Ethical issues in management - Principles of Management

The term ethics refersto accepted principles of right or wrong that govern the conduct of aperson,the members of a profession, or the actions of an organization. Business ethics arethe accepted principles of right or wronggoverning the conduct of businesspeople. Ethicaldecisions are those that are inaccordance with those accepted principles of right and wrong,whereas anunethical decision is one that violates accepted principles. This is not asstraightforwardas it sounds. Managers may face ethical dilemmas ,which are situations wherethere is no agreementover exactly what the accepted principles of right and wrong are, orwhere noneof the available alternatives seems ethically acceptable.

In our society many accepted principles of right andwrong are not only universally recognizedbut also codified into law. In thebusiness arena there are laws governing product liability(tort laws), contractsand breaches of contract (contract law), the protection of intellectualpropertyintellectual property law), competitive behavior (antitrust law), andthe selling of securitiesecurities law). Not only is it unethical to breakthese laws—but it is illegal. However,many actions, although legal, do not seemto be ethical. As we saw in the introduction, Nike’suse of “sweatshop labor” indeveloping nations was not illegal, but many considered it unethical.Behavingethically, in other words, goes beyond staying within the bounds of the law.

ETHICAL ISSUES IN MANAGEMENT

The ethical issues managers confront cover a widerange of topics; but most arise due to apotential conflict between the goals ofthe organization, or those of individual managers, andthe fundamental rights ofimportant stakeholders. Stakeholders have basic rights that shouldbe respected,and it is unethical to violate those rights. Shareholders have the right totimelyand accurate information about their investments (in accountingstatements). Customers havethe right to be fully informed about the productsand services they purchase, including howthose products might harm them orothers, and it is unethical to restrict their access to suchinformation.

Employees have the right to safe working conditions, to fair compensationforthe work they perform, and to be treated in a just manner by managers.Suppliers and distributorshave the right to expect contracts to be respected,and a firm should not take advantage ofa power disparity to opportunisticallyrewrite contracts. Competitors have the right to expectthat a firm will abideby the rules of competition and not violate the basic principles ofantitrustlaws. Communities and the general public, including their politicalrepresentatives ingovernment, have the right to expect that a firm will notviolate the basic expectations societyplaces on enterprises—for example, bydumping toxic pollutants into the environment orovercharging for work performedon government contracts.

Those who take the stakeholder view of businessethics often assert that it is in the enlightenedself-interest of managers tobehave in an ethical manner that recognizes and respects thefundamental rightsof stakeholders, because doing so will ensure the support of stakeholders,whichultimately benefits the firm and its managers.Othersgo beyond this instrumentalapproach to ethics to argue that in many casesacting ethically is simply the right thing to do.They argue that businessesneed to recognize their moral responsibility to give somethingback to thesociety that made their success possible.

Unethical behavior tends to arise when managers decide to put the attainment of their own personal goals, or the goals of the organization, above the fundamental rights of one or more stakeholder groups.The most common examples of such behavior involve self-dealing, information manipulation, anti competitive behavior, opportunistic exploitation of suppliers and distributors, the maintenance of sub standard working conditions, environmental degradation,and corruption.

Self-Dealing Self-dealingoccurs when managers find away to feather their own nests withcorporate funds. Classicexamples of this behavior include

  1. senior managerswho treatcorporate funds as their own personal treasury, raiding them tosupporta lavish lifestyle;
  2. senior managers who use theircontrol over thecompensation committee of the board of directorsto award themselvesmulti-million-dollar pay increases orstock option grants that are out ofproportion with their contributionto the corporation; and
  3. instances whereindividualmanagers award business contracts not to the most efficientsupplierbut to the one that provides the largest kickback. Inthese cases managers arenot acting in the best interests of theirshareholders and are instead consumingfunds that should legitimatelygo to shareholders. Some of this behavior isillegal;some is technically legal but unethical because it violates thebasicright of shareholders to a fair return on their investment.

For an example of self-dealing, consider the former CEO of TycoInternational, Dennis Kozlowski. Kozlowski treated Tyco as his personaltreasury, drawing on company funds to purchase a $30 million Manhattanapartment and a worldclassart collection. Kozlowski even used company funds to helppay for a lavish $2.2 million birthday party for his wife in Italy! Kozlowskiultimately was charged with securities fraud, found guilty of looting Tyco of$97 million, and was sentenced to jail term of 81–3 to 25 years.

