Business Ethics and Organizational Social Responsibility

S E C T I O N III

MANAGING ETHICS

IN THE ORGANIZATION

149

C H A P T E R5

ETHICS AS ORGANIZATIONAL

CULTURE

INTRODUCTION

Thus far, we have discussed business ethics primarily in terms of how individual

employees think and respond. But anyone who has ever worked knows that employ-

ees are not ‘‘just’’ individuals. They become part of something larger; they’re mem-

bers of an organizational culture that affects how they think and behave. Here, we

apply this culture concept to organizational ethics. You can think about the ethical

culture of an organization as a ‘‘slice’’ of the larger organizational culture that repre-

sents the aspects of organizational culture that affect the way employees think and act

in ethics-related situations.

In terms of how we’ve been thinking about ethical decision making, you can

consider ethical culture to be a significant organizational influence on individuals’

ethical awareness, judgment, and action, along with the individual differences and

other influences already discussed in Chapter 3. Recall that most employees are at

the conventional level of cognitive moral development, meaning that they are look-

ing outside themselves for guidance about how to think and act. Ethical culture is a

source of a good bit of that guidance and can influence employees to do either the

right thing or the wrong thing.

Individual Differences

Ethical Awareness → Ethical Judgment → Ethical Action

Ethical Culture

150

ORGANIZATIONAL ETHICS AS CULTURE

What Is Culture?

Anthropologists define culture as a body of learned beliefs, traditions, and guides for

behavior shared among members of a group. 1 This idea of culture has been particu-

larly useful for understanding and differentiating among work organizations and the

behavior of people in them. 2 It’s a way of differentiating one organization’s ‘‘person-

ality’’ from another. The organizational culture expresses shared assumptions, val-

ues, and beliefs 3 and is manifested in many ways, including formal rules and

policies, norms of daily behavior, physical settings, modes of dress, special language,

myths, rituals, heroes, and stories. 4 To assess and understand an organization’s

culture requires knowledge of the organization’s history and values, along with a

systematic analysis of multiple formal and informal organizational systems.

Organizational cultures can vary widely, even within the same industry (consider

Wal-Mart, Target, and Costco—all big-box retailers that have very different cul-

tures). In the computer industry, IBM was known for many years for its relative for-

mality, exemplified by a dress code that mandated dark suits, white shirts, and

polished shoes. Apple Computer, on the other hand, was known for its informality.

Particularly in its early days, T-shirts, jeans, and tennis shoes were the expected

Apple ‘‘costume.’’ Fortune magazine described IBM as ‘‘the sensible, wingtip,

Armonk, New York computer company, not part of that sneaker-wearing, tofu-eating

Silicon Valley crowd.’’ 5 Although that characterization was made a long time ago,

it’s still pretty applicable today.

Strong versus Weak Cultures

Organizational cultures can be strong or weak. 6 In a strong culture, standards and

guidelines are widely shared within the organization, providing common direction for

day-to-day behavior. This is likely because all cultural systems, formal and informal,

are aligned to provide consistent direction and to point behavior in the same direction.

In the 1980s, Citicorp’s culture was so strong that when Katherine Nelson, a coauthor

of this text and former vice president and head of human resources communications at

Citicorp, traveled to the firm’s offices in the Far East to deliver ethics training, she felt

right at home (despite huge differences in national culture). ‘‘You could tell that you

were in a Citicorp facility,’’ she said, ‘‘whether you were in London, Tokyo, or New

York.’’ When Nelson facilitated an ethics training session for Japanese managers, she

presented them with a common ethical dilemma—what do you do if you have raised

an important ethical issue with your manager and nothing is done? Moreover, the

manager discourages you from pursuing the issue. The potential answers included do

nothing, go around the manager to the next level, raise the issue in writing to the

manager, or take the issue to a staff department such as human resources.

The Japanese managers unanimously gave the ‘‘correct’’ answer according to

Citicorp culture and policies at the time. They said they would go around their

CHAPTER 5 ETHICS AS ORGANIZATIONAL CULTURE 151

manager and take the issue to the next level. Nelson was surprised at their response,

thinking that it conflicted with the wider Japanese culture’s deference to authority

and seniority. So she asked these managers, ‘‘Doesn’t this conflict with Japanese cul-

ture?’’ To which they responded, ‘‘You forget—we are much more Citicorp than we

are Japanese.’’ Citicorp’s culture proved to be so strong that standards and guidelines

spanned continents and superseded national culture. (Citicorp merged with Travelers

in 1998 to form Citigroup, and its culture has changed significantly since then.) This

type of experience has since been verified by some of our international students who

worked for U.S.-based multinationals before returning to school for their MBA

degree. For example, one student worked for Baxter Healthcare in a country known

for corruption and bribery. Baxter’s strong ethical culture didn’t allow such conduct,

and employees were proud to be a part of such an organization and happy to comply

(even or perhaps especially in the midst of a corrupt business culture).

In a weak organizational culture, strong subcultures exist and guide behavior that

differs from one subculture to another. Many large public universities can be thought

of as having weak cultures. For example, for faculty, departmental subcultures are

often stronger than the overall university culture; the romance languages department

differs from the accounting department. Among students at a large state university,

the fraternity-sorority subculture coexists with the political activist subculture, the

devout Christian subculture, the jock subculture, and many other subcultures, and

behavior is quite different within each. It’s important to note that weak doesn’t nec-

essarily mean bad. In some situations, weak cultures are desirable. They allow for

strong subcultures featuring diversity of thought and action. However, in a weak cul-

ture, behavioral consistency across the organization is tough to achieve. Look around

your own school or work organization. Would you characterize its culture as strong

or weak?

How Culture Influences Behavior: Socialization and Internalization

Employees are brought into the organization’s culture through a process called encul-

turation, or socialization. 7 Through socialization, employees learn ‘‘the ropes.’’

Socialization can occur through formal training or mentoring, or through more

informal transmission of norms of daily behavior by peers and superiors. New

members learn from observing how others behave or through informally transmitted

messages. When effectively socialized into a strong culture, employees behave in

ways that are consistent with expectations of the culture (or subculture). They know

how to dress, what to say, and what to do.

With socialization, people behave in ways that are consistent with the culture

because they feel they are expected to do so. Their behavior may have nothing to do

with their personal beliefs, but they behave as they are expected to behave in order to

fit into the context and to be approved by peers and superiors. 8 As an example, the

president of a huge financial firm once took a young, high-potential manager out to

lunch and walked him right over to Brooks Brothers for a new suit. ‘‘You can’t get

152 SECTION III MANAGING ETHICS IN THE ORGANIZATION

where you’re going in a cheap suit,’’ the president told the young man, who contin-

ued to buy his suits at Brooks Brothers.

But individuals may behave according to the culture for another reason—

because they have internalized cultural expectations. With internalization, individu-

als have adopted the external cultural standards as their own. Their behavior, though

consistent with the culture, also accords with their own beliefs. They may come into

the organization sharing its values and expectations, thus making for a very smooth

transition. Or, they may internalize cultural expectations over time. In the above

example, the young manager may have initially bought the Brooks Brothers suit

because he felt compelled to; but over time, he continued to buy those suits perhaps

because he had internalized the expectation and wanted to do so.

The concepts of socialization and internalization apply to understanding why

employees behave ethically or unethically in an organization. Most people prefer to

behave ethically. When they join an organization with a strong ethical culture, the

messages about honesty and respect resonate with their personal beliefs and are eas-

ily internalized. They act ethically because it’s natural for them to do so and consist-

ent with the cultural messages they’re receiving. But unfortunately, most employees

can be socialized into behaving unethically, especially if they have little work experi-

ence to contrast with the messages being sent by the current unethical culture. If

everyone around them is lying to customers, they’re likely to do the same as long as

they remain a member of the organization.

ETHICAL CULTURE: A MULTISYSTEM FRAMEWORK

We said earlier that ethical culture can be conceptualized as representing a slice of

the organization’s broader culture. Ethical culture is created and maintained through

a complex interplay of formal and informal organizational systems (Figure 5.1). For-

mally, executive leader communications, selection systems, orientation and training

FORMAL SYSTEMS INFORMAL SYSTEMS

Executive Leadership

Selection system

Policies/Codes

Orientation/Training

Performance

management

Authority structure

Decision processes

Role Models/Heroes

Norms

Rituals

Myths/Stories

Language

Ethical and

Unethical

Behavior

Alignment?

FIGURE 5.1 A Multisystem Ethical Culture Framework

CHAPTER 5 ETHICS AS ORGANIZATIONAL CULTURE 153

programs, rules, policies and codes, performance management systems, organiza-

tional structures, and formal decision-making processes all contribute to creating and

maintaining ethical culture. Informally, heroes and role models; norms of daily

behavior; rituals, myths, and stories; and language indicate whether the formal

ethics-related systems represent reality or facade. The next section provides exam-

ples of each of these important ethical culture systems. Although we discuss these

systems separately, keep in mind that they are all interconnected.

Alignment of Ethical Culture Systems

To create a consistent ethical culture message, the formal and informal systems must

be aligned (work together) to support ethical behavior. To have a fully aligned ethical

culture, the multiple formal and informal systems must all be sending employees

consistent messages that point in the direction of ethical behavior. For example,

imagine a company whose formal corporate values statement and ethics code tell

employees that honesty is highly valued in the organization and that employees

should always be truthful with customers and each other. Consistent with that values

statement, the selection system does background checks on potential employees,

incorporates ethics-related questions in interviews, and highlights the company’s val-

ues to recruits. Once hired, new employees are further oriented into the ethical

culture by learning about the values of the founder, how the history of the company

supports those values, and how the current executive team is carrying on that tradi-

tion. They’re also trained in the specific kinds of ethical issues they could face in

their jobs and how to handle them ethically. They learn that the performance manage-

ment system will assess them on values-related criteria, including honest and trust-

worthy interactions, and that these assessments will be important to decisions about

compensation and promotion. They are also encouraged to take personal responsibil-

ity and speak up about any ethical concerns. On the informal side, they learn that

high-level managers routinely tell customers the truth about the company’s ability to

meet their needs and that the company celebrates employees of exemplary integrity

at an annual awards dinner. Employees in such an organization receive a consistent

message about the organization’s commitment to honesty, and their behavior is likely

to be honest as well because these formal and informal systems are aligned and sup-

porting their ethical behavior.

But opportunities for misalignment abound in these complex systems. For exam-

ple, if the same organization touts its honesty in its values statement but regularly

deceives customers in order to land a sale, and the organization gives a highly ‘‘suc-

cessful’’ but highly deceptive sales representative the firm’s sales award, the organi-

zation’s formal and informal systems are out of alignment. The formal statements say

one thing while company actions and rituals say quite another. Employees perceive

that deceit is what the organization is really about, despite what the ethics code says.

Cultures can range from strongly aligned ethical cultures (where all systems are

aligned to support ethical behavior) to strongly aligned unethical cultures (where all

systems are aligned to support unethical behavior) to those that are misaligned

154 SECTION III MANAGING ETHICS IN THE ORGANIZATION

because employees get somewhat mixed messages due to conflicts between the for-

mal and informal systems.

DOW CORNING: AN ETHICAL CULTURE OUT OF ALIGNMENT? Developing a

strongly aligned ethical culture is easier said than done. Managers need to be careful

because an organization may easily be lulled into thinking that its ethical house is

soundly constructed, only to find that the roof has been leaking and it’s about to cave

in. This may be what happened to Dow Corning.

Dow Corning had been recognized as a corporate ethics pioneer. It was among

the first, in 1976, to establish an elaborate formal ethics program and structure. Then

chairman John S. Ludington set up a Business Conduct Committee comprised of six

company executives, each of whom devoted up to six weeks a year to the commit-

tee’s work and reported directly to the board of directors. Two of these members

were given responsibility for auditing every business operation every three years. In

addition, three-hour reviews were held with up to 35 employees who were encour-

aged to raise ethical issues. The results of these audits were reported to the Audit and

Social Responsibility Committee of the board of directors. John Swanson, manager

of corporate internal and management communication at the time, headed this effort

and was quoted as saying that the audit approach ‘‘makes it virtually impossible for

employees to consciously make an unethical decision.’’ 9

This apparently impressive formal program failed to help the organization avoid

its problem with breast-implant safety, however, despite documented warnings from

a company engineer in 1976 that suggested that the implants could rupture and cause

medical problems. It isn’t entirely clear why this well-intentioned ethics program

failed. It’s likely that, although it was designed to cultivate an overall environment of

ethical conduct, aspects of the ethical culture were out of alignment—sending

employees different messages. 10

‘‘Layering in a bureaucracy is no substitute for a

true corporate culture. Workers have a genius for discovering the real reason for a

system and learn quickly how to satisfy its minimum requirements.’’ 11

The system

relied on managers to identify the key ethical issues covered by the auditors. Were

these managers likely to alert the auditors to their most serious ethical problems?

What would the consequences be? The system also relied on periodic planned audits.

Did commitment to ethics peak during the planned audit sessions, only to disappear

into the woodwork after the auditors left? 12

We don’t know, but a comprehensive

multisystem audit of the ethical culture might have provided the answer.

Leaders should be interested in creating a strongly aligned ethical culture

because American employees strongly prefer working for such an organization.

A 2006 study found that 82 percent of Americans would actually prefer to be paid

less but work for an ethical company than be paid more but work for an unethical

company. Importantly, more than a third of people say that they’ve left a job because

they disagreed with the company’s ethical standards. So having a strong ethical

culture is an important way to retain the best employees. 13

Another reason leaders need to create and maintain a strongly aligned ethical

culture is that the U.S. Sentencing Commission revised its guidelines for sentencing

CHAPTER 5 ETHICS AS ORGANIZATIONAL CULTURE 155

organizational defendants in 2004 (see www.ussc.gov and Chapter 6 for more infor-

mation about these guidelines). When the U.S. Sentencing Commission (www.ussc.

gov) evaluated the effect of the original 1991 guidelines, it noted that many organiza-

tions seemed to be engaging in a kind of ‘‘check-off approach’’ to the guidelines. In

responding to guideline requirements to qualify for reduced sentencing and fines, these

organizations would establish formal ethics and/or legal compliance programs, includ-

ing ethics offices, codes of conduct, training programs, and reporting systems. But the

commission learned that many of these formal programs were perceived to be only

‘‘window dressing’’ by employees because they were inconsistent with the employees’

day-to-day organizational experiences. The commission subsequently revised its

guidelines to call for developing and maintaining a strong ethical culture. As a result,

many companies are now assessing their cultures to determine how they’re doing in

relation to ethics so if they do get into legal trouble, they can demonstrate that they

have been making sincere efforts to guide their employees toward ethical conduct.

ETHICAL LEADERSHIP

Executive Leaders Create Culture

Executive leaders affect culture in both formal and informal ways. Senior leaders can

create, maintain, or change formal and informal cultural systems by what they say,

do, or support. 14

Formally, their communications send a powerful message about

what’s important in the organization. They influence a number of other formal cul-

ture dimensions by creating and supporting formal policies and programs, and they

influence informal culture by role modeling, the language they use, and the norms

their messages and actions appear to support.

The founder of a new organization is thought to play a particularly important

culture-creating role. 15

Often, the founder has a vision for what the new organization

should be. He or she often personifies the culture’s values, providing a role model for

others to observe and follow, and guides decision making at all organizational levels.

For example, Thomas Jefferson founded the University of Virginia. Although he’s

long gone, it’s said even today that when the governing board of the university is

faced with a difficult decision, they’re still guided by ‘‘what Mr. Jefferson would

do.’’ Founders of small businesses frequently play this culture-creating role.

Herb Kelleher is the legendary founder of Southwest Airlines, often cited as the

best-run U.S. airline. The no-frills airline started in 1971 and has been growing and

flying pretty high ever since, despite many difficulties in its industry. Southwest

Airlines has never served a meal, and its planes are in and out of the gate in 20 min-

utes. During Kelleher’s tenure as CEO and chairman, other airlines went bankrupt,

suffered strikes, or disappeared. But Southwest continued to succeed even after the

terrorist attacks of September 11, 2001, that sent the entire industry reeling. The

secret is thought to be the company’s culture and an esprit de corps inspired by

Kelleher—he believes in serving the needs of employees, who then take great care of

156 SECTION III MANAGING ETHICS IN THE ORGANIZATION

customers and ultimately provide shareholder returns. The culture combines effi-

ciency, a family feeling, and an emphasis on fun. In support of efficiency, pilots have

been known to load luggage or even clean planes if necessary. During a fuel crisis,

Kelleher asked employees to help by providing money-saving ideas. The response

was immediate: within only six weeks after Kelleher’s request, employees had saved

the company more than $2 million. In the area of fun, Kelleher has always been

known for his crazy antics, jokes, and pranks. He settled business disputes by arm

wrestling; and when a fellow airline CEO criticized Southwest’s promotion that fea-

tured Shamu, the killer whale, Kelleher sent him a huge bowl of chocolate pudding

(meant to resemble whale poop) with a note reading, ‘‘With love, from Shamu.’’ 16

Employees are encouraged to make flying fun, so that customers leave every South-

west flight with a smile, and they’re encouraged to do that in a way that’s spontane-

ous, emotional, and from the heart. 17

Southwest is seen as a leader in its industry and

regularly shows up near the top of Fortune magazine’s most admired companies. It

continues to perform well even after Kelleher stepped down as CEO in 2001. In

explaining how they have remained so successful, Colleen Barrett (who stepped

down as president in 2008) referred to the culture, saying that Southwest does

‘‘everything with passion. We scream at each other and we hug each other . . . we

celebrate everything.’’ 18

The walls at Southwest’s headquarters are literally covered

with photos of employees dressed in crazy outfits or with their pets. But the company

is also financially conservative and cost conscious, and these cultural attributes con-

tribute to their ongoing success.

Leaders Maintain or Change Organizational Culture

Current executive leaders can also influence culture in a number of ways. 19

They can

help maintain the current culture, or they can change it by articulating a new vision

and values; by paying attention to, measuring, and controlling certain things; by

making critical policy decisions; by recruiting and hiring personnel who fit their

vision of the organization; and by holding people accountable for their actions.

Sometimes new leaders significantly change long-standing corporate culture.

Jack Welch, retired CEO of General Electric Company, radically changed the for-

merly staid bureaucratic culture of GE into a lean and highly competitive organiza-

tion during his leadership tenure. Welch began the culture change effort by clearly

articulating his vision that the new GE would be number one or number two in the

world in each of its businesses. Businesses that could not measure up would be sold.

Traditional GE employees had been attracted to the job security of the old

GE. But Welch wanted to encourage competitiveness, risk taking, creativity, self-

confidence, and dynamism. He recruited managers who were interested in doing

a great job and then moving on, if GE no longer needed them. Many of the old-line

GE employees found themselves unhappy, out of sync—and, frequently, out of a job.

Welch also focused on identifying and eliminating unproductive work in the

organization. He told managers to eliminate reports, reviews, and forecasts; to speed

decision cycles; and to move information more quickly through the organization by

CHAPTER 5 ETHICS AS ORGANIZATIONAL CULTURE 157

eliminating unnecessary bureaucratic layers. All of this contributed to the ‘‘leaner

and meaner’’ GE culture he created.

Welch’s successor, Jeff Immelt (who became CEO in 2001), has changed the GE

culture yet again. He announced in 2004 that four things would be required to keep

the company on top: execution, growth, great people, and virtue. The first three were

consistent with the GE everyone knew. However, most people don’t expect the word

virtue to be associated with a company that earns billions in revenue. But Immelt had

learned that people perceived GE to be ‘‘a laggard’’ on the social responsibility front,

and he vowed to change that. He has said that, in a world of business ethics scandals,

people don’t admire business as they used to and that the gulf between rich and poor

is growing. As a result, he believes that companies are obligated to provide solutions

to the world’s problems—not to just make money for shareholders and obey the law.

‘‘Good leaders give back. . . . It’s up to us to use our platform to be a good citi-

zen.’’ 20

In line with this new focus on virtue, Immelt appointed GE’s first vice presi-

dent for corporate citizenship and has been publishing corporate citizenship annual

reports. The company is committing itself to becoming a leader in environmental

cleanup and a catalyst for change. You’re probably familiar with its ‘‘Ecoimagina-

tion’’ initiative that focuses on green initiatives and concern about climate change.

