Business EthicsBusiness Ethics

The Managerial Approach to The Managerial Approach to Business EthicsBusiness Ethics

RoadmapRoadmap

1.1. What is the role of managers in What is the role of managers in corporate ethics? Leadership and corporate ethics? Leadership and example.example.

2.2. Corporate culture: raising the ethical Corporate culture: raising the ethical performance of a corporation by an inch.performance of a corporation by an inch.

3.3. Control systems: steering corporations Control systems: steering corporations away from ethical failure.away from ethical failure.

4.4. Stakeholders: Merck and Enron as Stakeholders: Merck and Enron as examples.examples.

The pointThe point

‘‘Rather than ask “What was going on with Rather than ask “What was going on with those people to make them act that way?”, we those people to make them act that way?”, we ask, “What was going on in that organization ask, “What was going on in that organization that made people act that way?”’ that made people act that way?”’ James WatersJames Waters

If we want individuals to be ethical, then we If we want individuals to be ethical, then we must support them. must support them.

Jackall’s five rules of Jackall’s five rules of corporate morality (survival)corporate morality (survival)

(1)(1) Don’t go around your boss; Don’t go around your boss;

(2)(2) even if your boss invites dissent, tell him or her even if your boss invites dissent, tell him or her what he or she wants to hear; what he or she wants to hear;

(3)(3) if the boss wants something dropped, drop it; if the boss wants something dropped, drop it;

(4)(4) anticipate the boss’s wishes - don’t force him anticipate the boss’s wishes - don’t force him or her to act the boss; or her to act the boss;

(5)(5) do not report what the boss does not want do not report what the boss does not want reported, cover it up and remain silent.reported, cover it up and remain silent.

Raising ethical culture by an Raising ethical culture by an inchinch

Say you are a new manager. As the Say you are a new manager. As the managing director walks out the door for managing director walks out the door for her annual holidays, she asks you to her annual holidays, she asks you to deliver a strategy to raise the ethical deliver a strategy to raise the ethical standards of the corporation by an inch by standards of the corporation by an inch by the time she returns.the time she returns.

What would you do?What would you do?

TWO BASIC RULESTWO BASIC RULES

1. Identify (and state) your rules of operation 1. Identify (and state) your rules of operation clearly. Make commitments and values clearly. Make commitments and values explicit.explicit.

2. Avoid organisational hypocrisy. Don’t 2. Avoid organisational hypocrisy. Don’t subvert formal requirements with informal subvert formal requirements with informal laxity (see Stonecipher case below).laxity (see Stonecipher case below).

Leadership at every levelLeadership at every level

The single biggest factor in sustaining The single biggest factor in sustaining ethical conduct is example from superiors.ethical conduct is example from superiors.

The CEO sets the example and all other The CEO sets the example and all other managers should follow.managers should follow.

Institutional supportsInstitutional supports

CodesCodes Leadership & Leadership & mentoringmentoring

Ethics training Ethics training Incentives and Incentives and disincentivesdisincentives

Ethics officersEthics officers HotlinesHotlinesCommitteesCommittees OmbudsmanOmbudsmanNewsletters Newsletters Performance standardsPerformance standards

Use examplesUse examples

Reward good behaviour and never punish it, Reward good behaviour and never punish it, even if brings problems - Sherron Watkins; even if brings problems - Sherron Watkins; Cynthia Cooper. Cynthia Cooper.

Recognise good conduct and use it in staff Recognise good conduct and use it in staff training.training.

Punish poor behaviour and never reward it, even Punish poor behaviour and never reward it, even if it brings results - Enron.if it brings results - Enron.

Use examples of ethical failure in training, but Use examples of ethical failure in training, but balance them with examples of excellence.balance them with examples of excellence.

