ‘‘case file format.’’ Each story includes a ‘‘subject,’’ the facts of the case, and the outcome. Employees comment on the story and reflect on its meaning and relevance within the context of USAA’s culture and values.

Consider what this kind of communication tool can accomplish. Reading employee comments could help establish a new norm or standard of behavior in the organization. Reading the replies also offers rationales that individual employees may not have thought about on their own and creates expectations about role respon- sibilities. So, by printing the appropriate replies and supplementing them with good information about expectations and available resources, the ethics office can reinforce many important messages on an ongoing basis.

A similar systemwas introduced in the early 1990s at Texas Instruments, but in this system, employees were encouraged to send in questions. This internal corporate com- munication tool, called ‘‘Instant Experience,’’ allowed employees to raise timely issues quickly andwithout a lot of bureaucracy, and it provided the ethics office with a constant line to the ethical pulse of the organization. The idea was the brainchild of Glen Coleman, a retired Air Force helicopter pilot and an aerospace engineer who worked for TI’s ethics office at the time. Coleman admitted that while in Vietnam, he and his fellow helicopter pilots sometimes made potentially life-threatening mistakes. On their return, they freely entered their ‘‘stupid mistakes’’ into a book they called ‘‘Instant Experi- ence,’’ so that their buddies wouldn’t make the samemistakes and lives could be saved.

In a variation of the idea that not everyone should have to get burned to find out that the stove is hot, Coleman reasoned that the ethics office could be a clearinghouse for ethical experiences that members of the organization were willing to share with others. As a result, these ‘‘instant experiences’’ were regularly transmitted to all employees via an e-mail communication system. The experiences were retained on the system so that new employees could get up to speed and ongoing employees could check the system whenever they wished.

Here’s an example of an anonymous question posed by a TI employee and then posted on the communication system.

Suppose I’m in a restaurant and I happen to overhear a conversation from behind me. It’s two TI competitors discussing sensitive, competitive information that would be very valuable to TI. What do I do? Continue to listen? Put my fingers in my ears? Tell them to stop? And what should I do with the information that I’ve already heard? Forget it and pretend it never happened? Mark it TI STRICTLY PRIVATE and distribute it?

I didn’t go out looking for the information and I couldn’t change my table location to get away from the conversation. It seems a little ridicu- lous to just throw away an opportunity to use valuable information that

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I’ve acquired but didn’t solicit in any way. What’s the right course of action?

And, here’s how Carl Skooglund, TI’s ethics director at the time, responded:

There is nothing illegal or unethical about accidentally being in the right place at the right time and overhearing a competitor’s conversation. They must accept the responsibility for irresponsibly discussing sensitive infor- mation in a public place. If you have overheard the conversation, your best course of action is to document to your best ability what you heard and notify TI Legal, telling them how you acquired it. The TI employee who raised this question is correct. It would be ridiculous to pretend that you never heard the information. Under these circumstances you can share the information with TI. The competitor must accept responsibility for his carelessness. Our ethical principles do not exclude common sense.

Skooglund’s response then took the issue a step further, inviting dialogue by ask- ing TI employees if the response should be different if the TI employee had inten- tionally sat at a table adjacent to known competitors. Many employees responded, and over 95 percent of the responses agreed that intentional eavesdropping was clearly unethical. Here are some of their responses:

‘‘We are not in the spy business. It’s totally unethical.’’

‘‘I was disappointed that you would even ask us this.’’

‘‘Spying is spying.’’

‘‘What happened to the golden rule?’’

‘‘My grandmother told me that if something makes you feel guilty, don’t do it.’’

‘‘If our customers knew about this, would their opinion of us suffer?’’

‘‘I would be ashamed.’’

‘‘It’s unmitigatedly unethical.’’

‘‘Would I be proud to have my TI badge on?’’

‘‘Let’s leave trickery to magicians.’’

‘‘Stay far enough away from legal limits so that TI’s character is never questioned.’’

Skooglund agreed with the large majority of responses and assured the respon- dents that their ethical compasses were pointing in the right direction. This Instant Experience system allowed employees to openly share their ethics-related questions and experiences, and everyone in the organization learned from the open exchange. In an organization without such a system, this individual may have struggled silently with the issue or may have asked a few peers or a manager for advice. But with the system, the entire organization can learn from one employee’s experience.

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In addition to the weekly transmissions and interactions, a collection of the weekly articles was retained on the Instant Experience system as an archive with a chronologi- cal and a subject index. A survey of TI employees found that 30 to 40 percent were reading it every week, and 70 to 80 percent read it at least monthly. Supervisors were also encouraged to print the messages and post them on a bulletin board.

This system was particularly effective because it fit TI’s culture and was based on sound communication principles. First, electronic communication was an essential part of the high-tech TI culture, so e-mail ethics discussions were a natural extension of that culture. Second, e-mail is appropriate for ‘‘ethics’’ discussions because it allows for interaction with reflection. Ethical issues generally require some introspec- tion, perhaps even a trip to the file cabinet to check the code of conduct. The Instant Experience system allowed employees to think about the issue and then participate in relatively informal discussions with other employees. Finally, research suggests that people are less inhibited when communicating electronically. They may be more willing to discuss sensitive ethical issues electronically than they would be face-to- face, thus contributing to the ‘‘it’s okay to talk about ethics’’ atmosphere.

Mission or Values Statements

In recent years, many corporations have developed mission or values statements. A mission statement, values statement, or credo is a succinct description of ‘‘how we do business’’—the corporate principles and values that guide how business is to be con- ducted in an organization. A mission statement is a short description of the organiza- tion’s reason for existence—a sort of ‘‘here’s what we do.’’ Values statements are the next step in the process of explaining an organization to the world—‘‘and here’s how we do it’’—a codification of essential corporate behavior. It’s a sort of ‘‘Ten Com- mandments’’ for an organization. If it’s to be effective, it should be short, memora- ble, and in plain language so that everyone can be clear about its message. It’s also essential that the organization’s own employees have input because a mission state- ment and values statement must accurately reflect the organizational culture. Some- thing scribed by outsiders just won’t ring true and is likely to end up as the subject of a Dilbert cartoon. But statements that develop out of the firm’s true values and his- tory can be mainstays of the corporate culture. Merck posts its values statement prominently on its website (www.merck.com):

Our Values

Our business is preserving and improving human life. We also work to improve animal health. All of our actions must be measured by our suc- cess in achieving these goals. We value, above all, our ability to serve everyone who can benefit from the appropriate use of our products and services, thereby providing lasting consumer satisfaction.

We are committed to the highest standards of ethics and integrity. We are responsible to our customers, to Merck employees and their

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families, to the environments we inhabit, and to the societies we serve worldwide. In discharging our responsibilities, we do not take profes- sional or ethical shortcuts. Our interactions with all segments of society must be transparent and reflect the high standards we profess.

We are dedicated to the highest level of scientific excellence and commit our research to improving human and animal health and the quality of life. We strive to identify the most critical needs of con- sumers and customers, and we devote our resources to meeting those needs.

We expect profits, but only from work that satisfies customer needs and benefits humanity. This depends on maintaining a financial position that invites investment in leading-edge research and that makes it possi- ble to effectively deliver the results of that research.

Our ability to excel depends on the integrity, knowledge, imagina- tion, skill, diversity and teamwork of our employees. To this end, we strive to create an environment of mutual respect, encouragement and teamwork. We also strive to reward commitment and performance and be responsive to the needs of our employees and their families.

Obviously, it’s possible to have meaningless values statements when the words are posted on websites and bulletin boards but aren’t really a part of the organiza- tional culture. To be meaningful, corporate values must guide corporate and individ- ual decision making on a regular basis. But Merck employees tell us that these values are ‘‘drilled into them’’ and used on a regular basis. Also, the role of the ‘‘customer first’’ value that guided Johnson & Johnson’s decision making in the Tylenol crisis (see Chapter 10) is perhaps the most famous single example of a corporate value being meaningfully applied.

What happens when a company ignores the importance of having in place a mis- sion and vision and values? That was the situation at Adelphia, the telecommunica- tions/cable company that imploded in 2002. The Rigas family, who founded and managed the organization, ran the company like a mom-and-mop corner store, even after the company—mainly through a series of acquisitions—grew to 15,000 employ- ees. In 2002, the founder and CEO, John Rigas, and his sons were indicted for looting hundreds of millions of dollars from the company’s coffers and concealing the true debt load from investors.15 When the new management team took over, they were surprised to find that Adelphia had no guiding principles, no mission, no vision, no ethics, no code—nothing! Ray Dravesky was soon hired to head communication at Adelphia, and his first project was to get the company back on track by helping the executive team to create and communicate a new mission, vision, and code of con- duct. Because the company had filed for bankruptcy, the ethics project had to be cre- ated on a shoestring. Within weeks, however, the company launched its new vision and code of conduct and installed an employee ethics hotline. Employee satisfaction scores later indicated that employees—after living in an ethics vacuum for years— were pleased to receive this kind of direction from the top of the company. Although

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the company was purchased shortly after, employees throughout the company were pleased with the new direction these formal statements had established.

Organizational Policy

Policy—the ‘‘rules of the organization’’—is critical to any company, and most orga- nizations create a policy manual or an intranet site to house all relevant company rules. Generally, policy manuals and websites describe not only laws and regulations pertaining to the company and its industry but also all company policy, including human resources policy. Although it’s critical for a corporation to define its policies and communicate them—it’s a stipulation of the U.S. Sentencing Guidelines—most employees don’t read every page of a manual or website. Employees consider policy manuals and websites to be for reference purposes only. As a result, employees con- sult policy manuals in the same way they use a dictionary—periodically and on a need-to-know basis. Many managers never consult a policy manual, however—it’s much easier to ask someone than to look up the rules in a voluminous book or website—and, depending on whom they ask, they may or may not get the right answer.

The very nature of policy—it’s usually voluminous and written in legalese— makes it a poor way to communicate important rules. Also, since all policy is detailed, all policy may be viewed as having the same importance. Obviously, some policies are much more important than others and should receive special emphasis.

When you’re designing policy communication, first analyze the audience. Who needs to know all the policy? Does some corporate policy apply only to certain employees? What do employees really need to know, and what’s nice for them to know? Here are some guidelines to follow.

COMMUNICATE RELEVANT RULES TO THE PEOPLE WHO NEED THEM

Although much of a firm’s policy applies to everyone, surely some policy applies only to specific employee groups. For example, if accountants in the organization need specific policy, either separate it from the main manual or site under a specific heading, or leave it out and distribute accounting policy only to accountants. If some policy applies to all employees, it can be incorporated into the code of conduct.

PRIORITIZE POLICY The material describing confidentiality is more important than a description of how to code a time sheet for sick time. Policy should be presented in a way that lets employees see, at a glance, what the most important rules are.

MAKE IT UNDERSTANDABLE First, eliminate the legalese—only lawyers like legalese; the rest of us like simple English. Second, tell employees what the policy means. Most policy prohibits conflicts of interest, yet few employees can define what a conflict is. Give examples of conflicts, and tell employees what a conflict looks like. If people can’t tell you what a conflict is, it will be difficult for them to avoid one.

MAKE POLICY COME ALIVE Effective communication occurs not when you send the message, but when people receive it and understand it. Important policy needs to

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be communicated in creative ways that highlight important rules. Policy also needs to be communicated in a variety of venues: in person, in staff meetings, in orientation programs, in training sessions—wherever there’s an opportunity.

Codes of Conduct

A code of conduct is not a substitute for an ethics program; a code is only the start of an ethics effort. Codes come up frequently because most ethics programs, good or bad, have them. Codes vary substantially in length, content, and readability; but they’re generally designed to be the main road map, the ground rules for ethical con- duct within the organization.

It’s probably fair to say that the longer the code, the less likely employees are to read it. On the other hand, the shorter the code, the broader and more abstract the guidelines will be. Reducing the number of pages represents acknowledgment that the company can’t have rules to cover the hundreds of choices employees make every day. Rather, a focus on the values that should guide decision making can help employees make the best decisions in a wide variety of situations.

Many organizations deal with a longer code by dividing it into parts. The first part provides the broad guiding principles. These are followed by a more detailed section that includes more specific application to cases, answers to commonly asked questions, and reference to more detailed policy manuals. Some organizations create separate booklets, as supplements to a more general code, for workers in particular functions such as purchasing or human resources management. These booklets can provide details and answers to the questions likely to arise in that particular type of job, and the individuals in that job are more likely to read those details.

Code content may vary depending on the industry and the degree to which the firm has entered the global marketplace. Specific issues are addressed depending on the industry. Firms in the defense industry carefully outline the guidelines for charg- ing one’s time to particular government projects. If the firm is global, the code almost certainly deals with issues such as bribery. We’ll talk more about this in the next chapter.

If the code is to be taken seriously, it should be updated regularly and redistrib- uted throughout the organization, and many companies circulate such a code every year or two. Also, many organizations ask employees to sign a statement acknowl- edging that they have read the company code and abided by it during the previous year. The real test is whether it is regularly used. For example, in decision-making meetings, if managers regularly refer to the code’s guidelines, employees will learn that the code is vital to how important decisions are made.

Communicating Senior Management Commitment to Ethics

In Corporate Culture and Performance, Kotter and Heskett16 pointed to one factor that could turn around a company that was heading in the wrong direction—a strong

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leader who could communicate the culture. They explained how the top managers of great companies lead.

Visions and strategies were communicated with words—spoken simply, directly, and often—and with deeds . . . they encouraged people to engage in a dialogue with them, not allowing the communication to flow in one direction only. In almost all cases, the leaders became living embodiments of the cultures they desired. The values and practices they wanted infused into their firms were on display in their daily behavior; in the questions they asked at meetings, in how they spent their time, in the decisions they made. These actions gave credibility to their words. The behavior made it clear to others that their speeches were serious. And successes, which seemed to result from that behavior, made it clear that the practices were sensible.

Without the buy-in and active support of senior management, ethics initiatives are doomed. But senior managers don’t have a great track record in communicating a vision, ethical or otherwise. In a survey of professional and management employees, respondents revealed a lack of trust in their senior executives.17 Most said that their company’s leaders failed to communicate a ‘‘clear understanding of a corporate vision, mission, and goals.’’ They also said that they trust their top management only about 55 percent of the time.18 We suspect that the number may be even lower today, given recent corporate scandals. An indication of falling trust levels comes from a 2002 Watson Wyatt survey that reported just 39 percent of employees trust their sen- ior leaders. The study also found that employee trust and financial performance are closely linked. Companies with high trust levels have three times the rate of share- holder returns as compared to companies with low trust levels, measured over a three-year period.19

Nevertheless, most employees want to hear from senior executives. Another study of 14,250 employees in 17 companies in the United States and Canada found that ‘‘62 percent of employees list top executives as their preferred source of infor- mation, but only 15 percent say they actually get their company news from this source.’’20

What can senior managers do to establish better communication and more trust with employees? How can they begin to build an organization in which ethics are valued? They can take a look at the advice that Peters and Waterman21 offered in their classic book, In Search of Excellence. ‘‘An effective leader must be the master of two ends of the spectrum: ideas at the highest level of abstraction and actions at the most mundane level of detail. The value-shaping leader is concerned, on the one hand, with soaring, lofty visions that will generate excitement and enthusiasm. . . . On the other hand, it seems the only way to instill enthusiasm is through scores of daily events.’’ With this advice in mind, here are some concrete steps senior managers can take:

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& Set high standards and communicate them loudly and repeatedly in public and in private. Be known for the consistency of your standards. Never let your standards be a mystery.

& Act swiftly and firmly when someone violates the standards. Be consistent— don’t have special rules for special people.

& Insist on complete candor from your direct reports. Tell them that you don’t want to be protected from bad news.

& Never, never shoot the messenger of ‘‘bad news,’’ or it will be the last one who reports problems to you. And if you don’t know about problems, you can’t fix them.

& Talk to a wide variety of employees on different levels and in different loca- tions. Get out there and find out what’s really going on. Don’t be satisfied with others’ interpretations.