This initiative even has its own devoted website (www.ecoimagination.com), as does

the GE Citizenship initiative more generally (www.ge.com/citizenship). The com-

pany also now audits suppliers in developing countries to ensure compliance with

labor, environmental, and health and safety standards. And the company has

increased its focus on diversity, including granting domestic partner health benefits

to employees, and has entered into dialogue with socially responsible mutual funds.

In response to a request from African American employees to do more in Africa, GE

is working with the public health service in Ghana, where it has provided equipment,

water treatment, and leadership training. In the last edition of this book, we noted that

GE’s foreign subsidiaries were still doing business with Iran. 21 But in 2008, the com-

pany decided it would not do business in any of the countries that the U.S. State

Department designates as sponsors of terrorism (including Iran). This move suggests

that the company is engaged in ongoing evaluations about where it should be doing

business, based upon its values and concern about its reputation.

ETHICAL LEADERSHIP AND ETHICAL CULTURE Clearly, employees take their

cues from the messages sent by those in formal leadership roles. But most employees

don’t know the senior executives of their organization personally. They only know

what they can make sense of from afar. Therefore senior executives must develop a

‘‘reputation’’ for ethical leadership by being visible on ethics issues and communicat-

ing a strong ethics message. A recent study 22

found that such a reputation rests upon

dual dimensions that work together: a moral person dimension and a moral manager

dimension (see Figures 5.1 and 5.2). In this section, first we explain what each di-

mension represents and then we combine these dimensions into a matrix that shows

how leaders can develop a reputation for ethical leadership, unethical leadership,

hypocritical leadership, or ethically neutral leadership.

158 SECTION III MANAGING ETHICS IN THE ORGANIZATION

The moral person dimension represents the ‘‘ethical’’ part of the term ethical

leadership and is vital to developing a reputation for ethical leadership among

employees. As a moral person, the executive is seen first as demonstrating certain

individual traits (integrity, honesty, and trustworthiness). For example, one executive

described ethical leaders as ‘‘squeaky clean.’’ But probably more important are visi-

ble behaviors.

These include doing the right thing, showing concern for people and treating

them with dignity and respect, being open and listening, and living a personally

moral life. To some extent, senior executives live in glass houses. They are often

public figures who are active in their communities. So they need to be particularly

careful about their private behavior. Rumors can begin quickly and taint an otherwise

solid reputation. Finally, an important contributor to being perceived as a moral per-

son is to make decisions in a particular way—decisions that are explicitly based on

values, fairness, concern for society, and other ethical decision rules.

But being a moral person is not in itself enough to be perceived as an ethical

leader. Being a moral person tells employees how the leader is likely to behave, but

it doesn’t tell them how the leader expects them to behave. So to complete the ethical

leadership picture, executives must also act as ‘‘moral managers’’—they must focus

on the ‘‘leadership’’ part of the term ethical leadership by making ethics and values

Hypocritical

leader

Weak Strong

Moral Person

Executive Ethical Leadership

Reputation Matrix

Executive Ethical Leadership

Is about Reputation, Which Rests

on These Two Pillars

Moral Person

Traits

Behaviors Rewards/Discipline

Decision making Communicating

Tells followers

how leader

behaves

• Honesty

• Openness

• Values-based

• Fair

Sends an “ethics

and values”

message

Holds people

accountable for

ethical conduct • Concern for

people

• Personal

morality

• Integrity

• Trust

Role Modeling

Takes visible

ethical action

Tells followers

how they should

behave and holds

them accountable

Moral Manager

W e

a k

M o

ra l M

a n

a g

e r

S tr

o n

g

Unethical

leader

?

Ethical

leader

Ethically neutral leader

FIGURE 5.2 Executive Ethical Leadership

CHAPTER 5 ETHICS AS ORGANIZATIONAL CULTURE 159

an important part of their leadership message and by shaping the firm’s ethical cul-

ture. They do that by conveying the importance of ethical conduct in a variety of

ways. Most of the messages employees receive in business are about bottom-line

goals. Therefore, senior executives must make ethics a priority of their leadership if

ethics is to get attention from employees. Moral managers do this by being visible

role models of ethical conduct, by communicating openly and regularly with employ-

ees about ethics and values, and by using the reward system to hold everyone

accountable to the standards. This ‘‘moral person/moral manager’’ approach is

similar to what executive headhunters Thomas Neff and James Citrin list as

their number one strategy (of six) of corporate stars: ‘‘Live with Integrity, Lead by

Example.’’ They say, ‘‘Integrity builds the trust in senior management that is critical

for high-performing organizations.’’ 23

James Burke, former CEO of Johnson & Johnson, is probably the best-known

example of a highly visible ethical leader. Soon after being appointed CEO in the

late 1970s, he challenged his senior managers to revisit and update the company’s

age-old credo (discussed later in more detail). He wasn’t willing to have it hanging

on the wall unless his senior managers were committed to living it. After much dis-

agreement, discussion, and input from J&J sites around the world, the credo was re-

vised and its commitment to customers first and foremost was intact. Less than three

years later, the Tylenol poisoning occurred (described in Chapter 10), and the credo

guided corporate decision making successfully through the crisis. Following that cri-

sis, Burke initiated a regular credo survey process in which employees were asked

about the company’s performance regarding the credo—and that process continues

to this day. 24

It was clear to employees that Burke really cared about the credo and

the values it represented.

When Paul O’Neill first became CEO at Alcoa, he brought with him a profound

concern for worker safety. Although Alcoa already had an enviable safety record at

the time based on industry standards, O’Neill created a goal of zero lost work days

from accidents—a goal that flabbergasted even the safety director. When O’Neill

visited plants, he told employees that the company was no longer going to budget for

safety—if a hazard was fixable, they should do it and the company would pay for it,

no questions asked. Then he gave the hourly workforce his telephone number at

home and told them to call him directly about safety problems. He created an acci-

dent reporting system that required reporting within 24 hours of any accident, no

matter how small, and he used the reports as an opportunity for learning so that future

accidents could be avoided. He also got on an airplane and visited employees who

had been seriously hurt, no matter where in the world they were. Safety messages

were everywhere, including woven into the carpets at some Alcoa sites. And when

employees in the Pittsburgh headquarters crossed the street, they were careful not to

jaywalk because it was ‘‘unsafe.’’ Years after O’Neill retired, Alcoa continued to

improve until it became the safest company in the world.

In the completely different arena of diversity, O’Neill again stood out for his

principled leadership. In his first week on the job, his secretary asked him to sign

papers to join a country club. This had been standard procedure in the past because

160 SECTION III MANAGING ETHICS IN THE ORGANIZATION

CEO membership was required in order for other Alcoa executives to join and use the

club. Upon asking for certification that the club did not discriminate, he learned that

the club did not have an open membership policy. O’Neill refused to sign the papers

and developed a new policy saying that Alcoa would not reimburse any employee

expenses at a place that did not allow admission to anyone who wanted it. O’Neill

was encouraged not to rock the boat and to wait before making such a huge change.

His response was, ‘‘What excuse am I going to use six or twelve months from now?

I’ve just discovered my principles? They were on vacation . . . when I first came?’’

He explained that you have to have the courage of your convictions and insist on

them all of the time, not just when it’s convenient. 25

Similar to business leaders, coaches of college sports are expected to set and

enforce ethical standards. Joe Paterno, the legendary Penn State football coach, and

Dean Smith, former coach of the University of North Carolina basketball team,

are coaches who exemplify moral management. They set high expectations (for

performance and ethics), create rules and policies for appropriate behavior, and

enforce them. 26

Coaches are also held responsible when ethical violations are discovered among

players, assistants, and boosters. A number of coaches have lost their jobs or resigned

because of such violations. 27

When wrongdoing occurs in any type of organization,

top managers are frequently held accountable even if they weren’t personally

involved. For example, the executives of Arthur Andersen, Enron, WorldCom,

Adelphia, Boeing, and AIG Insurance were all replaced soon after ethical scandals

came to light.

Coaches and business leaders are subject to immense pressure to win, and it can

be tempting to put intense pressure on their people to bend or even break the rules.

Ethical leaders maintain their principles through good times and bad. Bill George,

retired CEO of Medtronic, a maker of medical devices, recounts a story about the

time he had to tell analysts that, despite growing 15 percent for the quarter, the com-

pany’s earnings would fall short of analysts’ expectations. The analysts berated him

and called him a liar. Such experiences drive some executives to fudge the numbers

to meet Wall Street expectations. But true ethical leaders are not dominated by this

pressure. They learn to ignore these outside voices and begin to listen more to their

own inner voice and values. In George’s case, he learned an important lesson when

he visited a doctor who was performing an angioplasty with one of the company’s

balloon catheters that literally fell apart during the procedure. The doctor was so

angry that he took the blood-covered catheter and threw it at George. What was the

lesson for this ethical leader? Medtronic workers don’t make pacemakers to please

Wall Street. Their goal is to save lives. According to George, ‘‘the CEO can’t have

the shareholder centrally in mind when making decisions. . . . America’s leading

corporations became great not by getting their share prices up but by doing what they

were set up to do incredibly well.’’ 28

UNETHICAL LEADERSHIP Unfortunately, unethical leaders can just as strongly

influence the development of an unethical culture. In terms of our matrix, unethical

CHAPTER 5 ETHICS AS ORGANIZATIONAL CULTURE 161

leaders have reputations as weak moral persons and weak moral managers. In inter-

views, senior executives cited Al Dunlap as a senior executive with a reputation for

unethical leadership. John Byrne of Business Week wrote a book about Dunlap (Mean

Business, 1997) and published excerpts in the magazine. According to Byrne, Dunlap

became famous for turning struggling companies around. When hired at Sunbeam,

he was considered such a celebrity CEO that the stock price spiked 49 percent in

one day. But while at Sunbeam, he was also known for ‘‘emotional abuse’’ of

employees—being ‘‘condescending, belligerent and disrespectful.’’ ‘‘At his worst, he

became viciously profane, even violent. Executives said he would throw papers or

furniture, bang his hands on his desk, and shout so ferociously that a manager’s hair

would be blown back by the stream of air that rushed from Dunlap’s mouth.’’ Dunlap

also demanded that employees make the numbers at all costs, and he rewarded them

handsomely for doing so. As a result, they felt pressure to use questionable account-

ing and sales techniques. Dunlap also lied to Wall Street, assuring them that the firm

was making its projections and would continue to reach even higher. After just a

couple of years, Dunlap couldn’t cover up the real state of affairs, and Sunbeam’s

board fired him in 1998. But he left the company crippled. 29

In 2002, Dunlap settled

a civil suit filed by the Securities and Exchange Commission (SEC). He paid a

$500,000 fine and agreed that never again would he be an officer or a director of a

public company. Investigators learned that allegations of accounting fraud on

Dunlap’s watch go back to the 1970s and follow him through a number of companies.

HYPOCRITICAL LEADERSHIP Perhaps nothing can make us more cynical than a

leader who talks incessantly about integrity and ethical values but then engages in

unethical conduct, encourages others to do so either explicitly or implicitly, rewards

only bottom-line results, and fails to discipline misconduct. This leader is strong on

the communication aspect of moral management but clearly isn’t an ethical person—

doesn’t ‘‘walk the talk.’’ It’s a ‘‘do as I say, not as I do’’ approach. Al Dunlap made

no pretense about ethics. All that mattered was the bottom line, and he didn’t pretend

to be a nice guy. But hypocritical leadership is all about ethical pretense. The prob-

lem is that by putting the spotlight on integrity, the leader raises expectations and

awareness of ethical issues. At the same time, employees realize that they can’t trust

anything the leader says. That leads to cynicism, and employees are likely to dis-

regard ethical standards themselves if they see the leader doing so.

Jim Bakker remains the best public example of hypocritical leadership. In the

late 1970s and early 1980s, Bakker built Praise the Lord (PTL) ministry into one of

the world’s biggest religious broadcasting empires. At its peak, Bakker’s television

ministry reached more than 10 million homes and had 2,000 employees. Bakker,

along with his wife, Tammy Faye, claimed to be doing ‘‘the Lord’s work’’ as he

raked in millions of dollars, convincing the faithful to purchase a limited number of

lifetime memberships in two hotels he claimed would be built at the PTL’s Heritage

USA Christian theme park. The problem was that the 25,000 lifetime memberships

(promising a free annual family stay for four days and three nights) in the Heritage

Grand Hotel morphed into 66,683 memberships. And, instead of the limited 30,000

162 SECTION III MANAGING ETHICS IN THE ORGANIZATION

memberships at the proposed Heritage Towers, PTL sold 68,755 memberships. You

do the math. It would be impossible to provide promised services to this many peo-

ple. On top of that, the second hotel was never completed. The funds donated for

these projects were being tapped to support PTL operating expenses, including huge

salaries and bonuses for the Bakkers and other top PTL officials. When questioned at

times about PTL’s finances, Bakker referred to the organization’s annual audits con-

ducted by big auditing firms such as Deloitte and Laventhol. Unfortunately, PTL filed

for bankruptcy in 1987, three months after Bakker resigned in disgrace. The IRS

revoked PTL’s tax-exempt status, and in 1989 Bakker was convicted on fraud and

conspiracy charges. He spent eight years in prison. 30

A more recent example of hypocritical leadership is Lord John Browne, formerly

the CEO of BP. Under Browne’s leadership, the company launched a $200 million

‘‘Beyond Petroleum’’ campaign to promote its image as a highly socially responsible

company that would deliver performance without trading off worker safety or envi-

ronmental concerns. But when BP’s Texas City plant exploded (killing 15 workers

and injuring many more) and two big oil spills occurred in Alaska, regulators and

employees cited cost cutting on safety and negligence in pipeline corrosion preven-

tion as causes. It seemed that the Beyond Petroleum campaign was more about words

than action. Greenpeace awarded Browne the ‘‘Best Impression of an Environmental-

ist’’ award in 2005, and the CEO was finally asked to resign in 2007 after a scandal in

his personal life surfaced. 31

The lesson is pretty clear. If leaders are going to talk

ethics and social responsibility (as they should), they had better ‘‘walk the talk’’ or

risk cynicism or worse.

ETHICALLY NEUTRAL OR ‘‘SILENT’’ LEADERSHIP The fact is that many top man-

agers are not strong leaders either ethically or unethically. They fall into what

employees perceive to be an ethically ‘‘neutral’’ or ethically ‘‘silent’’ leadership

zone. They simply don’t provide explicit leadership in the crucial area of ethics.

They are perceived to be silent on this issue, and employees aren’t sure what the

leaders think about ethics, if anything. This may be because the leader doesn’t realize

how important executive ethical leadership is to the organization’s ethical culture,

isn’t comfortable with talking about ethics issues, or just doesn’t care that much. On

the moral person dimension, the ethically neutral leader is not clearly unethical but is

perceived to be more self-centered than people-oriented. On the moral manager di-

mension, the ethically neutral leader is thought to focus on the bottom line without

setting complementary ethical goals. Little or no ethics message is coming from the

top. But it turns out that silence represents an important message. In the context of all

the other bottom-line-oriented messages being sent in a highly competitive business

environment, employees are likely to interpret silence to mean that the top executive

really doesn’t care how business goals are met (only that they are met), and they’ll

act on that message. 32

Consider Sandy Weill, former charismatic CEO of Citigroup. Well before the

current financial crisis, a Fortune magazine article described the firm as a ‘‘block-

buster money machine.’’ But the article also recounted scandalous allegations about

CHAPTER 5 ETHICS AS ORGANIZATIONAL CULTURE 163

Citigroup and its Salomon Smith Barney unit (now sold off). ‘‘Citi helped Enron hide

debt; Salomon peddled worthless WorldCom debt; Star analyst Jack Grubman rec-

ommended Winstar as it was heading for bankruptcy; Salomon rewarded telecom

execs with hot IPOs,’’ and more. 33

In 2004, Japan shut down Citigroup’s private

bank in Japan that had made $84 million for the company in 2003. Regulators listed

a long series of transgressions including money laundering, sales of unsuitable prod-

ucts to customers, and generally sloppy business practices. 34

The company spent lots

of time and money playing defense with the media, responding to ugly headlines on a

regular basis. According to Fortune, Weill eventually became contrite and ‘‘got reli-

gion,’’ if a bit late. Weill told his board that . . . his most important job . . . was ‘‘to

be sure that Citigroup operates at the highest level of ethics and with the utmost

integrity.’’ 35

However, the article also cited widespread cynicism about that state-

ment, noting that Weill was often ‘‘tone deaf’’ on these ethics issues.

At least from the perspective of outside observers, Weill exemplified ‘‘ethically

neutral’’ leadership. Being tone deaf on ethics issues is exactly what ethically neutral

leadership is about. Weill’s public statement that the ‘‘company is too big to micro-

manage’’ applies to his approach to managing ethics. He said a CEO relies on ‘‘very

competent people’’ and trusts them to do a good job. In the case of ethics manage-

ment, that meant leaving it to the executives running Citi’s various businesses. If the

head of a division thought ethics was important, ethics got resources and attention. If

the head didn’t promote ethics, attention turned elsewhere, and most likely to financial

performance goals. So, with a kind of benign neglect, Weill sat on the sidelines and

provided little ethical leadership. And with corporate rewards focused on the bottom

line, managers had little motivation to attend to other issues. As a result, employees

didn’t know for sure where Weill stood. But the intense focus on the bottom line

suggested that profits were most important, and many employees probably acted

accordingly. This approach to ethics is in sharp contrast to prior CEO John Reed’s

leadership on ethics issues. Reed spent almost his entire career at Citicorp and was its

CEO when the huge American financial powerhouse merged with Weill’s Travelers

organization to form Citigroup. Reed, who was a banker his entire life, understood in

his gut how important reputation is to a financial institution. As a result, he encour-

aged and supported the development of a strong, centralized corporate ethics program

with global reach. Interestingly, the people associated with that program were quickly

gone, and much of the program itself was dismantled after Weill took over.

Weill stepped down in 2003 and handed the CEO reins to Chuck Prince, who

continued to address the scandals that Weill left behind—including $8 billion in

scandal-related charges that had to be absorbed. Prince fired high-level people

involved in scandals, including the chairman of Citigroup International who had

been credited with a 30 percent increase in international earnings in 2003. In an

interview with Fortune magazine, Prince said:

John Reed [CEO before Weill] told me once that culture is a set of

shared, unspoken assumptions. . . . I think the larger the company has

become, the more we need to speak about those unspoken assumptions.

164 SECTION III MANAGING ETHICS IN THE ORGANIZATION

We need to add to our celebration of financial performance a focus on

long-term compliance activities, long-term franchise building, being in

it for the long term. So one of the things we’re going to put into place,

starting in 2005, is a series of activities—training, communications,

performance appraisals—that will lend a little more balance to the

aggressive financial culture that we have always celebrated, and that

I still do.

Short-term growth at the cost of long-term growth is a very bad

trade. Some people make that bad trade when they only hear one instru-

ment in the orchestra. If they hear the full orchestra, the full panoply of

messages, then people have ‘‘no excuses’’—that’s the sign on my desk—

no excuses. 36

The more Prince scrutinized the organization, the more concerned he became

about loose internal controls. He began to add resources to legal compliance. He

even moved his office, from next to Weill’s to the floor below, and began consulting

more with John Reed. 37

But Prince seemed to feel powerless to really change the

culture that Weill had planted and that had taken root. Prince once confessed that he

knew the bank’s aggressive deal making could mean big trouble if the easy money

stopped flowing. ‘‘As long as the music is playing, you’ve got to get up and dance,’’

he told the Financial Times in summer 2007, even as credit markets began to shud-

der. ‘‘We’re still dancing.’’ 38

The firm suffered severe performance problems under Prince’s leadership, and

he was replaced by Vikram Pandit in late 2007. Citigroup, along with several other

financial institutions considered ‘‘too large to fail,’’ was rescued in the fall 2008 U.S.

government bailout of financial institutions. The firm was in trouble because of losses

related to risky mortgage-backed securities, which we speculate may have something

to do with the laxity around ethical standards created under Weill. Experts conclude

that Citigroup failed to integrate its varied businesses and failed in monitoring its

risky investments and freewheeling operations. Many point to the repeal of the

Glass-Steagall Act, which separated commercial banks from investment banks and

insurance, as one of the root causes of the 2008–2009 financial crisis. Weill had

championed this deregulation, and it made Citigroup possible. Recently, John Reed

expressed regret at his role in urging repeal of Glass-Steagall, but Weill would have

none of it. ‘‘When asked about Reed’s apology, Mr. Weill says, ‘I don’t agree at all.’