CODESCODES

State fundamental values & establish a common floor State fundamental values & establish a common floor akin to the rule of lawakin to the rule of law

Can combine general principles & prescriptionsCan combine general principles & prescriptions Must be used frequently to be effectiveMust be used frequently to be effective Should be part of induction and developmentShould be part of induction and development Must cover whole organisationMust cover whole organisation Can be developed at topCan be developed at top

Harry StonecipherHarry Stonecipher

Became CEO of Boeing to clean up corruption Became CEO of Boeing to clean up corruption and refurbish the corporation’s ethical image.and refurbish the corporation’s ethical image.

Championed a strong code of ethics, which Championed a strong code of ethics, which among other things, forbade relationships among other things, forbade relationships between subordinates and their managers.between subordinates and their managers.

Had a brief affair with a vice-president who did Had a brief affair with a vice-president who did not report to him.not report to him.

This became known and he had to resign. His This became known and he had to resign. His judgment was questioned, he had embarrassed judgment was questioned, he had embarrassed Boeing by breaching his own code, and there is Boeing by breaching his own code, and there is always the shadow of litigation …always the shadow of litigation …

Auditors/ConsultantsAuditors/Consultants

Auditors are supposed to attest to Auditors are supposed to attest to accounts independently.accounts independently.

The big firms ran lucrative consultancy The big firms ran lucrative consultancy businesses and Andersens was a classic businesses and Andersens was a classic example. It complied with pressures from example. It complied with pressures from Enron, Sunbeam and others to provide Enron, Sunbeam and others to provide good audits.good audits.

Its consultancy prospered until spun off Its consultancy prospered until spun off into Accenture.into Accenture.

Law and regulationLaw and regulation

Lobby for a regulatory environment appropriate Lobby for a regulatory environment appropriate to the times. A good company don’t have to be to the times. A good company don’t have to be ethical alone and lose competitive advantage ethical alone and lose competitive advantage because it is ethical.because it is ethical.

Self-regulate and be firm about it. Codes are Self-regulate and be firm about it. Codes are only one form of this. Policies and procedures only one form of this. Policies and procedures complement ethical directives and exhortations.complement ethical directives and exhortations.

Classic Symptoms Preceding Classic Symptoms Preceding CollapseCollapse

Overstatement of the value of assets, andOverstatement of the value of assets, andunderstatement of liabilities in financial reports.understatement of liabilities in financial reports.

Use of related party transactions to disguise the reality, e.g. to create a false Use of related party transactions to disguise the reality, e.g. to create a false impression about earnings. impression about earnings.

Delays in financial reporting.Delays in financial reporting. Continuing financial losses and cash flow deficienciesContinuing financial losses and cash flow deficiencies Weak management Weak management Inadequate management succession planning Inadequate management succession planning Looming debt payments & concealment of bad debtsLooming debt payments & concealment of bad debts Inadequate capital expenditure programsInadequate capital expenditure programs Lack of adequate information systemsLack of adequate information systems Shareholder disputes Shareholder disputes

In failing corporationsIn failing corporations

1. There is a "kill the messenger" ethos in the organisation - justifies 1. There is a "kill the messenger" ethos in the organisation - justifies distortion and concealment of information.distortion and concealment of information.

2. There is a low degree of confidence in the accuracy of internal reports.2. There is a low degree of confidence in the accuracy of internal reports.3. Despite claims to doing the right thing, in the last analysis, top management 3. Despite claims to doing the right thing, in the last analysis, top management

does the most expedient thing. does the most expedient thing.4. Employees do not know of or refer to written ethics policies .4. Employees do not know of or refer to written ethics policies .5. The operative value of the organisation is: if it's legal it's ethical. 5. The operative value of the organisation is: if it's legal it's ethical. 6. Top management's stated concern for ethics is for public relations.6. Top management's stated concern for ethics is for public relations.7. Managers while basically truthful are willing to deceive in order to 7. Managers while basically truthful are willing to deceive in order to

accomplish organizational or personal goals. accomplish organizational or personal goals. 8. Managers do not believe there is an obligation to be candid where could 8. Managers do not believe there is an obligation to be candid where could

harm personal or organizational goals.harm personal or organizational goals.9. People who ignore ethics but produce bottom line results get promoted.9. People who ignore ethics but produce bottom line results get promoted.