& In a crisis, take responsibility, be accessible, and be honest. Take the high road. If you do, the company will probably pull through the crisis with a minimum of damage. This is one reason why Johnson & Johnson received such high marks for its handling of the Tylenol crisis and why Exxon received bad marks for its handling of the Valdez oil spill (CEO Lawrence Rawls didn’t visit Alaska until three weeks after the incident). You’ll read more about these two crises in Chapter 10.

& Finally, put your money where your mouth is—fund and support ethics ini- tiatives. Without supporting systems, most corporate value statements are collections of empty platitudes that only increase organizational cynicism.22

To develop ethics initiatives, get help from your communications and train- ing professionals. Don’t leave your ethics strategy just to the lawyers.

At Merck, the CEO, Dick Clark, is very vocal about the ethics program and very supportive of its efforts. In frequent face-to-face meetings with employees in the United States and overseas, he routinely weaves in messages about ethics—that re- sults are important, but how the results are obtained is equally important.

At many firms, the code of conduct is introduced with a message from the senior executive. At UTC, Louis Chênevert, president and chief executive officer, intro- duces the company code with the following message:

Dear UTC Colleague: The UTC Code of Ethics does not merely require compliance with laws. It embodies a commitment to positive behaviors that build trust, promote respect, and demonstrate integrity . . . Working together, we can assure that ethics are at the foundation of our perform- ance culture.

The message goes on to introduce the code and the business practices/compliance infrastructure.

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At Lockheed Martin, the corporation has instituted the annual Chairman’s Award. The Chairman’s Award recognizes a single employee or a group of Lockheed Martin employees for extraordinary actions or behavior that exemplify the corpora- tion’s commitment to ethical business conduct and integrity. The award is presented at the annual senior leadership meeting of the top 250 executives in the corporation. Nominations come from these senior leaders, who are encouraged to designate some- one from their organization each year. The first winner in 2002 was Ron Covais, a vice president in business development. He was recognized for demonstrating the highest standards for integrity and ethical business conduct during the bidding phase of a significant new business opportunity with a foreign customer. Covais demon- strated the corporation’s values and set the standards with an international customer and the U.S. government by his willingness to walk away from an important contract. Covais had received an inappropriate ‘‘request for payment’’ by a foreign official. Lockheed Martin employees are expected to reject such bribes, and Covais did. By itself, rejecting the bribe was considered routine and would not have merited the award. But Covais halted the bidding process (placing at risk an important contract), reported the problem to senior officials, and worked with both U.S. government officials and the foreign government to have the foreign official removed from the decision-making process. The customer subsequently agreed to conduct a new bid- ding process on ethical terms. Covais’s action and his award were publicized, color photos and all, in Lockheed Martin Today, the company newspaper that goes to every employee. The other nominees, one from each business area and from corporate organizations, were also named in the story. And every top corporate executive witnessed the chairman giving the award. The tradition of honoring commitment to the highest level of integrity has continued since that time.

Think about the impact of such an event on the ethical culture. Every senior leader must expend effort each year to find employees who demonstrate exemplary ethical conduct. The award ceremony itself is exactly the kind of ‘‘ritual’’ that helps create an ethical culture. As the stories become part of the organization’s cultural lore, its impact grows as the stories accumulate over time. This impact is particularly important to a company like Lockheed Martin, which has scandal in its past. Misconduct by one of Lockheed Martin’s predecessor companies contributed to pas- sage of the antibribery Foreign Corrupt Practices Act (discussed in Chapter 11). It has become very important to the senior leadership of the firm to counteract any percep- tion that the organization is unethical.

ETHICS TRAINING PROGRAMS Values statements, policy manuals, and conduct codes aren’t enough. Organizations that are serious about ethics distribute these materials widely and then provide training in their meaning and application. Effec- tive training programs are ongoing efforts to teach everyone from new recruits to high-level managers. In Chapter 1 we discussed whether ethics can be taught; we hope that by now, you’re quite convinced that it can. Ethics in organizations is about awareness of ethical issues and knowledge of appropriate conduct, and these ideas can and must be taught to employees at all levels.

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Training should be designed to suit the group of individuals being trained. A new employee needs different training than a manager who has been with the firm for 10 years. An assembly-line worker might require only an hour of training, with regular refresher sessions, whereas a manager might require several days of training that ad- dress a variety of issues. Furthermore, training needs to be based on program goals. Is the training supposed to increase awareness of ethical issues, convey knowledge of laws and policies, change attitudes or behaviors? Finally, ethics training need not— and probably should not—be solely the province of the ethics office. Ethics training should be incorporated into leadership development and other programs so that it becomes integrated more fully into the culture of the organization.

TRAINING NEW RECRUITS Many firms provide ethics training through new employee orientation. For example, to set the stage properly, every new Lockheed Martin employee gets a briefing on ethical and legal issues as part of the first day on the job. This training is complemented throughout each year of employment, with the intent of setting the stage properly from the first day.

TRAINING EXISTING EMPLOYEES Training is also provided to existing employ- ees and takes a variety of forms. Some companies provide a basic ethics training module to all employees. For example, Staples provides all employees with case- based, online ethics training (developed by Staples ethics professionals and availa- ble in 14 languages). At Lockheed Martin, every employee participates in annual awareness training. This training focuses on the firm’s ethics, diversity, and leadership values and how employees can and should apply these values to their work. Each year, the ethics office staff is challenged to make the training different and memorable—something that employees will discuss with each other after leaving the training session.

The 2009 training, entitled ‘‘A Culture of Trust,’’ focuses on the corporation’s values, commitment to diversity, and leadership imperatives. The session begins with an introductory video in which the chairman and chief executive officer emphasizes the Lockheed Martin vision and how ethics and business conduct is integral to the company’s success. The training is video based and contains nine case scenarios, each one highlighting different ethical dilemmas including records falsification, time-card fraud, and intercompany relationships. Not all of the scenarios have clear-cut answers, because the intent is to stimulate conversation during and after the session. Each train- ing session contains from 5 to 25 people and is led by the department manager or an ethics officer. The annual training kicks off in early May, when chairman and chief executive officer Robert J. Stevens trains his staff. Each member of the executive staff then trains her or his employees, and the process continues until October, by which time all 140,000 employees will have been trained. This annual ethics awareness train- ing has become integral to the Lockheed Martin culture. People expect it and look forward to what the ethics staff will create each year. One limitation of this training is that, depending on the length of the dialogue regarding the cases, teams can get through only three or four of the case scenarios in a single training session.

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To complement its annual ethics awareness training, Lockheed Martin launched an initiative called ‘‘The Integrity Minute,’’ a series of short (about one minute) video messages sent to employees via e-mail. Each series contains three or four episodes on a central ethics theme. The episodes, which are sent in consecutive weeks, contain a cliff-hanger to maintain employee interest in the series.

Another awareness initiative at Lockheed Martin is the Ethics Arts and Film Festival. All employees are invited to participate in a celebration of the creative arts to promote ethics, diversity, and good leadership. The entries come from across all business areas, both domestically and internationally. Participants use a variety of creative media to produce posters, videos, photographs, poems and other works of art with a focus on ethics, diversity, and leadership. Employees use their own resources, on their own time and away from the office, to prepare their submissions. Most of the submissions are team entries that provide work groups with a team- building opportunity. An independent panel of judges selects the top entries, and the winners are invited to a recognition event.

USAA has used an employee training approach called facilitated dialogue. The approach is best used in groups of 12 to 15 people, but it can be effective in groups as large as 30 to 50. In these training sessions, employees are first given a virtual tour of the company’s intranet website and an introduction to the code of conduct. Then, participants are given customized scenarios that are relevant to their own work area. The groups discuss each scenario and refer to the website when they have questions. The purpose is to familiarize them with the website and how it can be used to answer questions that arise in their work as well as to promote other ethics resources.

Staples created ‘‘meetings to go’’ for its managers to use in spreading the ethics message across the organization. The meeting-to-go kit contains PowerPoint presen- tations, talking points, interactive exercises, and more. This approach has proven effective in training employees because it brings the ethics message close to home, and it’s delivered by someone the employees trust—their manager, who can answer questions about how corporate policy and values apply in their unique corner of the company. In addition to this training, Staples is introducing anticorruption workshops globally in 2010. These workshops are tailored to various parts of the world and their unique ethical challenges.

TOP MANAGEMENT INVOLVEMENT IN TRAINING When organizations conduct ethics training for the first time, many of them begin the training at the top of the organization. Cascading is a term frequently used to describe ethics initiatives that begin at the top of the organization and work their way down, level by level. This technique is often used because of the importance of leadership to the credibility of ethics training. Each leader trains his or her direct reports, modeling the expected training behavior and the necessary commitment to integrity.

LOCAL MANAGEMENT INVOLVEMENT IN TRAINING Many organizations rec- ommend having local management conduct the ethics training, using common every- day ethical dilemmas as the basis for discussion. Training sessions are thought to be

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more useful and effective if they address real ethical issues that people face every day in their own work setting. Examples of calls that have come in to the ethics office can be used as the basis for training. Employees make ethical decisions every day. Any- body who reports the time that they work—or decides how to divide their time across different government contracts, or decides whether they are going to engage in some kind of an outside business activity that might be in conflict with their job, or has to decide what to tell a customer about a delayed order—is making an ethical decision. Using common everyday issues in training gives employees a feeling of comfort that the issue they’ve faced has been a problem for others and that they’re not some screwball who is worrying about something that doesn’t matter.

CREATING A DIALOGUE At USAA, the ethics office held an annual strategic plan- ning conference with 30 to 35 ethics facilitators and other invited guests from across the enterprise. The session was modeled on a large group dialogue technique known as Appreciative Inquiry (developed by David Cooperrider and Suresh Srivastva at Case Western’s Weatherhead School of Management). The session facilitator asked the participants to pair up and think about and share with their partner some positive, memorable, peak ethics experiences they have had in their lives with their interview partner. Then, in groups, the participants thought about the conditions under which these kinds of peak experiences might happen more regularly. Finally, they consid- ered what USAA might do to make such experiences even more the norm in the organization than they are today. Participants found the focus on the positive (rather than problems and deficiencies) particularly energizing. And their discussions led to some very specific suggestions that have been implemented.

USAA has also applied other large group dialogue methods, such as ‘‘World Caf!e,’’ to ethics training. World Caf!e was developed by Juanita Brown and David Isaacs in 1995. It involves developing provocative questions about topics that matter to people and establishing a relaxed, coffee-shop-like environment to contain and focus the conversations. The best questions promote accountability; for example, ‘‘What is the one thing I could do tomorrow that would promote ethics in the area I work?’’ Employees talk about ethics in small groups and then reconvene in a larger group to process and apply insights. Participants find the dialogue both empowering and transforming.

A TRAINING MODEL: THE ETHICS GAME A powerful method of communicating a corporate ethics message is through an ethics game. Katherine Nelson, coauthor of this book, created the first corporate ethics game, ‘‘The Work Ethic: An Exercise in Integrity,’’ when she was head of human resources communication at Citicorp in the late 1980s.

The game worked like this: A group of employees were divided into teams; a facilitator then positioned the exercise with the following messages:

‘‘We’re playing a game about ethics because we want to make sure we get your attention. Integrity is critical here.’’

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‘‘This is an opportunity for you to practice making ethical decisions in a risk-free environment.’’

‘‘We’re doing this to give you an overview of corporate policy and how things are done here. We’re also going to outline all of the resources available to you if you think you’d like some help or advice if you’re faced with an ethical dilemma.’’

A facilitator presented the teams with a series of ethical dilemmas related to such topics as sexual harassment, reporting ethical concerns, responsibilities of customers, the need for confidentiality, and conflicts of interest. The ethical dilemmas were writ- ten so that there was no clearly right answer.

For each issue, the teams took a few minutes to discuss what they considered to be appropriate action. Then, based on a consensus among team members, they chose one of four possible courses of action. Once the teams decided, the facilitator played devil’s advocate and questioned the entire group about why they voted the way they did. The discussions could get very heated, as participants and teams loudly defended their positions. The facilitator then revealed the scores for each course of action (scores are predetermined, preferably by the management of the organization where the game is being played). If the participants disagreed with the scores, they could take them to an appeals board of senior managers. Again, the discussions could get quite impas- sioned and lively. And the competition for the best scores kept interest high.

The senior management appeals board was one of the most important aspects of the ethics game. The very presence of senior managers for 90 minutes or so sent a strong message that integrity and ethics must be important in this company, or all these executives wouldn’t be spending so much time talking about it. In addition, when discussing an appeal, the appeals board often communicated the ethics message about company standards and expectations more powerfully than any other element of the ethics program.. Along the way, employees could see how senior managers worked through an ethical dilemma and what factors they considered important in making decisions.

Groups could disagree with the scoring of a question and appeal to the senior managers, who had the power to change scores if they heard a good argument for that. This process somehow ‘‘stamped’’ participating managers as approachable. Managers who participated in appeals boards frequently reported a marked increase in the number of employees seeking them out and asking for advice. One manager described how he had been stopped in hallways, restrooms, cafeterias, and even on the street to be asked advice by employees who had seen him as a judge on an ethics game appeals board. Most companies would do just about anything to have their employees seek advice from managers on ethical issues.

Senior managers also learned a lot by participating in the game, which gave employees an opportunity to raise issues directly to management. In one session, sev- eral male managers were made aware of how offensive young female trainees found any kind of sexual stereotyping. The young women were so determined to let

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management know how strongly they felt on this issue that the women continued the discussion face-to-face with the executives at a reception after the game had offi- cially ended.

Since the game usually raised more questions than it answered, it was crucial to debrief the group. At the end of the game, the facilitator gave advice on how to solve ethical dilemmas and outlined the resources available to help employees if they found themselves in need of advice.

The ethics game met many communication and training goals, but it was especially effective in raising awareness, creating a dialogue, and describing expected dilemmas and how employees might handle them. However, for an ethics program to be effective over the long term, training and communications should continue over time. A game is an excellent beginning and can be used repeatedly with different dilemmas. However, it can’t exist in a vacuum or be all things to all people. It needs to be part of an integrated ethics program with other media and complementary messages.

Although some may view an ethics game as heresy, those who have seen this type of training program in action are quickly convinced of its effectiveness. Other compa- nies have developed their own versions of the game and have used them successfully. For example, years ago, Lockheed Martin developed an ethics game modeled after the Citicorp game, but with a twist. At the time, the company received permission from Scott Adams, author of the Dilbert cartoons (popular with employees), to use the Dilbert character in their game. Then Chairman of the Board Norm Augustine appeared with Dilbert in an introductory video, and the game included a humorous ‘‘Dogbert answer’’ to each ethical question. With the introduction several years ago of online ethics training, the Citicorp format featuring a series of scenarios with scored answers has become increasingly popular with a wide range of companies.

Formal and Informal Systems to Resolve Questions and Report Ethical Concerns

An organization with a strong ethical culture is one where employees feel free to speak openly about ethical issues, question authority figures, and report concerns, and where managers are approachable and listen to their people. This may be the most important thing an organization can do to open up the communication lines and set up an environment of candor. Make sure people feel they can discuss their opin- ions, their ideas, and their thoughts openly. Most important, set up an environment where people feel they can sincerely bring up and resolve problems without being embarrassed or fearing retribution. The first time you shoot the messenger who brings you bad news, you’ve taken the first step toward squelching ethics in the organiza- tion. News of the ‘‘dead messenger’’ will spread like wildfire on your organization’s grapevine.

Although most organizations encourage employees to bring their concerns to their immediate supervisor first, employees sometimes want to ask a question anony- mously, or they may have a concern about their supervisor’s behavior. Also, the U.S.

