How Business Ethics Failed Corporate America (and what we must do next)

What is ethics in business?

Ethics refers to a prescribed or accepted code of conduct. Ethical issues are a set of moral values that need to be addressed while carrying out business. Businesses operate in a society that is structured around moral values. Therefore, when conducting its operations, a business has certain responsibilities which are to provide the society with quality goods and services that will improve the people's living standards. These are times that test our courage. Our headlines are filled daily with revelations of corporate corruption, blind greed and staggering billion dollar losses in stock evaluations that have affected financial markets around the world. These are times that test our character. A 2000 study by the Ethics Resource Center showed that when times are the toughest, integrity matters the most. Companies in transition from mergers, acquisitions or restructuring are most at risk for unlawful or unethical behavior.

A look back at business ethics

The Harvard Business School was the first to offer a class on "social factors in business enterprise" in 1915, but the modern business ethics movement grew out of widespread distrust of government after the Watergate scandal. Distrust spread with organizations with Ford Pinto's infamous exploding gas tanks, illegal payments overseas by government contractors. In 1976, when Dr. Michael Hoffman, founder of Bentley College's Center for Business Ethics first applied for to the National Endowment for the Humanities for a grant to fund the center, he was rejected - the agency had never heard of business ethics. When the Wall Street Journal first wrote about CBE center, they called business ethics an oxymoron. In the following decade, the need for CBE became clear. The roaring 1980s were brought to an abrupt close by discovery of Wall Street insider trading and U.S. department of defense scandals surrounding $600 hammers and $800 toilet seats. Under the business-friendly climate of the Reagan-Bush era, business had an opportunity to police itself. In 1991, the Federal Sentencing Guidelines for Organizations (FSGO) outlined corporate guidelines for an effective ethics program. By successfully following the guidelines, companies accused of criminal conduct can reduce federal fines by up to 95%. The FSGO outlined a minimum framework that includes, among other components: clear standards, ethics training for employees, a reporting system to report misconduct anonymously and establishing a track record of disciplining violators.

For the first time, executives were held responsible for the misconduct of subordinates. But if organizations could show they made a serious, pro-active effort to prevent white-collar crime, it would mitigate a judgment against the company and lessen their liability. Large organizations responded by creating ethics officer positions, installing ethics hotlines and crafting codes of conduct. Eleven years after its inception, the carrot and stick combination of FSGO and director liability seemed to have worked. A 2000 study by the Society of Financial Service Professionals found that almost 90% of respondents reported that their companies have a written code of ethics and conduct. Almost a dozen years later, employees are not entering organizations firmly grounded in their values. A 2000 KPMG study showed that 76 % of employees have observed unlawful or unethical conduct on the job. The white hot economy of the late 1990s put profits ahead of people, putting those same people under tremendous pressure to do things they normally would not do to meet quarterly targets. Any miss in earnings per share, by even a penny, resulted in Wall Street's swift, sure punishment. Now, stories of accounting fraud and white collar crime have become prevalent. Fortune Magazine found that "In 1999 and 2000 the SEC demanded 96 restatements of earnings or other financial statements - more than the past 9 years combined." Companies spend years and millions of advertising dollars building brand image and loyalty. Years of solid performance and profits can be wiped out overnight with one TV expose. When people make mistakes of judgment, the cost to companies is staggering. Litigation, plunging share prices, and loss of market share directly affect the bottom line. There are unmeasured costs to damaged brand image and organizational good will. And there are human costs to morale and productivity - employees who lose heart as their company is dragged through the headlines. Up to this point, business ethics has been largely a legal issue because of the mandatory sentencing guidelines established in 1991 by the U.S. Sentencing Commission. Company codes of conduct are often written in "legalese" by the legal or internal audit department. Drafted only to protect the organization from potential vulnerability; they poorly cover everything from discrimination to sexual harassment, from overseas bribery to insider trading. Frequently, these codes of conduct are drafted without commitment from senior management or the involvement of those doing the work. This approach misses the opportunity to strengthen the company culture and reputation. While corporate codes of ethics provide an important and necessary framework for conduct, doing the right thing always comes down to the individual. The responsibility for organizational integrity must start with the organization's framework and end with individual accountability.

Federal legislation and organizational ethics statements act as the white lines on either side of the road, giving us freedom to drive fast within the boundaries. As all of the recent fraud and accounting scandals have shown, it isn't a faceless organization doing wrong, it is individuals within their organizations making mistakes in a misguided attempt to please their bosses and Wall Street. Today, many companies have learned that organizational integrity is more than following laws and regulations. They are evolving from reactive, post-scandal compliance programs to proactive, values-driven programs. "Today there is pressure put on people to meet targets, pressuring them into things they normally wouldn't do," "It takes courage and moral character to stand up to pressure. It takes ordinary people with good habits of character."

Integrating professional and personal values is the solution

"Can ethics be taught?" "Too many employees are not receiving any grounding in values from their home, their church, their school or their community service." Corporate America has taken on the job of teaching values to its people, a sociological sea change that is as widespread as it is necessary. Many would argue that values must be taught in the home; that developing character is the responsibility of parents, pastors and teachers. The cynics would say it is too late to teach adults right from wrong. It's true that employees come into your organization with their values largely shaped, but companies can benefit by communicating their values and connecting them to leadership. Above the mundane daily details of getting the job done, of meeting quarterly and annual performance goals, there is a larger issue of leadership and character. How you lead at work and at home makes a difference; because it influences the people who work for you. It affects the kind of leaders they will become. Leadership integrity must be firmly grounded in the company's values and integrated into individual employee values. Leaders must build a company culture based on its core values and supported by a storehouse of stories, by telling your people what the organization stands for, what it is trying to achieve and what is in it for them. Values-driven leadership is not a panacea or an easy answer to today's challenges. But by grounding your leadership in your beliefs as you make decisions about people and strategy, your values will become bedrock in a storm of uncertainly and change.