Such differences, he says, were ‘part of our problem.’’’ 39

Research has found that executive ethical leadership is critical to employees.

Unethical behavior is lower, and employees are more committed to their organiza-

tion, more ethically aware, and more likely to engage in positive helping behaviors

(including reporting problems to management) in firms that have an ethical culture

characterized by top executives who are strong ethical leaders. 40

Research has also

found evidence that executive ethical leadership flows down through the organiza-

tion, affecting supervisors’ ethical leadership behavior and finally employee

behavior. 41

But interestingly, senior executives are often not aware of how important

CHAPTER 5 ETHICS AS ORGANIZATIONAL CULTURE 165

their ethical leadership is. Many believe that being an ethical person who makes eth-

ical decisions is enough. But it isn’t enough. Executives must lead on this issue (be

moral managers) if it is to register with employees. In a highly competitive environ-

ment of intense focus on the bottom line, employees need to know that the executive

leaders in their organization care about ethics at least as much as financial perform-

ance. An ethical leader makes it clear that strong bottom-line results are expected, but

only if they can be delivered in a highly ethical manner. Leaders may talk in terms of

reputation or use other language they find comfortable. But the message must be that

the firm’s long-term reputation is an asset that everyone must protect.

OTHER FORMAL CULTURAL SYSTEMS

Selection Systems

Selection systems are the formal systems that are in place for recruiting and hiring

new employees. Selection systems are vital to hiring people who fit the culture of the

firm. For example, all employees at Southwest Airlines (including pilots) are selected

based on their personalities (traits that include cheerfulness, optimism, and team

spirit) among other credentials. So it’s not surprising to find pilots helping to clean

the cabin when time is short, and flight attendants throwing gate parties on Hallow-

een and telling jokes to passengers over the plane’s loudspeakers. 42

When considering the ethical culture, organizations can avoid ethical problems

by recruiting the right people and by building a reputation that precedes the organiza-

tion’s representatives wherever they go. Companies can conduct background checks,

check references, administer integrity tests, and survey applicants using some of the

individual differences discussed in earlier chapters. For example, they might be wary

of hiring someone high on Machiavellianism if they’re trying to create a cooperative

culture where people help and support each other. Interviewers can also ask ethics-

related questions in interviews, for example, by asking candidates about ethical

issues they’ve confronted in the past and how they’ve handled them.

In an article entitled, ‘‘Can You Interview for Integrity?’’ William Byham 43

offered a series of questions an interviewer concerned about ethics might ask a

recruit. Here are adaptations of some of them:

1. We sometimes have to choose between what we think is right and what’s best

for the company. Can you give an example of such a time and tell how you

handled it?

2. Can you describe your current employer’s ethics? Are there things you feel

good about? bad about?

3. Please provide an example of an ethical decision you’ve made at work and tell

how you handled it. What factors did you consider?

4. Can you provide an example of some past work behavior that you’ve regretted?

How would you behave differently today?

166 SECTION III MANAGING ETHICS IN THE ORGANIZATION

5. Have you ever felt the need to exaggerate or bend the truth to make a sale?

6. Have you ever observed someone else stretching the rules at work? What did

you do, if anything?

7. People are often tempted to make something seem better than it is. Have you

ever been in such a situation?

8. Have you ever had to go against company policies in order to accomplish

something?

9. Have you ever managed someone who misled a client? How did you handle it?

10. What’s your philosophy of how to think about policies? Are they guidelines, to

be followed to the letter?

Our students have been asked similar types of questions in interviews with the

best companies. Are you prepared to answer questions like these?

Recruiters can also inform prospective employees about the importance of integ-

rity in their organization and what happens to those who break the rules. Companies

that are serious about integrity can include statements about their values and expect-

ations in recruiting literature, in the scripts recruiters use when interviewing job

candidates, in offer letters to candidates, and in new-hire orientation programs.

Coach Joe Paterno was outspoken on this topic in our interview with him. He

claimed that the Penn State football program avoids lots of problems faced by other

college sports organizations by being absolutely clear up front about its commitment

to education for its athletes and to doing things ‘‘by the [NCAA] book’’:

I think our reputation eliminates most problems before we start. Because

we do have a reputation. If a kid is looking for some kind of a deal, he

generally won’t fool around with us. But, I remember one kid whose dad

openly said, ‘‘He can’t live on that. He’s gotta have more money than

that.’’ I said, ‘‘That’s all we can do.’’ He said, ‘‘Well, somebody will

give it to us.’’ I wished the kid luck and walked out of the house.

Because the Penn State football program has a reputation for integrity, Coach

Paterno and his staff rarely face such requests. Those who are looking for money

under the table know to look elsewhere. And athletes who break the rules know in

advance that they’ll be disciplined.

These days, companies also need to be very selective when recruiting leaders

who are being considered for important decision-making roles in the firm. Many

recent business scandals have zeroed in on company chief financial officers (CFOs)

who played with the numbers to make it look as if profit goals expected by Wall

Street had been achieved when, in reality, they had not. Such individuals must dis-

play the strongest moral character in order to withstand marketplace pressures

to make the numbers look good. Questions about how they would respond to such

pressures and how they have handled them in the past can be useful in selecting these

key players.

CHAPTER 5 ETHICS AS ORGANIZATIONAL CULTURE 167

Values and Mission Statements

Once employees are on board, many organizations aim to guide employees’ behavior

through formal organizational value statements, mission statements, credos, policies,

and formal codes of ethical conduct. Value and mission statements and credos are

general statements of guiding beliefs. Most companies have them, but it’s important

that the values and mission statement be closely aligned with other dimensions of the

culture. According to James Collins, coauthor of Built to Last: Successful Habits of

Visionary Companies, ‘‘the words matter far less than how they are brought to life.

The mistake most companies make . . . is not setting up procedures to make sure the

mission is carried out.’’ If the policies and codes are followed in daily behavior

and people are held accountable to them, this is another example of a strong ethical

culture in alignment.

In the year 2000, Verizon’s published core values were integrity, respect, imagi-

nation, passion, and service. But consider this. Customer service representatives were

expected to finish each call with the following question (in precisely these words) to

the customer: ‘‘Did I provide you with outstanding service today?’’ During a strike in

the fall of 2000, workers cited this disconnect between values and operating proce-

dures as a source of stress and cynicism. Asking customer service representatives to

follow a specific ‘‘script’’ (that sometimes led to irate customers becoming even more

irate) did not respect the individual customer service representative’s ability to serve

the customer in a more natural way, and it certainly didn’t allow the employee to use

imagination or passion in providing customer service. The script may have been well

intentioned, but it conflicted with several of the core values professed by the com-

pany and appeared hypocritical to employees. Stated values that are inconsistent

with management practice can quickly generate employee cynicism. 44

Wouldn’t it

be better and more consistent with the value of respect to simply ask service repre-

sentatives to end their calls with a question about whether the customer was satisfied

with the quality of service, but let the representatives choose their own words?

Probably the most famous example of an effective mission and values statement

that is aligned with other cultural systems is the Johnson & Johnson credo, which

outlines the pharmaceutical company’s commitments. Probably most important is

the statement that the company’s ‘‘first responsibility is to the doctors, nurses and

patients, to the mothers and fathers and all others who use our products and ser-

vices.’’ Other responsibilities follow, for example, to employees, suppliers, commu-

nities, and finally stockholders. Notably, stockholders are listed last under the

assumption that if the other responsibilities are taken care of, stockholders will do

well. On its website (www.jnj.com), the company includes a video about the credo

and ‘‘how it lives in the Johnson & Johnson family,’’:

The values that guide our decision making are spelled out in our Credo.

Put simply, Our Credo challenges us to put the needs and well-being of

the people we serve first. Robert Wood Johnson [founder] . . . crafted

Our Credo himself in 1943. . . . This was long before anyone ever heard

168 SECTION III MANAGING ETHICS IN THE ORGANIZATION

the term ‘‘corporate social responsibility.’’ Our Credo is more than just a

moral compass. We believe it’s a recipe for business success.

Most famously, the corporation drew on its credo for guidance during the

Tylenol crises of the 1980s, when the company’s product was adulterated with cya-

nide. Company managers and employees made countless decisions (including

recalling all Tylenol at huge cost) that were inspired by and consistent with the

credo’s guidance. Today, company employees participate in a periodic survey and

evaluation of how well the company performs its credo responsibilities. Survey

results are then fed back to the senior management, and corrective action is taken to

correct any shortcomings. The current CEO, Bill Weldon, also makes a point of visit-

ing employees who are moving into leadership positions around the world to discuss

real problems and how the credo applies to them. As one recent example, in 2007, the

company reported itself to the SEC and Justice Department when it discovered possi-

ble violations of the Foreign Corrupt Practices Act (discussed further in Chapter 11).

It takes little for a company to make a formal statement like the J&J Credo, but it

takes quite an ongoing commitment to actually follow it. 45

Certainly, Johnson &

Johnson has had its share of ethical problems. But when you talk to current J&J

employees, they talk easily about the credo, its importance in the J&J culture, and

how it guides ethical conduct in the organization.

When you are considering joining an organization, look for the organization’s

values statement and ask employees for examples of how the organization lives its

values (or doesn’t). Such a question can provide useful insight into cultural alignment

and misalignment by making clear whether the values statement represents lofty for-

mal statements with little basis in reality or ‘‘values in use’’ that represent how peo-

ple really behave every day. It’s important to ask yourself whether your own stated

values (you should have assessed them in Chapter 2) match up with the organiza-

tion’s values. If they do, and you have evidence that this is an organization that lives

its values, you’re on your way to a job you’ll find satisfying.

Policies and Codes

Formal ethics policies (often called codes of ethics or codes of conduct) are longer

and more detailed than broad values and mission statements. They provide guidance

about behavior in multiple specific areas. For example, most ethics codes address

issues of respectful treatment of others, conflicts of interest, expense reporting, and

the appropriateness of giving and receiving gifts. Policy manuals are even lengthier

than codes and include more detailed lists of rules covering a multitude of job situa-

tions that are specific to the industry, organization, and type of job. An extended dis-

cussion of policies and codes follows in Chapter 6.

Most ethics codes were introduced within the past 30 years. A mid-1990s study

of the Fortune 1000 found that 98 percent of these large firms reported addressing

ethics and conduct issues in formal documents. Of those 98 percent, 78 percent had

codes of ethics. 46

In a 2005 Ethics Resource Center study, 86 percent of respondents

CHAPTER 5 ETHICS AS ORGANIZATIONAL CULTURE 169

from a wide variety of employers across the United States reported that the private

sector, public sector, and not-for-profit organizations they work for have formal

ethics policy standards. 47

So it’s fair to say that most employers are making an effort

to provide formal guidance to their employees regarding ethical and legal conduct.

It’s also important to note that these codes are living documents that are revised regu-

larly in response to changing conditions. For example, early ethics codes said nothing

about Internet privacy or social networking guidelines, but these topics are much

more common in today’s codes.

Most companies with codes now distribute them quite widely. A 1995 survey of

Fortune 1000 firms found that 75 percent of responding companies reported distrib-

uting their code or policy to at least 80 percent of their employees. 48

This finding

may be a by-product of the U.S. Sentencing Guidelines (discussed in Chapter 6),

which specify communication of compliance standards to all employees as a guiding

principle. Research has found that when employees are familiar with the code and

refer to it for guidance, they are less likely to engage in unethical behavior, more

likely to seek advice about ethical issues, and more likely to report ethical rule viola-

tions. 49

But, to have real influence on behavior, a code must be enforced. 50

Other-

wise, codes of conduct are more likely to be viewed as mere ‘‘window dressing’’

rather than guides for actual behavior.

Many firms post their codes on their websites. Some firms also distribute their

codes beyond their own employees to vendors and suppliers who are explicitly asked

to comply. For example, a supermarket company distributed its code to its suppliers

along with a letter, signed by the president:

Dear Business Associate:

As the holidays draw near, we are mindful of the mutually satisfying and

mutually profitable relationship which exists between our company and

our suppliers. We look forward to many more years of successful growth

together through our joint efforts to provide our customers with quality

products, excellent service and low price.

In recent years, we have found many of our staff members embar-

rassed by well-intentioned gifts from those with whom we do business.

Our Board of Directors approved the enclosed Code of Ethics which

clearly states our policy prohibiting our Associates from accepting gifts

from our suppliers and customers. We feel that this policy should apply

during the holidays as well as throughout the year.

With so much attention being given to practices which bring the

business community’s ethics into question, we urge your support of our

efforts to maintain the respect and confidence of the industry for the ob-

jectivity of our dealings with suppliers.

Since failure to comply with our policy will result in disqualification

from further business dealings with us, we request that you distribute this

letter to those in your company who have business dealings with our

corporation and its subsidiaries.

170 SECTION III MANAGING ETHICS IN THE ORGANIZATION

The most significant means of expressing your appreciation to our

staff continues to be your efforts to help us grow together by anticipating

and meeting the changing consumers’ needs and wants.

If you have any questions regarding this policy, please contact. . . .

With our best wishes for happy holidays and a healthy and prosper-

ous New Year.

Companies are also taking more responsibility for the behavior of suppliers,

even if those suppliers are in foreign countries. If Nike or Wal-Mart buys shoes or

clothes from a factory in Asia, these firms are increasingly aware that the supplier’s

actions are their responsibility. As an example, Wal-Mart requires its suppliers to

agree to comply with its code of ethical conduct and requires that suppliers post its

free 1-800 reporting telephone number at work sites. We’ll discuss this topic further

in Chapter 11.

The idea of guiding behavior with codes of conduct extends to higher education

institutions, where many colleges have honor codes that apply to academic (e.g., test

cheating, plagiarism) and sometimes even nonacademic (job search) behavior.

Research on honor codes in colleges and universities suggests that students cheat less

in institutions that have honor codes. 51 However, students’ perceptions of their peers’

cheating has an even stronger influence on cheating behavior than the existence of

a code. In addition, the certainty of being reported and the severity of penalties

are important because they support the idea that the code alone is not the most impor-

tant influence. 52

Managers, especially middle managers, want to have a stated organizational pol-

icy or code when it comes to serious ethical matters. Remember, cognitive moral

development research tells us that most people are looking outside themselves for

guidance, and stated organizational policy can be an important source of that guid-

ance. To determine where policy is needed, the organization can survey managers

about areas of ethical concern and their perception of the need for policy in each

area. In one study, managers made it clear that policy was needed in such areas as

expense claims, gifts and bribes, and treatment of competitor information. 53

Orientation and Training Programs

Socialization into the ethical culture is often begun through formal orientation pro-

grams for new employees and is reinforced through ongoing training. The organiza-

tion’s cultural values and guiding principles can be communicated in orientation

programs. Employees often receive an introduction to the values and mission state-

ments as well as the company’s history and current code of conduct. But new

employees are so overwhelmed with information that it’s important to follow up

with training programs that offer more specific guidance. An increasing number of

firms have added ethics to their list of training programs. Some have done so as

a result of the revision of the U.S. Sentencing Commission Guidelines and the

Sarbanes-Oxley legislation that requires public companies to conduct compliance

CHAPTER 5 ETHICS AS ORGANIZATIONAL CULTURE 171

training at all levels, including senior executives and the board of directors. Most

Fortune 1000 firms provide some ethics training, 54 and many of them do so annually.

In the 2005 Ethics Resource Center study, 55

69 percent of people surveyed said that

their employers provide ethics training and that this training is generally mandatory.

Some companies use online ethics training; others use classroom face-to-face train-

ing. In Chapter 6, we’ll present more specifics about how different firms conduct

ethics training.

It’s important to note that the ethics training must be consistent with other ethical

culture systems, because a training program that is out of alignment with other cul-

ture systems is thought of, at best, as a pleasant day away from the office. At its

worst, the ethics training is seen as an obstacle to getting ‘‘real’’ work done—or even

as a joke. For example, a young man who worked in mortgage lending in 2006 said

that his company had provided a high-quality weeklong training program to prepare

him for his job. Among other more technical aspects of his job, he was taught to

advise clients to be sure that they could afford their payments and to avoid incurring

additional credit card debt. He felt that this was smart and caring advice, and he felt

good about his new role. But when he returned to the office, his ‘‘mentor’’ (who had

been in the job only six months longer than he had) told him that all that mattered

was closing the deal and making money for himself and the company, and that

‘‘advising’’ clients was a waste of time. If his ‘‘advisor’’ role had been reinforced by

his mentor, the cultural message would have been entirely different. Perhaps the

company’s fate would have been different as well—it no longer exists.

Performance Management Systems

Performance management systems involve the formal process of articulating

employee goals, identifying performance metrics, and then providing a compensation

structure that rewards individual—and frequently team—effort in relation to those

goals. Performance management systems also include formal disciplinary systems

that are designed to address performance problems when they arise. An effective per-

formance management system is a key component of the ethical culture. The system

plays an essential role in alignment or misalignment of the ethical culture because

people pay attention to what is measured, rewarded, and disciplined. So if employees

with integrity are the ones who get ahead, and unethical behavior is disciplined, that

process goes a long way toward promoting an ethical culture.

DESIGNING A PERFORMANCE MANAGEMENT PROCESS THAT SUPPORTS

ETHICAL CONDUCT Because people ‘‘do what’s measured and rewarded,’’ the

best way for an organization to design a comprehensive performance management

system is to spend time identifying which factors drive the results the organization

strives to achieve. This type of corporate soul-searching generally results in a list of

these factors, both financial and nonfinancial. Just as Fortune magazine considers

reputation when designing its famed ‘‘lists’’ of admired companies, many sophisti-

cated companies understand that reputation, in many cases, drives long-term financial

172 SECTION III MANAGING ETHICS IN THE ORGANIZATION

results. However, many companies continue to design performance management pro-

grams that consider only financial results. They ignore the nonfinancial drivers that

can actually serve as the underpinning of the numbers. These companies focus on

what business results are delivered, and they ignore how those results were achieved.

That is probably the fastest way for an organization’s ethical culture to get out

of alignment.

Here’s how performance management systems can be designed to get great

results the right way. First, an organization needs to focus on the mechanics. For

example, once an organization understands what is necessary to drive results, it needs

to set goals to achieve those desired results and metrics to determine whether the

goals are being met. Real success in this area comes when organizations effectively

communicate those goals to every employee, helping employees identify how each

person can create value for the organization and then rewarding employees fairly for

their contribution to achieving those corporate goals. Once the mechanics are in

place, the next challenge is to marry the what with the how, and that’s where an

organization’s articulated values come in. Those values—probably concerning the

importance of people, integrity, diversity, customer service, and so forth—need to be

translated into behavior metrics that every employee is held accountable for. When

such a process is in place, high fliers who exceed all of their numbers can be held

accountable for how they met those numbers because this step is built right into their

performance expectations and rewards process. A good example is an account execu-

tive with a leading consulting company who managed her firm’s relationship with

many of the largest companies in New York City. Her clients generated revenues in

the millions for her firm, and that fact alone would ordinarily be enough to ensure

that she was named a partner in the firm. However, the senior management team was

so upset at how she trounced the firm’s stated value of ‘‘treating people with

respect’’—she was extremely abusive to her coworkers—that they repeatedly denied

her promotion. Of course, one could argue that she shouldn’t have a job at all. But at

least her behavior—the how involved in attaining her huge results—prevented her

from being promoted and esteemed as a partner.

American Express has tied its performance appraisal system directly to its values

and code of conduct. The values are associated with a culture that focuses on long-

term results as well as the desire to be an ‘‘employer of choice.’’ The company’s

ethics code states the expectation that leaders will be ethical role models who exhibit

the highest standards of integrity, develop employees, communicate the company’s

ethical expectations and their own support for those expectations, and create an open

environment so that employees feel free to express their concerns. The company’s

360-degree performance management process for senior leaders then identifies a

number of leadership competencies, including explicit examples of high performance

such as the following:

& Treats others with respect at all times; is fair and objective

& Actively listens and incorporates input from others

& Acts with integrity

CHAPTER 5 ETHICS AS ORGANIZATIONAL CULTURE 173

& Inspires the trust of the team, is reliable and consistent

& Talks openly and honestly—says it as it is

Examples of poor performance are also part of the system (e.g., ‘‘breaks promises, is

inconsistent, fails to show respect for others’’).