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Sentencing Guidelines require that organizations ‘‘take reasonable steps to achieve compliance with written standards through monitoring, auditing, and other systems designed to detect criminal conduct, including a reporting system free of retribution to employees who report criminal conduct.’’ As a result, many firms have established a more formal system for raising concerns. This generally takes the form of a tele- phone line employees can call to ask for help in resolving an ethical dilemma or to report an ethical problem or behavior they’ve observed in the organization. A number of names have emerged for these reporting systems—‘‘Communication Lines,’’ ‘‘Guideline,’’ ‘‘Open Line,’’ ‘‘Helpline,’’ ‘‘Hotline,’’ and ‘‘Ethics Action Line.’’ These phone lines generally ring in the ethics office if there is one. For example, at Lockheed Martin, the Corporate Ethics helpline is available during regular working hours, and employees can leave a voice message 24 hours a day. In addition to the helpline, Lockheed Martin provides an e-mail option, a web-based ‘‘Ask-Us’’ chan- nel, a fax number, and a postal address that employees may use to submit ethical concerns. Each business unit advertises the local ethics program on posters that include a photo of the site ethics officer and the phone number for the ethics helpline. Lockheed Martin also recently introduced its Planet Ethics Blog, which encourages employees to engage in a dialogue about ethics. Some large organizations provide separate reporting lines for each business unit. In a few firms, the line actually rings on the chairman’s desk. Other firms have hired an outside consulting firm or law firm to take the calls at a toll-free number and then transfer the information to the com- pany.23 That system is especially prevalent in many global firms, where a call can come at any time of the day or night because of time zone differences.

We believe that, where possible, it’s best for ethics office staff to talk with call- ers directly. As ethics office staff, they need to be in touch with what’s going on in the organization. If they delegate the task, they lose the tone and perspective of the callers. For example, the nonverbal clues that come through on the phone can easily get lost in a paper report. One way to handle this is to answer calls during business hours and then contract with an outside firm for after-hours capability. Around-the- clock answering capability is essential for a global business. The ethics office can explain the decision to hire an outside contractor to employees as its solution to han- dling calls from around the globe. Organizations that have experience with telephone reporting lines find that most of the calls represent requests for clarification. The indi- vidual says, ‘‘Here’s what I want to do. Is it okay? Does it follow procedure?’’ Most of the calls in many organizations represent HR-related issues, such as fairness con- cerns. Some are relatively routine. But occasionally calls come in that represent seri- ous breaches of the code of conduct or even illegal conduct. Managing these lines is no small feat. It’s not unusual for a company hotline to receive thousands of calls per year. One ethics officer reported that 90 percent of the calls to his company’s hotline were to report HR-related issues. ‘‘But many of the other 10 percent were issues of great interest to us and it’s well worth dealing with all of the HR issues to get to the others,’’ he said.

One concern often raised about these reporting lines is that individuals will make invalid reports—‘‘tattling’’ on people they don’t like. But that’s not the experience of

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the ethics officers we interviewed. Most people call about valid issues. Although their motives may not always be noble, the content is usually correct. Most of the people who use the communication line are using it because they sincerely have a question or concern about something they think is wrong. It’s one reason that confi- dentiality is so important within the entire reporting and investigative system. The identity of both the reporter and the alleged violator must be protected throughout the process. The alleged violator must be protected because allegations can result from simple misunderstandings. The reporter must be protected from any retaliation from the accused.

Another relevant question concerns how to interpret the meaning of the number of calls and letters. Obviously, if an organization institutes and promotes an easy way to ask questions, express concerns, and report violations, the number of calls should increase dramatically. Does this mean that there are more ethical problems? Probably not. The executives who run these programs generally interpret such increases as evidence that their programs are working. However, in an ideal world, the ethics office should aim to put itself out of business. In other words, ethical conduct should become so institutionalized that there would be no reason for people to call. They would handle issues locally, with their managers. Like the old ad about a Maytag repairman, the ethics officer would have a very boring job. On the other hand, a quiet telephone may also signal a number of other positive or negative conditions:

& Lack of concern or recognition of ethical problems (negative)

& An intimidating environment where people fear retribution (negative)

& Good problem solving at the local level (positive)

& No one knowing the ethics office exists (negative)

Ultimately, it’s up to the ethics office to devise ways to determine what the numbers and changes in the numbers mean.

At USAA, Earnie Broughton monitors the Helpline for information about pro- gram effectiveness. He prefers to see a relatively low and stable level of allegations of misconduct and a higher level of advisory questions. That means that people are call- ing the Helpline for advice—which is a good thing. The question remaining is whether employees are aware of and willing to use the resources that are made available to them. USAA conducts a periodic Intranet survey of randomly selected employees in order to determine their awareness of the ethics office and related resources, their like- lihood to use those services, and if they are not likely to use them, why not.

Confidentiality and protection of reporters remains an important issue. Some firms use outside individuals, often called ombudspersons, who may answer the reporting line, provide information, investigate complaints, serve in an alternative dispute resolution role, and report problems to a corporate compliance or audit com- mittee while maintaining the confidentiality of the reporter.24

Whether a telephone line, an ombudsperson, or some other formal procedure is most appropriate for a particular corporate culture, the important thing is to have

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some way for employees to raise issues without fear of retribution. If there’s no way for employees to raise issues without such fear, the first time an executive hears about a problem may be from a district attorney, a regulator, or a newspaper reporter.

Finally, each of the firms we talked with has a system for investigating reports of misconduct. These are multistage processes that can be quite complex, depending on the seriousness of the allegation. Obviously, facts must be gathered to determine whether the allegation can be verified. Confidentiality must be maintained throughout these investigations, and they must be coordinated with other parts of the organiza- tion such as the legal, audit, security, or human resources department, depending on the problem. Then, based on a thorough analysis of the findings, recommendations must be made and actions taken to discipline employees and/or correct systemic problems in the organization.

USING THE REWARD SYSTEM TO REINFORCE THE ETHICSMESSAGE

Recall from Chapter 5 that the reward system is vital to alignment in an ethical cul- ture. At Lockheed Martin, the Performance Management Process rates employees not just on results of the job such as increased sales or profits. Employees are also rated on how you got there through attributes that include ethics, excellence, integrity, and people and teamwork. Each of these attributes is explicitly defined. For example, ethics is defined as: ‘‘Is honest and forthright; Embraces truthfulness; Knows regula- tions, rules, policies, and compliance requirements, and actively demonstrates com- pliance; Always does the right thing.’’ Integrity is defined as ‘‘Acts with integrity; Walks the talk; Is reliable, and holds self accountable for actions and results; Is a good steward of Lockheed Martin resources; Credits others’ contributions as appro- priate.’’ The People and Teamwork attribute is defined as ‘‘Treats others with respect and dignity; Values and encourages diverse perspectives; Consistently professional in all dealings with others, and demonstrates good interpersonal skills; Builds trust through interactions; Partners with others in setting priorities, solving problems, and improving quality; Demonstrates continuous, consistent, and clear communications; Actively listens.’’

Managers are asked to provide specific behavioral examples of each attribute. They are required to base their salary increase recommendations on these attributes (along with bottom-line performance expectations) and to put those recommenda- tions in writing.

At Staples, 40 percent of every employees’ performance appraisal is devoted to how an employee did his or her job. Measuring the how and not just the what (results achieved) is an excellent and proven way to drive desired behavior and discourage unethical behavior.

At Otis Elevator Company (a subsidiary of United Technologies Corporation), Stephen Page, then president and now retired as UTC’s vice chairman, wrote a letter to employees making it clear that Otis seriously disciplines breaches of integrity. In his words:

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Our company is making substantial changes in the way we do business. I am writing today to highlight what has not changed, and never will change: our commitment to the highest ethical standards and business practices.

We know that Otis employees are honest, mature, independent, and scrupulous in their conduct at work. We know that Otis employees care about ethics and our company’s reputation. And we know that employees support sanctions for any colleague whose behavior shows he or she does not hold these fundamental Otis values.

Our ethics program grows out of this knowledge. We provide train- ing and communications programs to all employees in our Code of Ethics, which offers guidance in how to behave in specific business situa- tions. Through our worldwide network of business practices officers (BPOs), we also provide expert advice to employees who have questions or who face ethical dilemmas.

But for those few who do not care about ethics; who think they can cut corners; who violate the law, our policies or our standards, there is no place in Otis. To our regret, we have had to terminate the employment of nearly a dozen colleagues this year alone for violations of our Code of Ethics—a record that is simply unacceptable. Unlawful or unethical con- duct can only harm our company and we will take whatever actions are necessary to prevent that from happening.

Our actions reflect our fundamental belief: Otis would rather lose business than compromise our standards of conduct.

Please take this opportunity to refresh your knowledge of our Code of Ethics, and to recommit yourself to its guidelines and principles. We have so much to be proud of at Otis, and our reputation as an ethical company stands in the first rank of our accomplishments. We are deter- mined to protect this priceless asset.

Thank you for your continued support.

This letter confirms the company’s willingness to take firm action to uphold standards through discipline when necessary, and it is likely welcomed by the com- pany’s many ethical employees (see Chapters 7 and 8 for information about the appropriate use of discipline).

EVALUATING THE ETHICS PROGRAM

Many organizations have committed significant resources to their ethics efforts— hiring high-level executives, developing values statements and codes, designing and implementing training programs, and more. But few organizations have system- atically evaluated these efforts, because doing so presents many challenges. For example, as suggested earlier, more calls to the telephone line can mean different

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things and can be interpreted in a variety of ways. And asking employees at an ethics training program whether they ‘‘liked’’ it or not doesn’t tell you much about the qual- ity of the ethics program. Many employees will respond affirmatively just because they liked the idea of a few hours or a day away from the office. Whether or not they liked it should be secondary. The most important question should be whether the program is accomplishing its goals.

Otis has gone the extra mile in the area of evaluation. It has over a million elevators in operation in more than 200 countries around the world! You may not have thought much about it, but all of us depend on the integrity of a company that provides many of the elevators we ride daily. As part of a toolkit provided to each of its companies, Otis requires a self-assessment process that involves regular evalua- tions of program effectiveness including training, communication, work practices reviews, instances of misconduct, corrective actions, reports, and records. Companies are also asked to identify the strengths and weaknesses of their programs and to im- plement changes to overcome weaknesses. Finally, they are asked to share their suc- cesses, program strengths, and lessons learned with the rest of Otis.

Organizations that are members of the Defense Industry Initiative (DII) are often at the forefront on evaluation because the DII asks each of its member organizations each year to certify that the firm is complying with the six DII principles. These self- certifications are available to all members, and a report is published and sent to the U.S. Congress annually.

Surveys

Surveys are probably the most common approach to evaluation. Many organizations already conduct regular employee attitude surveys; some have added ethics to the list of survey topics, and some conduct separate ethics surveys. Surveys can target knowledge, attitudes, skills, and behaviors. For example, if ethics training has been recently required of all employees, surveys can evaluate the extent to which employ- ees understand the company’s expectations and standards. Baseline data can be col- lected before ethics training is begun, and then again several months after it’s completed, to analyze whether positive change has occurred. Surveys can help evaluate employees’ skill at recognizing and resolving ethical issues, and they can measure the extent to which employees observe unethical conduct in the organiza- tion. Finally, attitudes toward ethics management programs and processes can be evaluated. It’s important to survey regularly so that changes and progress can be evaluated. A final suggestion about surveys—don’t ask questions if you’re not willing to accept the answer. Employees will expect action based on survey results. If you’ve asked them to take the time to complete a survey, you should communicate the results and planned action.

The most famous ethics-related survey is likely Johnson & Johnson’s Credo survey. Then Chairman James Burke had been on the board of IBM Corporation in the 1980s and became impressed with IBM’s employee survey program. He decided

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that one way to keep the Johnson & Johnson Credo alive would be to survey employ- ees about how the company was doing relative to the Credo. The survey went through a number of iterations after being tested on employees at a variety of loca- tions. The first survey was conducted in the United States in 1986–87. The first international survey was conducted the following year. The first part of the survey contains 118 items and takes about 25 minutes to complete. It asks employees to rate things such as the company’s ‘‘customer orientation’’ on five-point scales. The second section is open-ended for written comments. One of the findings has been the impact of top leadership and corporate culture on survey results. For example, former Chairman Burke had emphasized the customer above all. Presi- dent David Clare emphasized safety first. In an analysis of the survey results, ratings on these two survey dimensions were highest. Most of all, the survey is viewed as a way to keep the Credo alive, a way of ‘‘closing the loop on this thing called the Credo.’’25

Lockheed Martin conducts an employee survey every two years, so that the firm can gauge whether ethical principles are being applied and whether employees have observed wrongdoing—and, if so, whether they have reported it. The survey is moving to an annual basis and has been combined with the company’s employee perspectives and diversity survey. The survey allows the firm to assess its culture, determine the impact of ethics programs, and point out areas in need of attention. All 140,000 employees are asked to participate in the voluntary survey, for which the participation rate has increased over the years. Results of the survey are shared with employees, and in many instances it is used to gauge the health of departments down to the first-line managers.

In 2007, the ethics and employee perspectives surveys were combined for the first time and results were benchmarked with data from the DII and the Mayflower Group, a consortium of blue-chip companies. More than 80 percent of the Mayflower Group’s member companies are included in the Fortune magazine list of the most admired companies in America. The ethics survey measurements include pressure to compromise standards, observed/reported misconduct, and commitment to ethics. Most survey results were positive and consistent with favorable results from the 2005 survey. For example, a high percentage of employees reported that they know what constitutes ethical business conduct, how to obtain guidance on eth- ical issues, and how to report misconduct.

The 2007 results demonstrated that Lockheed Martin continued to progress on key metrics. Specifically, the percentage of people who believe they observed mis- conduct reduced by three percentage points, and perceived pressure to commit misconduct was down to two percent of the total surveyed population. In general, employees indicated that management will act on reports, and managers are held accountable for their conduct. Where areas of concern were noted, action plans were developed by the business unit leadership; where particular business units showed strong positive results, they were studied for best practices that contributed to the results.

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VALUES OR COMPLIANCE APPROACHES

Formal corporate ethics initiatives can be categorized as emphasizing either a values or a compliance approach to managing ethics. The values approach is proactive and aspi- rational. It emphasizes expected behavior and an effort to achieve high standards repre- sented by the spirit of the law and organizational values. It relies on such techniques as leader communication and role modeling to affirm the organization’s commitment to its stated ethical values and goals. Employees learn that these are not empty words, but words that organizational leaders believe and live by. Ethics becomes a point of pride in the organization: ‘‘We’re so good we don’t have to cheat!’’ The response to a values- oriented program is generally good until violations occur. Then, employees expect that commitment to be backed up with sanctions against the violators.

With a compliance emphasis, the focus is more on required behavior—obeying the letter of the law rather than aspiring to lofty ethical principles. Disciplinary pro- cedures for violators are also important to compliance efforts. Many organizations that are motivated by the U.S. Sentencing Guidelines and Sarbanes-Oxley legislation mandate a compliance approach. Employees are told that compliance with the law is essential and that employees who break the law will be punished. The danger with a compliance-only focus is the possibility that employees will believe anything goes as long as there isn’t a rule against it, or that the company is interested only in protecting itself, not in helping them.

An effective program should have both values and compliance components. By themselves, abstract values statements can appear hypocritical to employees. ‘‘Management makes these lofty statements, but they don’t tell us what we should do.’’ Values must be translated into rules for behavior; and to give the rules meaning, violators must be disciplined. Employees welcome information that reduces ambiguity about what they can and can’t do. And if enforcement is applied consistently across all organizational levels, they are likely to perceive the system as fair and just.

On the other hand, employees often view a strictly compliance-oriented pro- gram with cynicism. Without a strong values base, compliance programs seem to focus on catching employees doing something wrong rather than on aspiring to do things right. Employees translate this emphasis into mistrust and a CYA approach. Either ‘‘the organization doesn’t trust its employees,’’ or ‘‘the organi- zation is just out to protect its own behind.’’ The best programs aim to focus on aspiring to a set of values first and foremost, supported by just and fair enforce- ment of the rules.

At Merck, development of a formal ethics program was driven by its long- standing values-based culture. Interestingly, Merck did not have a formal ethics code until 1999. In rolling out the code initiative, the firm was careful to posi- tion it as simply a continuation of the good things the company was already doing. It also worked hard to get participation and buy-in through focus groups and surveys. This is typical of values-based programs where employee buy-in and support are essential.