Information Manipulation Informationmanipulation occurs when managers usetheir control over corporate data to distort or hide information to enhancetheir own financial situations or the competitive position of the firm. Many ofthe accounting scandals that swept through American companies in the early2000s involved cases of information manipulation. For example, the now-bankruptenergy trading firm Enron hid significant debt from shareholders in off–balancesheet partnerships.

This practice misled investors about the level of riskEnron had assumed and supported a much higher stock price than was justified. Not surprisingly, this higher stock price enabled managers to exercise stockoption grants for considerable personal gain (a case of information manipulation to support self-dealing). When the scale of hidden debts was finally revealed, Enron quickly collapsed into bankruptcy, resulting in losses of over $100 billion for shareholders. Information manipulation is unethical because it violates the right of investors to accurate and timely information.

Information manipulation can also take place with non financial data. This occurred when managers at tobacco companies suppressed internalresearch that linked smoking to health problems, violating the right ofconsumers to accurate information about the dangers of smoking.When evidence ofthis came to light, lawyers brought class action suits against the tobacco companies,claiming they had intentionally caused harm to smokers. In 1999 the tobaccocompanies settled a lawsuit brought by several states, which sought to recoverhealth care costs associated with tobacco-related illnesses; the total payoutto the states was $260 billion!

Anticompetitive Behavior Anticompetitivebehavior includes a range of actions aimed atharming actual or potential competitors, most often by using monopoly power toenhance the prospects of the firm. For example, in the 1990s the Justice Departmentclaimed that Microsoft used its monopoly in operating systems to force PCmakers to bundle Microsoft’s Web browser, Internet Explorer, with Windows and to display Internet Explorerprominently on the computer desktop.

Microsoft reportedly told PC makers thatit would not supply them with Windows unless they did this. Because the PCmakers had to have Windows to sell their machines, this wasa powerful threat.The alleged aim of the action, which is an example of tie-in sales (illegal under antitrust laws), was to drive a competing browsermaker, Netscape, out of business.The courtsruled that Microsoft was indeedabusing its monopoly power in this case, and in a 2001 consent decree thecompany agreed to stop the practice.

Putting the legal issues aside, action such as that allegedlyundertaken by managers at Microsoft is unethical in at least three ways. First,it violates the rights of end consumers by unfairly limiting their choice;second, it violates the rights of downstream participants in the industry valuechain, in this case PC makers, by forcing them to incorporate a particularproduct in their design; and third, it violates the rights of competitors tofree and fair competition.

Opportunistic Exploitation Opportunisticexploitation of other players in the value chain in which the firm is embeddedis another example of unethical behavior.

Opportunisticexploitation of this kind typically occurs when themanagers of a firm seek to unilaterally rewrite the terms of a contract withsuppliers, distributors, or complement providers in a way that is morefavorable to the firm, often using the firm’s power to force the revisionthrough. For example, in the late 1990s Boeing entered a $2 billion contractwith Titanium Metals Corp. to buy certain amounts of titanium annually for 10years. In 2000, after Titanium Metals Corp.

had already spent $100 million toexpand its production capacity to fulfill the contract, Boeing demanded thatthe contract be renegotiated, asking for lower prices and an end to minimumpurchase agreements. As a major purchaser of titanium, managers at Boeingprobably thought they had the power to push this contract revision through, andthe investment by Titanium Metals meant that firm would be unlikely to walkaway from the deal.

Titanium Metals Corp. promptly sued Boeing for breach ofcontract. The dispute was settled out of court, and under a revised agreementBoeing agreed to pay monetary damages to Titanium Metals (reported to be in the$60 million range) and entered an amended contract to purchase titanium.Irrespectiveof the legality of this action, it seems unethical because it violated the rightsof a supplier to be dealt with in a f air and open w ay.

Substandard Working Conditions Substandardworking conditions arise when managerstolerate unsafe working conditions or pay employees below-market rates toreduce costs of production. The most extreme examples of such behavior occurwhen a firm establishes operations in countries that lack the workplaceregulations found in developed nations such as the United States. The exampleof Nike, given earlier, falls into this category.

