Risk & Compliance

Ethics: Good for Goodness’ Sake

What we mean when we talk about ethics.
Jeffrey L. SeglinOctober 1, 2002

Three years ago, when CFO magazine surveyed 500 chief executive officers about what they thought was most important in a chief financial officer, 84 percent of them ranked personal integrity just behind financial expertise. Evidently, CEOs were hungry to hand over the financial reins to a few honest men and women.

The media and Washington have spun the recent high-profile financial misdeeds of a handful of large corporations as an indictment of the ethical behavior of all Corporate America. Part of the fix, if you believe the country’s top policymakers, is…a call for more ethics in business. But isn’t that what CEOs said they were looking for all along?

The trouble with demanding ethical behavior is that unless those doing the demanding heed their own words, the call rings hollow. In fact, it’s likely to do more damage than good if you’re going to proclaim such behavior but practice otherwise.

In its 2000 Organizational Integrity Survey, KPMG found that the ethical behavior of top executives affects employees’ perception of their companies. Overall, 69 percent of the 2,390 employees of the companies surveyed believed that their current customers would recommend their company to others. But when employees believed management would uphold the company’s stated ethical standards, that number shot up to 80 percent. It fell to 40 percent among employees who believed that management would not adhere to written standards.

When it came to recruiting word-of-mouth, the differences were staggering. Overall, 66 percent of employees would recommend their company to prospective employees. Among those who believed management would walk the ethical line it talked, the number of recommenders jumped to 81 percent. But among those who believed their boss’s behavior clashed with stated policies, the number was just 21 percent.

The Business of Ethics

During the 1990s, the ethics business boomed, and not simply because companies were hoping for a little good PR. In 1991, new federal sentencing guidelines stipulated that when a corporation was accused of violating federal laws, its management’s efforts to prevent misconduct would be taken into account in assessing culpability. Minimizing fines and jail time also provided a huge incentive to create ethics policies.

Companies fell into line. Consultants were brought in, manuals were drawn up, and few companies would be caught dead without a well-crafted code of ethics or values statement. RICE — respect, integrity, communications, and excellence — became the most common acronym for values statements. To read one company’s statement after another, you might think the same person wrote every code.

The catch is, in order to work, these values statements must reflect the reality within a company. A few years ago, Jim Collins, the co-author of Built to Last and Good to Great, two management bestsellers that found adherence to core values to be the sign of great, enduring companies, said: “I’m not a big fan of the ‘right statement’ model of the world. I’m more a fan of the ‘get clear, skip the statement’ part.”

Greed Is Not Good

Getting clear is not all that easy. Although the word “ethics” gets tossed around freely, those doing the tossing often aren’t entirely clear what they mean by it.

Basically, ethical standards are built on a set of morals that define good and bad behavior. Almost everyone can agree that some actions — murder, for instance — are wrong. Others behaviors — bluffing during negotiations, explicitly disclosing during a job interview how excruciating a debilitating disease will be — are open to debate. But generally speaking, behaving ethically means avoiding lying, cheating, and stealing, as well as cruelty, deception, and subterfuge.

It’s not enough to fall back on “if everyone is doing it, it’s OK.” And just because an action is legal does not automatically make it ethical. What makes ethical decision-making difficult is that it requires thinking through the impact of a decision on all the constituencies affected, regardless of whether the law permits it and despite the negative or positive personal consequences.

In business, unethical behavior is most often inspired by greed cloaked in the mantle of “increasing value for shareholders.” At Sunbeam Corp., a massive layoff enabled the executives to capitalize on a short-term uptick in stock price while depleting the company of long-term value and disrupting thousands of lives. Clearly, that was ethically wrong.

During the recent boom, things got murkier. Companies laid off thousands in the wake of mergers, but with unemployment so low, most quickly found other jobs. The “New Economy thinking,” which deeply influenced the cultural standards in the business community, placed high value on achieving goals rapidly. Deals were negotiated over a weekend, employees hopped from one job to another, executives looked to cash out as quickly as possible. Consultants, academics, analysts, and journalists espoused reckless behavior and short-term thinking in the belief that the good times would continue to roll.