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GLOBALIZING AN ETHICS PROGRAM

In Chapter 11, we’ll talk about business ethics in a global environment. What sets United Technologies Corporation (UTC) apart is the truly global extent of its ethics and compliance efforts. Recall that UTC has over 200,000 employees, more than half outside the United States, and a presence in more than 180 countries. Imagine how difficult it must be to design systems and programs to effectively reach such a wide audience across multiple cultures. UTC’s program rests on three coordinated efforts: management engagement, the Ombudsman/DIALOG program, and a worldwide business practices organization.

Management engagement is the keystone, because no ‘‘program’’ succeeds with- out direct management support. At UTC, managers are evaluated on an ‘‘ethics com- petency’’ that is based on behaviors identified by the research of the Ethics Resource Center as well as on a complementary set of ethics objectives. The ethics objectives cascade through management from the CEO and require ongoing communications, training of employees, continuous improvements in control systems, and efforts to improve the ethics score on the biennial employee survey. UTC policy states speci- fically that the business leaders are responsible for fostering a culture of ethical conduct, encouraging open communications, and instilling a commitment to the code of ethics. Both the competency and the objectives are evaluated through the company’s ‘‘Performance Feedback Tool,’’ which was developed by the human resources department.

The Ombudsman/DIALOG program at UTC is an alternative communications channel for raising issues to management. Created in 1986, it fields questions or con- cerns on essentially any subject. Ombudsman/DIALOG is a confidential channel that does not reveal the user’s identity; it serves as a neutral intermediary between employees and management by advocating only for clear communication, it works independently of management, and it performs under the standards of the Interna- tional Ombudsman Association. Inquiries come via phone contacts through toll-free calling, or via written contacts, through either postage-paid mailers or an encrypted, web-based system. UTC has three ombudsmen who handle more complex issues, including those with legal implications. Less complex issues are managed by DIALOG coordinators who work directly under the supervision of the ombudsmen. Users of Ombudsman/DIALOG can choose to remain completely anonymous to the organization, and the company goes to great lengths to keep this commitment. For example, an assistant to a senior business-unit executive called with concerns about expense report behavior. If investigated openly, the source of the information would have been identifiable. Instead, the company audited all expense reports of people at the same level, as a routine review. In that way, they protected the reporter’s iden- tity. They found the problem, fired the executive, and no one was the wiser. However, the ombudsmen do not conduct investigations. If the issue requires investigation or intervention, it is turned over to people in other areas (e.g., human resources, business practices) for further action. Ultimately, the ombudsman or DIALOG coordinator reviews the answer from the company. If it doesn’t completely and

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fairly address all of the issues raised by the employee, it goes back to management with the suggestion that it be fixed. Ombudsman/DIALOG receives more than 3,500 inquiries per year, from around the world, and makes translators readily available. Over the past five years, with respect to those Ombudsman/DIALOG inquiries requesting change, about half resulted in change. Moreover, in recent years, more than half of all Ombudsman/DIALOG inquiries came from outside the United States.

The business practices organization is led by Michael Monts, a lawyer who was an attorney for the U.S. Navy and the Department of Defense and who then held a variety of significant positions at UTC before becoming vice president for business practices in early 2005. Monts is one of the company’s top executives. He reports to the senior vice president and general counsel as well as to the audit committee of the board of directors, with whom he meets four times per year. He has a small staff at headquarters, and he supervises a network of more than 400 business practices offi- cers (BPOs), who are embedded in UTC businesses around the globe. Overall, about 30 BPOs are full-time. Three of those are area BPOs reporting to headquarters, one each located in Europe, Asia-Pacific, and the Americas, and six serve as the business practices leaders at UTC’s major businesses. Monts participates in selecting and appointing the BPOs as well as in evaluating their performance, and he can veto appointments. Most have at least several years of experience in the company and are familiar with internal controls and the company culture. They are considered high- potential people who generally come from staff functions such as finance or safety. Good communication skills are considered a must for business practices staff, along with the ability to take the ball and run with it when a problem arises. UTC has a BPO Handbook, an investigations handbook, standard work for case management, an online case management system, toolkits for communications and risk manage- ment, and an online knowledge management system. In addition, UTC has a standard curriculum for training BPOs, which includes written materials, online modules, WebEx meetings, and regional conferences. BPOs serve for about two or three years, a turnover rate that is considered to be both a boon and a bane. It’s a boon because these individuals bring fresh ideas and energy to the function, and they take their business practices experience with them to their future roles, becoming continuing champions for the business practices organization. It’s a bane because training new people is a constant challenge.

The business practices unit manages UTC’s code of ethics (in place since 1990), a companion policy statement on doing business with the U.S. government, and the corporate policy manual. The code applies to UTC employees worldwide and includes sections that specifically address ethical issues relating to doing business abroad. But the code is not ethnocentric, so it allows for some adaptation to the cultural mores of different cultures. It is made clear, however, that this flexibility does not permit violations of U.S. or local laws, and the code states that UTC will not facilitate illegal conduct or fraud by others, regardless of local norms. In 2008, a total of 357 employees were discharged for violations of the code of ethics.

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CONCLUSION

This chapter has offered specifics about how ethics is managed in large business organizations. Large businesses that are committed to ethics are likely to have formal ethics management systems such as an ethics office, ethics officer, explicit ethics training, a telephone counseling/reporting line, and a system for investigating and following up on reports of misconduct. However, the specifics of these systems vary with the context and culture of the firm. Some companies in highly regulated indus- tries may focus more on legal compliance. Others that have a long-standing values- based culture will want to make sure that the ethics management system is designed with a heavy emphasis on values and aspirations. Research has found that the best of these formal ethics management programs have an overarching values-based approach that incorporates legal compliance within the framework of a broader set of company values. Smaller firms with a strong commitment to ethics are less likely to have separate formal ethics management structures and systems. Whether an organi- zation is large or small, the keys to effective ethics management are commitment to ethics from the very top, involvement of leaders and employees at every level, and recognition that ethics management is an ongoing effort requiring continuous reinforcement and integration into the larger corporate culture.

DISCUSSION QUESTIONS

1. Think about the impact of the U.S. Sentencing Guidelines. Would organizations have tried to drive ethical behavior among employees without government encouragement?

2. After reading about how a number of large companies try to encourage ethical behavior, what stands out? What approach is most unique? Which one do you think is most effective? Which one would make the biggest impression on you if you were an employee?

3. Imagine that it’s your responsibility to select an ethics officer for your organiza- tion. What qualities, background, and experience would you look for? Would you ever be interested in such a position? Why or why not?

4. What are the advantages of having an ethics office or officer report to a com- pany’s chief executive officer, the legal department, human resources, or audit? What are the disadvantages?

5. Think about an organization where you’ve worked. What kinds of ethical di- lemmas are unique to that organization? To that industry? What might be the best way to prepare employees to deal with those dilemmas?

6. Think about all of the communication opportunities provided by social media. How could an organization use social media like Facebook, Twitter, and the like to promote ethical behavior and communicate the organization’s values? What are the advantages and dangers of those media?

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7. Which of the following exist in an organization where you’ve worked: mission or values statement, policy manual, code of conduct, ethics training (who con- ducts it), hotline? Were they consistent and credible?

8. Is senior management committed to ethics? How do you know? What could they do differently or better?

9. Are leaders at all levels held accountable for their ethical conduct? If so, how? If not, why not? What would you recommend?

10. What recommendations would you make for handling frivolous calls to the hotline?

11. Does the organization evaluate its ethics initiatives? How? If not, why not?

12. Would you characterize the ethics efforts in this organization as taking a values, compliance, or combination approach? Is it effective? How could it be improved?

13. How would you raise an ethical concern in this organization? List all of the resources available to you. Which ones would you be likely to use? Why or why not?

14. Imagine that you’re the CEO of a small manufacturing company. An employee has dumped toxic waste in a nearby stream. Who would you call into your office, and what would you want to know? Develop a short-term and long-term action plan for dealing with the crisis. Who would you communicate with and why?

15. Evaluate the ethics program at your organization from the perspective of ‘‘fit.’’ Has the ethics program been designed to fit the organization’s overall culture? If so, how? If not, what could be done to make the program a better fit?

16. Think about your own positive, memorable, ‘‘peak experiences’’ when it comes to ethics. Be prepared to discuss them with others in your class and to think about the conditions that would make it possible for such experiences to happen more regularly at work. Or, if you don’t have much work experience yourself, interview someone who has, and ask these questions. Be prepared to report on what you learned from the interview.

SHORT CASE

WHAT’S WRONG WITH THIS PICTURE?

You’re a management consultant who has been asked by Green Company to help design an ethics communication and training program for all Green Company employees. Your meetings to date have been with the head of human resources, and your contract with the company has been negotiated with him. Once the papers have been signed, you begin your research and are quickly stymied by Green’s corporate counsel. He says you will not be allowed to ask employees about ethical dilemmas that have occurred at Green. He specifically asks you to get your information from other sources such as press accounts of problems in the industry, or from other

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organizations you’ve worked with. In addition, the head of human resources has told you that you’ll be unable to meet the three most senior executives because they’re busy negotiating a large acquisition. You will have access to other high-level manag- ers who can tell you what they think the seniors want. You’re instructed to write a code of conduct for the company and a mission statement, and to prepare presenta- tions for the senior managers to give to employees sometime next month on corporate expectations and values.

Case Questions

1. Based on what you know about developing ethical cultures and programs, identify the problems presented by this case.

2. Why do you think the corporate counsel has responded in this way? What will be your response to him, if any?

3. As a consultant, what are your ethical obligations, if any?

4. How will you proceed?

CASE

IMPROVING AN ETHICAL CULTURE AT GEORGIA-PACIFIC

Integrating an acquired company into an existing organization is one of the most challenging tasks any company faces. Read about the AOL/Time Warner marriage to learn how a merger or acquisition can go wrong. Read the following to learn about a successful integration. This is a fascinating case of how privately held Koch Indus- tries acquired Georgia-Pacific, a public company, and how Koch immediately took steps to transfer its unique and highly ethical culture to its newest ‘‘family member.’’

When privately held Koch Industries acquired Georgia-Pacific—a large con- sumer 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 compli- ance 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

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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 day- to-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 con- tributing 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 long- term 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.

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Integrity: Conduct all affairs lawfully and with integrity.

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

Value Creation: Create real, long-term value by the economic means. Under- stand, 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 prof- itably anticipate and satisfy their needs.

Knowledge: Seek and use the best knowledge and proactively share your knowl- edge 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 under- stand and constructively deal with reality to create real value and achieve per- sonal 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, start- ing 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 compa- nies, 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 per- son’s performance reviews and compensation. In other words, it’s not just what you accomplish but how that matters.

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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 pro- cesses—the good barrels—to make sure these employees can contribute at their full- est 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 busi- ness 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 deliber- ate 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 cul- ture. 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 pro- vided a series of SBOs (situations, behaviors and outcomes),’’ Butz explains. Bad deci- sions, 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-perform- ing 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 com- mit 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 busi- nesses, 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 employ- ees, but don’t end there. The company has more than 50 specific corporate

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compliance standards that are translated into multiple languages to support employ- ees around the world. These standards address commercial, environmental, and health and safety areas. Each standard is designed as a tool to help employees iden- tify 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 assess- ment, 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 communica- tions 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 prin- ciples of the company. Most important, Georgia-Pacific’s program strives for contin- uous 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, cus- tomers, 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?

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APPENDIX

How Fines Are Determined under the U.S. Sentencing Guidelines

For more details, see www.ussc.gov. Part 8C1.1 of the guidelines states that ‘‘If, upon consideration of the nature and

circumstances of the offense and the history and characteristics of the organization, the court determines that the organization operated primarily for a criminal purpose or primarily by criminal means, the fine shall be set at an amount (subject to the statutory maximum) sufficient to divest the organization of all its net assets.’’

Factors That Can Increase or Decrease Culpability Scores

Aggravating Factors: Result in an increase to the base level of 5

” The size of the organization coupled with the degree of participation, tolerance, or disregard for the criminal conduct by ‘‘high level personnel’’ or ‘‘substantial authority personnel.’’ In a firm with greater than 5,000 employees, this factor can result in an increase of as much as 5 points.

” Prior history: Organizations that have been either civilly or criminally adjudicated to have committed similar conduct within the past five years can have up to 2 points added.

” Obstructing, impeding, (or attempting to obstruct or impede) during the investiga- tion, prosecution, or something can result in 3 points added.

Mitigating Factors: Result in decreases from the base level of 5

” Having an effective program to prevent and detect violations of the law can result in a downward departure of 3 points.

” Self-reporting, cooperating, and accepting responsibility for the criminal conduct can result in a downward departure of 5 points.

Table A.1 Method for Determining Minimum and Maximum Fines

Culpability Score MinimumMultiplier MaximumMultiplier

10 or more 2.00 4.00

9 1.80 3.60

8 1.60 3.20

7 1.40 2.80

6 1.20 2.40

5 1.00 2.00

4 0.80 1.60

3 0.60 1.20

2 0.40 0.80

1 0.20 0.40

0 or less 0.05 0.20

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If that is not the case, penalties are based on a base fine and the ‘‘culpability score’’ assigned by the court. The base fine is the greatest of the following: the pretax gain from the crime, the amount of intentional loss inflicted on the victims, and an amount based on the Sentencing Commission’s ranking of the seriousness of the crime (ranging from $5,000 to $72.5 million). This amount is then multiplied by a number that depends on the culpability score. The culpability score ranges from 0 to 10, and the multipliers range from 0.05 to 4.

Every defendant starts at a culpability score of 5 and can move up or down depending on aggravating or mitigating factors (see Table A.1). The presence of aggravating factors can cause the culpability score to increase. These aggravating factors include (1) organizational size, combined with the degree of participation, tolerance, or disregard for the criminal conduct by high-level personnel or substantial authority personnel in the firm; (2) prior history of similar criminal conduct; and (3) role in obstructing or impeding an investigation.

The presence of mitigating factors, however, can cause the culpability score to drop. To decrease the culpability score, the organization must have in place an ‘‘effective program to prevent and detect violations of the law.’’ If the court deter- mines that the organization has such a program, 3 points can be removed from the base culpability score of 5. Besides having an effective compliance program in place, the culpability score can be substantially reduced if the organization reports the criminal conduct promptly after becoming aware of the offense and before govern- ment investigation. According to the guidelines, an organization that reports its own misconduct, cooperates with authorities, and accepts responsibility can have as many as 5 points subtracted from the base culpability level of 5.

The mitigating factors that reduce the culpability score have important implica- tions for the way companies manage ethical conduct. For example, many believe that overseeing an ‘‘effective’’ program for preventing and detecting legal violations is a full-time job for at least one person. It would likely involve the development of a conduct code, training programs, scrutiny of performance management systems, the development of communication systems, detection systems, and so on. Many of these elements have been described in this chapter.

NOTES 1. G. Weaver, L. K. Trevi~no, and P. Cochran, ‘‘Corporate Ethics Programs as Control Systems:

Managerial and Institutional Influences,’’ Unpublished working paper, 1998.

2. S. A. Reiss, Speech given at the Conference Board meeting on business ethics, 1992. 3. United States of America v. David D’Lorenzo, 96-CV-1203, U.S. Dist. Ct., 1996. 4. J. A. Byrne, ‘‘Fall from Grace,’’ Business Week, 12 August 2002, 50–56. 5. J. M. Kaplan, ‘‘The Sentencing Guidelines: The First Ten Years,’’ Ethikos and Corporate Conduct

Quarterly 15, no. 3 (2001): 1–4. 6. D. Murphy, ‘‘The Federal Sentencing Guidelines for Organizations: A Decade of Promoting

Compliance and Ethics,’’ Iowa Law Review 87 (2002): 697–719. 7. Governance, Ethics, and the Sentencing Guidelines: A Call for Self-Governing Cultures (Los

Angeles: LRN, 2004).