The ratings of these competencies are weighted substantially in promotion and

compensation decisions, thus making it difficult to get promoted if one is rated poorly

on these ethical leadership competencies and important to be rated highly if an

employee wants to advance. Finally, the company is investing resources in providing

leaders with the necessary skills so that they can effectively fulfill the company’s

expectations consistent with its values. 56

Alignment of the goals and rewards with the organization’s values is essential

because employees will generally do what’s measured and rewarded, and they’ll

assume that the behaviors that are rewarded represent the ‘‘real’’ ethical culture. So,

in the American Express example, behavior consistent with the company’s stated

values is measured and rewarded with promotions and compensation. This is a great

example of ethical culture alignment.

But misalignment of rewards with other aspects of the ethical culture is quite

common. For example, imagine an organization where everyone knows that the top

sales representative’s sales depend on lying to customers about delivery dates despite

an ethics code that talks about customer satisfaction as a key value. Not only does the

unethical conduct go undisciplined, but the sales representative receives large

bonuses, expensive vacations, and recognition at annual sales meetings. Members of

the sales force recognize that information about what is rewarded carries the ‘‘real’’

cultural message, and so the code becomes meaningless—or worse yet, an example

of top management’s hypocrisy.

For an ethical culture to be in alignment, poor performance against stated ethical

goals must also be addressed quickly and fairly. For example, dishonest or dis-

respectful behavior (or any behavior inconsistent with ethical values) should be dis-

ciplined using a progressive disciplinary system that employees perceive to be fair.

For example, a first offense (unless it is particularly serious) is usually addressed in a

constructive manner that gives the employee the opportunity to provide input and to

change the behavior. Subsequent misconduct is addressed more severely, and dismis-

sal is the ultimate outcome for repeat or serious offenses. It’s also important that

employees be disciplined equally across organizational and performance levels. That

means the successful star executive as well as the lower-level employee must be dis-

ciplined for knowingly breaking the rules. In fact, at that higher level, the discipline

should probably be quicker and harsher because the higher in the organization one

goes, the more responsibility one holds, and the more one is a role model for others.

As a result of recent scandals and increased scrutiny by regulators, companies are

taking discipline more seriously. Even the perception of unethical behavior can lead

companies to dismiss high-level executives in the current environment.

Penn State football coach Paterno, in our interview with him, was clear about the

importance of rules and their enforcement with every player. ‘‘The players know

174 SECTION III MANAGING ETHICS IN THE ORGANIZATION

what the penalties are. They have a pretty good idea of what’s going to happen to

them if they break the rules. . . . If I tell the players we have a rule, we have to

enforce it and apply it to everyone. You can’t say this is the rule and it’s for every-

body but your top quarterback.’’ Paterno showed how he held players accountable

when the Penn State team played its 1998 bowl game without two star players. One

had academic problems, and the other had been accused of taking a gift from a sports

agent. The team lost, but the program’s integrity was intact. Interestingly, Paterno’s

rule enforcement extends to alumni and boosters who have gotten other football pro-

grams in big trouble with the NCAA. Penn State regularly sends letters reminding

football game ticket holders about their responsibility to uphold the integrity of the

football program. And, according to Paterno, some alumni have lost their rights to

buy tickets because of past violations.

The bottom line is that performance management systems are important in them-

selves because they provide guidance about expected behavior, but they’re particu-

larly important in the sense that people look to them to reflect the ‘‘real’’ message

about what is valued in the organization. The essential question is whether consist-

ency exists between what the organization says (e.g., values statements, codes) and

what it actually measures, rewards, and punishes.

Organizational Authority Structure

Ethical cultures should guide individuals to take responsibility for their own behavior,

question orders to behave unethically, and report misconduct or problems. A strong

ethical culture incorporates a structure that emphasizes and supports individual respon-

sibility and accountability at every level. Employees are encouraged to take responsi-

bility for their own actions and to question authority figures if they have concerns. And

individuals are held accountable for negative consequences when they occur and for

reporting problems they observe. One manager we know created the idea of ‘‘Velcro’’

to convey the importance of responsibility to her direct reports. She tells them, if you

know about a problem, it’s yours until you address it. It’s stuck to you like Velcro!

Most modern organizations are bureaucratic, 57

meaning that they have a hierar-

chy of authority, a division of labor or specialization, standardization of activities,

and a stress on competence and efficiency. Bureaucracy provides many advantages,

and large organizations require a certain amount of bureaucracy in order to function.

The bureaucracy can also be used to create a structure that supports ethics, and you’ll

learn more about these in Chapter 6. For example, ethics and legal compliance offices

in organizations signal to everyone that these are important issues worthy of re-

sources, expertise, and staff. However, certain characteristics of bureau-cracy—such

as specialization, division of labor, and hierarchy of authority—can present problems

for the organization’s ethical culture.

AUTHORITY, RESPONSIBILITY, AND ETHICAL CULTURE With bureaucracy

comes the idea of legitimate authority. Look at any organizational chart. It will tell

you who supervises whom—who has authority over whom. These authority figures

CHAPTER 5 ETHICS AS ORGANIZATIONAL CULTURE 175

serve important bureaucratic roles. They direct work, delegate responsibility, conduct

performance appraisals, and make decisions about promotions and raises. 58

But the idea of legitimate authority can present problems for the ethical culture.

First, as you’ll learn in Chapter 7, people tend to obey authority figures no matter

what they are ordered to do. 59 This natural tendency toward unquestioning obedience

can be a real threat to the organization’s attempt to build individual responsibility

into its ethical culture. In attempting to control employee behavior, many firms

expect loyalty; and some demand unquestioning obedience from their employees.

You might think that’s a good idea—that authority figures have more experience and

should know what’s right, and employees should follow their orders. But even the

military with its authoritarian structure expects soldiers to question unethical orders.

Loyalty is generally a good thing, but you shouldn’t be expected to be loyal or obedi-

ent to an unethical boss or organization. Unquestioning obedience to authority means

that employees are not expected to think for themselves, to question bad orders, or to

take responsibility for problems they observe. Therefore, a ‘‘do as you’re told’’ and

‘‘don’t ask any questions’’ culture that expects unquestioning obedience from

employees can become involved in serious ethical problems. Research has found that

the more a firm demands unquestioning obedience to authority, the higher the

unethical conduct among employees, the lower their tendency to seek advice about

ethical issues, and the lower the likelihood that employees would report ethical

violations or deliver ‘‘bad news’’ to management. 60

Some managers create a structure designed to help them avoid blame. 61

Their

greatest fear is that when it comes time to blame someone, the finger will point their

way, and their job will be at risk. By delegating responsibility to those at lower levels

in the organization, the authority figure can often avoid personal blame for mistakes

or ethical blunders. When it comes time to blame someone, the finger of blame fre-

quently points down. Underlings, in particular, fear becoming the scapegoat for mis-

takes made at higher levels. CYA (cover your a—) memos proliferate as managers

look to blame someone in a relatively powerless position who is considered to

be expendable.

The structure of an organization can also fragment jobs and roles. 62

It isn’t nec-

essarily that individuals don’t want to take responsibility. But jobs and roles get so

divided up that they simply can’t see the big picture. 63

We’ll see in Chapter 7 how

military bureaucrats passed the buck for responsibility during an investigation of the

My Lai massacre in Vietnam. Those involved saw themselves only as cogs in a

machine. No one felt responsible for the larger outcomes of their actions.

NEW ORGANIZATIONAL STRUCTURES Organizations today are developing

structures designed to remove bureaucratic layers, push responsibility down, and

empower individuals to make decisions at every organizational level. Take the exam-

ple of office furniture manufacturer Herman Miller, Inc. (HMI), which is committed

to the values of ‘‘open communication,’’ ‘‘the dignity of each individual,’’ and ‘‘qual-

ity relationships based on mutual trust and integrity.’’ Kevin Knowles, a crew leader

for six years, said, ‘‘What always surprises me is that everyone in the company . . . is

176 SECTION III MANAGING ETHICS IN THE ORGANIZATION

free to talk with anyone in management about whatever they’d like to talk about.’’

Managers at HMI cite workers’ ability to go over their managers’ heads as a major

reason for the company’s success. ‘‘There’s no fear of retribution if you call someone

three levels above.’’ HMI touts a process its chairman calls ‘‘roving leadership’’ that

allows anyone to be a leader on a particular issue.

Here is an example of how roving leadership was tested successfully. An

employee with AIDS decided that he should let others know about his illness. A cow-

orker took the roving leader responsibility and informed the human resources man-

ager. Quickly, the entire plant was informed, and a physician from headquarters flew

in with a training videotape and a question-and-answer session. According to the rov-

ing leader, what’s important is that HMI’s value system ‘‘allows us to act on our

instincts and know the company will support us. Because the value of each individual

is important to us, we were able to stop the manufacture of furniture for one day to

take care of Peter.’’ 64

Such a culture likely contributes to the success of a company

that was named in 2002 by Forbes magazine as among the 400 best-performing large

American corporations. Business Ethics magazine also ranked HMI in the top 10

among the ‘‘100 Best Corporate Citizens.’’

These recent changes in organizational structure have powerful implications for

taking responsibility and for ethical decision making, and they increase the impor-

tance of having a strongly aligned ethical culture. When individuals are indepen-

dently making decisions, with less direct supervision, they need a strongly aligned

ethical culture to guide them. An important part of this picture is a structure that

supports taking individual responsibility for ethical action.

STRUCTURES TO SUPPORT REPORTING OF PROBLEMS In today’s organiza-

tions, fewer employees are directly supervised and organizations rely increasingly on

employees to alert them to problems or report misconduct. Yet employees are often

reluctant to do so. Therefore most large organizations have set up formal structures

and systems for making suggestions and for reporting misconduct internally. These

systems use intranets and phone systems to answer employees’ concerns and take

complaints and reports about observed wrongdoing.

As we all know, powerful norms exist against reporting on peers or superiors (in-

ternal whistle-blowing). The words we use to describe this behavior—tattling, squeal-

ing, snitching, informing, and ratting—all have negative connotations. In fact, there

isn’t a nice or even a neutral word to describe it. Can you come up with one? As sug-

gested in Chapter 4, whistle-blowers frequently suffer retaliation, particularly when

they report managerial or organizational misconduct. 65

They perceive that they are

punished rather than rewarded for doing what they think is right. Therefore employee

fear of reporting misconduct is widespread. If an organization claims that it’s attempt-

ing to develop a strongly aligned ethical culture, retaliation against a whistle-blower is

a powerful example of misalignment. Again, the workers view this ‘‘punishment’’ of

the whistle-blower as an example of the organization’s ‘‘real’’ ethical beliefs.

The ethical organization, however, should view an employee who takes respon-

sibility for reporting a problem or misconduct as important to an effective control

CHAPTER 5 ETHICS AS ORGANIZATIONAL CULTURE 177

system and must find ways to make such activity safe and encouraged. Some organi-

zations have even rewarded whistle-blowing. For example, in 1996, Fortune maga-

zine published memos from the chairman of a Wall Street financial services firm.

The following memo was addressed to senior managing directors, managing direc-

tors, and associate directors.

We need your help. Please help us get a message out to every associate. It

is essential that once again we stress that we welcome every suspicion or

feeling that our co-workers might have about something they see or hear

that is going on . . . that might not measure up to our standards of

honesty and integrity. . . .

We want people . . . to cry wolf. If the doubt is justified, the reporter

will be handsomely rewarded. If the suspicion proves unfounded, the per-

son who brought it to our attention will be thanked for their vigilance and

told to keep it up.

Forget the chain of command! That is not the way [the company]

was built. If you think somebody is doing something off the wall or his/

her decision making stinks, go around the person, and that includes

me. . . .

Get these messages out loud and clear.

We have had some senior people who resented ‘‘end runs.’’ They

quickly became associated with more conventional firms—you can draw

your own conclusions about whether their career change worked out for

the best. 66

This leader sent a clear message that whistle-blowing was encouraged and

rewarded. In the second memo, he shared information about a specific instance in

which two administrative assistants detected that fictitious taxicab vouchers were

being submitted by an employee. The employee was terminated, and the administra-

tive assistants were provided a cash award.

Decision-Making Processes

The organization’s formal decision-making processes are another important part of

the ethical culture. In an aligned ethical culture, leaders make ethical concerns a for-

mal part of all decision making. This emphasis on ethics in decision making can be

reinforced by regularly addressing ethical concerns in meetings and by making them

an expected part of managers’ reports regarding new products or new business ven-

tures. For example, managers may be asked to consider potential harm to multiple

stakeholders when proposing a new product or process. As one example, environ-

mental impact is now an expected and routine part of corporate decision making in

many firms. Some organizations are also creating special high-level ‘‘ethics’’ com-

mittees charged with reviewing major organizational level decisions from an ethical

perspective. 67

For example, one can imagine a responsible pharmaceutical company

178 SECTION III MANAGING ETHICS IN THE ORGANIZATION

making such assessments about whether to launch a new drug that has serious side

effects even after the FDA has approved it. Others have advocated the implementa-

tion of moral quality circles, groups set up to assess the morality of business

decisions. 68

OVERRELIANCE ON QUANTITATIVE ANALYSIS Decision-making processes can

contribute to unethical behavior by relying exclusively on quantitative analysis and

focusing only on financial outcomes. For example, in Chapter 3 we discussed the

decision-making process that kept the Ford Pinto from being recalled. In that situa-

tion, exclusive reliance on a quantitative cost-benefit analysis to the exclusion of

ethical considerations had disastrous consequences. In another example, Johns

Manville, the former corporate giant and producer of asbestos, was brought down

by decision-making processes that focused on the bottom line to the exclusion of

worker health. More than 40 years ago, top management began to receive informa-

tion implicating asbestos inhalation as a cause of severe lung disease in workers.

Managers and medical staff suppressed the research and concealed the information

from employees. During testimony, a lawyer reported on a confrontation with the

corporate counsel about the failure to share X-ray results with employees. The law-

yer reported asking, ‘‘You mean to tell me you would let them work until they

dropped dead?’’ The Johns Manville lawyer replied, ‘‘Yes, we save a lot of money

that way.’’ It was apparently cheaper to pay workers’ compensation claims than to

develop safer working conditions. A New Jersey court found that the company had

made a ‘‘conscious, cold-blooded business decision to take no protective or reme-

dial action.’’ 69

Obviously, organizational decision makers must rely on quantitative

analysis in making business decisions. But their reliance on numbers, to the exclu-

sion of ethical considerations, is problematic and contributes to an unethical cul-

ture. Discussions about whether the decision is the ‘‘right’’ thing to do must

accompany discussions about the effect of a particular decision on the bottom line.

Important decisions should be subjected to a discussion of ethical concerns, espe-

cially potential impacts on stakeholders.

BURDEN OF PROOF In 1986, Beech-Nut Nutrition Corporation, the second-largest

U.S. baby food manufacturer, pleaded guilty to 215 felony counts and admitted to

selling apple products that were a blend of synthetic ingredients. How did this hap-

pen? There were many causes, among them the company’s financial difficulties, the

belief that other companies were selling fake juice (industry norms), and the belief

that the juice was perfectly safe.

A chief cause may also have been the decision-making processes that were used.

When Jerome LiCari, director of research and development, recommended changing

suppliers in 1981 (because he suspected adulteration), Operations Head John Lavery

turned the traditional burden of proof around. Generally, baby food manufacturers

would switch suppliers if the supplier couldn’t demonstrate that the product was gen-

uine. In this case, Lavery said that if LiCari wanted to go with a more expensive

supplier, he would have to prove that the concentrate they were buying was

CHAPTER 5 ETHICS AS ORGANIZATIONAL CULTURE 179

adulterated (rather than genuine). Given the technology available at the time, this was

difficult, and the supplier was retained. 70

A similar decision-making criterion was used in the decision to launch the space

shuttle Challenger despite engineers’ concerns about O-ring failure in cold weather.

In previous launches, engineers had been required to show evidence that the launch

was safe (which would have been difficult, if not impossible). In the case of the

Challenger, the burden of proof was changed. Engineers who balked at the

impending launch decision were asked to prove that it was unsafe.

These examples suggest that it’s relatively easy to alter decision-making pro-

cesses to support whatever decision managers have already made. That’s why it’s

extremely important that organizations design formal decision-making processes in

good financial times and before a crisis occurs. Then, when trouble strikes, they can

rely on these effective decision-making processes to guide them. The space shuttle

Challenger might never have been launched if engineers had been required to prove

that the launch would be safe, rather than unsafe. Managers must be particularly alert

to changes in traditional decision-making criteria, especially in times of crisis.

INFORMAL CULTURAL SYSTEMS

In addition to the formal systems described previously, ethical culture is kept alive

informally and symbolically through informal norms, heroes, rituals, myths, and

stories. Employees experience the ‘‘real’’ organization through these informal sys-

tems, and information about them is carried through informal communication systems

such as the grapevine and water cooler gatherings. In this way, people come to know

what behaviors are ‘‘really’’ rewarded, how decisions are ‘‘really’’ made, and what

organizational leaders ‘‘really’’ care about and expect. If messages from the formal

and informal cultural systems differ, the ethical culture is out of alignment. It’s impor-

tant to note that employees are more likely to believe the messages carried by the

informal system. Recent research has found that employees’ perceptions of informal

cultural systems influence their ethics-related behavior more than the formal systems

do. 71 Therefore management of these informal systems is extremely important.

Role Models and Heroes

Much socialization about ethics is informally conducted by role models and mentors.

Role models may be senior managers, immediate superiors, or just more experienced

coworkers. Kent Druyvesteyn, former staff vice president of ethics, General Dynam-

ics Corporation, made an important point about senior leaders as ethical role models.

‘‘People in leadership need to . . . set the tone by the example of their own conduct.

We could have had all the workshops in the world. We could have even had Jesus

and Moses and Mohammed and Buddha come and speak at our workshops. But, if

after all of that, someone in a leadership position then behaved in a way which was

contrary to the standards, that instance of misconduct by a person in a leadership

position would teach more than all the experts in the world.’’ By contrast, if senior

180 SECTION III MANAGING ETHICS IN THE ORGANIZATION

leaders consistently model behavior of the highest integrity, employees learn that the

formal messages about ethics are real.

Mentoring occurs at all levels in the organization and is an informal process of

socialization whereby a more senior person takes a junior person under wing, provid-

ing information, career strategies, rules of the road, and so on. Individuals who are

passing through organizational ‘‘boundaries,’’ such as new hires, or those who are

transferring from one part of the organization to another are most affected by these

socialization influences. 72

In an ethical culture, the mentor emphasizes the impor-

tance of integrity and resistance to pressure to behave unethically. In an unethical

culture, the mentor may indoctrinate the individual into accepted unethical practices,

making it difficult for the individual not to go along. 73

The new accounting graduate

who was told by his superior in a public accounting firm, ‘‘You’re too honest to be an

auditor,’’ received a powerful message about ethics (or, actually, the lack thereof) in

that organization. When looking for evidence of ethical culture alignment and mis-

alignment, ask whether the organization’s role models behave consistently with the

organization’s espoused values and codes.

In an ethical culture, heroes should personify the organization’s values. 74 Heroes

are symbolic figures who set standards of performance by modeling certain behav-

iors, and they can be the organization’s formal leaders. Heroes can also be founders

who are no longer even present in the organization. As we noted earlier, Thomas

Jefferson is still very much alive at the University of Virginia. Stories about the

values of these heroes continue to influence decision making. Thus, a hero who

champions integrity and stands up for what is right may influence the behavior of

many in the organization.

The organization’s hero can also be someone who is not the president or chief

executive officer. When asked to identify their organization’s hero, Penn State stu-

dents inevitably name football coach Joe Paterno. ‘‘Joepa’’ as he is affectionately

known around campus, is not only the formal leader of the football team, but a cul-

tural hero as well. His values, including education first for college athletes and win-

ning by sticking to the rules of the game, 75

are considered by many to extend far

beyond the football program to permeate Penn State’s culture. On campus, Joepa and

his wife are also known for their philanthropy. For example, they showed their lead-

ership in the fund-raising campaign for a much-needed university library addition,

now known as the Paterno Library addition. Some say that Penn State is the only

university whose sports arena is named after a former president while the library

addition is named after its football coach.

Savvy executives understand the role that heroes play in forming or changing a

culture. One CEO of a financial services firm was very serious about identifying and

rewarding people who lived his organization’s values. He challenged his executives

to bring him stories of employees who were doing the right things in the right way,

who were models of the culture. He collected these stories and sent personal, hand-

written thank-you notes to those model employees. While a phone call might have

sufficed, employees were so thrilled with his written recognition and praise that they

displayed his notes in their offices. Those framed notes sent a rather loud message to

CHAPTER 5 ETHICS AS ORGANIZATIONAL CULTURE 181

other employees about what kind of behavior was valued at high levels. Of course,

they also helped spread word of the ‘‘heroes’’ and their deeds. In a similar example,

Southwest Airlines publishes letters from customers in its monthly newsletter about

employees who provided outstanding customer service. They publish the employees’

pictures in the newsletter and post them on the wall in the headquarters.