In another recent example,the Ohio Art company ran into an ethical storm when newspaper reports allegedthat it had moved production of its popular Etch a Sketch toy from Ohio to asupplier in Shenzhen province, where employees, mostly teenagers, worked longhours for 24 cents per hour, below the legal minimum wage of 33 cents an hourthere. Moreover, production reportedly started at 7:30 a.m. and continued until10 p.m., with breaks only for lunch and dinner.

Saturdays and Sundays weretreated as normal workdays. This translated into a workweek of seven 12-hourdays, or 84 hours a week, well above the standard 40-hour week set byauthorities in Shenzhen. Such working conditions clearly violated the rights ofemployees in China as specified by local regulations (which were poorlyenforced). Is it ethical for the Ohio Art company to use such a supplier? Manywould say not.

Environmental Degradation Environmentaldegradation occurs when managers take actions thatdirectly or indirectly result in pollution or other forms of environmentalharm. Environmental degradation can violate the rights of local communities andthe general public to clean air and water; land that is free from pollution bytoxic chemicals or excessive deforestation that causes land erosion and floods;and so on.

The issue of pollution takes on added importance because someparts of the environment are a public good that no one owns but anyone candespoil. No one owns the atmosphere or the oceans, but polluting them, nomatter where the pollution originates, harms all.

Theatmosphere and oceans can be viewed as a global commons from which everyonebenefits but for which no one is specifically responsible. In such cases aphenomenon known as the tragedyofthe commons becomes applicable. The tragedy of thecommons occurs when a resource held in common by all, but owned by no one, isoverused by individuals, resulting in its degradation.

The phenomenon was firstnamed by Garrett Hardin in describing a particular problem in 16th-centuryEngland. Large open areas called commons were free for all to use as pasture.The poor put out livestock on these commons to supplement their meager incomes.It was advantageous for each family to put out more and more livestock, but theconsequence was far more livestock than the commons could handle. The result wasovergrazing and degradation of the commons to the point where they could nolonger support livestock.

In the modern world corporations contribute to the global tragedyof the commons by moving production to locations in developing nations whereenvironmental regulations are lacking or less strict than they are at home.There the firms are freer to pump pollutants into the atmosphere or dump themin oceans or rivers, thereby harming these valuable global commons. Althoughsuch action may be legal, is it ethical? Again, if seems to violate basicsocietal notions of ethics and clearly harms important stakeholder groups,including the general public and local communities.

Corruption Corruption canarise in a business context when managers pay bribes to gain access tolucrative business contracts. A recent example of corruption concerns theallegation that the Texas-based energy company Halliburton participated in aconsortium that made $180 million in illegal payments to government officials(that is, bribes) to secure a $4.9 billion contract to build a liquefiednatural gas plant in Nigeria.

Corruption

Corruption is clearly unethical: It violates several rights,including the right of competitors to a level playing field when bidding forcontracts and, when government officials are involved, the right of citizens toexpect that government officials will act in the best interest of the local communityor nation, and not in response to corrupt payments that feather their ownnests.

Corruption is widespread in much of the world. According toTransparency International, an independent nonprofit organization dedicated toexposing and fighting corruption, businesses and individuals worldwide spendsome $400 billion a year on bribes related to government procurement contractsalone!Transparency International has also measured the level ofcorruption among public officials in different countries.

As can be seen inthe organization rated countries suchas Finland and New Zealand as very clean, whereas countriessuch as Russia,India, Indonesia, and Zimbabwe were seen as corrupt. Bangladesh rankedlast outof all 146 countries in the survey; Finland ranked first.

THE ROOTS OF UNETHICAL BEHAVIOR

Why do some managers behave unethically? Whatmotivates them to engage in actions that violate accepted principles of rightand wrong, trample on the rights of stakeholder groups, or simply break thelaw? There is no simple answer to this question, but a few generalizations canbe made . First, business ethics are not divorced frompersonal ethics. As individuals we are taught that it is wrong and unethical tolie and cheat and that it is right to behave with integrity and honor and tostand up for what we believe to be right and true. The personal ethical codethat guides our behavior comes from a number of sources, including our parents,schools, religion, and the media.

Our personal ethical code exerts a profoundinfluence on how we behave as businesspeople. An individual with a strong senseof personalethics is less likely to behave in an unethical manner in a businesssetting—and in particular is less likely to engage in self-dealing and morelikely to behave with integrity.