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8. Staples Corporate Soul Report, 2007, 2. http://www.staples.com/sbd/img/content/soul/pdf/2007_ staples_soul_report.pdf.

9. Personal communication, Kent Druyvesteyn, 1994.

10. G. Weaver, L. K. Trevi~no, and P. Cochran, ‘‘Corporate Ethics Practices in the Mid-1990s: An Empirical Study of the Fortune 1000,’’ Journal of Business Ethics 18, no. 3 (1999): 283–94.

11. N. K. Austin, ‘‘The New Corporate Watchdogs,’’Working Woman, January 1994, 19–20. 12. P. L. Towne, ‘‘Training Employees and Communicating Ethical Standards,’’ in Corporate Ethics:

Developing New Standards of Accountability, Conference Board Report No. 980 (New York: The Conference Board, 1991), 25–26.

13. D. G. Simmons, ‘‘The Nature of the Organizational Grapevine,’’ Supervisory Management, Novem- ber 1985, 39–42.

14. T. DeAngelis, ‘‘Honesty Tests Weigh in with Improved Ratings,’’ APA Monitor 7 (1991); D. S. Ones, C. Ziswesvaran, and F. Schmidt, ‘‘Comprehensive Meta-analysis of Integrity Test Validities:

Findings and Implications for Personal Selection and Theories of Job Performance,’’ Journal of Applied Psychology 78 (1993): 679–703; P. R. Sackett, L. R. Burris, and C. Callahan, ‘‘Integrity Testing for Personal Selection: An Update,’’ Personal Psychology 42 (1989): 491–529.

15. R. Farzad, ‘‘Jail Terms for 2 at Top of Adelphia,’’ New York Times, 21 June 2005, C1. 16. J. P. Kotter and J. L. Heskett, Corporate Culture and Performance (New York: Free Press, 1992). 17. A. L. Smith, Innovative Employee Communication: A New Approach to Improving Trust, Teamwork

and Performance (Englewood Cliffs, NJ: Prentice-Hall, 1991). 18. Ibid.

19. ‘‘CEOs Are Getting Younger but Employees Don’t Trust Them,’’ HRM Guide Network, Human Resource Management, March 5, 2003, www.hrmguide.com.

20. A. L. Smith, Innovative Employee Communication: A New Approach to Improving Trust, Teamwork and Performance (Englewood Cliffs, NJ: Prentice-Hall, 1991).

21. T. J. Peters and R. H. Waterman Jr., In Search of Excellence: Lessons from America’s Best-Run Companies (New York: Harper & Row, 1982).

22. M. Hammer and J. Champy, Reengineering the Corporation: A Manifesto for Corporate Revolution (New York: HarperCollins, 1993).

23. J. M. Powell, ‘‘Pinkerton Responds to the Federal Sentencing Guidelines,’’ Corporate Conduct Quarterly 3, no. 1 (1994): 10.

24. S. S. Miller, ‘‘The Ombudsperson,’’ in Corporate Ethics: Developing New Standards of Accountability, Conference Board Report No. 980 (New York: The Conference Board, 1991), 29–30.

25. ‘‘Johnson & Johnson’s Credo Survey: Genesis and Evolution,’’ Ethikos 7, no. 2 (1993): 2.

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CHAPTER7 MANAGING FOR ETHICAL CONDUCT

INTRODUCTION

We talked (in Chapter 3) about how most employees look outside themselves (to leaders and others) for guidance about how to behave. We have also discussed ethical culture and how organizations, especially large ones, manage ethics and legal compliance. Within this broad organizational context, managers oversee employee behavior every day, and they can have enormous influence on employee behavior. Therefore managers need simple and practical tools for managing the ethical conduct of their direct reports in the context of the broader organizational culture. This chap- ter introduces some basic management concepts that provide a foundation for under- standing how to manage in a way that increases the probability that employees will behave ethically. These principles can be applied at the department level or at the level of the entire organization. Consistent with the focus of the book, each section concludes with practical implications for managers. Underlying our recommenda- tions to managers are three key assumptions:

1. Managers want to be ethical.

2. Managers want their subordinates to be ethical.

3. Based on their experience, managers will have insight into the unique ethical requirements of the job.

IN BUSINESS, ETHICS IS ABOUT BEHAVIOR

In business, when people talk about ethics, they’re talking about behavior. In this con- text, ethics isn’t mysterious or unusual, nor does it depend on the individual’s innate goodness, religious conviction, or philosophical understanding (or lack of these qualit- ies). In work situations every day, people face ethical dilemmas—questions of right and wrong where values are in conflict. Should I hire, fire, promote, or demote this individual? Should I offer or accept a gift in this or that situation? How should I respond when my supervisor asks me to act against my own beliefs?1

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The study of ethical behavior in business involves understanding the factors that influence how people behave in these situations. Although we’ve seen (in Chapter 3) that internal factors such as individual moral development are important, we know that for most people ethical conduct depends largely on external factors such as the rules of the work context, rewards and punishments, what peers are doing, what authority figures expect, the roles people are asked to play, and more. In this chapter, we’re focusing on these factors because they’re the ones managers can have the most influence on. Once managers understand how management principles apply to ethical conduct, they can manage ethical behavior more proactively and effectively. On the other hand, if managers fool themselves into thinking that ethical conduct is deter- mined exclusively by some mysterious character trait, they’ll throw up their hands and walk away from situations they could proactively manage. Or they’ll think that simply getting rid of a ‘‘bad apple’’ will make unethical conduct stop. This kind of thinking is a cop-out. Unethical behavior is rarely as simple as a bad apple. It’s often something about the work environment that allows the bad apple to behave badly. And the work environment is managers’ responsibility. Top managers are responsible for the broad organizational culture (as we saw in Chapter 5). In most cases, though, lower-level managers can do a lot to influence the subordinates in their own depart- ments—and that’s what this chapter is about.

Practical Advice for Managers: Ethical Behavior

What are the practical implications for managers? First, think of ethics in concrete behavioral terms. Specifically, what kind of behavior are you looking for in your sub- ordinates, and how can you create a departmental work context that will support that behavior? Specifying concrete expectations for ethical behavior means going beyond abstract statements, such as ‘‘integrity is important here’’ to more concrete state- ments, such as ‘‘I expect sales representatives to be absolutely honest with our cus- tomers about such things as the characteristics of our products and our ability to deliver by a certain date.’’ Providing a reason for these expectations is also important. ‘‘We’re interested in building long-term relationships with our customers. We want them to think of us as their most trusted supplier.’’ Finally, it’s the manager’s respon- sibility to create a work environment that supports ethical behavior and discourages unethical behavior just as much as it’s the manager’s responsibility to manage for productivity or quality. Don’t just set ethical behavior goals. Follow up to make sure that they’re achievable and that they’re being met, and model ethical conduct your- self. Your people will pay more attention to what you do than to what you say. Take advantage of opportunities to demonstrate the ethical conduct you expect.

OURMULTIPLE ETHICAL SELVES

To understand ethics at work, we must understand that people are socialized to accept different behavior depending on the context. Cultural anthropologists have known for years that we have multiple selves and that we behave differently depending on the

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situation we confront.2 Children in our society are taught very early that it’s all right to be loud and boisterous on the playground, but they must be reverent at the church, synagogue, temple, or mosque. Table manners are important when visiting, but eat- ing with one’s fingers may be acceptable at home. As adults, we play highly differen- tiated roles, and we assume that each social context presents different behavioral expectations. Football players are expected to tackle each other deliberately and aggressively on the playing field, but they would be arrested for such behavior on the street. Businesspeople are expected to be aggressive against competitors but gentle with their spouses and children. Game jargon is often applied to business dealings— like the term playing field, which makes the business dealings seem like a game and therefore less subject to moral scrutiny. One ‘‘bluffs’’ and conceals information in business negotiations the same way one bluffs in a poker game. Bluffing sounds a lot better than lying (the word lying would raise ethical awareness, as discussed in Chapter 3), and the game analogy helps distinguish business behavior from morality in other situations. Although we might prefer to think that we take a single ethical self from situation to situation, reality suggests that most people behave differently in different contexts. This means that we can and often do have multiple ethical selves.

The Kenneth Lay Example

Kenneth Lay, former chairman of Enron Corporation (until he was forced out by the firm’s creditors in 2002), exemplifies the concept of multiple ethical selves. A Newsweek article written after Enron’s bankruptcy described the paradox that was Ken Lay.3 First, we see the affable leader who was loved and admired by Enron employees. Even Sherron Watkins, the Enron whistle-blower who brought Lay her concerns about the accounting problems and was rebuffed, described Lay as a man of integrity. He grew up a poor preacher’s son who pulled himself up by his boot- straps and eventually won the Horatio Alger Award (designed to foster entrepreneur- ship and honor the American dream of success through hard work). At the University of Missouri, he was president of a dry fraternity and went on to earn a Ph.D. in economics. He created Enron, and by 2000 it was the seventh largest company in the United States in terms of revenue. Despite becoming quite rich, he never flaunted his wealth. He drove an old Cadillac and used rental cars rather than limos when travel- ing. He was highly philanthropic in the Houston community. He talked about making Houston a world-class city and worked to make that happen, spreading his largesse to the ballet, symphony, museums, the United Way, the NAACP—you name it. He was even discussed as a possible mayoral candidate.

But Lay had another side. He has been described as an arrogant gambler who valued risk taking and boosting the firm’s stock price above all. He transformed Enron from the 1980s merger of two old-fashioned pipeline companies into a huge energy trader. Enron ‘‘became a giant casino, taking positions, hedging, betting on winners and losers.’’4 Interestingly, the merger deal was financed by Michael Milliken, 1980s junk-bond trader and one of Lay’s heroes (even though Milliken had done jail time for financial fraud). Lay fired Enron’s conservative accounting firm,

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Deloitte Haskins Sells, early on because they were ‘‘not as creative and imaginative’’ as he wished, and he replaced them with Arthur Andersen. He created a corporate culture that was described by insiders as ‘‘cutthroat’’ and ‘‘vicious,’’ and hired Ivy League ‘‘hot shot risk takers’’ like Jeff Skilling (CEO) and Andrew Fastow (CFO) to run it. People who didn’t make their numbers were quickly fired, and a large internal security force came to be feared by employees. Lay was also a political pro. He gave generously to political candidates and received favors in return, including exemptions from a variety of local and state regulations; his reach extended all the way to the White House. As the largest single contributor to George W. Bush’s presidential campaign, Lay and other Enron officials met at least six times with Vice President Richard Cheney and his aides while the vice president headed the National Energy Policy Development Group and formulated the Bush administra- tion’s energy policy.5

After CEO Jeff Skilling resigned in August 2001, Lay told employees that the company’s upcoming financials looked fine and encouraged them to ‘‘talk up the stock and talk positively about Enron to your family and friends.’’ In an online dis- cussion, he told employees that he had been buying stock himself. In fact, he had bought about $4 million worth, but what he failed to mention was that he had sold $24 million worth in the previous few months. Those who heeded his suggestion to buy or hold saw their retirement plans wiped out and were furious when they learned that Lay had been unloading his own stock for years. According to Newsweek, although he claims that he was deceived by unscrupulous subordinates,6 Lay had to know about Enron’s ‘‘elaborate schemes to hide losses and debts’’—the off-the- books partnerships that no one, including stock analysts, really understood.

‘‘The difference between ‘‘lie’’ and ‘‘lay’’ Has fallen into deep decay.

But now we know from Enron’s shame That Lay and ‘‘lie’’ are just the same’’7

So was Kenneth Lay ethical or unethical? Had he lived (in 2006 he died of a heart attack at age 64—after being found guilty, but before being sentenced), perhaps he would have written a book that would have helped us understand his motivations and behaviors. But we’ll never know. We suspect the answer is that, like many peo- ple, he had multiple ethical selves. In some areas of his life he did good, ethical things, including his many philanthropic efforts. But philanthropy shouldn’t be equa- ted with ethical conduct in daily business dealings. In fact, if he felt responsibility for what happened, wouldn’t he have turned over at least some of his estimated $20 mil- lion net worth to help those who lost so much?

A prominent victim of the Enron bankruptcy was Cliff Baxter, Enron’s 43-year- old former vice chairman, who committed suicide following Enron’s collapse. We can only speculate about the reason, but a clash of his multiple ethical selves may have played a role. Those who knew him described Baxter as a family man who bal- anced his home and work lives. He was certainly instrumental in creating the massive

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Enron fortune in the 1990s. Over time, however, he clashed with Andrew Fastow and openly criticized the firm’s involvement in financial deals he considered to be ques- tionable and inappropriate. Upon realizing he couldn’t influence what was happen- ing, Baxter left the company in May 2001 (citing a desire to spend more time with his family). We will likely never know for sure why he committed suicide. Friends said he was ‘‘devastated by the company’s demise.’’ He may have felt responsible for the many employees who lost their life savings in the collapse that could have been prevented. It’s possible that the ethical self who cared about those employees could no longer live with the self who contributed to their pain.8

The Dennis Levine Example

Now for an example of someone lower in the organizational hierarchy. Dennis Levine’s personal account of his insider trading activities, which resulted in his arrest and imprisonment in the 1980s, also suggests multiple ethical selves. He described himself as a good son, husband, and father, and a man who had been encouraged by his parents to ‘‘play straight.’’ ‘‘I come from a strong, old-fashioned family . . . [my father] taught me to work hard, believe in myself, and persevere . . . as a kid I always worked.’’9 Levine’s wife, Laurie, had no idea that he had been secretly and illegally trading in stocks for years. In fact, the family lived in a cramped one- bedroom apartment for nearly three years after their son was born despite Levine’s huge insider trading profits. That someone is ‘‘from a good family’’ or is ‘‘a family man or woman’’ is no guarantee of ethical behavior in the office. At the office, the manager is dealing with the ‘‘office self,’’ who may be very different from the ‘‘family self’’ or the ‘‘religious self.’’

Levine was a good son, husband, and father. But he separated his family self from his insider trading self. Why was his insider trading self allowed to exist? We can only speculate that this office self fit into an environment where peers were cross- ing the ethical line and not getting caught. Most important, his continuing huge prof- its led Levine into a downward spiral of unethical behavior that he found difficult to stop despite his recognition that it was illegal.

Practical Advice for Managers: Multiple Ethical Selves

So what should managers do? First, it’s important to evaluate the organizational envi- ronment. As a lower- or middle-level manager, you can do little to influence that environment. If senior executives are creating a cutthroat, Darwinian culture where only bottom-line results count, it’s probably time to look elsewhere for a job. Chapter 5 pro- vides information about how to conduct an ‘‘ethical culture audit’’ that can help you make that tough decision. But let’s assume that senior management is supportive. It is then up to you to contribute to the larger organizational culture by creating a work envi- ronment that supports ethical conduct and integrity for the people you manage. Integrity is defined as ‘‘that quality or state of being complete, whole, or undivided.’’ Individuals of strong character and high integrity are thought to be consistent and ethical across

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contexts. So the ultimate goal is to bring these multiple ethical selves together—to sup- port the idea that an individual can be consistent—and make the individual as ethical at the office as he or she is at home. Managers should pursue that goal with the practical understanding that many people find it quite possible to divide themselves into multiple ethical selves and to behave differently in different life contexts.

Begin by analyzing yourself. Is your office self consistent with your personal ethical self? If not, what will be required to bring the two together? Again, you’re an important role model for your subordinates. If you’re clearly a ‘‘whole’’ person of integrity, they’re more likely to aspire to ‘‘wholeness’’ themselves.

Next, think about those who report to you. Make no assumptions about ethics at work based on a person’s background, religious affiliation, family life, or good deeds in the community. Instead, find out what norms and expectations guide their work selves, and make sure that these influences support ethical behavior. You can learn a great deal simply by keeping your eyes and ears wide open. Of course, the best way to find out how your people think about these issues is to ask them, either in person or in survey form. You may be surprised what they’ll tell you. And you’re sending an important symbolic message about what concerns you just by asking. Do employees feel, as many surveys have suggested, that they must compromise their personal ethics to get ahead in your organization? If so, what do they think can be done about it?