Norms: ‘‘The Way We Do Things around Here’’

Norms are standards of daily behavior that are accepted as appropriate by members

of a group. They exert a powerful influence on individual behavior in organizations,

and they can serve to support an ethical or unethical culture. For example, imagine an

individual entering a computer software sales job who is told immediately by peers in

the sales force that customers should always be dealt with honestly because long-

term customer relations are so important to the firm. Here, the norm of honesty with

customers supports ethical conduct and an ethical culture. On the other hand, con-

sider the individual who begins a new job and is told by his or her colleagues that

making the sale is all that counts, even if you have to lie to the customer about the

capabilities of the software or delivery dates. This norm supports unethical conduct

and contributes to an unethical culture. Either kind of norm (ethical or unethical) can

become ‘‘the way we do things around here’’ in the organization.

Formal rules are often inconsistent with the informal norms that develop. For

example, the salesperson described previously may have attended a mandatory ethics

training session that taught rules of honesty in customer relationships. But if the mes-

sage being sent on the job is to make the sale no matter what, the formal rule is over-

ridden. Similarly, at a fast-food restaurant, new employees may be told about a rule

against eating food without paying for it. However, once on the job, they may see

coworkers eating while the supervisor looks the other way. These coworkers may

rationalize their behavior because of their low pay or poor working conditions, or

because the supervisor doesn’t seem to care or eats food himself or herself. Encour-

aged to join in, the new employee is likely to do so, having learned the ‘‘real’’ rules.

Thus, despite formal rules, regulations, codes, and credos, informal norms are fre-

quently the most influential behavior guides and clues to the culture. When the for-

mal messages are consistent with the informal norms, this contributes to an ethical

culture in alignment. And when informal norms are inconsistent with formal rules

and codes, the culture is clearly out of alignment.

Rituals

Rituals are an important part of an ethical culture. They tell people symbolically what

the organization wants them to do and how it expects them to do it. 76

Rituals are a

way of affirming and communicating culture in a very tangible way. 77

Organizations

have meetings, parties, banquets, barbecues, and awards ceremonies that all convey

messages about what’s valued in the organization, Years ago, General Motors of

Canada introduced a new vision and values by asking each manufacturing unit to

182 SECTION III MANAGING ETHICS IN THE ORGANIZATION

create a small float representing one of the key values. These floats were part of a

parade that kicked off a full day of culture-building ritual surrounding the theme

‘‘Customers for Life’’ and the motto ‘‘I Am GM.’’ During the day, the CEO unveiled

a large painting of the group vision and told a story about the company’s future. To

reinforce the ‘‘I Am GM’’ motto, employees were asked to see themselves as being

responsible, at any moment, for the company, its products, and services. The day

ended with the ‘‘GM Acceleration Song’’ performed by the 100-person Up With

People singing and dancing group. The song had been revised to incorporate the new

values created by the leadership team. 78

Some companies have annual family picnics and ‘‘bring your child to work

days’’ that encourage employees to value time with their families. Some have on-site

child care so that having lunch with your preschool child in the company cafeteria

becomes a valued daily ritual and symbol of the extent to which the organization

values family. Others have awards ceremonies that convey the values of the organi-

zation, including awards for exemplary ethical conduct (see the discussion of

Lockheed Martin’s Chairman’s Award in Chapter 6). It’s important to ask what val-

ues are celebrated at these rituals and ceremonies because they can easily support

unethical behavior, such as making the numbers no matter how. For example, sales

meetings occur in most organizations. So is success with integrity being touted and

celebrated at these meetings, or are only those who make their numbers celebrated at

these events? Look for whether the rituals are consistent with the company’s stated

values, formal rules, and reward systems to help determine whether the culture is

in alignment.

Myths and Stories

Another extremely important way organizational culture is communicated and kept

alive is through the informal communication network. People tell stories to give

meaning to their world and life. 79

Organizational myths and stories explain and give

meaning to the organizational culture. They may be anecdotes about a sequence of

events drawn from the organization’s history. The story’s characters are employees,

perhaps company heroes, and the moral of the story expresses the organization’s

values. 80

At IBM, a story that has been told and retold describes how a low-level

employee denied Tom Watson, then IBM president, entry into a restricted area of the

company because Watson was not wearing his IBM identification badge. Watson

praised the employee, suggesting the importance of upholding company rules and

applying them to everyone.

In Paterno by the Book, 81

Joe Paterno recounted a powerful story from the Penn

State football program’s history about a leader standing up for what he believes at a

critical moment.

The Miami game was a turning point for me. . . . Late that night, as we

waited to board our charter plane, I strolled around the terminal replaying

CHAPTER 5 ETHICS AS ORGANIZATIONAL CULTURE 183

the joys of our victory when I saw something. . . . I looked again and

sure enough two of our best players were standing at a not-too-visible

spot of the airport bar, each fingering a glass of beer. . . . ‘‘You’re in

trouble,’’ I told them. ‘‘You know that you’re never to be seen standing

at a bar.’’ Naturally they protested that they were having only one, that

they were coming down after the great game, that nobody around here

knew them. ‘‘Never means never,’’ I said. Nobody on the squad could

possibly have the faintest doubt about my rule: We don’t want a

Penn State football player to drink in a public place. . . . He throws a

bad light on the entire team, putting every member under suspicion. Fur-

thermore, . . . football players are public figures, watched and talked

about. Also they’re role models. I reminded the two guys of the one loop-

hole in my rule: You can sit down with your folks privately and have a

glass of wine. You can even have a couple of beers on a Saturday night—

in private, with personal friends. That won’t make you victims of hear-

say. But if I see you standing at a public bar, you’re in trouble.

So now these two kids had forced the decision on me. One of them

had previously got himself in a minor jam with the police. It made a men-

tion in the paper. ‘‘You’re gone,’’ I said. That meant for good. Off the

team. To the other I said, ‘‘This is the first trouble I know about. You get

one more chance, but you’re suspended for the next two games.’’ On

Monday evening the captains . . . came to see me. The whole squad was

meeting at that moment, they said, and had sent the captains to tell me

that they felt the penalties were too harsh. They wanted me to take the

first guy back and lift the suspension on the second—and they wanted to

return to the meeting with my changed decision.

There are moments in the life of a manager when his ability to main-

tain control teeters on a hair. He can only manage with the consent of the

managed, unless he’s a prison warden. On the other hand, he can only

manage by unambiguous assertion of authority. Those are opposites, in a

sense. If the manager, who sometimes has to choose in a split second,

chooses the wrong one of those two, his effectiveness is finished.

‘‘Go back to your meeting and I’ll be there myself in five minutes,’’ I

said. The sentence was harsh, I said to myself, but the rule they had bro-

ken was perfectly clear, defensible, and necessary. The morale and sup-

port of the entire squad hung in the air. If I backed off, the message was

clear as a bell: I’m afraid of you guys. Ignore this rule. Ignore any rule

that itches as much as this one does. And if there’s a rule that itches less,

try me on that, too.

Five minutes later, that squad room was a tableau of sullen, hard

faces. I looked around, eye to eye, then talked. ‘‘A rule that protects us

all was broken. The decision I made was the best one for all of us. I have

no choice but to stand with it.’’ Faces stayed frozen, waiting. I couldn’t

read them. ‘‘If anybody here can’t live with it, go. Right now. If you stay,

184 SECTION III MANAGING ETHICS IN THE ORGANIZATION

you do it my way, the right way, living by the rules. If you decide to stay

and do it that way, we’ll have a great football team. I’m going to walk out

of here right now. A minute later I’m coming back in. Whoever’s here,

that’s who we’re going to play with.’’

As I walked bravely out of there, imitating John Wayne the best I

could, my knees were shaking. In the promised minute, I returned. Every

frozen face that was there during my first visit was still there, although

still frozen. 82

This story represents a critical event in the history of Paterno’s tenure as Penn

State’s football coach. It symbolizes the idea that rules are valued and enforced in a

culture of high integrity and accountability. To the extent that the story has become a

part of the organization’s culture, it serves to reinforce the culture’s emphasis on the

value of rules and represents alignment between the informal and formal cultures.

Similarly, in other ethical organizations, many of the stories that convey the impor-

tance of the ethical culture refer to rule violators being disciplined harshly or fired.

Organization members remember these stories, and they serve to reinforce the value

of doing the right thing. But note that stories can easily reinforce an unethical culture

if they’re about rule violators succeeding despite their unethical behavior.

Organizations can create stories to enhance the ethical culture. Medtronic, a

medical technology firm, has embraced storytelling as a way to do just that. At their

annual holiday party, the company invites several patients and their doctors to share

their stories of how the company’s products helped them. For example, one patient

with a long history of Parkinson’s disease told a story about how his life had become

uncontrollable until his doctor suggested trying a new Medtronic device for deep-

brain stimulation that gave him his life and his smile back. The CEO noted how these

stories help reinforce the company’s mission of serving others. 83

The best stories are simple ones based on real people and experiences that tap

into the company’s values and employees’ pride. Leaders interested in creating an

ethical culture should be on the lookout for examples of exemplary ethical behavior

to celebrate and find ways to communicate those stories on corporate websites and in

newsletters and award ceremonies. If you want to learn about an organization’s cul-

ture, ask an employee to tell you a story that exemplifies the culture. Then just sit

back and listen.

Language

Cultures develop and use language to communicate values to employees. The old

joke that business ethics is an oxymoron suggests the conventional wisdom that the

language of ethics is out of place in the business context. But in a strong ethical cul-

ture, ethics becomes a natural part of the daily conversation in the organization.

Employees feel comfortable talking ethics with each other and with their managers.

Organizational values are invoked in decision making. And managers routinely talk

ethics with their direct reports. It could be as simple as asking whether the decision is

CHAPTER 5 ETHICS AS ORGANIZATIONAL CULTURE 185

the right one, in an ethical as well as a business sense. Is this the ‘‘proper’’ thing to do

for customers, suppliers, the community? What is the potential harm to all

stakeholders?

The use of ethical language is likely related to decision-making behavior. In one

study, individuals who discussed their decision-making using ethical language were

more likely to have actually made an ethical decision. 84

These people talked about

ethics, morals, honesty, integrity, values, and good character. Those who had made

the unethical decision were more likely to recount the decision in the more traditional

business language of costs and benefits.

But, without cultural support for the use of ethical language, business managers

are reluctant to describe their actions in ethical terms even when they are acting for

ethical reasons. This reluctance, referred to as moral muteness, can be attributed to

the value placed on ‘‘efficient’’ decision making such that ethics talk can be thought

of as a distraction as well as to the desire to appear powerful and effective. Ethics talk

can also appear overly idealistic and utopian and inconsistent with the expectation

that managers can solve their own problems. 85

Interestingly, getting managers to talk with their employees about ethics has

been likened to parents discussing sex with their children. Although parents agree

that sex education is a good thing, they often find it difficult to broach the subject

with their children. Similarly, managers may find it difficult to begin a conversation

about ethics with other managers or with their subordinates. If these topics are typi-

cally not discussed, the manager who brings it up may feel like a goody-goody or a

spoilsport. 86

But managers who become comfortable talking about ethics will be role

models of important behaviors for their subordinates.

Kent Druyvesteyn, one of the first corporate ethics officers, told us an anecdote

about the early development of ethics training at General Dynamics.

Early on, at General Dynamics, we declared that our ethics training

workshops were to be small and interactive, and that they were to be led

by managers. And, we heard some complaints from managers who said,

‘‘We don’t know anything about this.’’ They thought we were going to

have them teach Aristotle and Kant, but that’s not what we were trying to

do. We also had people in training say, ‘‘We can’t have people in man-

agement do this. There won’t be any quality control.’’

At that point I said, ‘‘Let’s consider what it is we’re trying to do

here. What we are trying to do is raise awareness, to increase knowl-

edge of company standards and stimulate commitment to those stan-

dards. That’s the most important thing.’’ Here’s an analogy I’d like

you to consider. You have some small children and you decide that

you want to teach them about sex. There are a number of ways that

you could do this. You could hire an expert—someone who knows all

about sex, who knows the right words to use, who knows all the latest

terminology, who is pedagogically very skilled. You could hire this

person to come into your home, sit down in your living room with

186 SECTION III MANAGING ETHICS IN THE ORGANIZATION

your children, and teach them about sex. I mean, isn’t that good man-

agement technique—to delegate it to someone? On the other hand,

you could do it yourself. You may have limitations. You don’t know

everything. You might be embarrassed or tongue-tied. In the end

though, who do you think would be more effective? To have the

expert do it or for you to do it yourself? I have never had a person say

that the expert would be more effective.

Top managers can also make ethics an acceptable topic of conversation by sending a

message that it’s not only okay, but expected, to talk about one’s ethical concerns.

They can do this by leading discussions about ethics, discussing the ethics code and

its application in a video that is shown to employees, and otherwise openly discuss-

ing ethical problems with managers and employees. Senior managers can also build

‘‘ethical talk’’ into the fabric of the organization by requiring routine discussion of

ethical issues when important decisions are made. 87

In unethical cultures, ethical language is mostly absent or unethical language

may be used (as when employees talk about ‘‘screwing’’ customers). But, as we

noted in our discussion of euphemistic language in Chapter 3, organizational lan-

guage can also be used to avoid the ethical implications of actions. This can

happen either by design or inadvertently. For example, in Nazi Germany, the

code names for killing and genocide were final solution, evacuation, and special

treatment. This use of euphemisms allowed people to avoid confronting the true

meaning of their behavior. 88

Similarly, companies use euphemisms to avoid the

pain of decisions to lay off employees. Downsizing, rightsizing, restructuring,

and targeted outplacement are just a few terms we’ve encountered. It may be

easier to impose a targeted outplacement than a layoff, but are the ethical consid-

erations as obvious for targeted outplacement as they are for layoffs? Recall

from Chapter 3 that using ethical language increases individuals’ ethical aware-

ness. So, it’s essential that ethical language become a part of the organization’s

ethical culture.

ORGANIZATIONAL CLIMATES: FAIRNESS, BENEVOLENCE, SELF-INTEREST, PRINCIPLES

Beyond these specific systems, we have learned that employees’ perceptions of broad

climates within the organization are extremely fundamental and influential. These

climates tend to cross cultural systems. For example, when employees think about

ethical culture, they tend to think first about the climate for fairness in the organiza-

tion. This refers to whether they believe employees are treated fairly every day, in

terms of outcomes (pay, promotions, termination), processes (are processes for mak-

ing these important decisions about employees fair, nonarbitrary, and unbiased?) and

interactions (are employees treated every day with dignity and respect?). It makes

sense that it would be hard to talk seriously with employees about their ethical behav-

ior if they believe that the organization isn’t behaving fairly toward them. Research

CHAPTER 5 ETHICS AS ORGANIZATIONAL CULTURE 187

has demonstrated that these very general perceptions of fair treatment can be as pow-

erful an influence on employees’ ethical conduct as just about any of the formal or

informal cultural systems just described. Employees appear to reciprocate the organi-

zation’s fair treatment with their own ethical behavior. 89

Consistent with these findings about fairness climate, employees’ behavior is

also influenced by their general perceptions related to whether the organization is

characterized by a benevolence climate—meaning the organization is one that

‘‘cares’’ about multiple stakeholders, including employees, customers, and the

broader community and public. So employees are much more likely to demonstrate

ethical behavior in an organization they see as one that cares.

By contrast, employees in some organizations see their firm as promoting a very

instrumental self-interest climate, in which people protect their own interests above

all and everyone is essentially out for him or herself. Little attention is given to the

social consequences of one’s actions. You can imagine that an organization that

focuses exclusively on financial outcomes would create such a climate; and, logi-

cally, employee unethical behavior is higher in such organizations.

Finally, in a rule-based climate, employees perceive that the organization is

one where employees follow both laws and the organization’s rules when making

decisions. One can imagine that organizations in highly regulated industries that

take their codes, rules, and policies quite seriously would be rated highly on this

climate dimension, which has the largest impact on reducing unethical behavior.

This may be because this climate taps into perceptions of ethical culture align-

ment. An organization in which employees follow the rules is more likely to be

one whose formal (codes, policies) and informal systems (norms of daily behav-

ior) are aligned. 90

DEVELOPING AND CHANGING THE ETHICAL CULTURE

We can conclude from this cultural analysis that ethics at work is greatly influ-

enced by the organization’s ethical culture. Both formal and informal systems

and processes channel and reinforce certain kinds of behavior. Each of the sys-

tems on its own can support either ethical or unethical conduct. In addition, these

multiple systems can work together or at cross purposes, thus leading to an orga-

nization that is aligned to support ethical (or unethical) conduct or one that is

misaligned and creating mixed messages. Imagine an organization with an ethics

code that forbids employees from accepting gifts of any kind, but a senior execu-

tive is known to have accepted box seats at the ball game from a client. This ‘‘we

say one thing, but do another’’ approach leads to widespread cynicism. The code

loses all credibility as workers pay more attention to what’s done than to what’s

said. On the other hand, when the organization disciplines that executive, this

action visibly reinforces the code and supports the firm’s ethical stance with

all workers.

188 SECTION III MANAGING ETHICS IN THE ORGANIZATION

How an Ethical Culture Can Become an Unethical Culture

The story of Arthur Andersen, the now defunct auditing company, provides a sad

example. It demonstrates how a solidly ethical culture can be transformed into an

unethical culture and lead to the demise of an 88-year-old firm.

Founder Arthur Andersen created the company when he was in his twenties. As

chief executive, the messages he conveyed about ethical conduct were strong, con-

sistent, and clear. Andersen’s mantra, ‘‘Think straight—talk straight,’’ guided

employee behavior in an organization where ‘‘integrity mattered more than fees.’’

Stories about the founder’s ethics quickly became part of the firm’s mythology and

lore. For example, at the age of 28, Andersen confronted a railway executive who

insisted that the accounting firm approve his company’s books. Andersen said,

‘‘There’s not enough money in the city of Chicago to induce me to change that

report.’’ 91

Andersen lost the railway company’s business, but when that company

later went bankrupt, Arthur Andersen became known as an organization people could

trust to be honest and to stand up for what was right. In the 1930s, Arthur Andersen

emphasized accountants’ special responsibility to the public. The founder died in

1974; but he was followed by leaders with similar beliefs, and the strong ethical cul-

ture continued for decades. The management style Andersen initiated was a central-

ized, top-down approach that produced employees who were systematically trained

in the ‘‘Andersen Way.’’ Customers around the world knew they could expect quality

work and integrity from Andersen employees, who were all carefully socialized to

speak the same language and to share ‘‘Android’’ values. Through the 1980s, people

were proud to say they worked for Arthur Andersen, which would provide a good

career within a respected company.

In the mid-1990s, Arthur Andersen still provided formal ethical standards and

ethics training. In 1995 it even established a consulting group, led by Barbara Toffler,

to help other businesses manage their ethics. But Toffler quickly became concerned

about the ethics of her own employer, which she chronicled in her book Final

Accounting: Ambition, Greed, and the Fall of Arthur Andersen. 92

Toffler attributes

much of the change from ethical culture to unethical culture to the fact that the firm’s

profits increasingly came from management consulting rather than auditing. Auditing

and consulting are very different undertakings, and the cultural standards that worked

so well in auditing were inconsistent with the needs of the consulting business. Under

the new business realities, rather than standing for principles of honesty and integrity,

consultants were encouraged to keep clients happy and to concentrate on getting

return business because only revenues mattered. They were even expected to pad

prices or create work to increase profits.

Even the training that had always been so important to Andersen’s culture wasn’t

immune from change. Traditionally, new employees (recent college graduates) had

been required to attend a three-day enculturation session, but now new consultants

(often hired with experience outside the firm) were told not to forgo lucrative client

work to attend the training. So Toffler and lots of other consultants never got the

cultural training.