Criteria for legitimate Criteria for legitimate whistleblowingwhistleblowing

You have good evidence of an immediate and You have good evidence of an immediate and serious issue of public concern in your serious issue of public concern in your organisation.organisation.

You have tried reporting the matter to the proper You have tried reporting the matter to the proper authorities without success.authorities without success.

Your intervention is likely to make a difference.Your intervention is likely to make a difference. You believe the damage resulting from your You believe the damage resulting from your

action will be proportionate to the resolution of action will be proportionate to the resolution of the issue.the issue.

Whistleblowing: a last resortWhistleblowing: a last resort

Public exposure of a danger to public interestPublic exposure of a danger to public interest Permitted when a serious issue is not addressed Permitted when a serious issue is not addressed

within an organisationwithin an organisation Not internalNot internal Involves a betrayal of kindsInvolves a betrayal of kinds Is a costly remedyIs a costly remedy Motives of whistleblower not centralMotives of whistleblower not central Difficult to legislate protection forDifficult to legislate protection for

Sherron Watkins to Ken LaySherron Watkins to Ken Lay

Dear Mr. Lay,Dear Mr. Lay,

Has Enron become a risky place to work? For those of us who didn't get Has Enron become a risky place to work? For those of us who didn't get rich over the last few years, can we afford to stay? rich over the last few years, can we afford to stay?

… … I am incredibly nervous that we will implode in a wave of accounting I am incredibly nervous that we will implode in a wave of accounting scandals. My eight years of Enron work history will be worth nothing on scandals. My eight years of Enron work history will be worth nothing on my resume, the business world will consider the past successes as nothing my resume, the business world will consider the past successes as nothing but an elaborate accounting hoax. Skilling is resigning now for "personal but an elaborate accounting hoax. Skilling is resigning now for "personal reasons" but I would think he wasn't having fun, looked down the road and reasons" but I would think he wasn't having fun, looked down the road and knew this stuff was unfixable and would rather abandon ship now than knew this stuff was unfixable and would rather abandon ship now than resign in shame in two years. … I firmly believe that the probability of resign in shame in two years. … I firmly believe that the probability of discovery significantly increased with Skilling's shocking departure. Too discovery significantly increased with Skilling's shocking departure. Too many people are looking for a smoking gun.many people are looking for a smoking gun.

Sherron Watkins Sherron Watkins Enron heroineEnron heroine

Do you think that post-Enron America is a more Do you think that post-Enron America is a more ethical place? ethical place? ““Not really. We are building more Enrons, but we Not really. We are building more Enrons, but we don't want to admit it. I fall into Warren Buffett's don't want to admit it. I fall into Warren Buffett's camp when he says that C.E.O. pay is the acid test. camp when he says that C.E.O. pay is the acid test. When C.E.O. pay has been reduced, then I'll believe When C.E.O. pay has been reduced, then I'll believe that our business leaders have adopted a spirit of that our business leaders have adopted a spirit of corporate reform.”corporate reform.”

A legal remedy: A legal remedy: the Sarbanes - Oxley Actthe Sarbanes - Oxley Act

Sarbanes-OxleySarbanes-Oxley (2002) passed in wake of Enron and (2002) passed in wake of Enron and other collapses to strengthen corporate governance other collapses to strengthen corporate governance and restore investor confidence and public trust in and restore investor confidence and public trust in accounting and reporting practices.accounting and reporting practices.

Establishes enhanced governance and management Establishes enhanced governance and management standards for all US publicly listed companies and standards for all US publicly listed companies and public accounting firms.public accounting firms.

Establishes the Public Company Accounting Establishes the Public Company Accounting Oversight Board under the SEC to oversee public Oversight Board under the SEC to oversee public accounting firms and issue accounting standards.accounting firms and issue accounting standards.

The effect …?The effect …?