ROOTS OF UNETHICAL BEHAVIOR

Second, many studies of unethical business behaviorhave concluded that businesspeople sometimes do not realize they are behavingunethically, primarily because they simply fail to ask the relevant question:Is this decision or action ethical? Instead they apply astraightforward business calculus to what they perceive as a business decision,forgetting that the decision may also have an important ethical dimension. Thefault here lies in processes that do not incorporate ethical considerationsinto business decision making.

This may have been the case at Nike whenmanagers originally decided to subcontract work to businesses in developing nationsthat had poor working conditions. Those decisions were probably made on thebasis of good economic logic. Subcontractors may have been chosen on the basisof business variables such as cost, delivery, and product quality, and the keymanagers simply failed to ask how the subcontractors treated their workers. Ifthey thought about the question at all, they probably reasoned that it was thesubcontractors’ concern, not theirs.

Unfortunately the climate in some businesses doesnot encourage people to think through the ethical consequences of businessdecisions. This brings us to the third cause of unethical behavior inbusinesses: an organizational culture that deemphasizes business ethics,reducing all decisions to purely economic factors. Author Robert Bryce hasexplained how the organizational culture at now-bankrupt energy company Enronwas built on values that emphasizedgreed anddeception.

According to Bryce, the tonewas set by top managers who engagedin self- dealingto enrich themselves and their own families. Brycetells how formerEnron CEO Kenneth Lay made sure his own family benefited handsomely fromEnron(which is an example of self-dealing). Muchof Enron’s corporate travel businesswas handled bya travel agency partly owned by Lay’s sister. Whenan internalauditor recommended that the companycould do better by using another travelagency, hewas fired.

In 1997 Enron acquired a company ownedby Kenneth Lay’sson, Mark Lay, which was tryingto establish a business trading paper and pulpproducts.At the time Mark Lay and another company hecontrolled were targets ofa federal criminal investigationof bankruptcy fraud and embezzlement. Aspart ofthe deal, Enron hired Mark Lay as an executivewith a three-year contract thatguaranteed him atleast $1 million in pay over that period, plus optionstopurchase about 20,000 shares of Enron.

Brycealso details how Lay’s growndaughter used an Enronjet to transport her king-sized bed to France.WithKenneth Lay as an example, it is perhaps not surprisingthat self-dealingsoon became endemic atEnron. Another notable example was CFO AndrewFastow, whoset up the off–balance sheet partnershipsthat not only hid Enron’s truefinancial conditionfrom investors, but also paid tens of millions ofdollarsdirectly to Fastow (Fastow was subsequentlyindicted by the government forcriminal fraud andwent to jail).

A fourth cause of unethical behavior has alreadybeen hinted at.This is pressure from top managementto meet performance goals that areunrealistic and can be attained only by cutting cornersor acting in an unethicalmanner. Again, Bryce discusses how this may have occurred atEnron. Lay’ssuccessor as CEO, Jeff Skilling, put a performance evaluation system inplacethat weeded out 15 percent of “underperformers” every six months. Thiscreated a pressurecookerculture with a myopic focus on short-term performance.Some executives and energytraders responded to that pressure by falsifyingtheir performance (such as by inflating thevalue of trades) to make it look asif they were performing better than was actually the case.

The lesson from the Enron debacle is that an organizationalculture can appear to legitimizebehavior that society would judge as unethical,particularly when this culture is mixedwith a focus on unrealistic performancegoals, such as maximizing short-term economic performanceno matter what thecosts. In such circumstances there is a high probability thatmanagers mayviolate their own personal ethics and engage in behavior that is unethical.Bythe same token, an organizational culture can do just the opposite andreinforce the need forethical behavior.

At Hewlett-Packard, for example, BillHewlett and David Packard, the company’sfounders, propagated a set of valuesknown as the HP Way. These values, which shapethe way business is conductedboth within and by the corporation, have an important ethicalcomponent. Amongother things, they stress the need for confidence in and respect forpeople,open communication, and concern for the individual employee.

The Enron and Hewlett-Packard examples suggest a fifth rootcause of unethical behavior:leadership. Leaders help to establish the cultureof an organization, and they set an examplethat others follow. Other employeesin a business often take their cue from business leaders;and if those leadersdo not behave in an ethical manner, other employees may see this asjustification for their own unethical behavior.