CHAPTER 5 ETHICS AS ORGANIZATIONAL CULTURE 189

By the time Toffler arrived at Andersen, no one referred to the ethical standards,

although they still existed in a big maroon binder. Toffler says, ‘‘When I brought up

the subject of internal ethics, I was looked at as if I had teleported in from another

world.’’ So Andersen still had ethics policies, and they still talked about ethics in

formal documents, but the business had changed dramatically and the approach to

ethics management had not kept pace. 93

Andersen was convicted of obstruction of justice for shredding documents asso-

ciated with its role as Enron’s auditing firm and quickly went out of business. The

Supreme Court reversed the decision in 2005, ruling that the jury had not been

advised that conviction in a white-collar crime case requires evidence of criminal

intent. However, the Supreme Court reversal did not clear Andersen of wrongdoing.

In fact, prosecutors provided evidence of criminal intent. 94

In the end, even if

someone had wanted to, there was no firm left to resurrect.

Was Andersen’s transformation from ethical culture to unethical culture a con-

scious process? Did anyone ever say, ‘‘Now we’re going to create an unethical cul-

ture at Arthur Andersen’’? We doubt that. But leaders’ lack of attention to the ethical

culture as the organization was undergoing a significant business transformation

practically guaranteed that the messages sent by the informal culture (revenues, reve-

nues, revenues) would begin to contradict those sent by the formal culture (ethics

standards) and lead to a culture that was seriously out of alignment as well as one

that increasingly sent messages suggesting only the bottom line mattered.

Becoming a More Ethical Culture

What should an organization do if it wants to transform itself into a more ethical

culture? Given our multisystem perspective on ethical culture, changing organiza-

tional ethics in a positive direction involves simultaneously developing or changing

multiple aspects of the organization’s ethical culture. If the effort is to be successful,

this ethical culture development or change should involve the alignment of all

relevant formal and informal organizational systems to focus on ethics. Obviously,

this requires a major commitment from the most senior levels in the organization.

Culture change attempted at lower levels is likely to be ineffective unless it is fully

supported and modeled by senior management. Unfortunately, some companies (e.g.,

Arthur Andersen) go out of business before they have this opportunity.

Changing organizational culture is more difficult than developing it. In a new

organization, workers are quite open to learning and accepting the culture of their

new organizational home, especially if it fits with their own values. However, anthro-

pologists and organizational scientists agree that changing an existing culture is an

extremely difficult process. 95

This view is consistent with an idea basic to all organi-

zational change and development efforts—that changing individual and group behav-

ior is both difficult and time-consuming. The human tendency to want to conserve the

existing culture is referred to as cultural persistence, or inertia. Culture has an addict-

ive quality, perhaps because culture members are aware that culture components can-

not be altered without affecting other cherished values and institutions. 96

Also, an

190 SECTION III MANAGING ETHICS IN THE ORGANIZATION

unethical culture tends to feed on itself. Why would successful (but unethical) man-

agers want to change? They wouldn’t. They would tend to hire people like them-

selves and perpetuate the culture that exists.

Most often, pressure for culture change comes from outside—from stockholders,

the government, regulators, and other outside stakeholders. The public’s general mis-

trust of business executives 97

and the threat of increased government regulation may

encourage leaders to look more closely at their ethical cultures. In addition, organiza-

tions whose members have been ‘‘caught’’ engaging in unethical behavior, or those

faced with costly lawsuits, are prime candidates for such ethical culture change

attempts. Finally, the government’s sentencing guidelines for corporate crime turned

the attention of many organizations to an evaluation of their ethical cultures during

the 1990s.

The influence of bad publicity and costly lawsuits extends beyond the targeted

organization. Organizations scan the environment for information that is relevant to

their concerns. When one organization in an industry is called on the carpet for a

legal or ethical violation, other organizations in the industry take notice and act.

Arthur Andersen’s indictment for document shredding in the Enron case, as well as

its mishandling of multiple audits over a number of years, sullied the reputation of

the entire auditing industry. Thus any organization that senses increased vulnerability

to external pressure is also more likely to consider the need for attention to the

management of its ethical culture.

The pressure to change organizational ethics can also come from within, but it is

not likely to occur unless the CEO decides that change is required. Often a new CEO

is brought in to lead the charge when serious culture change is needed, because only

the CEO has the clout and resources to make such significant changes. John A.

Swainson was brought in after a nearly 30-year career at staid and solid IBM to lead

Computer Associates (CA) in 2004. CA provides IT management software to large

users and generates over $4 billion in annual revenue. According to Swainson, the

‘‘tipping point’’ for the company occurred when its board instituted a new stock

option plan for senior executives in the 1990s. Executives had to hit stock price num-

bers and keep them up over a period of time if they were to get payouts of more than

$1 billion (you read that right—it’s a b). These senior managers started breaching

accounting rules in order to adjust revenues, and they started down a slippery slope

of accounting malfeasance. Over time, they became desperate to cover themselves

and engaged in ever more illegal acts. To make matters even worse, when the

government started investigating, the senior managers engaged in a cover-up. The

government’s investigation resulted in a huge fine and the firing of more than 15 exec-

utives including the CEO, who is now serving a 12-year prison sentence.

Swainson was brought in under a deferred prosecution agreement (DPA) with

the government. With a DPA, the government sets aside prosecution because prose-

cuting the company would likely put it out of business and its employees (most of

them innocent) out of a job. The company accepts a full-time government overseer

on the premises and agrees to all sorts of actions aimed at righting the ship. Perhaps

the most important requirement was to institute a new ethical ‘‘tone at the top.’’ As

CHAPTER 5 ETHICS AS ORGANIZATIONAL CULTURE 191

part of that effort, Swainson held hundreds of town hall meetings and began an inter-

nal blog where he communicates with employees about what he’s thinking or what

they’re thinking. He also answers ‘‘ask John’’ questions in a question-and-answer

forum where employees write him directly and he answers. He hired a highly experi-

enced senior-level legal compliance officer with access to the senior executive team,

set up an ethics training program and a hotline, and improved investigation capabili-

ties. In regard to the basic business, Swainson visited major customers and learned

that the sales force needed to be reorganized and their performance management sys-

tem changed to support building relationships rather than just making transactions.

Also, employees had to be brought into ‘‘a single, cohesive, ethics-based culture.’’

Because CA had grown so rapidly through acquisition, employees identified more

with their previous companies than with CA. Employees are now surveyed annually.

Morale and trust in management are improving, and just about everyone says they

understand the importance of the CA’s core values and ethical behavior. At the end

of his talk to students, Swainson said, ‘‘Today we are back on track. Employees are

proud of where they work. Customers want to do business with us. . . . Regaining

our reputation and our credibility has been a long and arduous process. We can’t and

won’t go back.’’ 98

A CULTURAL APPROACH TO CHANGING ORGANIZATIONAL ETHICS

Hopefully, we have made it very clear that changing the ethical culture requires

simultaneous and systematic attention to all cultural systems, with the goal of making

changes aimed at aligning all of these systems to support ethical conduct.

This is a huge job, so many companies employ consultants to help them design

their ethics initiatives. That may be appropriate, especially if the firm doesn’t have

the expertise in-house. But for these initiatives to go beyond superficial cookie-cutter

prescriptions, they need to be based on an in-depth analysis of the company and its

current ethical culture. Many consultants provide this kind of service. Unfortunately,

what firms sometimes receive is an off-the-shelf report with standard prescriptions

that could apply to any firm in what has sometimes been referred to as ‘‘spray and

pray.’’ ‘‘Consultants sprayed some ethics over [big companies] and prayed that some-

thing happened.’’ 99

These spray-and-pray programs can breed cynicism because they

raise employees’ awareness of ethics problems while simultaneously suggesting, in

many cases, how little the organization is doing about them. Employees are likely to

say, ‘‘We had our ethics-for-a-day training program. Now we’re back to doing things

the way we’ve always done them.’’

Companies that are looking for advice from consultants need a unique plan, one

designed to fit their firm’s needs and culture. Obviously, a unique plan takes more

resources to develop than the off-the-shelf variety. It requires the consultants to get

to know the firm, its people, and its operations. They must interview and survey

employees, managers, and executives to learn about the current state of affairs. Such

192 SECTION III MANAGING ETHICS IN THE ORGANIZATION

knowledge will allow the consultants to propose a culture shift that addresses the

firm’s unique needs.

Audit of the Ethical Culture

The only way to determine if the culture is aligned to support ethical behavior is to

conduct regular, comprehensive audits of all relevant cultural systems, both formal

and informal. If the ethical culture audit determines that aspects of the current culture

are not aligned to support ethical behavior, and the goal is to produce consistent eth-

ical conduct, then the culture must change.

Any attempt to develop or change organizational ethics can benefit from an orga-

nizational change approach that includes a system-wide, long-term view. In addition,

the approach should be based on the assumption that human beings are essentially

good and capable of development and change.

A Cultural Systems View

The cultural approach relies on the idea that to be successful, any attempt to develop

or change the organization’s ethics must take the entire cultural system into ac-

count. 100

The change effort must target multiple formal and informal organizational

subsystems. All of these subsystems must work together to create clear, consistent

messages about what is and is not appropriate behavior in the organization. If subsys-

tems conflict, confusion and mixed messages will result. Thus, the entire range of

formal and informal subsystems must be analyzed and targeted for development

and change.

This complex, multisystem approach to managing organizational ethics argues

against any short-term, quick-fix solutions that target only one system. The idea that

an organization could solve its ethics problem simply by establishing a code of ethics

or by hiring a consultant to deliver a one-hour ethics training program becomes ludi-

crous when the complexity of the ethics culture is understood. The management of

ethical conduct must be complex because it is influenced by multiple systems, each

of them complex in itself. Thus the complexity of the solution must match the com-

plexity of the problem. A solution that isn’t sufficiently complex will miss important

information, make incomplete diagnoses, and produce overly simple and short-

sighted solutions. The organization that creates a code of ethics in response to exter-

nal pressure and files it away without making changes in other systems such as the

reward system and decision-making processes is more likely making a negative state-

ment about organizational ethics rather than a positive one. The informal message is

that management is hypocritical and that the code of ethics serves no useful purpose

beyond creating a facade. The same can be said of lofty values statements. For exam-

ple, many of these statements talk about valuing diversity. But what happens when

people look around the organization and see few minority managers? Executives

need to understand that when they put a values statement in writing, employees

expect a commitment to follow through. The bottom line about systems thinking is

CHAPTER 5 ETHICS AS ORGANIZATIONAL CULTURE 193

understanding that if an organization decides to get into the ‘‘ethics business’’ with a

values statement, code, or training program, employees expect follow-through in

other parts of the organization. A failure to follow through will be interpreted

as hypocrisy.

A Long-Term View

The development of organizational culture takes place over a number of years; effec-

tive culture change may take even longer, as much as 6 to 15 years. 101

It requires

alterations in both formal and informal organizational systems that take time to

implement and take hold. Resistances must be overcome. New rules and values must

be reinforced via training programs, rites and rituals, and reward systems. Although

not all organizational change efforts take this long, deep interventions in the organi-

zational culture should be considered long-term projects.

Assumptions about People

Mainstream economics rests on the assumption that human beings are driven by self-

interest and opportunism and are likely to shirk responsibility. 102

Acceptance of this

assumption logically leads to change efforts focused almost exclusively on behav-

ioral control.

We believe, however, that human beings are essentially good and open to growth

and change. Most employees prefer being associated with a fair organization that

supports ethical behavior and disciplines unethical behavior. Given this type of envi-

ronment, most individuals can be expected to choose ethical behavior. Individuals

who engage in unethical behavior should not simply be labeled ‘‘bad’’ people. They

are often responding to external pressures or behaving according to organizationally

sanctioned definitions of what’s appropriate. Although unethical behaviors must be

disciplined, the organization should also treat unethical behavior as a signal to inves-

tigate itself and the cultural context in which the behavior occurred. Through culture,

the organization can change definitions of what is appropriate and inappropriate and

can relieve pressures to behave unethically.

Diagnosis: The Ethical Culture Audit

Formal attempts to develop or change organizational ethics should begin with diag-

nosis. Diagnosing culture calls for time-consuming techniques, such as auditing the

content of decision making, coding the content of organizational stories and anec-

dotes, and holding open-ended interviews with employees at all levels. 103

It also re-

quires systematic analysis of formal organizational systems, such as the structure and

criteria for rewards and promotion.

The framework presented in this chapter can provide guidance for an audit of the

organization’s ethical culture. 104

The audit should include probes into the formal and

informal organizational systems that are maintaining the ethics culture in its current

194 SECTION III MANAGING ETHICS IN THE ORGANIZATION

state. First, formal organizational systems can be analyzed in a number of ways.

Through surveys, interviews, observation at meetings, orientation and training ses-

sions, and analysis of organizational documents, perceptions of how formal organiza-

tional systems either encourage or discourage ethical behavior can be identified. The

kinds of questions that can be asked are listed in Table 5.1.

Auditing informal systems is equally important. In small organizations that don’t

have formal policies and decision processes, the informal systems are often more

important than the formal ones. The culture can be analyzed to identify the organiza-

tion’s heroes as well as the daily behaviors that are reinforced through stories, rituals,

and language. This can be accomplished through open-ended interviews, observation

of organizational rituals, and analysis of the organization’s stories. Some questions

that might be asked in an audit of the informal system are offered in Table 5.2. The

questions in Tables 5.1 and 5.2 are designed to suggest the general direction of an

ethical culture audit. Specific questions that arise out of the particular system being

analyzed must be developed to tap that system’s unique problems and needs. Canned

approaches to discovering culture that assume they can identify the relevant dimen-

sions in advance are bound to fail. 105

In addition, the multisystem nature of organiza-

tional culture suggests that responses must be compared within and across systems to

Table 5.1 Selected Questions for Auditing the Formal System

1. Do organizational leaders send a clear ethics message? Is ethics part of their

‘‘leadership’’ agenda?

2. Does the organization incorporate ethics into its selection procedures? Is integrity

emphasized in orienting new employees and training existing ones?

3. Does a formal code of ethics and/or values exist? Is it distributed? How widely? Is it

used? Is it reinforced in other formal systems, such as performance management

and decision-making systems?

4. Does the performance management system support ethical conduct? Are only

people of integrity promoted? Are ethical means as well as ends important in

performance management systems?

5. Is misconduct disciplined swiftly and justly in the organization, no matter what the

organizational level?

6. Are workers at all levels encouraged to take responsibility for the consequences of

their behavior? To question authority when they are asked to do something that they

consider to be wrong? How?

7. Are employees encouraged to report problems, and are formal channels available

for them to make their concerns known confidentially?

8. Are ethical concerns incorporated into formal decision-making processes? How? Or,

are only financial concerns taken into account?

9. Are managers oriented to the values of the organization in orientation programs?

Are they trained in ethical decision making?

10. Are ethical considerations a routine part of planning and policy meetings and new

venture reports? Does a formal committee exist high in the organization for

considering ethical issues?

CHAPTER 5 ETHICS AS ORGANIZATIONAL CULTURE 195

answer the key question of whether formal and informal systems are aligned within

themselves and with each other.

As you may have determined by now, a full-fledged ethical culture audit is a

complex process that the average manager is probably not prepared to conduct.

Many large organizations will have human resources staff with the required exper-

tise, and conducting such an audit within the firm can send a powerful message that

the firm cares about ethics (assuming that the audit is followed up with action). But

other organizations that do not have the expertise in-house will need assistance with

these diagnoses and intervention efforts. And in some firms, employees may be more

willing to discuss sensitive ethical issues with a trusted outsider.

Understanding the cultural issues addressed in this chapter can help any manager

become more sensitive to the complex nature of organizational ethics and the impor-

tance of cultural alignment. In fact, with a few changes, the questions in Tables 5.1

and 5.2 could be used to assess the ethics of an organization you’re considering join-

ing. You can ask your prospective manager or peers relevant questions and see how

they respond. If they welcome such questions, and respond to them easily, that’s a

good sign that people in the organization are comfortable talking about ethical issues.

Ethical Culture Change Intervention

Once the audit is complete, the data should be discussed with employees, who can

then be enlisted in developing a culture change intervention plan. The plan will be

guided by the diagnosis and the cultural, multisystem framework shown earlier in

Figure 5.1. Complementary changes in both the formal and informal organizational

systems should be a part of any recommended change effort.

Though difficult, changing formal systems is a more straightforward process

than changing informal systems. Gaps and problems identified in the diagnosis can

Table 5.2 Selected Questions for Auditing the Informal System

1. Identify the organization’s role models and heroes. What values do they represent?

What advice do mentors give?

2. What informal socialization processes exist, and what norms for ethical/unethical

behavior do they promote? Are these different for different organizational

subgroups?

3. What are some important organizational rituals? How do they encourage or

discourage ethical behavior? Who gets the awards—people of integrity who are

successful, or individuals who use unethical methods to attain success?

4. What are the messages sent by organizational stories and myths? Do they reveal

individuals who stand up for what’s right despite pressure, or is conformity the

valued characteristic? Do people get fired or promoted in these stories?

5. Does acceptable language exist for discussing ethical concerns? Is ‘‘ethics talk’’ part

of the daily conversation?

196 SECTION III MANAGING ETHICS IN THE ORGANIZATION

be addressed in a number of ways. Structure can be altered to encourage individuals

to take responsibility for their behavior and to discourage unquestioning deference to

authority. Codes of ethics can be designed participatively, distributed, and enforced.

Performance management systems can be designed with an emphasis on what people

do as well as on how they do it. Reporting misconduct can be encouraged by provid-

ing formal communication channels and confidentiality. 106

Orientation programs can

be designed to incorporate the organization’s values, and training programs can be

set up to prepare individuals to handle the ethical dilemmas they are most likely to

face in their work. Integrity can be emphasized in selection and promotion decisions.

Decision-making processes can incorporate attention to ethical issues by devoting

time at meetings and space in reports.

It’s more difficult to change the informal systems, particularly those that

have been found to maintain unethical behavior in the organization. However, these

changes must be undertaken if the total change effort is to be effective. These

changes require attention to the ‘‘art’’ rather than the science of management and

are consistent with ideas about the importance of ‘‘symbolic management.’’ With

symbolic management, organizational leaders and managers are encouraged to create

rituals, symbols, and stories that will influence those they manage. 107

The organization may have to be ‘‘remythologized’’ by reviving myths and

stories of its founding and resurrecting related tales that can guide organizational

behavior in the desired direction. 108

For example, Alexander Graham Bell’s com-

ment, ‘‘Come here, Watson, I need your help,’’ set up Bell’s concept of service that

was so important to AT&T’s success for many years. However, myths must also be

frequently evaluated for their continuing usefulness. New ones may have to be found

or developed to fit the organization’s current needs and goals. Remythologizing

should be done carefully and infrequently. Employees generally know what’s ‘‘really

going on’’ in the organization. If the revived myth doesn’t fit with organizational

reality, it will only increase their cynicism. Also, myths can’t be changed frequently.

Their strength and value in the culture come from their stability across time.

ETHICAL CULTURE CHANGE EVALUATION As with any organizational change

and development effort, results should be evaluated over an extended period of time.

Evaluation, like diagnosis and intervention, should be guided by the multisystem

framework. Surveys and interviews can be repeated regularly to determine if norms

have changed and to pinpoint potential problem areas. Documents can be analyzed to

determine if ethical issues are being consistently considered. Other outcomes, such as

number of lawsuits or reports of unethical behavior, can also be tracked. However,

interpretation may need to go beyond simply analyzing the numbers. Increased

reporting to a hotline, for example, may mean only that ethical sensitivity has been

raised and can be viewed as a positive outcome rather than a negative one. This part

of culture building is probably the most neglected. Most organizations are unwilling

to make the investment in evaluation, and therefore they really can’t calculate the

effectiveness of their efforts.

CHAPTER 5 ETHICS AS ORGANIZATIONAL CULTURE 197

THE ETHICS OF MANAGING ORGANIZATIONAL ETHICS

An effort aimed at changing organizational ethics requires us to face a particularly

knotty ethical dilemma: whose values or ethics are to prevail? We believe that a change

effort that involves employees is not manipulative or coercive and is most consistent

with a concern for the ethics of the change effort itself. Employees should participate

in the problem diagnosis and planning process. They should be aware of what’s hap-

pening and should take part in identifying problems and recommending solutions.

CONCLUSION

This chapter has proposed a cultural framework for thinking about ethical and

unethical behavior in the organizational context. Although individual character traits

may predispose a person to ethical or unethical behavior (as we learned in Chapter 3),

the cultural context in the organization also has a powerful influence on the behavior

of most employees. An organization that wishes to develop or change its ethical cul-

ture must attend to the complex interplay of formal and informal systems that can

support either ethical or unethical behavior. Quick-fix solutions are not likely to suc-

ceed. A broad, multisystem approach to developing and changing organizational

ethics was outlined to guide organizations in diagnosing and, if necessary, changing

their ethical culture.