Find out what influences their thoughts and behavior in ethical dilemma situations. Find out what inhibits them from being the best they can be, from doing the right thing. You can base your questions on real or hypothetical situations. Most supervisors have never bothered to ask such questions. Is it any wonder then that most subordinates end up believing that their managers don’t really care about ethics? Once you’ve had this type of discussion, it’s essential for you to follow up in ways that support ethical conduct. A number of practical ideas for how to do that follow.

REWARDS ANDDISCIPLINE

People DoWhat’s Rewarded and Avoid Doing What’s Punished

In Chapter 5 and our discussion of ethical culture, we discussed the importance of per- formance management systems and the signals they send about what the organization cares about (because it signals what the organization measures, rewards, and disci- plines). Managers implement those systems through their application of rewards and discipline every day. Rewards and discipline are probably the most important influences on people’s behavior at work. Most managers can probably recite a few basics recalled from a college psychology or management class. For example, most of us remember something about reinforcement theory—people are more likely to behave in ways that are rewarded, and they’re less likely to do what’s punished. In fact, people in work organizations are constantly on the lookout for information about rewards and punishments—especially if this information isn’t explicit. In fact, the more ambiguous

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the situation, the more people search for clues. They know that to be successful at work, they’ll have to determine what’s rewarded and do those things while avoiding behaviors that are punished. Remember this simple adage: what gets rewarded gets done! Finan- cial industry employees were rewarded handsomely for creating and selling risky mort- gages and mortgage-backed securities. They did this without much attention to the risks to customers or the system as a whole.

People Will Go the Extra Mile to Achieve Goals Set by Managers

In combination with rewards, goal setting is a powerful motivational tool. Rewards are often tied to explicit goals (Sandy will win a trip to the Caribbean if she hits a particular sales target within a particular period of time). Goals focus attention on the desired outcome (the sales target and vacation), and they lead individuals to strate- gize about how to achieve the goals that have been set. That is generally considered to be a good thing. Meeting the goal makes Sandy feel good (providing psychological benefits), and it results in a significant valued reward.

Researchers are beginning to understand more about how people think about goals, what they will do to achieve goals, and what happens when they fall short of achieving a goal.

For example, intense focus on attaining a task goal can distract people from other goals, such as ethical goals. Consider the goals that Lee Iacocca set for design and production of the Ford Pinto—recall from the Pinto fires case (Chapter 2) that goals were set—the car had to weigh less than 2,000 pounds and cost less than $2,000. An intense organizational focus on striving for those goals may have contributed to shortcuts and safety problems. Apparently, Iacocca had not set explicit safety goals to accompany these challenging production goals. Thus the employees involved focused on achieving the stated weight and price goals without giving equivalent attention to safety. Researchers have found that employees may be less likely to report problems to management if they are intently focused on achieving a task.10 In addition, attempting to achieve a task goal increases risky behavior while falling short of the goal can lead to increased lying about performance.11 Imagine that a claims handler at an insurance company is assigned an explicit goal to close a certain num- ber of claims within a particular period of time and is offered a financial reward for doing so. He’s likely to find ways to reach that goal even if it means denying some legitimate claims, and he’ll be less likely to report concerns about legitimate claims being denied. On the other hand, setting goals for ethical performance can make a difference. For example, one study found that participants who were given a goal to revise a paragraph from their boss were more likely to correct misinformation if they were given an explicit goal to ensure the accuracy and truth of the information.12

Incentives and goals are popular with managers because they work well to moti- vate behavior. But managers often fail to recognize the potential of goals and incen- tives to motivate unethical behavior if not used thoughtfully. Let’s look at a more specific example.

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HowGoals CombinedWith Rewards Can Encourage Unethical Behavior

THE ELECTRONICS APPLIANCE SALES EXAMPLE Suppose an electronic appli- ance store has a sales force that is paid on the basis of a modest salary plus commis- sion. In other words, the salespeople are paid a percentage of the items they sell. The company frequently advertises specials on certain television models in the local newspaper—and, of course, people come into the store asking about those models. But because of the lower profit margin on these sale items, the company also lowers its salespeople’s commission on these models. The higher rewards (i.e., higher com- missions) come with sales of models that aren’t on special. The company prefers to sell the higher-priced models but advertises the lower-priced ones to get customers into the store. The company has set sales goals for each salesperson, and the goals are higher for the higher-priced models. The company offers little sales training. New salespeople spend a day or so working with the store manager and then are pretty much on their own. The manager doesn’t seem to care how sales are made— just that they are made. The manager’s own commissions are based on store sales.

If the salespeople value money (and their jobs), and let’s assume that they do, they’ll be motivated to sell more of the higher-priced models. They can do this in a variety of ways. For example, they might point out that some of these models have features that the sale models don’t have. Some customers will probably listen to the advice and buy the more expensive models. As buyers listen and go through with the purchase, the connection between selling higher-priced items and positive outcomes (commissions, praise from the manager) becomes stronger for salespeople, and their motivation to sell more of these items grows.

Still, lots of folks will probably insist on buying the sale models. To sell more of the higher-priced models, a salesperson might try stressing the advantages of the high-priced model’s features even when the customer doesn’t need them. The sales- person may find that a good number of people go along with this sales tactic. The salesperson then receives more rewards—higher commissions, more praise from the manager—and no obvious negative outcomes. This behavior can even be justified, or at least rationalized. These customers are getting features they wouldn’t otherwise get, right? And the salesperson doesn’t know much about their finances or personal life, so there would be no way to know (without asking) if spending more money really had negative consequences for the customer.

Things are going so well that the salesperson might now be tempted to go a bit further—perhaps playing with the controls to make it look as if the picture on the sale TV is a bit fuzzier than the picture on the more expensive models. That makes it even easier to sell the more expensive models.

Explained this way, the connection between goals, rewards, and unethical behav- ior seems pretty clear. Although no one was explicitly telling salespeople to be un- ethical, the motivating factors were there: management set higher sales goals for higher-priced models and rewarded the sale of these models with higher commis- sions. The store manager didn’t seem to care how the sales got made and may not have objected to the salesperson playing with the controls to deceive customers.

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Management wanted to sell higher-priced models and set higher sales goals for those models. But the exclusive focus on goals frequently obscures the method of reaching a goal. If managers are concerned about ethical conduct, it’s essential that they focus at least as much on how the goal is being achieved. They must let their workers know that they’re interested in ethical means as well as ends and that they plan to evaluate both. If individuals are rewarded for meeting goals no matter what methods are used, they’re much more likely to try methods that cross the line between ethical and unethical behavior.

Many people have told us of their experience with managers who say something like this: ‘‘I don’t care how you do it, just do it.’’ Or ‘‘I don’t want to know how you meet the goal, just meet it.’’ These statements are clearly giving permission to use any means necessary (ethical or unethical) to meet the goal. Managers who have uttered these words shouldn’t be surprised to find that unethical behavior is often the result. Goal setting and incentives combine to create the most effective motivational method available to managers. Set challenging and achievable goals, reward people for meeting them, and people will go to great lengths to achieve the goals that have been set. That’s why responsible managers need to be clear about the importance of using only ethical means to achieve the goals they have set for their employees. The statement, ‘‘I don’t care how you do it, just get it done,’’ should send up a huge red flag that triggers ethical awareness. Managers shouldn’t say it, and workers should beware of ethical land mines if they hear it.

Practical Advice for Managers: Goals, Rewards and Discipline

First, remember that people do what’s rewarded. And these rewards don’t have to be explicit. The electronics store in our example would probably never have dreamed of saying that it was rewarding salespersons for being unethical. In fact, they weren’t doing this explicitly. But if the designers of the motivational plan had thought care- fully about the plan’s potential effects (and it’s their responsibility to do so), they might very well have identified its fatal flaw—it focuses on ends only and leaves it to the salespeople to figure out the means (how to accomplish the goals). Managers are more likely to identify these flaws in advance if they put themselves in their employ- ees’ shoes. Think about what the average individual would be likely to do given the rewards. What kinds of attitudes and behaviors are being rewarded explicitly or implicitly? How can you find out? Ask your staff. If you have good, open communi- cation with them, they’ll tell you.

Second, think carefully about the goals you’ve set for your employees. Combin- ing specific, challenging, and achievable goals with rewards for achieving them is a powerful motivational tool. People set their sights on those goals and work hard to reach them. It’s up to the manager to think about the likely behavioral outcomes and potential unintended consequences. Again, put yourself in employees’ shoes and ask yourself what those consequences might be. Also ask yourself whether you have set goals for ethical conduct (e.g., safety, honesty with customers) as well as for bottom- line performance (e.g., number of TVs sold) that focuses on means (building trusting

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customer relationships) as well as ends. Are you measuring and rewarding both? We believe in an ethical ‘‘Pygmalion effect.’’ In tests of the more general Pygmalion effect, researchers have found that people in school and work settings generally live up to the expectations that are set for them, whether they’re high or low.13 Students and workers perform better in response to a teacher’s or supervisor’s high expect- ations, but they fall behind if they’re expected to fail. With the ethical Pygmalion effect, expectations for ethical behavior (as well as performance) are set high, and people are expected to fulfill them. This ethical Pygmalion effect appeals to people’s desire to do what’s right. It is also likely to get people to think about how they achieve their goals, not just whether they’ve achieved them.

Recognize the Power of Indirect Rewards and Punishments

It’s important to recognize that workers don’t have to be personally rewarded (or punished) for the message to have an impact. A powerful extension of reinforcement theory is social learning theory.14 According to social learning theory, people learn from observing the rewards and punishments of others. Imagine if we had to touch a hot stove to learn that we’ll get burned if we do so! Luckily, we can observe others to learn most of what we need to know about what works and what doesn’t in life and at work. So workers’ behavior is influenced even when they don’t experience a reward or punishment themselves. If they see that others get away with lying, cheating, or stealing—or worse yet, if they see those individuals getting promotions or big bonuses—they’re much more likely to try such behaviors themselves. On the other hand, if they see that someone is quickly dismissed for lying to a customer, they learn that such behavior is unacceptable.

THE TAILHOOK EXAMPLE As an example of how people learn about rewards and punishments by observing others, consider the 1991 Tailhook scandal. The Tailhook Association is a nonprofit organization of naval aviators that, in 1991, had formal ties with the U.S. Navy. According to many insiders, the type of sexual harassment (of some 90 women) that occurred at the annual Tailhook Association meeting held in the Las Vegas Hilton in 1991 had been implicitly rewarded (or at least not punished) in the Navy for some time. These sexual harassment rituals were regular events that the male participants experienced as fun (rewarding). The Navy brass was known to turn a blind eye to reports, responding with a ‘‘boys will be boys’’ attitude. Investiga- tions were torturously slow and resulted in little, if any, punishment. The reward sys- tem became well known, and therefore the men continued to engage in these ‘‘rewarding’’ behaviors that weren’t punished.

Many people (especially women) looked to the Navy’s reaction to the Tailhook scandal as an opportunity to change the messages being sent about the acceptability or unacceptability of such conduct. Some early signs were encouraging, but the longer-term results disappointed many women. The secretary of the Navy resigned his post at the outset of the scandal, and the Navy severed ties with the Tailhook

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Association in late 1991. Investigations of potential criminal misconduct were also launched. However, the Navy’s discussions with 1,500 men resulted in only two sus- pects. When the Pentagon took over, 140 aviators were accused of indecent exposure, assault, or lying under oath. However, only 80 of these individuals were ever fined or even moderately disciplined. None of those involved in the assault of the 90 women was court-martialed or seriously disciplined. Perhaps most significant, in early 1994 the young woman who filed the first complaint, Lieutenant Paula Coughlin, resigned from the Navy, explaining that Tailhook ‘‘and the covert attacks on me that followed have stripped me of my ability to serve.’’15 Lieutenant Coughlin left amid ‘‘rumor mongering by officers trying to impugn her credibility’’ and with a ‘‘stack of hate mail.’’ However, also in 1994, a federal jury awarded Lieutenant Coughlin $1.7 mil- lion in compensatory damages and $5 million in punitive damages and held the Hilton Hotel responsible.16 The Navy’s top admiral, Frank B. Kelso, retired two months early to praise from the Defense Secretary for being a man of the highest integrity. The Tailhook Association continues to hold an annual convention, but it is now a much tamer affair. In 1999, after an investigation of the Tailhook Association and its 1999 convention in Reno, the Navy restored its ties with the organization. Sec- retary of the Navy Richard Danzig said, ‘‘The shameful events of the Tailhook Con- vention in 1991 led to a withdrawal of our support for the Association. Over the past eight years, however, the Association took a number of constructive steps that war- ranted a review of its status . . . [and] we’ve concluded that the time is right to restore ties.’’ The association has committed itself to prevent the type of misconduct that occurred in 1991. (See www.tailhook.org for more information on the association.)

The message to Navy men (and women) has clearly been mixed. Yes, the event caused a lot of turmoil, probably enough to suggest to Navy men that assaulting their female colleagues was not going to be as ‘‘rewarding’’ as it used to be. In fact, mem- bership in the Tailhook Association dropped dramatically after the incident, espe- cially among younger members.17 Moreover, several admirals have been discharged for inappropriate sexual behavior committed since Tailhook. Sexual harassment sen- sitivity training is now required in the Navy. But in 1996 Newsweek reported that in the four years after Tailhook, the Navy received more than 1,000 harassment com- plaints and more than 3,500 charges of indecent assault. Women still complained that they faced reprisals for filing complaints.18 To sum up, organizations send a powerful message to all personnel every time a decision is made to respond to a sexual harassment complaint. Everyone watches and learns from what happens to the perpetrators and to the victims.

The problem with sexual harassment goes beyond the Navy. In 2005, the Washing- ton Post reported results of a survey that found more than half of the women studying at all three military academies had experienced sexual harassment of some kind. One in seven reported being sexually assaulted, but few had reported any of the incidents. Rea- sons included fear of retaliation, privacy concerns, loyalty to classmates, and concern about being punished for their own behavior (such as underage drinking).19

Managers, take note of the messages you’re implicitly sending to all of your work- ers by what you reward and punish (or fail to punish). Employees are constantly on the

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lookout for these cues. They want to know what’s okay and not okay in your work environment. If they observe that people advance by stepping on others, lying to cus- tomers, and falsifying reports, they’ll be more inclined to do so because they will have learned that such behavior is rewarded. If they see sexual harassment go undisciplined, they may feel free to engage in it themselves. If they see those who report misconduct suffering reprisal, they won’t risk reporting problem behavior. So if you become aware of unethical behavior in your group, chances are that it’s being rewarded somehow. Ask yourself how the system might be intentionally or unintentionally rewarding the un- desired behavior, and take responsibility for changing it. On the other hand, if unethical individuals are dismissed, and persons of integrity advance, the ethical lesson is also clear. Integrity is valued and unethical behavior won’t be tolerated.

CanManagers Really Reward Ethical Behavior?

For years, management writers have preached that whenever possible, managers should use rewards instead of punishment—that punishment is inherently a bad man- agement practice. This idea, good as it sounds, may be impractical when the goal is to encourage ethical behavior and discourage unethical behavior. Relying on rewards means rewarding ethical behavior. So let’s think about how a manager might regu- larly reward routine ethical behavior. Perhaps he or she could give awards or bonuses to those whose expense reports were honest and accurate or to those managers who didn’t harass their secretaries. Does this seem ridiculous to you? Of course it does. Workers don’t expect to be rewarded for behaviors that are expected of everyone— for simply doing the right thing every day. So in the short term, it’s quite difficult to reward routine ethical behavior. However, as we noted in Chapter 6, some organiza- tions do reward extraordinary ethical behavior that goes above and beyond the rou- tine. Doing so sends a powerful message to everyone that such extraordinary behavior is highly valued in the organization.