Accounting firms and lawyers are booming on Accounting firms and lawyers are booming on the back of Sarbanes-Oxley.the back of Sarbanes-Oxley.

In May 2004, In May 2004, RateFinancials found that most RateFinancials found that most financial statements did not reflect public financial statements did not reflect public companies' true financial states.companies' true financial states.

In November it found that related party In November it found that related party transactions were still common.transactions were still common.

Misconduct encouraged byMisconduct encouraged by

A lack of a system of laws that clearly state A lack of a system of laws that clearly state obligations and prohibitionsobligations and prohibitions

A diminished sense of personal responsibilityA diminished sense of personal responsibility A lack of enforcable laws and regulationsA lack of enforcable laws and regulations A a small risk of being detectedA a small risk of being detected A insufficient penaltiesA insufficient penalties A a climate of sharp practiceA a climate of sharp practice A a lack of ethical recognitionA a lack of ethical recognition

But law and enforcementBut law and enforcement

Will not replace ethics and a personal Will not replace ethics and a personal sense of responsibilitysense of responsibility

Will not prevent corruption by themselvesWill not prevent corruption by themselves Still rely upon a level of trust: fear will Still rely upon a level of trust: fear will

make people risk averse and stifle make people risk averse and stifle business.business.

Are expensive means of securing Are expensive means of securing compliancecompliance

Al DunlapAl Dunlap

''He is the logical extreme of an executive who has no ''He is the logical extreme of an executive who has no values, no honor, no loyalty, and no ethics. And yet he values, no honor, no loyalty, and no ethics. And yet he was held up as a corporate god in our culture.”was held up as a corporate god in our culture.”

At Scott Paper he fired 35% of the workforce and sold the At Scott Paper he fired 35% of the workforce and sold the company to Kimberly-Clark.company to Kimberly-Clark.

Recruited to Sunbeam in July 1996, drove the stock price Recruited to Sunbeam in July 1996, drove the stock price up steeply by sacking half the corporation’s 12,000 up steeply by sacking half the corporation’s 12,000 workforce, closing 12 of its 18 factories, and inflating workforce, closing 12 of its 18 factories, and inflating inventories.inventories.

The stock price collapsed and he was sacked in June The stock price collapsed and he was sacked in June 1998. A cruel and uncaring man he was over rated as a 1998. A cruel and uncaring man he was over rated as a manager by the markets and media.manager by the markets and media.

An Example of Excellence:An Example of Excellence: Merck and Merck and MectizanMectizan

In 1979, Merck scientist William Campbell, suggested In 1979, Merck scientist William Campbell, suggested that the company’s veterinary product, Ivermectin, that the company’s veterinary product, Ivermectin, should be appraised to combat ‘river blindness’ in should be appraised to combat ‘river blindness’ in humans. humans.

River blindness is a disease of the poor of tropical Africa River blindness is a disease of the poor of tropical Africa and South America caused by a parasitic worm, which and South America caused by a parasitic worm, which burrows beneath the skin and breeds there. These burrows beneath the skin and breeds there. These subcutaneous parasites colonise the skin to such an subcutaneous parasites colonise the skin to such an extent that people are driven to suicide by the itching extent that people are driven to suicide by the itching they cause.they cause.

Justifiable goodness?Justifiable goodness?

If If Campbell was correct, then Merck would be able to cure Campbell was correct, then Merck would be able to cure river blindness cheaply and safely.river blindness cheaply and safely.

But development - trials etc. - would cost $M100 and as the But development - trials etc. - would cost $M100 and as the afflicted were poor, there would be no profit in developing it.afflicted were poor, there would be no profit in developing it.

The point in Merck’s case is that it held the patent for a The point in Merck’s case is that it held the patent for a potential life saver: could it lock it up? Would it not protect its potential life saver: could it lock it up? Would it not protect its patent by developing a human version?patent by developing a human version?