Although most managers are not prepared to conduct a broad culture change

effort themselves, we hope this chapter has helped them understand that organiza-

tional ethics is a complex cultural phenomenon. With this knowledge, the manager

can begin to assess the ethical culture of his or her organization and will know what

questions to ask the consultant who is brought in to help with a culture change effort.

Individuals can also use these questions to help them assess their own organization

and their fit within it.

DISCUSSION QUESTIONS

For the following questions, focus on an organization you are familiar with. If you do

not have significant organizational experience, discuss the questions with someone

who is currently in a managerial role.

1. Does your organization address ethical issues in a formal, systematic way? How

has the organization customized an ethical culture to match its unique needs?

2. To the best of your ability, use Figure 5.1 and the questions in Tables 5.1 and 5.2

to conduct an ethics audit of the formal and informal systems in your

organization.

3. Having conducted the ethics audit, identify the formal and informal systems that

are in need of attention. Where is the culture out of alignment (if it is)? Design a

198 SECTION III MANAGING ETHICS IN THE ORGANIZATION

change program to address weaknesses and to align formal and informal systems

into a strong ethical culture.

4. How would you change the culture audit questions if you were planning to use

them to conduct an ethics culture audit of a firm you were considering joining?

CASE

CULTURE CHANGE AT TEXACO

In 1999, Texaco settled a lawsuit that charged the firm with discriminating against

African American employees. Texaco paid $175 million, the largest settlement of

this kind ever. The stock had fallen $3 per share after damning audiotapes became

available to the public. Peter Bijur, then CEO, decided to stop fighting the lawsuit

and settle. Minority employees received $140 million in damages and back pay, and

$35 million was used to establish an independent task force to evaluate the firm’s

diversity efforts for the next five years.

Apparently, there had been very real problems throughout the Texaco organiza-

tion. These included blatant racist language and behavior on the part of Texaco

employees and managers, documented lower pay for minority employees (in some

cases lower than the minimum for the job category), and comments such as the fol-

lowing overheard from a white manager: ‘‘I never thought I’d live to see the day

when a black woman had an office at Texaco.’’ Unfortunately for Texaco, and fortu-

nately for minority employees, a Texaco official taped meetings about the lawsuit in

which executives used racial epithets and discussed disposing of incriminating docu-

ments. The tapes were made available to the New York Times and, through it, to the

public. To make matters worse for Texaco, a former senior financial analyst, Bari-

Ellen Roberts, wrote a book detailing the humiliating experiences faced by many

minority employees, including herself. One time, a white official referred to Roberts

publicly as a ‘‘little colored girl.’’ She also detailed how the organization regularly

ignored grievance claims from minorities.

Bijur’s unusual solution to the problem was to launch a complete culture change

effort. During 1998 and early 1999, the company was in difficult financial straits due

to low crude oil and natural gas prices. Revenues and earnings dropped precipitously,

and the number of employees was reduced from 27,000 to 18,500. At a time like that,

another CEO might have put diversity issues aside in favor of a focus on the bottom

line. But Bijur took advantage of the opportunity to ‘‘make us a better company.’’

First, as leader, he made it clear that he would simply not tolerate disrespect and that

those who didn’t go along with the culture change would be dismissed. He even went

outside the company, speaking to groups such as the Urban League, saying that ‘‘a

real commitment must be more than a diversity checklist. It must be integrated into a

company’s business plan. It must guide our strategies for hiring, developing, promot-

ing and retaining a diverse workforce. And it must extend beyond our corporate

boundaries—not only to our customers and suppliers, but also to the communities in

CHAPTER 5 ETHICS AS ORGANIZATIONAL CULTURE 199

which we work and live.’’ 109

Bijur hired African Americans in key positions such as

director of global business development, general counsel, and head of diversity for

the company. All of these individuals said that they agreed to join the company

because they were convinced of Bijur’s personal commitment to real culture change.

New recruiting systems were set up to increase the pool of minority candidates for

every position. Women and minorities were included on all human resources com-

mittees. Search firms with success in minority hiring were brought in to help in the

effort. For a longer-term solution, the company set up scholarship and internship pro-

grams to interest minorities in areas of study of importance to the firm. Next, Bijur set

specific diversity goals and timetables and linked managers’ career success and

bonus compensation to their implementation of the initiatives. For all supervisors, he

instituted 360-degree feedback that included performance on diversity issues in eval-

uation criteria. He also established formal mentoring and leadership development

programs to ensure that the company was preparing minorities for leadership posi-

tions. All employees were required to attend diversity training, and such training is

now being incorporated into more general management training. And multiple meth-

ods were set up for filing grievances. These included hotlines, an alternative dispute

resolution process with independent arbitration and mediation, and a confidential out-

side ombudsman. Finally, the company set up a Minority and Women Business

Development Program to increase the number of minority wholesalers it works with.

This entire change effort is overseen by the independent task force set up as part of

the settlement. The task force meets frequently with employee groups and monitors

the firm’s progress.

How is Texaco doing? Angela Vallot, director of corporate diversity initiatives,

says, ‘‘You’re not going to change the way people think, but you can change the way

people behave.’’ Evidence suggests that changes in behavior are real. The new gen-

eral counsel has few discrimination lawsuits to work on. In 1999, a total of 44 percent

of new hires and 22 percent of promotions went to minorities. The company spent

over $1 billion with minority and women-owned vendors in 1997 and 1998 and

exceeded a goal set in 1996. Texaco even applied for inclusion in Fortune maga-

zine’s 1999 list of America’s 50 Best Companies for minorities. It didn’t make the

list, but the application suggests that company officials were feeling pretty good

about their progress. Weldon Latham, diversity expert at a Washington, D.C., law

firm, says, ‘‘They are absolutely a model for how to approach one of the biggest

problems facing this country.’’ 110

Reports of the monitoring task force were posted

on Texaco’s website. In a report, released in July 2000, the task force acknowledged

the commitment of Texaco’s leadership. ‘‘Through the values espoused by its leader-

ship and its efforts to improve its employment practices, the Company continues to

communicate effectively the message that it will not tolerate discrimination, harass-

ment, or retaliation in its workplace and that equality and fairness for all employees

are central to its mission as a highly competitive business enterprise.’’ The report also

cited the ombudsman program as employees’ preferred way to resolve grievances

that might otherwise have become serious problems. 111

The task force’s subsequent

report cited more mixed results. Although the overall percentage of women and

200 SECTION III MANAGING ETHICS IN THE ORGANIZATION

minority employees increased slightly, the percentage of new hires and promotions in

both categories declined, and the representation of women and minorities in execu-

tive positions fell slightly as well. Nevertheless, the percentage of promotions in

these groups exceeded the percentage represented in the overall Texaco workforce,

and this was viewed as a sign of continuing progress. 112

These reports noted that

there was much more work to be done, particularly after the firm became part of

Chevron in 2001. On its website, Chevron says that it values diversity and runs the

business ‘‘in a way that respects our employees and the world community.’’ The

company has recently received awards for its treatment of women and of gay, les-

bian, and transgender employees and was named a 1008 Best Diversity Company by

Diversity/Careers in Engineering & Information Technology magazine.

Case Questions

1. Identify the ethical culture problem at Texaco in the mid-1990s.

2. Based on the facts in the case and what you have learned in this chapter, evaluate

the culture change effort that is under way. What cultural systems have been tar-

geted in the culture change effort? What systems are missing, if any? Does the

culture appear to be in alignment? Misalignment? What else might management

do that it hasn’t already done to make the culture change successful?

3. How long might such a culture change take?

CASE

AN UNETHICAL CULTURE IN NEED OF CHANGE: TAP PHARMACEUTICALS

In 1995, Douglas Durand was offered the position of vice president for sales at TAP

Pharmaceuticals. TAP had been formed 25 years before by Takeda Chemical Indus-

tries of Japan and Abbott Laboratories. Durand, 50 years old at the time, had married

his high school sweetheart and worked for Merck & Co. for 20 years, during which

he moved up in the sales organization to senior regional director. TAP offered him

the opportunity to earn 40 percent more per year (in addition to a $50,000 signing

bonus) and help the company move from niche player to mass-market purveyor of

ulcer and prostate cancer medicine. He took advantage of the opportunity and looked

forward to the challenge.

But only a few months after arriving at TAP, he was shocked to find a very dif-

ferent culture from the one he had become accustomed to at Merck. Merck has long

had a reputation for ethics and social responsibility, and these qualities had been

borne out in Durand’s two decades of experience. For example, at Merck, every new

marketing campaign was evaluated by a legal and regulatory team before being

launched, and drugs were pulled back if necessary. But TAP turned out to be very

different. It quickly became clear that this was a culture where only numbers

CHAPTER 5 ETHICS AS ORGANIZATIONAL CULTURE 201

mattered. On his very first day on the job, Durand learned that TAP had no in-house

legal counsel. The legal counsel was considered a ‘‘sales prevention department.’’ At

one point, Durand found himself listening in on a conference call where sales repre-

sentatives were openly discussing bribing urologists with an up-front ‘‘administration

fee’’ to doctors who prescribed Lupron, the company’s new drug for prostate cancer.

TAP sales representatives also gave doctors Lupron samples at a discount or for free;

then they encouraged the doctors to charge Medicare full price and keep the differ-

ence. Durand overheard doctors boasting about their Lupron purchases of boats

and second homes. TAP offered a big-screen TV to every urologist in the coun-

try (10,000!), along with offers of office equipment and golf vacations. And reps

weren’t accounting for the free samples they gave away—as required by law. Durand

knew that failure to account for a single dose can lead to a fine of as much as

$1 million. Finally, rather than selling drugs based on good science, TAP held parties

for doctors. One such party for a new ulcer drug featured ‘‘Tummy,’’ a giant fire-

belching stomach.

Durand soon became frantic and worried about his own guilt by association. Ini-

tially, he tried to change the culture. After all, he had been hired as a vice president.

But everything he tried was resisted. He was told that he just didn’t understand the

culture at TAP. When he talked about the importance of earning physicians’ trust,

the sales reps just rolled their eyes. He then tried to influence change ‘‘the TAP way’’

by offering a bonus to reps who kept accurate records of their samples. The program

actually worked, but then senior management discontinued the bonus—and, of

course, the reps stopped keeping track. Over time, Durand began finding himself

excluded from meetings, and he felt trapped. What would happen to him if he left

this new job in less than a year? He wouldn’t collect his bonus, and he wondered if

anyone else would hire him. What would happen to his family? But he also worried

about becoming the corporate scapegoat.

In desperation, Durand turned to an old friend he knew from Merck—

Glenna Crooks, now president of Strategic Health Policy International. Appalled

by what she heard, Crooks encouraged him to document the abuses he had ob-

served and share the information with Elizabeth Ainslie, a Philadelphia attorney.

Given the documented fraud against the U.S. government, Ainslie encouraged

Durand to sue TAP under the federal whistle-blower program. Armed with doc-

uments, he filed the suit and federal prosecutors ran with it. Durand left TAP for

Astra Merck in 1996. But under the whistle-blower program, investigations are

conducted in secret. Neither TAP nor Astra Merck was supposed to know about

it. The investigation took years, and, when called to testify, Durand had to make

excuses to take time off from his new job. He was uncomfortable living as a

‘‘double agent.’’ In the end, TAP pleaded guilty to conspiracy to cheat the fed-

eral government and agreed to pay a record $875 million fine. In October 2001,

Durand collected $77 million ($28 million went to taxes), his 14 percent share

of the fine paid under the federal whistle-blower statute. He retired to Florida to

be closer to his parents, but he had yet to face the unpleasant task of testifying

against six TAP executives, some of whom had worked for him.

202 SECTION III MANAGING ETHICS IN THE ORGANIZATION

NOTES

1. R. A. Barrett, Culture and Conduct: An Excursion in Anthropology (Belmont, CA: Wadsworth,

1984).

2. T. E. Deal and A. A. Kennedy, Corporate Cultures (Reading, MA: Addison-Wesley, 1982); M. R.

Louis, ‘‘A Cultural Perspective on Organizations: The Need for and Consequences of Viewing

Organizations as Culture-Bearing Milieux,’’ Human Systems Management2 (1981): 246–58; J.

Martin and C. Siehl, ‘‘Organizational Culture and Counterculture: An Uneasy Symbiosis,’’

Organizational Dynamics (Autumn 1983): 52–64; A. M. Pettigrew, ‘‘On Studying Organizational

Cultures,’’ Administrative Science Quarterly 24 (1979): 570–80; E. H. Schein, Organizational

Culture and Leadership (San Francisco: Jossey-Bass, 1985); L. Smircich, ‘‘Concepts of Culture

and Organizational Analysis,’’ Administrative Science Quarterly 28 (1983): 339–58.

3. Smircich, ‘‘Concepts of Culture and Organizational Analysis.’’

4. Deal and Kennedy, Corporate Cultures.

5. B. Morris, ‘‘He’s Smart. He’s Not Nice. He’s Saving Big Blue,’’ Fortune, 14 April 1997, 68–81.

6. Deal and Kennedy, Corporate Cultures.

7. J. Van Maanen and E. H. Schein, ‘‘Toward a Theory of Organizational Socialization,’’ in Research

in Organizational Behavior (vol. 1), eds. L. Cummings and B. Staw (New York: JAI Press, 1979);

C. D. Fisher, ‘‘Organizational Socialization: an Integrative Review,’’ in Research in Personnel and

Human Resources Management (vol. 4), eds. K. Rowland and G. Ferris (Greenwich, CT: JAI Press,

1986), 101–45.

8. Barrett, Culture and Conduct.

9. P. Murphy, ‘‘Creating Ethical Corporate Structures,’’ Sloan Management Review 30, no. 2 (1989):

221–27.

10. Ibid.

11. P. Wesslund, ‘‘Ethics Are No Substitute for the Real Thing,’’ Business Week, 27 April 1992, 10.

12. Murphy, ‘‘Creating Ethical Corporate Structures.’’

13. ‘‘The Business Effect of Ethics on Employee Engagement,’’ LRN Ethics Study, 2006, www.lrn

.com.

14. Schein, Organizational Culture and Leadership.

15. Pettigrew, ‘‘On Studying Organizational Cultures’’; E. H. Schein, ‘‘How Culture Forms, Develops,

and Changes,’’ in Gaining Control of the Corporate Culture, eds. R. H. Kilmann, M. J. Saxtion, and

R. Serpa (San Francisco: Jossey-Bass, 1985), 17–43; P. Selznick, Leadership in Administration

(New York: Harper & Row, 1957).

16. K. Brooker, ‘‘Can Anyone Replace Herb?’’ Fortune, 17 April 2000, 186–92.

17. J. Guinto, ‘‘Wheels Up,’’ Southwest Airlines Spirit, June 2006, 109–17.

18. A. Sewer, ‘‘Southwest Airlines: The Hottest Thing in the Sky,’’ Fortune, 8 March 2004, 88–89.

Case Questions

1. Analyze the ethical culture at TAP. Does the culture appear to be in alignment?

Misalignment?

2. Based on the facts in the case and what you have learned in this chapter, evaluate

the culture change effort that Douglas Durand undertook. What cultural systems

did he target in the culture change effort? What systems were missing, if any?

3. Why did his culture change effort fail? What would it take for it to succeed?

Source: C. Haddad. and A. Barrett, ‘‘A Whistle-Blower Rocks an Industry,’’ Business Week, 24 June 2002,

126–30.

CHAPTER 5 ETHICS AS ORGANIZATIONAL CULTURE 203

19. Schein, ‘‘How Culture Forms, Develops, and Changes’’; Selznick, Leadership in Administration.

20. M. Gunther, ‘‘Money and Morals at GE,’’ Fortune, 15 November 2004, 177–78.

21. Ibid.

22. L. K. Trevi~no, M. Brown, and L. Pincus-Hartman, ‘‘A Qualitative Investigation of Perceived

Executive Ethical Leadership: Perceptions from Inside and Outside the Executive Suite,’’ Human

Relations 56, no. 1 (2003): 5–37; L. K. Trevi~no, L. P. Hartman, and M. Brown, ‘‘Moral Person and

Moral Manager: How Executives Develop a Reputation for Ethical Leadership,’’ California

Management Review 42, no. 4 (2000): 128–42.

23. T. J. Neff and J. M. Citrin, Lessons from the Top: The Search for America’s Best Leaders (New

York: Doubleday, 1999).

24. Trevi~no et al., ‘‘Moral Person and Moral Manager.’’

25. P. O’Neill, ‘‘O’Neill on Ethics and Leadership,’’ Speech at the Berg Center for Ethics and

Leadership, Katz Graduate School of Business, University of Pittsburgh, 2002.

26. Joe Paterno, Paterno by the Book (New York: Random House, 1989).

27. R. C. Borden, ‘‘Sherrill’s Termination Released,’’ Bryan College Station Eagle, 3 March 1989, 1; A.

Hamilton, ‘‘Switzer Resigns,’’ (State College, PA) Centre Daily Times, 20 June 1989, D1; ‘‘Status

of Sports Investigations on College Campuses,’’ Chronicle of Higher Education, 7 June 1989, A34.

28. B. George, ‘‘Why It’s Hard to Do What’s Right,’’ Fortune, 29 September 2003, 98.

29. J. A. Byrne, ‘‘Chainsaw,’’ Business Week, 18 October 1999, 128–49.

30. G. Tidwell, ‘‘Accounting for the PTL Scandal,’’ Today’s CPA, July–August 1993, 29–32.

31. J. Sonnenfeld, ‘‘The Real Scandal at BP,’’ Business Week, 14 May 2007, 98.

32. L. K. Trevi~no, G. R. Weaver, D. G. Gibson, and B. L. Toffler, ‘‘Managing Ethics and Legal

Compliance: What Works and What Hurts,’’ California Management Review 41, no. 2 (1999):

131–51.

33. C. Loomis, ‘‘Whatever It Takes,’’ Fortune, 25 November 2002, 74–75.

34. C. Loomis, ‘‘Tough Questions for Citigroup’s CEO,’’ Fortune, 29 November 2004, 115–22.

35. Loomis, ‘‘Whatever It Takes,’’ 75.

36. Loomis, ‘‘Tough Questions for Citigroup’s CEO,’’ 118.

37. M. Vickers, ‘‘The Unlikely Revolutionary,’’ Fortune, 6 March 2006, 132–44.

38. Peter S. Goodman, ‘‘Sluggers and Bankers in the Strikeout Era,’’ New York Times, 16 January 2010,

www.nyt.com.

39. Katrina Brooker, ‘‘Citi’s Creator, Alone with His Regrets,’’ New York Times, 3 January 2010,

www.nyt.com.

40. Trevi~no et al., ‘‘Managing Ethics and Legal Compliance.’’

41. D. Mayer, M. Kuenzi, R. Greenbaum, M. Bardes, and R. Salvador, ‘‘How Does Ethical Leadership

Flow? Test of a Trickle-Down Model,’’ Organizational Behavior and Human Decision Processes

108 (2008): 1–13.

42. Brooker, ‘‘Can Anyone Replace Herb?’’

43. W. C. Byham, ‘‘Can You Interview for Integrity?’’ Across the Board, March–April 2004, 34–38.

44. J. L. Seglin, ‘‘The Values Statement vs. Corporate Reality,’’ New York Times, 17 September 2000,

www.nytimes.com.

45. G. Colvin and J. Shambora, ‘‘J&J: Secrets of Success,’’ Fortune, 4 May 2009, 117–21.

46. G. R. Weaver, L. K. Trevi~no, and P. L. Cochran, ‘‘Corporate Ethics Practices in the Mid-1990s: An

Empirical Study of the Fortune 1000,’’ Journal of Business Ethics 18, no. 3 (1999): 283–94.

47. 2005 National Business Ethics Survey (Washington, D. C.: Ethics Resource Center, 2005).

48. Weaver et al., ‘‘Corporate Ethics Practices in the Mid-1990s.’’

49. Trevi~no et al., ‘‘Managing Ethics and Legal Compliance.’’

50. J. Kish-Gephart, D. Harrison, and L. K. Trevi~no, ‘‘Bad Apples, Bad Cases, and Bad Barrels: Meta-

analytic Evidence about Sources of Unethical Decisions at Work: Understanding Calculated and

Impulsive Pathways,’’ Journal of Applied Psychology 95 (2010):1–31.