It is notwhat leaders say that matters, but whatthey do. Enron, for example, had a codeof ethics that Kenneth Lay himself often referred to;but Lay’s own actions toenrich family members spoke louder than any words.

PHILOSOPHICAL APPROACHES TO ETHICS

Soon we will discuss what steps managers can take tomake sure that they and their coworkersact in an ethical manner. Before doingthis, however, let’s take a closer look at the philosophicalunderpinnings ofbusiness ethics. These theories have a practical purpose: They provideguidancethat can help managers navigate their way through difficult ethical issues andmakebetter decisions.

Utilitarian Theutilitarian approach to business ethics was developed in the 18th and19thcenturies. Although it has been superseded by more modern approaches, it isalso part ofthe tradition upon which newer approaches have been constructed.Thus it is important toreview this approach.

The utilitarian approach toethics holds that the moral worth of actions or practices isdetermined by theirconsequences. 23 An action is judged to be desirable if it leads tothe bestpossible balance of good over bad consequences. Utilitarianism iscommitted to the maximizationof good and the minimization of harm.Utilitarianism recognizes that actions havemultiple consequences, some of whichare good in a social sense, and some of which areharmful.

As a philosophy forbusiness ethics, it focuses attention on the need to carefullyweigh all socialbenefits and costs of a business action and to pursue only actions thathavemore benefits than costs. The best decisions, from a utilitarianperspective, are those that producethe greatest good for the greatest number ofpeople.

Many businesses have adopted specific tools, such ascost–benefit analysis and risk assessment,that are rooted in utilitarianphilosophy. Managers often weigh the benefits and costs ofa course of actionbefore deciding whether to pursue it. An oil company considering drillinginAlaska must weigh the economic benefits of increased oil production and thecreation ofjobs against the costs of environmental degradation in a fragileecosystem.

Utilitarian philosophy has some serious drawbacks.One problem is measuring the benefits,costs, and risks of a course of action.In the case of an oil company considering drilling inAlaska, how does one measure the potential harm tothe fragile ecosystem of the region?

The second problem with utilitarianism is that thephilosophy does not consider justice.The action that produces the greatest goodfor the greatest number of people may resultin the unjust treatment of aminority. Such action cannot be ethical because it is unjust. For example,suppose that in the interests of keeping down health insurance costs, the governmentdecides to screen people for the HIV virus and deny insurance coverage to thosewho are HIV positive. By reducing health costs, such action might producesignificant benefits for many people; but the action is unjust because itdiscriminates unfairly against a minority.

Rights Theories Developedin the 20th century, rights theories recognizethat human beings have fundamental rights and privileges. Rights establish aminimum level of morally acceptable behavior. One well-known definition of afundamental right construes it as something that takes precedence over or“trumps” a collective good. Thus we might say that the right to free speech isa fundamental right that takes precedence over all but the most compelling collectivegoals; it overrides, for example, the interest of the state in civil harmony ormoral consensus.

Moral theorists argue that fundamental human rightsform the basis for the moral compass managersshould navigate by when making decisions that have an ethical component. In abusiness setting, stakeholder theory provides a useful way for managers toframe any discussion of rights. As noted earlier, stakeholders have basicrights that should be respected, and it is unethical to violate those rights.

Alongwith rights come obligations. Because we have the right to free speech, we arealso obligated to make sure we respect the free speech of others. Within theframework of a theoryof rights, certain people orinstitutions are obligated to provide benefits or services that securetherights of others. Such obligations also fall upon more than one class of moralagent (amoral agent is any person or institution that is capable of moralaction, such as a governmentor corporation).

For example, in the late 1980s, to escape the high costs of toxicwaste disposal in the West, several firms shipped their waste in bulk toAfrican nations, where it was disposed of at a much lower cost. In 1987 fiveEuropean ships unloaded toxic waste containing dangerous poisons in Nigeria.Workers wearing thongs and shorts unloaded the barrels for $2.50 a day andplaced them in a dirt lot in a residential area. They were not told about thecontents of the barrels.