If we switch to longer-term thinking, there should be rewards for doing the right thing. For example, most people know how to get ahead in their own organization. As we noted in our discussion of ethical culture, large organizations have performance management systems that provide regular feedback to employees about their per- formance. This information is used to make important decisions about pay and pro- motion. Is information about integrity incorporated into those systems? Is it weighted heavily enough to make the point that integrity matters at least as much as bottom- line performance if an employee wants to advance in the organization? Or do people get highly compensated and promoted despite ethical lapses? If so, the message is clear. If you want to get ahead around here, you have to do whatever it takes. People who advance are likely the ones who have decided to go along to get along or, worse yet, the ones who stepped on others along the way. On the other hand, are those who have advanced to the highest levels known for their integrity? If so, the organization is sending a message about the importance of integrity. Rewards may be a limited tool for influencing specific ethical behaviors today or tomorrow, but they should be used to set the tone for what’s expected and rewarded in the long term.

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What about the Role of Discipline?

As for discipline, we all know that managers sometimes have to discipline errant subordinates, just as responsible parents are expected to discipline unruly children. It’s an essential part of the manager’s job to step in when an employee is headed down the wrong path. In fact, it can be a real gift to give an employee a heads-up and the opportunity to correct bad behavior and avoid severe negative consequences later. We also know that discipline works. If people expect their misconduct to be detected and punished, they’re less likely to engage in it. So if it works, why not use it? Well, it turns out that managers are often told to avoid punishment and to rely on rewards as much as possible because of a belief that employees will automatically react badly to punishment. They’ll dislike the supervisor or engage in sabotage to retaliate. But we now know that discipline can produce good results when it’s carried out in a particu- lar way—when workers perceive it as fair.

If we examine the idea that punishment should be avoided, we find that it’s based on old psychological research that was conducted on rats and small children. It has little to do with adults in work settings who can distinguish discipline that’s fair (i.e., punishment that is deserved and fairly administered) from discipline that’s unfair. Have you ever heard an adult say, ‘‘I had it coming; I deserved it’’? As Dennis Lev- ine said of his arrest and imprisonment for insider trading, ‘‘I’ve gained an abiding respect for the fairness of our system of justice. . . . When I broke the law, I was punished. The system works.’’ He also said, ‘‘My former life was destroyed because I figured the odds were a thousand to one against my getting caught.’’20 If he had thought he would be caught and punished, the odds would have been reversed, and he may never have cut an insider trading deal. Once caught and punished, he acknowledged that the punishment was just.

Discipline should be administered fairly. Research evidence suggests that pun- ishment results in more positive outcomes (e.g., the behavior improves and the employee becomes a better corporate citizen) if the recipient perceives it to be fair.21

These positive outcomes are linked primarily to the appropriate severity of the pun- ishment and employee input. The punishment should ‘‘fit the crime,’’ and it should be consistent with what others have received for similar infractions. It’s also important that you give the employee an opportunity for input—to explain his or her side of the story. In addition, the disciplined worker is more likely to respond positively to the punishment if you approach it in a constructive fashion and carefully explain the rea- sons for the punishment. Finally, if you punish, do it in private. Punishment can be a humiliating experience, and public punishment adds insult to injury.

Recognize the indirect effects of punishment. The punished employee should not be the manager’s only concern. Social learning theory suggests that other workers will be affected as well. Remember, we learn a great deal from observing the rewards and punishments of others. But if the punishment occurs in private, how will others know about it? Anyone who has worked in a real organization knows about the grapevine, the communication network that flashes organizational news throughout a department or company. Good managers are aware of the power of the grapevine and

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rely on it to transmit important information. Research has discovered that when peo- ple are aware that unethical behavior has taken place, they want the violators to be punished.22 People want to believe that their workplace is ‘‘just’’—that the organiza- tion rewards good guys and punishes bad guys. They also want to feel that they aren’t suckers who, in a sense, are being punished for following the rules when others get away with breaking them. This is an important reason that managers must discipline unethical behavior when it occurs. There must be no exceptions. High-level rule vio- lators must be held to the same standards. By clearly disciplining all rule violators, managers send an unequivocal message to the violator and all observers that this be- havior won’t be tolerated. They also support the notion that the company is a just place to work, where the rules are enforced fairly and consistently.

Imagine how the honest employees at Enron must have felt—long before the public implosion of the company in 2001—when two Enron energy traders in New York made massive fraudulent energy trades and siphoned off company money into their own personal accounts in the mid-1980s. In short, the traders had kept two sets of books and had routinely destroyed records to obliterate any paper trail. When Enron’s board heard of these shenanigans, CEO Ken Lay said openly at a board meeting that the two traders ‘‘made too much money to let them go.’’ So the trading crooks were allowed to stay on, until an internal investigator discovered the magni- tude of the fraud and the company took an $85 million charge to after-tax earnings to cover losses. Lay complained at an all-employee meeting that he never knew about these activities. Later, a lawyer involved in a lawsuit against the company said, ‘‘Any honest competent management, confronted with the conduct of Borget and Mas- troeni, as revealed to Enron’s senior management in January 1987, would have fired these gentlemen without delay.’’23 It makes us wonder if Enron’s later difficulties could have been avoided if only the executive team had regularly disciplined the company’s rogue employees.

In his book Father Son & Co.; My Life at IBM and Beyond (1990), Thomas Watson Jr., the son of IBM’s founder, described his experiences in running the company for almost 20 years at a time when IBM dominated the computer industry. Watson also discussed the importance of imposing swift, severe punishment for breaches of integrity as well as the indirect effects of punishing or not punishing. He said, ‘‘If a manager does something unethical, he should be fired just as surely as a factory worker. This is the wholesome use of the boss’s power.’’ But, as he explains in the following excerpt, his managers didn’t always follow his advice.

On one occasion some managers in one of our plants started a chain letter involving U.S. savings bonds. The idea was that one manager would write to five other managers, and each of those would write to five more, who would each send some bonds back to the first guy and write to five more, and so on. Pretty soon they ran out of managers and got down to employees. It ended up that the employees felt pressure to join the chain letter and pay off the managers. I got a complaint about this and brought it to the attention of the head of the division. I expected him to say, at a

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minimum, ‘‘We’ve got to fire a couple of guys, I’ll handle it.’’ Instead, he simply said, ‘‘Well, it was a mistake.’’ I couldn’t convince him to fire anybody. Now, you could admire him for defending the team, but I think there is a time when integrity should take the rudder from team loyalty. All the same, I didn’t pursue the matter any further, and my failure to act came back to haunt me.

A couple of years later in that same division, a manager fired a low- level employee who had been stealing engineering diagrams and selling them to a competitor. Firing him would have been fine, except that the manager handled it in a brutal way. The employee in question had one thing in his life that he was proud of—his commission in the U.S. Army Reserve, where he held the rank of major. Instead of simply going to the man’s house and telling him, ‘‘You swiped the drawings and we’re going to fire you,’’ the manager picked a week when the fellow was in military camp to lower the boom. Somehow the military authorities got involved as well, and the man was stripped of his commission. The humiliation caused him to become insanely angry, and for the next few years he devoted himself to making me uncomfortable. He sent pictures of Tom Watson Jr. behind bars to his senators and his congressman and to every justice of the Supreme Court. And he kept harking back to that chain letter, because he knew we had tolerated the men responsible for it. Even- tually he simmered down, but the incident really taught me a lesson. After that I simply fired managers when they broke rules of integrity. I did it in perhaps a dozen cases, including a couple involving senior executives. I had to overrule a lot of people each time, who would argue that we should merely demote the man, or transfer him, or that the business would fall apart without him. But the company was invariably better off for the decision and the example.24

Sometimes employees are punished for trying to do the right thing. For example, Owen Cheevers was an experienced researcher at the Bank of Montreal who wrote an honest report expressing his concerns about the radio industry. Investment bankers at the firm asked him to make his report more positive. When he refused to write a more glowing report, Cheevers was fired. Obviously, such punishment sends a powerful message to all other employees who are aware of it—go along or be fired.25

Practical Advice for Managers: Discipline

TomWatson learned the hard way what can happen when breaches of integrity aren’t disciplined swiftly and severely. Workers have long memories about incidents such as the chain letter and how management handles them. They tuck that sort of infor- mation away for later use. When the IBM employee who stole the engineering draw- ings was fired in a particularly humiliating way, he was outraged. His severe and

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public punishment seemed particularly unfair when compared with the way others had been treated. And he reacted in ways that managers are told to expect from pun- ished employees. He was angry at the punisher and the organization.

The important point about discipline is that adults differentiate between fair and unfair punishment. If you use punishment consistently to enforce the rules, employ- ees will expect to be punished when they break them. However, they expect punish- ment that fits the crime and that is consistent with how others have been treated. In most cases, if you impose discipline fairly, the problem behavior improves and the subordinate goes on to be a productive organizational citizen.

Remember that you should be concerned about observers who pay a great deal of attention to how rule violations are handled. When the chain letter offenders weren’t severely disciplined, an implicit message was sent to all who were aware of the scheme, and expectations were set up for how management would respond to future breaches of integrity. A just organization is one that disciplines rule violations fairly and consistently and doesn’t punish people who try to do the right thing. Workers expect managers to discipline fairly, and they’re morally outraged when management doesn’t do its job.

‘‘EVERYONE’S DOING IT’’

People Follow Group Norms

‘‘Everyone’s doing it’’ is the refrain so frequently used to encourage (and rationalize or justify) unethical behavior. We’ve all heard it. From fraternity brothers who are expected to advise their peers about the content of exams to college football players who accept booster money to waiters and waitresses who don’t claim all of their tip income for tax purposes to auditors who sign off on financial statements that haven’t been thoroughly checked to insider traders who share secrets about upcoming financial deals, individuals are much more likely to engage in unethical behavior if they’re con- vinced that others are doing it too. It lets them off the hook by providing an acceptable justification and rationale for the behavior. Also, recall what you learned about ethical awareness in Chapter 3. People are more likely to recognize issues as being ethical ones if there is social consensus in the group that the issue raises ethical concerns. But if ‘‘everyone is doing it,’’ social consensus is low (everyone seems to agree that the behavior is not a problem) and it’s more likely that ethical concerns just won’t come up.

Rationalizing Unethical Behavior

For some behaviors, the refrain ‘‘everyone is doing it’’ is used primarily to rationalize behavior that’s guided by unethical norms. The employee who inflates his or her expense reports believes that it’s justified first because everyone else is doing it (and getting away with it, too). Within the group, inflating expenses may also be explained as a way of compensating for the extra hours spent away from home, to pay for the

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drink at the bar or a movie, or to cover other expenses that aren’t deductible under the organization’s formal travel cost reimbursement policy. These rationalizations are often explicitly or implicitly supported by the boss, who suggests the behavior or engages in it himself or herself. Either way, the manager sends a powerful message that it’s okay to bend the rules, and that message can easily be generalized to other rules in the organization.

A better way to manage the process is to state the rules clearly and then enforce them. In other words, if it seems reasonable to reimburse a traveling employee for a drink at the bar, a movie, or a telephone call home, then change the rules so that these expenses can be legally reimbursed under the organization’s formal travel policy. Then abuses of the system can be disciplined.

Pressure to Go Along

For other behaviors, the ‘‘everyone is doing it’’ refrain represents not just a rational- ization but actual pressure to go along with the crowd. The argument is used to encourage those who are reluctant. ‘‘Aw, c’mon, everybody does it!’’ Not going along puts the individual in the uncomfortable spot of being perceived as some sort of goody-goody who is highly ethical but also unlikable, and certainly not someone who can be trusted. The result can be ostracism from the group, and most of us would rather go along than be ostracized.26 Many individuals will go along with unethical behavior because of their strong need to be accepted. If left to their own devices, they might very well follow the rules. But in the group situation, they feel that they have no choice but to comply, or at least to remain silent about what others are doing.

Practical Advice for Managers: Group Norms

So what does the notion of group norms mean for the manager? Above all, you must be acutely aware of the power of group norms (informal standards of behavior), which aren’t always consistent with the formal, written rules.

Group norms represent what’s really happening in the group, and you must be in touch with this reality. Any new employee will be quickly schooled in ‘‘the way we do things in this group’’ and will be expected to go along. Loyalty to the group may be the most powerful norm and one that’s extremely difficult to counteract. If the group norms support ethical behavior, you have no problem; but if they don’t, you face a particularly tough situation. If the group is strong and cohesive, one approach you can use is to identify the informal group leader and attempt to influence that individual, hoping she or he will influence the others. It’s also important to consider the reward system. Norms often arise to support behaviors that are implicitly rewarded. If people are doing some- thing, it’s usually because they find it rewarding and the system somehow encourages it. Changes in the reward system can lead to changes in group norms.

THE SLADE COMPANY CASE EXAMPLE A classic organizational behavior case explains how a highly productive manufacturing work group with a strong informal

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leader has created a problematic group norm for punching in and out at the time clock. After the foreman leaves, all but one of the group members goes home. The one person remaining behind punches out all of the other group members. The result is that group members are paid for more hours than they actually work. On occasion, when a group member is delayed in the morning, the group punches him in. But this practice is carefully controlled, and the group has developed norms so that it is not abused. Although the punch-out system seems to be clearly wrong, the case is com- plicated because management admits that although pay is low, productivity in the group is high. What’s more, the group is highly cohesive and very willing to work hard when necessary to fulfill last-minute orders or solve unusual production prob- lems. The workers also value the ability to have some control over the workday. Finally, management has known about the practice for some time and has ignored it.

The solution to the case isn’t clear-cut. The case writers have suggested that management might be better off leaving well enough alone. ‘‘If it ain’t broke, don’t fix it.’’ However, we believe that this is impossible if the ethical dimensions of the case are brought into focus. Leaving it alone implies tacit acceptance and approval of rule breaking and sends that message not only to this work group but to all of the others as well. Other groups that, for some reason, can’t manage to do the same (per- haps because of less cohesion or because their supervisor stays later) will no doubt resent the injustice. Management must also accept some responsibility for tacitly approving this practice over a long period of time.

Remembering that people do what’s rewarded, we believe that the norm is most likely to change via adjustments in the reward system. For example, moving to a five- day salary (somewhat higher than their current average take-home pay) rather than hourly pay would reward people for getting the job done rather than staying a certain number of hours on weekdays. Group members could still be paid extra for weekend overtime work when it’s available. If the late-arrival norm isn’t being abused, it could be institutionalized. If someone must be late, a new rule could state that he or she must inform someone in the work group by a certain time. As with absences, a certain number of late arrivals would be allowed within a specified period. The informal group leader should be involved in devising the solution through an appeal to his or her concern for fairness to other workers in the organization.

PEOPLE FULFILL ASSIGNED ROLES

Roles are strong forces for guiding behavior, and workers are assigned roles that can powerfully influence their behavior in ethical dilemma situations. Roles can reduce a person’s sense of his or her individuality by focusing attention on the role and the expectations that accompany it. It doesn’t really matter who fills the role. It’s the role requirements that are important. This focus on the role reduces the individual’s awareness of the self as an independent individual who is personally responsible for an outcome. This psychological process is called deindividuation.27

So the individual acts ‘‘in role’’ and does what’s expected. This is fine when behaving in role means doing the right thing. But what happens when in-role

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behavior involves behaving illegally or unethically? For example, aggression is part of the police officer’s role. Sometimes, though, police officers step over the ethical line; they become overly aggressive and assault suspects without cause. Several such incidents have been videotaped by bystanders in recent years. Another important part of the police officer role is loyalty to other police officers and protection of his or her peers. Police officers often travel in pairs and must rely on each other in difficult, life- threatening situations. Loyalty, protection, and trust within the ranks thus serve an important, positive purpose. But loyalty can also end up supporting unethical behav- ior when, for example, a fellow police officer is overly aggressive and a peer who observes the conduct doesn’t report it.