An example of direct corporate humanitarian investmentAn example of direct corporate humanitarian investment

Merck’s decisionMerck’s decision

Merck did develop the drug, Mectizan, and Merck did develop the drug, Mectizan, and tried to interest the US and UN agencies in tried to interest the US and UN agencies in supporting its distribution. Eventually, after supporting its distribution. Eventually, after 10 years of development, they not only 10 years of development, they not only gave the drug away, but paid for its gave the drug away, but paid for its distribution.distribution.

Was this decision justifiable?Was this decision justifiable?

The case of EnronThe case of Enron

Kenneth Lay, former chairman and CEO of Kenneth Lay, former chairman and CEO of Enron, claims that he and the board were Enron, claims that he and the board were misled by CFO, Andrew Fastow (who has misled by CFO, Andrew Fastow (who has pleaded guilty to fraud and is to be sent to pleaded guilty to fraud and is to be sent to jail).jail).

A clutch of Enron officers have pleaded A clutch of Enron officers have pleaded guilty to crimes, so what does that say guilty to crimes, so what does that say about the CEO and board’s governance?about the CEO and board’s governance?

Not just rotten applesNot just rotten apples

Enron’s culture, which included strategies such Enron’s culture, which included strategies such as the ‘war for talent’, licenced officers to act on as the ‘war for talent’, licenced officers to act on their own initiative but to act without regard for their own initiative but to act without regard for probity. This made it possible for Enron to probity. This made it possible for Enron to manipulate the Californian energy market.manipulate the Californian energy market.

It adopted a veritable thicket of questionable It adopted a veritable thicket of questionable accounting practices, such as booking its energy accounting practices, such as booking its energy trades at full value rather than at the value of its trades at full value rather than at the value of its margin, thus inflating profits.margin, thus inflating profits.

The culture at EnronThe culture at Enron

It was clear that Enron routinely engaged in It was clear that Enron routinely engaged in sharp practice, that it sought to disguise this sharp practice, that it sought to disguise this from investors and the financial world by a from investors and the financial world by a complex and an all but unintelligible structure of complex and an all but unintelligible structure of accounts and partnerships.accounts and partnerships.

It is clear that Enron encouraged maverick It is clear that Enron encouraged maverick behaviour by sacking the lowest performing 10% behaviour by sacking the lowest performing 10% of staff and promoting the best 10%. Results of staff and promoting the best 10%. Results were all that counted.were all that counted.

Conversing with Enron Conversing with Enron traderstraders

Kevin: So the rumour’s true? They’re fuckin’ takin’ all the money back Kevin: So the rumour’s true? They’re fuckin’ takin’ all the money back from you guys? All those money you guys stole from those poor from you guys? All those money you guys stole from those poor grandmothers in California?grandmothers in California?

Bob: Yeah, grandma Millie, man. But she’s the one who couldn’t Bob: Yeah, grandma Millie, man. But she’s the one who couldn’t figure out how to fuckin’ vote on the butterfly ballot.figure out how to fuckin’ vote on the butterfly ballot.

Kevin: Yeah, now she wants her fuckin’ money back for all the power Kevin: Yeah, now she wants her fuckin’ money back for all the power you’ve charged right up - jammed right up her ass for fuckin’ $ 250 a you’ve charged right up - jammed right up her ass for fuckin’ $ 250 a megawatt hour. Laughtermegawatt hour. Laughter

These guys were beating up These guys were beating up grandmothers, not regulators, legislators grandmothers, not regulators, legislators or legal draftsmen.or legal draftsmen.

Corporate ethics Corporate ethics

Should not have to rely on individuals to Should not have to rely on individuals to do the jobs of regulators.do the jobs of regulators.

Should support individuals in their ordinary Should support individuals in their ordinary ethical commitments.ethical commitments.

Should be exemplified in formal and Should be exemplified in formal and informal practices in the organisation.informal practices in the organisation.

Should be led from the top and throughout Should be led from the top and throughout management structure.management structure.

Can always be improved by an inch.Can always be improved by an inch.