Who bears the obligation for protecting the rights of workersand residents to safety in a case like this? According to right theorists, theobligation rests not on the shoulders of one moral agent, but on the shouldersof all moral agents whose actions might harm or contribute to the harm of theworkers and residents. Thus it was the obligation not just of the Nigerian government,but also of the multinational firms that shipped the toxic waste, to make surethat it did no harm to residents and workers. In this case both the governmentand the multinationals apparently failed to recognize their basic obligation toprotect the fundamental human rights of others.

Justice Theories Justicetheories focus on attaining a just distribution ofeconomic goods and services. A just distribution is one that isconsidered fair and equitable. One of themost influential justice theories was developed by thephilosopher John Rawls.Rawls asserts that all economic goods and services should be distributedequally except when an unequaldistribution would work to everyone’s advantage. According toRawls, valid principles of justice are those to which all people would agree if they couldfreely and impartially considerthe situation. Impartiality is guaranteed by a conceptual devicethat Rawls calls the veilofignorance.

Under the veil of ignorance, everyone is imagined to be ignorantof all his or her particular characteristics (such as race, sex, intelligence,nationality, family background, and special talents). Rawls then asks what system people woulddesign under such a veil of ignorance. Rawls’s answer is that under these conditions, peoplewould unanimously agree on two fundamental principles of justice. The first principle is that each person should be permitted themaximum amount of basic liberty compatible with similar liberty for others.

Roughly speaking, Rawls takes these to be political liberty (such as the rightto vote), freedom of speech and assembly, liberty of conscience and freedom ofthought, the freedom and right to hold personal property, and freedom fromarbitrary arrest and seizure. The second principle is that once equal basicliberty is ensured, inequality in basic social goods—such as income and wealthdistribution and opportunities—is to be allowed only if it benefits everyone.

Rawlsaccepts that inequalities can be just so long as the system that producesinequalities is to the advantage of everyone. More precisely, he formulateswhat he calls the differenceprinciple, which says that inequalities are justifiedif they benefit the position of the least advantaged person. So the widevariations in income and wealth that we see in the United States can be consideredjust if the market-based system that produces this unequal distribution alsobenefits the least advantaged members of society. One can argue that awell-regulated market-based economy, by promoting economic growth, benefits theleast advantaged members of society. In principle, at least, the inequalitiesinherent in such systems are therefore just.

In the context of business ethics, Rawls’s theory creates an interestingperspective. Managers could ask themselves whether the policies they adoptwould be considered just under Rawls’s veil of ignorance. Is it just, for example,to pay foreign workers less than workers in the firm’s home country? Rawls’stheory might suggest that it is, so long as the inequality benefits the leastadvantaged members of the global society.

Alternatively, it is difficult to imaginethat managers operating under a veil of ignorance would design a system inwhich employees are paid subsistence wages to work long hours in sweatshopconditions and are exposed to toxic materials. Such working conditions areclearly unjust in Rawls’s framework, and therefore it is unethical to adoptthem. Similarly, operating under a veil of ignorance, most people wouldprobably design a system that imparts protection from environmentaldegradation, preserves a free and fair playing field forcompetition, and prohibits self-dealing.

Thus in a real sense Rawls’s veil ofignorance is a conceptual tool that contributes toward amoral compass thatmanagers can use to navigate through difficult ethical dilemmas andmakedecisions that are ethically robust.

BEHAVING ETHICALLY
What is the best way for managers to make sureethical considerations are taken into account when decisions are made? In manycases there is no easy answer to this question: Many of the most vexing ethicalproblems arise because they contain real dilemmas and no obvious right courseof action. Nevertheless, managers can and should do many things to ensure thatbasic ethical principles are adhered to and that ethical issues are routinelyinserted into business decisions.

Here we focus on seven things that a business andits managers can do to make sure that ethical issues are considered in businessdecisions:

  1. Favor hiring and promoting people with awell-grounded sense of personal ethics.
  2. Build an organizational culture that places ahigh value on ethical behavior.
  3. Make sure that leaders within the business notonly articulate the rhetoric of ethical behavior, but also act in a manner thatis consistent with that rhetoric.
  4. Put decision-making processes in place that requirepeople to consider the ethical dimensions of business decisions.
  5. Develop strong go vernance processes.
  6. Appoint ethics of ficers.
  7. Act with moral courage.