Consider this example from an old television series. Two female police detec- tives were part of a stakeout intended to catch one of their fellow police officers stealing heroin. The detectives realized they were facing a complex moral dilemma when the officer told them he was stealing the heroin for his mother, who was dying of cancer and in severe pain. He had clearly broken the law, and the rules clearly said that they must turn him in. But loyalty and protection were important parts of their police role. Their colleague had good intentions—to help his dying mother. After much discussion and individual soul searching, they decided to protect their col- league and keep silent about what they knew. Although we may disagree about whether they made the right decision, the point here is that the peer protection and loyalty aspects of the police officer role were an important part of that decision.

The Zimbardo Prison Experiment

A powerful and widely cited social-psychological study illustrates the power of roles to influence behavior.28 The researchers created a prison environment in the base- ment of the psychology building at Stanford University. Twenty-four psychologically healthy subjects (people like us) were recruited and randomly assigned to play the roles of prisoners or guards. General rules were provided regarding how to fulfill the role, but subjects were left free to interact within those general guidelines. With the cooperation of the local police, the guards were actually sent out to arrest the prison- ers, book them, and transport them to their simulated cells. The prisoners were given uniforms and were referred to by identification numbers. The guards were given comfortable quarters and a recreation area. The guards wore uniforms and mirrored sunglasses, and they worked standard eight-hour shifts during which they were given a great deal of control over the prisoners (physical abuse was not allowed). With rare exceptions, the guards enjoyed the social power and status of the guard role. Some ‘‘guards’’ were exhilarated by the experience and reinforced their guard role with aggression, threats, and insults. The ‘‘prisoners’’ quickly began to show dramatic signs of emotional change, including acute anxiety, helplessness, and passivity verging on complete servility. Some became severely distressed and physically ill.

Although the experiment was originally scheduled to last two weeks, it was halted after only six days due to concern about the prisoners’ well-being. ‘‘At the end of only six days . . . it was no longer apparent to most of the subjects (or to us) where reality

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ended and their roles began. The majority had indeed become prisoners or guards, no longer able to clearly differentiate between role playing and the real self. There were dramatic changes in virtually every aspect of their behavior, thinking, and feeling.’’29

After the experiment ended, guards expressed a combination of excitement and dismay at the darker side of themselves that had emerged. The simulated situation had become real very quickly, and both sides had readily assumed the roles expected of them as members of their respective groups (prisoner or guard). This occurred despite the other roles these individuals may have played in their ‘‘normal’’ lives just days before. Finally, when individuals attempted to deviate from the role behavior, the deviation was quickly suppressed by pressure to conform as expressed by other group members. The experimental results were used to support the ‘‘situational’’ explanation for prison behavior. In other words, perfectly normal people behaved cruelly and aggressively when placed in a role where these behaviors were either expected or allowed.

The Zimbardo experiment can help us better understand the 2004 Abu Ghraib prison scandal in Iraq. At Abu Ghraib, beginning in 2003, poorly trained American mili- tary police officers (MPs) and civilian contractors tortured Iraqi captives in what had ironically been one of Saddam Hussein’s most infamous prisons. The brutal torture ranged from physical violence to verbal, psychological, and sexual abuse. The American public became incensed when photographs of the abuse showed up on the Internet thanks to one young military policeman, Joseph Darby. The most famous photos include one of a supervisor giving a thumbs-up sign while standing next to a pyramid of hooded, naked Iraqis. Another shows female Private Lyndie England leading a naked Iraqi around on a leash. According to the Red Cross, most of the prisoners at Abu Ghraib had committed no crime. They had just managed to be in the wrong place at the wrong time. So what drove these Americans, men and women, to engage in such horrific behavior and to laugh at the humiliation of other human beings? What happened at Abu Ghraib was complex and likely caused by many factors. But at least some of them seem haunt- ingly reminiscent of the Zimbardo experiment. The Abu Ghraib guards quickly donned the role of prison police, and they relished the power over prisoners that accompanied the role. This in-role behavior was likely enhanced further by intelligence officers’ encouragement to use more aggressive techniques to soften up the prisoners for interro- gation and by praise when such techniques ‘‘worked.’’30

Roles at Work

But prisons aren’t your average work setting. How do the results of this experiment apply to work organizations? People enter work organizations in a state of ‘‘role readiness.’’31 In this state, they’re likely to engage in behaviors that are consistent with their organizationally prescribed role, even if those behaviors violate other val- ues they hold (another example of multiple ethical selves). A particularly interesting example is provided by corporate professionals such as lawyers, physicians, and accountants. Professionals are thought to adhere most closely to their professional roles. In fact, this is part of the definition of a professional. Although there’s little

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research evidence, much anecdotal evidence suggests that many corporate physi- cians, lawyers, and accountants identify more closely with their organizational role. For example, Johns Manville medical personnel conformed to corporate policy and remained silent about asbestos exposure, despite the known medical dangers.32 In their dual roles of physician and organizational member, the latter took precedence. The same can be said of auditors who are supposed to adhere to the ethical guidelines of their professional organization, the American Institute of Certified Public Accountants (AICPA). They are supposed to protect the public interest and report financial irregularities they find. As we have learned from auditing scandals, how- ever, the corporate organizational role seems to take over for many.

Conflicting Roles Can Lead to Unethical Behavior

In their jobs, people are sometimes expected to play different roles that may make competing demands on them, causing internal conflict and stress that may be resolved via unethical behavior such as lying. For example, professional nurses are taught that patient education and patient advocacy are important aspects of the nurs- ing role. Yet these nursing role expectations may conflict with physicians’ orders, or they may be difficult to implement because of time pressures and paperwork that take nurses away from patients. In a research study, nurses responded to various scenarios, some of which placed them in role-conflict situations.33 Those nurses who were in role-conflict situations said they would be more likely to lie by misreporting their behavior on the patient’s chart.

Managers must be aware that conflicting role demands can pressure workers to be dishonest. The best way to avoid this type of dishonesty is to minimize conflicting role demands. Ask your staff to analyze their jobs and to identify sources of conflict that could cause them to feel they have to lie to you or someone else in order to successfully accomplish some aspect of their job. Then, see if the job can be redesigned to minimize these conflicts.

Roles Can Also Support Ethical Behavior

Roles can also work to support ethical behavior. For example, whistle-blowing (reporting the misconduct of others) is sometimes prescribed for individuals in cer- tain jobs. This makes a difficult behavior easier to carry out. A survey of internal auditors found that whistle-blowing was more likely when the auditors saw reporting as a prescribed job requirement.34 Managers should consider the extent to which or- ganizational roles encourage either ethical or unethical behavior. Obviously, those that support and encourage unethical behavior should be changed. Those that encour- age ethical behavior (e.g., whistle-blowing) should be bolstered. For example, research has found that although reporting a peer’s misconduct is a distasteful and difficult act, people are more likely to report a peer if doing so is explicitly made a part of their role via an honor code or code of conduct.35 In other words, if their role requires them to report misconduct when they see it, they’re more likely to do so.

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Many colleges and universities have honor codes that require students to report any cheating they observe. The requirement makes it easier for the reporter because the behavior becomes a duty, a role responsibility rather than a voluntary ethical act.

Practical Advice for Managers: Roles

The key concept for managers to understand is that roles influence behavior. Think about the roles people play in your department or organization. What are the implica- tions of their role expectations for ethical and unethical behavior? Do some individuals experience conflicts between their roles? For example, are professionals torn between their organizational and professional roles? Or do employees experience conflicts within a role—for example, like nurses, who are supposed to play the conflicting roles of patient advocate and subordinate to the physician? Again, the individuals who hold the jobs are probably the best source of information about their role expectations and poten- tial conflicts. Once you’ve analyzed roles and role conflicts, determine whether jobs need to be altered to reduce conflict. If change isn’t possible, at least you can anticipate the problems that are likely to arise for people in these jobs.

PEOPLE DOWHAT THEY’RE TOLD

In a 60 Minutes segment, Americans working for a Japanese company in the United States reported that their supervisor told them to unpack machine tools manufactured in and shipped from Japan, remove the ‘‘Manufactured in Japan’’ label, change a few things, replace the label with a ‘‘Manufactured in the U.S.’’ label, and repack the machine tools for shipping. These products were then shipped as if they had been manufactured in the United States to, of all places, the American military (where U.S. manufacture of machine tools was a requirement). An American accountant at the firm finally blew the whistle; but when the workers who had been doing the unpacking and repacking were asked why they did it, they replied that they were doing what their supervisor had told them to do. One of the men who had attempted to protest was told that he could find another job if he didn’t like it, so he continued doing what he was told to do.

This is just one of many examples we could cite of workers at all levels doing what they’re told by managers. Participants in the famous 1972 Watergate break-in referred to their unquestioning obedience to superior orders in testimony before the Senate investigating committee, as did Nazi SS officers in war crimes trials and par- ticipants in the Iran-Contra affair.36 Organizations (corporate, political, or military) are authority structures whose members accept the idea that, to be members in good standing, they must give up a certain amount of independence and autonomy. They expect that managers will tell them what to do. That’s the managerial role. They also assume that they should do what’s expected of them. That’s the subordinate role. These assumptions and expectations allow organizations to avoid chaos and function in an orderly way. In addition, individuals often feel that they owe the organization and their manager their loyalty, thus further reinforcing the pressure to comply.

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TheMilgram Experiments

Probably the most famous social-psychological studies of all time were conducted by Stanley Milgram in the 1960s. They provide uncomfortable insights into how normal adults behave in authority situations.37 Most adults will carry out the authority fig- ure’s orders even if these orders are contrary to their personal beliefs about what’s right and lead to harm of other human beings.

In a number of laboratory experiments, Milgram paid subjects recruited from the New Haven, Connecticut, area to participate in a one-hour study on the effects of punishment on learning. The subject was asked to play ‘‘teacher’’ in a learning experiment; the ‘‘learner,’’ unbeknownst to the teacher/subject, was a member of the research team. The learner was strapped into a chair with an electrode attached to his or her wrist. The teacher/subject was seated at a shock generator and was told to pose questions to the learner. Each time the learner provided an incorrect response to a question, the teacher/subject was told to turn a dial to administer an increasingly severe shock—though in fact no shocks were actually given. As the apparent ‘‘shocks’’ intensified, the learner verbally expressed scripted responses representing increasing discomfort, finally screaming and then going silent. During the experi- ments, many teacher/subjects would question the experimenter and express the desire to stop. The experimenter, dressed in a white lab coat, would provide the following scripted response, ‘‘Although the shocks may be painful, there is no permanent tissue damage, so please go on.’’ If the teacher/subject continued to resist, the experimenter would respond with three successive prods: ‘‘The experiment requires that you con- tinue’’; ‘‘It is absolutely essential that you continue’’; ‘‘You have no choice, you must go on.’’ If the teacher continued to resist, the experiment was finally terminated.

To the surprise of Milgram and other observers, about 60 percent of the teacher/subjects in these experiments continued to the end, obeying the authority figure’s instructions despite the conflict they felt and expressed. It’s not that they felt okay about what they were doing. In fact, their emotional appeals to the experi- menter suggested that they very much wanted to stop. But most of them didn’t. They may have felt that refusing to continue would challenge the experimenter’s authority, affect the legitimacy of the experiment, and cause embarrassment for themselves.38 They acted as if they were constrained to do as they were told by the authority figure, rather than as independent adults who could end the experiment at any time. We should also note that teacher/subjects who were at the principled level of cognitive moral development (see Chapter 3) were more likely to chal- lenge the experimenter’s authority as well as more likely to stop giving the electric shocks. So, although some participants did resist the authority figure’s commands to continue, most of them did not.

Do you think that people today are different somehow—that they would be less susceptible to authority figure dictates? Jerry Burger, a psychology professor at Santa Clara University carried out a partial replication of the original Milgram experiment and published the results in 2009.39 Much like Milgram had done, he recruited people from the community. The recruitment process screened out individuals who might

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have been familiar with the original Milgram experiments or whose screening sug- gested that they might have a negative reaction to participating. In its design, the study closely followed the original. The main difference was that, in keeping with modern-day ethics rules about protecting human subjects in research, the experiment was stopped when the ‘‘teacher’’ thought she or he had administered a 150-volt shock (rather than continuing all the way to 450 volts, as in the original version). In the original experiment, 150 volts appeared to be a turning point. Most subjects who passed that point continued all the way up the shock generator. In the replication, subjects were also told multiple times that they could leave at any time and keep the $50 they were being paid. Once the experiment was completed, the ‘‘learner’’ imme- diately entered the room and told the ‘‘teacher’’ that he or she was feeling fine. Finally, the experimenter was a trained clinical psychologist who stopped the experi- ment immediately at any sign of serious stress. Even with all of these changes, the results were quite similar to those Milgram found more than 40 years ago. About two-thirds of the ‘‘teacher’’ subjects continued to deliver shocks up to 150 volts.

No matter what the results, this is still an experiment that took place in a behav- ioral laboratory. Do the findings apply in the real world? Apparently, yes. A few years ago, ABC TV showcased a horrifying ‘‘real-world’’ version of the Milgram experiment. A person posing as a police officer telephoned a McDonald’s in 2004 and told the assistant manager, Donna Summers, that a young woman employee (whom he described) had stolen a purse and should be brought into the office. He also claimed that he had Donna’s boss on another phone line. Once the employee was in the office, the caller instructed the manager to take the employee’s cell phone and car keys and have her remove her clothes and do jumping jacks in the nude. The manager said that she needed to get back to the busy restaurant so the caller suggested that she tap her middle-aged fianc!e, Walter Nix, to watch the employee. Nix followed further phone instructions from the alleged police officer and ultimately, sexually abused the young woman employee. The entire event was recorded on the restaurant’s surveil- lance camera, and much of it was broadcast in the ABC special report. Nix was sen- tenced to several years in prison for sexual assault. The caller was caught when police discovered that he had used a telephone card bought at a Wal-Mart in Florida. They identified the man using Wal-Mart’s surveillance cameras (he was a corrections officer and the married father of five!) and he was arrested—but surprisingly, not convicted. Donna Summers was fired and received probation. The victim also brought a civil suit against McDonald’s which she won in late 2008 (the case is under appeal). We share this story with you because it provides a too real (some might say surreal) example of obedience to authority at two levels. First, the young woman employee obeyed her boss’s instruction to hand over her keys, cell phone, and clothes. It didn’t occur to her to resist these extraordinary requests, because they were coming from an adult authority figure. Even more outrageous is the willingness of Summers and Nix to harm another person simply because someone posing as a police officer told them to do so. In the broadcast interview, Summers convincingly claimed that she believed he was a police officer and that she was doing the right thing.

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Obedience to Authority at Work

The obedient behavior seen in the Milgram experiments and their modern counterparts is similar to behavior observed again and again in work organizations. The notion of legitimate authority is an accepted tenet of organizational life. In 1968, American mili- tary men massacred hundreds of innocent civilians at My Lai, Vietnam. They didn’t ask questions. They did what they were told to do despite the military’s efforts in training soldiers to believe that it is their duty to disobey unjust authority.

More recently, Lyndie England, who was found guilty of prisoner abuse at Abu Ghraib prison in Iraq, claimed that she and others were following orders of authori- ties above her. In addition, such behavior is not limited to organizations we think of as authoritarian such as the military. Individuals who testified to the U.S. Congress about price-fixing practices in the electrical industry were asked why they didn’t report these practices to higher authorities. They responded that they felt they couldn’t because they reported to a prescribed superior only.40 Roger Boisjoly, who questioned the safety of the O-rings and attempted to convince managers to cancel the launch of the space shuttle Challenger, never went outside the chain of command at his company to protest.41 So, as current or future work organization members, we encourage you to stop and think hard when an authority figure asks you to do some- thing that could harm another person or seems wrong in some other way. Think for yourself—and as difficult as it might seem at the time, say no.

Practical Advice for Managers: Obedience to Authority

Managers must also realize the power they hold as authority figures in work organi- zations. Old concepts die hard. And even today in team-oriented organizations, most people will do as they’re told. Authority figures therefore must exhibit ethical behav- ior, and they must send powerful signals that high ethical standards are expected of everyone and that employees are expected to question authority figures if they believe they are being asked to do something that is wrong. This message should begin at the to

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