In the end, many dot-com business plans were revealed as foolhardy. Demand for telecom services turned out not to be infinite. Many mergers and acquisitions turned out not to have added value, but instead enriched insiders disproportionately. Whether or not most executives were knowingly enriching themselves at the expense of the long-term health of their companies, many employees shared the short-term mindset.

Sixty percent of the employees at Enron, for example, held stock options in the company. As they waited for their shares to vest, they were clearly motivated to pump up the stock price fast. In the elevators at Enron, employees could watch the financial news stations and see how their stock was doing. Keeping the stock rising was clearly Enron’s core value, regardless of what its values statement said.

Misplaced Loyalty

Loyalty, a noble value in many cases, can also cloud an employee’s clarity about doing the right thing. Rather than confront a colleague on unethical or even illegal behavior, many employees, out of loyalty to the company, will remain silent out of fear that disclosure could make the joint come tumbling down.

If companies truly valued integrity, employees would be empowered to shine a light on wrongdoing. Of course, when the top executives are doing wrong, it takes particular strength to call them on it. In practice, many companies make life difficult for whistle-blowers, and some actively stifle dissent.

Good Ethics May Equal Good Business

Some ethics consultants will argue that good ethics equals good business. Often this is true, because some of the principles of good management — treating employees fairly, rewarding positive performance, being honest with customers and investors — mirror sound ethical behavior. Indeed, studies have shown that companies practicing more than just a desire to boost stock prices have outperformed companies more exclusively focused on the bottom line.

In the early 1990s, John Kotter and James Heskett, two Harvard Business School professors, studied the performance of 207 large companies (including Hewlett-Packard, ICI, Nissan, and First Chicago) over an 11-year period. “Corporate culture can have a significant impact on a firm’s long-term economic performance,” they wrote in Corporate Culture and Performance. They found that the companies that paid attention to all constituencies — customers, employees, and stockholders — and took their needs into account when making management decisions, simultaneously putting an emphasis on leadership from managers at all levels in the company, “outperformed by a huge margin firms that did not have those cultural traits.”

During the period studied, companies whose focus extended beyond the bottom line “increased revenues by an average of 682 percent versus 166 percent for the latter; expanded their workforces by 282 percent versus 36 percent; grew their stock prices by 901 percent versus 74 percent; and improved their net incomes by 756 percent versus 1 percent.”

While it’s nice to think that making ethical choices always results in a better bottom line, that’s not necessarily the case. Sometimes a leader must make an ethical decision even when he or she knows it might result in a short-term financial hit to the company’s bottom line.

Ed Shultz, the former chief executive of Smith & Wesson, the gun maker based in Springfield, Massachusetts, made such a choice. In March 2000, as he faced lawsuits from 29 different municipalities accusing handgun manufacturers of being responsible for violent crimes, Shultz decided to make some changes. He agreed to start including locks on Smith & Wesson’s handguns and to continue research into smart gun technology that ensures only a gun’s owner can operate his or her gun.

The company’s customers and retailers were furious. Sales dropped dramatically. By September 2000 Shultz had left the company, and by October Smith & Wesson had laid off 125 of its 725 Springfield employees. Shultz might have known his decision would prove unpopular, but he said that he had made it because when he asked himself, “Would I put locks on our guns if it might save one child?” the answer was yes.

What’s Needed Now

To stem the tide of bad corporate behavior, Washington is calling for a wide variety of reforms. But it’s all meaningless unless companies begin to reward ethical behavior as clearly as they reward bottom-line performance.

Sadly, at best, companies usually offer a negative reward against unethical behavior rather than a positive reward for ethical behavior. They have yet to find their way to rewarding integrity in the same way as they reward, say, achievement of a monthly sales quota. Until management does the hard work of deciding that it really values integrity as much as it values financial performance, and then finds a way to hold employees equally accountable for both, the public has a right to be cynical about talk of a renewed commitment to corporate responsibility.

Jeffrey L. Seglin teaches at Emerson College in Boston and is the author of The Good, the Bad, and Your Business: Choosing Right When Ethical Dilemmas Pull You Apart (Wiley, 2000). He also writes a monthly business ethics column for the Sunday New York Times.