Ethical behaviour

Hiring and Promotion It seems obviousthat businesses should strive to hire people who have a strong sense ofpersonal ethics and would not engage in unethical or illegal behavior. Similarly,you would rightly expect a business to not promote people, and perhaps firepeople,whose behavior does not match generally accepted ethical standards. Butwhen you think about it, doing so is difficult. How do you know that someonehas a poor sense of personal ethics? In our society we have an incentive tohide a lack of personal ethics from public view. Once people realize that youare unethical, they will no longer trust you.

Is there anything businesses can do to make sure they do nothire people who subsequently turn out to have poor personal ethics? Businessescan give potential employees psychological tests to try to discern theirethical predisposition, and they can check potential employees’ references. Andpeople who have displayed poor ethics should not be promoted in a company wherethe organization culture places a high value on the need for ethical behavior,and where leaders act accordingly.

Not only should businesses strive to identify and hire people witha strong sense of personal ethics, but it is also in the interests ofprospective employees to find out as much as they can about the ethical climatein an organization. After all, nobody should want to work at a firm like Enron.

Organizational Culture and Leadership To foster ethical behavior, businesses need to build anorganizational culture that places a high value on ethical behavior. Threethings are particularly important in building an organizational culture thatemphasizes ethical behavior. First, businesses must explicitly articulatevalues that place a strong emphasis on ethical behavior. Many companies now dothis by drafting a code of ethics, which is a formal statement of the ethicalpriorities a business adheres to.

Others have incorporated ethical statementsinto documents that articulate the values or mission of the business. Forexample, the food and consumer products giant Unilever has a code of ethicsthat includes the following points: “We will not use any form of forced,compulsory, or child labor” and “No employee may offer, give, or receive anygift or payment that is, or may be construed as being, a bribe. Any demand for,or offer of, a bribe must be rejected immediately and reported to management.”Unilever’sprinciples send a clear message about appropriate ethics to managers and employeeswithin the organization.

Having articulated values in a code of ethics or some otherdocument, it is important that business leaders give life and meaning to thosewords by repeatedly emphasizing their importance and then acting on them. This means using every relevant opportunity to stress the importanceof business ethics and making sure that key business decisions not only make goodeconomic sense but also are ethical. Many companies have gone a step further,hiring independent firms to audit the company and make sure employees arebehaving in a manner consistent with their ethical code. After its experiencein the 1990s, for example, Nike hired independent auditors to make suresubcontractors used by the company live up to Nike’s code of conduct.

Finally, building an organizational culture that places a highvalue on ethical behavior requires incentive and reward systems, includingpromotion systems, that reward people who engage in ethical behavior andsanction those who do not. At General Electric, for example, former CEO JackWelch has described how he reviewed the performance of managers, dividing theminto several different groups. These included overperformers who displayed theright values, who were singled out for advancement and bonuses, andoverperformers who displayedthe wrong values, who were let go. Welch’s pointwas that he was not willing to tolerate leaders within the company who did notact in accordance with the central values of the company, even if they were inall other respects skilled managers.

Decision-Making Processes Inaddition to establishing the right kind of ethical culture in an organization,businesspeople must be able to think through the ethical implications ofdecisions in a systematic way. To do this they need a moral compass, which bothrights theoriesand Rawls’s theory of justice help to provide. Beyond these theories,some ethics experts have proposed a straightforward practical guide—an ethicalalgorithm—to determine whether a decision is ethical.A decisionis acceptable on ethical grounds if a businessperson can answer yes to each ofthese questions:

  1. Does my decision fall within the accepted values or standardsthat typically apply in the organizational environment (as articulated in acode of ethics or some other corporate statement)?
  2. Am I willing to see the decision communicated to all stakeholdersaffected by it—for example, by having it reported in newspapers or ontelevision?
  3. Would the people with whom I have a significant personalrelationship, such as family members, friends, or even managers in otherbusinesses, approve of the decision?

Ethics Officers To ensure that abusiness behaves in an ethical manner, a number of firms now have ethicsofficers. These are individuals who make sure that all employees are trained tobe ethically aware, that ethical considerations enter the businessdecision-making process, and that the company’s code of ethics is adhered to.Ethics officers may also be responsible for auditing decisions to make surethey are consistent with this code. In many businesses an ethics officer actsas an internal ombudsperson—handling confidential inquiries from employees,investigating complaints from employees or others, reporting findings, andmaking recommendations for change.

