What goes around comes around this adage characterizes kohlberg's

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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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http://www.usatoday.com
http://www.usatoday.com
http://www.edelman.com
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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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http://giveitaway.jpmorgan.com/cm/cs?pagename=JPM_redesign/JPM_Content_C/Generic_
http://www.youtube.com/watch?v=tgbZzgyHZgI
http://www.globalethics.org/news-line/2009/07/06/banks-honesty-poll/
http://www.globalethics.org/news-line/2009/07/06/banks-honesty-poll/
http://www.globalethics.org/news-line/2009/07/06/banks-honesty-poll/
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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?