United Technologies, a large aerospace company with worldwide revenuesof over $28 billion, has had a formal code of ethics since 1990. 30 There arenow some 160 ethics officers within United Technologies who are responsible formaking sure the code is adhered to. United Technologies also established anombudsperson program in 1986 that lets employees inquire anonymously aboutethics issues. The program has received some 56,000 inquiries since 1986, and8,000 cases have been handled by an ombudsperson.

Strong Corporate Governance Strongcorporate governance procedures are needed to ensure that managers adhere to ethicalnorms, and in particular to make sure senior managers do not engage inself-dealing or information manipulation. The key to strong corporate governanceprocedures is an independent board of directors that is willing to hold topmanagers into account for self-dealing and is able to question informationprovided by managers. If companies like Tyco, WorldCom, and Enron had strongboards of directors, is it unlikely that they would have been subsequently rackedby accounting scandals, and top managers would not have been able to view thefunds of these corporations as their own personal treasuries.

There are five foundations of strong governance. The first is aboard of directors that is composed of a majorityof outside directors who haveno management responsibilities in the firm, who are willing and able to holdtop managers accountable, and who do not have business ties with importantinsiders. The outside directors should be individuals of high integrity whosereputation is based on their ability to act independently. The secondfoundation element is a board of directors in which the positions of CEO andchairperson are held by separate individuals, and thechairperson is an outsidedirector.

When the CEO alsochairs the board of directors, he or she can controlthe agenda, thereby furthering a personal agenda (which may includeself-dealing) or limiting criticism of current corporate policies. The thirdfoundation element is a compensationcommittee of theboard of directors that is composed entirely of outside directors.Thecompensation committee sets the level of pay for top managers, includingstock optiongrants and the like.

If the compensation committee is independentof managers, the scopefor self-dealing is reduced. Fourth, the audit committeeof the board, which reviews thefinancial statements of the firm, should also becomposed of outsiders, thereby encouragingvigorous independent questioning ofthe firm’s financial statements. Finally, the boardshould use outside auditorswho are truly independent and do not have a conflict of interest.

This was notthe case in many recent accounting scandals, where the outside auditors werealso consultants to the corporation and therefore were less likely to ask hardquestionsof management for fear that doing so would jeopardize lucrativeconsulting contracts.In the United States the 2002 Sarbanes–Oxley Actsignificantly strengthened corporategovernance by legally requiring thataccounting firms that audit a corporation do not alsoprovide consultingservices to the enterprise, and by requiring that CEOs affirm that afirm’sfinancial accounts represent a true and accurate picture of a corporation.

Moral Courage Itis important to recognize that on occasion managers may need significant moralcourage. This enables managers to walk away from a decision that is profitablebut unethical.

Moral courage gives an employee the strength to sayno to a superior that tells her or him to pursue actions that are unethical.And moral courage gives employees the integrity to blow the whistle onpersistent unethical behavior in a company. Moral courage does not come easily—thereare well-known cases in which individuals have lost their jobs because they blewthe whistle on corporate behaviors they thought unethical, telling the mediaabout what was occurring.

Companies can strengthen employees’ moral courage bycommitting themselves to not take retribution against employees who exercisemoral courage, say no to superiors, or otherwise complain about unethicalactions. For example, consider the following extract from Unilever’s code ofethics:

Any breaches of the Code mustbe reported in accordance with the procedures specified by the JointSecretaries. The Board of Unilever will not criticize management for any lossof business resulting from adherence to these principles and other mandatorypolicies and instructions. The Board of Unilever expects employees to bring totheir attention, or to that of senior management, any breach or suspectedbreach of these principles. Provision has been made for employees to be able toreport in confidence, and no employee will suffer as a consequence, of doingso.

This statement gives “permission” to employees toexercise moral courage. Companies can also set up ethics hotlines, which allowemployees to anonymously register complaints with a corporate ethics officer.

Summary

Allof the steps discussed here can help ensure that when managers make businessdecisions, they are fully cognizant of the ethical implications and do notviolate basic ethical precepts. But we must remember that not all ethicaldilemmas have a clean and obvious solution; that is why they are dilemmas. Atthe end of the day, there are clearly things that managers should not do andthings they should do; but there are also actions that present true dilemmas.In these cases a premium is placed on the ability of managers to make sense outof complex messy situations and make balanced decisions that are as justaspossible.


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