51. W. J. Bowers, Student Dishonesty and Its Control in College (New York: Bureau of Applied Social

Research, Columbia University, 1964); W. G. Campbell, A Comparative Investigation of Students

204 SECTION III MANAGING ETHICS IN THE ORGANIZATION

under an Honor System and a Proctor System in the Same University (Los Angeles: University of

Southern California Press, 1935); R. Canning, ‘‘Does an Honor System Reduce Classroom

Cheating? An Experimental Answer,’’ Journal of Experimental Education 24 (1956): 291–96.

52. D. L. McCabe and L. K. Trevi~no, ‘‘Academic Dishonesty: Honor Codes and Other Situational

Influences,’’ Journal of Higher Education 64, no. 5 (1993): 522–28.

53. D. Nel, L. Pitt, and R. Watson, ‘‘Business Ethics: Defining the Twilight Zone,’’ Journal of Business

Ethics 8 (1989): 781–91.

54. Weaver et al., ‘‘Corporate Ethics Practices in the Mid-1990s.’’

55. Ethics Resource Center, 2005 National Business Ethics Survey.

56. G. Weaver, L. K. Trevi~no, and B. Agle, ‘‘Somebody I Look Up To: Ethical Role Models in

Organizations,’’ Organizational Dynamics 34, no. 4 (2005): 313–30.

57. M. Weber, The Theory of Social and Economic Organizations, trans. A. M. Henderson and

T. Parsons (New York: Free Press, 1947).

58. G. Sjoberg, T. R. Vaughan, and N. Williams, ‘‘Bureaucracy as a Moral Issue,’’ Journal of Applied

Behavioral Science 20, no. 4 (1984): 441–53.

59. S. Milgram, Obedience to Authority: An Experimental View (New York: Harper & Row, 1974).

60. Trevi~no et al., ‘‘Managing Ethics and Legal Compliance.’’

61. R. Jackall, Moral Mazes: The World of Corporate Managers (New York: Oxford University Press,

1988).

62. R. M. Kanter, The Changemasters (New York: Simon & Schuster, 1983).

63. H. C. Kelman and V. L. Hamilton, Crimes of Obedience: Toward a Social Psychology of Authority

and Responsibility (New Haven, CT: Yale University, 1989).

64. Joani Nelson-Horchler, ‘‘The Magic of Herman Miller,’’ Industry Week, 18 February 1991, 11–12,

14, 17.

65. M. P. Glazer and P. M. Glazer, ‘‘Whistleblowing,’’ Psychology Today, August 1986, 36.

66. A. C. Greenberg, ‘‘Memos from the Chairman,’’ Fortune, 29 April 1996, 173–75.

67. H. Schwartz and S. M. Davis, ‘‘Matching Corporate Culture and Business Strategy,’’

Organizational Dynamics, Summer 1981, 30–48.

68. L. Tiger, ‘‘Stone Age Provides Model for Instilling Business Ethics,’’ Wall Street Journal,

11 January 1988, 18.

69. S. Gellerman, ‘‘Why ‘Good’ Managers Make Bad Ethical Choices,’’ Harvard Business Review 64,

no. 4 (1986): 85–97.

70. C. Welles, ‘‘What Led Beech-Nut Down the Road to Disgrace?’’ Business Week, 22 February 1988,

124–37.

71. Trevi~no et al., ‘‘Managing Ethics and Legal Compliance.’’

72. Van Maanen and Schein, ‘‘Toward a Theory of Organizational Socialization.’’

73. J. A. Waters, ‘‘Catch 20.5: Corporate Morality as an Organizational Phenomenon,’’ Organizational

Dynamics, Spring 1978, 319.

74. Deal and Kennedy, Corporate Cultures.

75. Paterno, Paterno by the Book.

76. Deal and Kennedy, Corporate Cultures.

77. J. M. Beyer and H. M. Trice, ‘‘How an Organization’s Rites Reveal Its Culture,’’ Organizational

Dynamics 15, no. 4 (1987): 524.

78. J. Channon, ‘‘Creating Esprit de Corps,’’ in New Traditions in Business: Spirit and Leadership in

the 21st Century (San Francisco: Berrett-Koehler, 1992) 53–66.

79. I. Mitroff and R. H. Kilmann, ‘‘On Organizational Stories: An Approach to the Design and

Analysis of Organization through Myths and Stories,’’ in The Management of Organization

Design: Strategies and Implications, eds. R. Kilmann, L. Pondy, and D. P. Slevin (New York:

North-Holland, 1976).

80. J. Martin and C. Siehl, ‘‘Organizational Culture and Counterculture: An Uneasy Symbiosis,’’

Organizational Dynamics, Autumn 1983, 52–64.

81. Paterno, Paterno by the Book.

CHAPTER 5 ETHICS AS ORGANIZATIONAL CULTURE 205

82. Ibid.

83. S. Fisher, ‘‘Telling Tales: The Art of Corporate Storytelling,’’ Costco Connection, October 2007,

22–23.

84. L. K. Trevi~no, ‘‘The Influences of Vicarious Learning and Individual Differences on Ethical

Decision Making in the Organization: An Experiment,’’ Unpublished doctoral dissertation, Texas

A & M University, College Station, Texas.

85. F. B. Bird and J. A. Waters, ‘‘The Moral Muteness of Managers,’’ California Management Review,

Fall 1989, 73–88.

86. K. Berney, ‘‘Finding the Ethical Edge,’’ Nation’s Business, August 1987, 18–24.

87. Bird and Waters, ‘‘The Moral Muteness of Managers.’’

88. Kelman and Hamilton, Crimes of Obedience.

89. Trevi~no et al., ‘‘Managing Ethics and Legal Compliance.’’

90. K. D. Martin and J. B. Cullen, ‘‘Continuities and Extensions of Ethical Climate Theory: A Meta-

analytic Review,’’ Journal of Business Ethics 69 (2006): 175–94.

91. B. Toffler, Final Accounting: Ambition, Greed, and the Fall of Arthur Andersen (New York:

Broadway Books, 2003).

92. Ibid.

93. Toffler, Final Accounting; L. K. Trevi~no and M. E. Brown, ‘‘Managing to Be Ethical: Debunking

Five Business Ethics Myths,’’ Academy of Management Executive 18, no. 2 (2004): 69–81.

94. K. Eichenwald, ‘‘Reversal of Andersen Conviction Not a Declaration of Innocence,’’ New York

Times, 1 June 2005, C6.

95. Barrett, Culture and Conduct; B. Uttal, ‘‘The Corporate Culture Vultures,’’ Fortune, 17 October

1983, 66–71.

96. Ibid.

97. R. Ricklees, ‘‘Ethics in America Series,’’ Wall Street Journal, 31 October–3 November 1983, 33.

98. J. A. Swainson, ‘‘Back from the Brink: Rebuilding a Company after a Near-Fatal Ethics

Breakdown,’’ Raytheon lectureship in Business Ethics at Bentley University, Waltham, MA, 2008.

99. J. Byrne, ‘‘The Best-Laid Ethics Programs,’’ Business Week, 9 March 1992, 67–69.

100. N. Tichy, Managing Strategic Change (New York: Wiley & Sons, 1983).

101. Uttal, ‘‘The Corporate Culture Vultures.’’

102. W. R. Nord, ‘‘OD’s Unfulfilled Visions: Some Lessons from Economics,’’ in Research in

Organizational Change and Development, eds. R. W. Woodman and W. A. Pasmore (Greenwich,

CT: JAI Press, 1989), 39–60.

103. Uttal, ‘‘The Corporate Culture Vultures.’’

104. A. L. Wilkins, ‘‘The Culture Audit: A Tool for Understanding Organizations,’’ Organizational

Dynamics 12 (1983): 24–38.

105. F. Luthans, ‘‘Conversation with Edgar H. Schein,’’ Organizational Dynamics 17, no. 4 (1989):

60–76.

106. J. P. Near and M. P. Miceli, ‘‘Whistleblowers in Organizations: Dissidents or Reformers?’’ in

Research in Organizational Behavior, eds. Cummings and Staw, 321–68.

107. T. Peters, ‘‘Symbols, Patterns, and Settings: An Optimistic Case of Getting Things Done,’’

Organizational Dynamics 7 (1978): 3–23.

108. W. McWhinney and J. Batista, ‘‘How Remythologizing Can Revitalize Organizations,’’

Organizational Dynamics 17, no. 2 (1988): 46–79.

109. ‘‘Texaco Chairman and CEO Tells National Urban League that Diversity Commitment Must Be

Worked on Daily,’’ Press Release (August 4, 1998), Chevron Texaco Corporation.

110. K. Labich, ‘‘No More Crude at Texaco,’’ Fortune, 16 September 1999, 205–12.

111. ‘‘Fourth Annual Report of the Equality and Fairness Task Force for the Year ending June 30,

2001,’’ Chevron Texaco Corporation, 2001.

112. Ibid.

206 SECTION III MANAGING ETHICS IN THE ORGANIZATION

C H A P T E R6

MANAGING ETHICS AND LEGAL

COMPLIANCE

INTRODUCTION

Chapter 5 presented ethics as organizational culture. But it may have raised as many

questions as it answered, such as ‘‘What are real organizations doing to create and

communicate an ethical organizational culture?’’ This chapter is designed to help

answer that question by focusing more narrowly on ethics and legal compliance pro-

grams in multiple large American corporations. These programs are designed to

manage and communicate ethics in a variety of ways.

Whatever your organizational level, you should find the information in this chapter

helpful. If you’re at a high organization level, it should give you ideas about how to

manage ethics and legal compliance in your firm. If you’re at a lower or middle manage-

ment level, it should help you understand your own organization’s approach to ethics

management and how it compares to what other organizations are currently doing. If

you’re a student, it will help you think about what to look for during the job search.

In preparing this chapter, we spoke with executives from six companies in a

variety of industries: Lockheed Martin Corporation (global security); United Tech-

nologies (Otis elevators, Carrier air conditioners, Pratt & Whitney engines, Sikorsky

helicopters); Merck & Co., Inc. (medicines, vaccines, and consumer health and ani-

mal health products); Adelphia (telecommunications/cable); Staples (office sup-

plies); and USAA (insurance and financial services). We are grateful to these

executives for their time and contributions to this book. These companies range in

size and ownership from USAA, an insurance and financial services company with

22,000 employees at four U.S. locations and two overseas offices, to United Technol-

ogies, which has over 200,000 employees (more than half outside the United States)

and a presence in more than 180 countries. Staples has more than 91,000 associates in

27 countries. Merck has 106,000 employees in 140 countries. Adelphia had 14,000

employees across the United States when its assets were purchased in 2005 by Com-

cast and Time Warner. Lockheed Martin has 140,000 employees and operates in 600

locations across all 50 U.S. states and internationally in 75 nations and territories.

Think about the challenge of managing ethics and legal compliance in these firms,

many with employees at locations around the globe. All of the companies are

207

engaged in a variety of efforts, but their approaches differ somewhat due to differ-

ences in industries and organizational cultures. For example, some industries (e.g.,

defense and chemicals) are more highly regulated than others. So compliance with

laws and regulations is an important goal, and it must be managed. For many of these

companies, ethics and legal compliance are closely tied to maintenance of the firm’s

reputation and brand value. In such an environment, integrity becomes a key driver of

corporate action.

STRUCTURING ETHICS MANAGEMENT

Many businesses are allocating significant resources to formal ethics and legal com-

pliance programs. The increasing attention to formal ethics management programs

has come about partially because of media attention to scandals in American business

and management’s awareness of the U.S. Sentencing Guidelines (see more about the

guidelines at the end of this chapter); because for a number of years, organizations

such as the Conference Board have held business ethics conferences at which formal

ethics management systems are encouraged; and because some corporate leaders are

simply committed to the importance of ethics in their organizations. 1

Perhaps nothing, however, has influenced corporate ethics programs in the

United States more than the U.S. Sentencing Guidelines, which took effect in the

early 1990s. Until the mid-1980s, criminal law focused on the individual defendant

rather than the corporation, and fines on corporations were relatively modest. In 1984

Congress created the U.S. Sentencing Commission in response to criticism of judicial

discretion in sentencing and perceived disparities between sentences for ‘‘white-

collar’’ and other types of crimes. In 1987, the Commission imposed federal sentenc-

ing guidelines for individual offenders, and as a result the trend has been toward

increasing fines for both individuals and organizations convicted of felony crimes.

The guidelines limited judicial sentencing discretion and mandated some incarcera-

tion for virtually every felony offender.

In 1991, the Commission issued new sentencing guidelines for organizations

convicted of federal crimes. The organization can be convicted even if only one

employee is caught breaking the law. The guidelines cover most federal crimes,

including fraud, antitrust, securities, tax, bribery, and money-laundering offenses,

and they impose a schedule of mandatory fines. ‘‘Virtually without exception, the

Guidelines require a convicted organization to make restitution and to pay a substan-

tial fine (which is not tax deductible).’’ 2 The guidelines even include a provision call-

ing for a ‘‘corporate death penalty.’’ The provision was used by federal prosecutors in

the case of American Precision Components Inc., a Farmingdale, New York, com-

pany that sold ordinary nuts and bolts to government contractors as highly tested

space components. 3 The company agreed to divest all of its assets. Arthur Andersen,

the former auditing firm that once ‘‘stood for integrity,’’ put its stamp of approval on

a long list of dirty books (e.g., Sunbeam, Waste Management, Enron, Global Cross-

ing, Qwest, and WorldCom) and has now become the biggest case ever of corporate

capital punishment. 4

208 SECTION III MANAGING ETHICS IN THE ORGANIZATION

The sentencing guidelines were designed to use a ‘‘carrot and stick’’ approach to

managing corporate crime. The carrot provides incentives to organizations to develop

a strong internal control system to detect and manage illegal behavior. The guidelines

list seven requirements (outlined in detail in Table 6.1) for due diligence and an ef-

fective compliance program. For example, the guidelines propose that organizations

establish and communicate compliance standards and set up communication, moni-

toring, reporting, and accountability systems. In this approach, the stick provides for

severe punishment for organizations that are convicted of crimes and were not pro-

actively managing legal compliance within the organization. Fines and other sanc-

tions vary widely depending on prior violations, whether management reports itself

and cooperates with investigative authorities, and depending on whether the com-

pany has an effective program in place to prevent and detect illegal behavior. The

1991 guidelines listed the following seven specific requirements for an effective legal

compliance program.

Therefore, the same crime can be subject to a wide range of penalties. The mini-

mum fine under the guidelines is $250, and the maximum is $290 million or even

more if the crime meets certain criteria. (For more specific information about how

fines are determined, see the appendix, ‘‘How Fines Are Determined under the U.S.

Sentencing Guidelines,’’ at the end of this chapter.) The guidelines also provide that a

defendant organization that does not have an effective legal compliance program

should be put on corporate probation. Some of the recommended conditions of pro-

bation include requiring that the organization publicize (at its own expense and as

directed by the court) the fact of its conviction and the nature of the punishment;

Table 6.1 Seven Requirements for Due Diligence and an Effective Compliance

Program !

1. Establishing compliance standards reasonably capable of preventing criminal

conduct

2. Assigning specific high-level individuals with responsibility to oversee those

compliance standards

3. Exercising due care to ensure that discretionary authority is not delegated to

individuals with a propensity to engage in illegality

4. Taking necessary steps to communicate compliance standards and procedures to all

employees, with a special emphasis on training and the dissemination of manuals

5. Taking reasonable steps to achieve compliance with written standards through

monitoring, auditing, and other systems designed to detect criminal conduct, including

a reporting system free of retribution to employees who report criminal conduct

6. Consistently enforcing the organization’s written standards through appropriate

disciplinary mechanism, including, as appropriate, discipline of individuals

responsible for failure to detect an offense

7. After an offense is detected, taking all reasonable steps to respond and to prevent

future similar conduct

!

These requirements are from the U.S. Sentencing Guidelines of 1991

(see www.ussc.gov for more information).

CHAPTER 6 MANAGING ETHICS AND LEGAL COMPLIANCE 209

periodically report to the court regarding financial condition and operating results;

submit to periodic, unannounced reviews of books and records, and interrogation of

employees by court-appointed experts (paid by the organization); and inform the

court of any material adverse change in business conditions or prospects.

According to the U.S. Sentencing Commission’s reports (found at www.ussc.

gov), more and more firms are being sentenced under the guidelines. Because the

guidelines were not applied retroactively, they remained under the radar for a number

of years. However, their impact has steadily increased and companies are paying

attention. For example, in 1995, Con Edison was convicted of an environmental

offense and was subject to probation that included onerous compliance requirements.

In 1996, in what has come to be known as the Caremark decision, corporate boards of

directors were put on notice to take the guidelines into account as part of their corpo-

rate governance responsibilities or face personal liability. In 1999, Hoffman-LaRoche

was convicted of antitrust conspiracy charges and was fined $500 million, the largest

criminal fine imposed to that point in the United States, and Rhone Poulenc was

granted amnesty because it reported the offense. In 2001, TAP Pharmaceuticals

received the third largest fine ever imposed to that date under the guidelines—$290

million. 5 (See Chapter 5 for a case study about TAP Pharmaceuticals.) A review of

sentencing over 10 years found that although the number of organizations sentenced

remained stable, fine amounts increased substantially. For example, in 1990, the aver-

age fine was $167,214. In 2000, the average fine had risen to $3,225,462. 6

In 2004, the U.S. Sentencing Commission released revisions to the guidelines,

including the expectation that the board of directors will oversee the compliance and

ethics program, that senior management will ensure its effectiveness, and that the com-

pliance officer will have adequate authority and access to senior management. In addi-

tion, organizations must train employees and conduct risk assessments to identify

potential areas of concern. The revision also ensures that organizations cannot just

‘‘check off’’ the list of guidelines (for example, with a code of conduct that just sits on

the shelf). Rather, the program in place must be seen as an integral part of the organi-

zation’s culture (see Chapter 5 for more on ethical culture). With the Supreme Court’s

2005 United States v. Booker decision, judges are no longer required to follow the

guidelines strictly. But the guidelines remain advisory, and federal prosecutors have

been told they are expected to take steps to ensure adherence to them. Therefore, most

observers now expect that the guidelines will continue to be followed in most cases. 7

As you’ll see in the material that follows, most of the elements of the sentencing

guidelines have become integral parts of organizational ethics programs throughout

the United States. While most companies make a real effort to meet the ‘‘letter’’ of

the guidelines, others go much further to incorporate the ‘‘spirit’’ of the guidelines.

We discuss some of those efforts in this chapter.

Making Ethics Comprehensive and Holistic

The U.S. Sentencing Guidelines very clearly aim to encourage organizations to

create ethics programs that drive integrity and ethical behavior in their business

210 SECTION III MANAGING ETHICS IN THE ORGANIZATION

operations. As the guidelines have become more refined and sophisticated over

time, responsible organizations have found numerous ways of making ethics and

values central to how they do business. As we read in the last chapter, values

like ethics and integrity become part of an organization’s culture by aligning various

elements throughout the organization. Integrating any corporate value into the orga-

nizational culture starts with strong executive commitment. Once executives

are clearly behind the effort, then the effort must be communicated to every

employee and compliance must be measured and rewarded for the value to become

part of the culture.

At Staples, the office supply giant, executives tried to capture the sentiment

underpinning their ethics program by calling it ‘‘Staples Soul.’’ The Staples Soul pro-

gram brings together a number of ethics and social responsibility efforts under one

umbrella, including the company’s concern for ethics, the environment, its commu-

nity activities, and diversity. The Staples Soul symbol is appropriately a paper clip

bent into the shape of a heart. According to company documents, ‘‘Staples Soul

reflects our commitment to corporate responsibility. It’s what moves us to embrace

diversity, sustain the environment, give back to our communities, and practice sound

ethics. Linking all of these values with our global business strategy and operations

contributes to our financial success and helps us become a great employer, corporate

citizen and neighbor.’’ 8

Managing Ethics: The Corporate Ethics Office

Some organizations delegate ethics management responsibilities widely, finding that

a strong statement of values and a strong ethical culture can keep the ethics manage-

ment effort together. This approach may be particularly effective in smaller firms.

However, most large firms find that ethics initiatives need to be coordinated from a

single office to ensure that all of the program’s pieces fit together and that all of the

U.S. Sentencing Guideline requirements are being met.

The corporate ethics office concept can be traced to 1985 and General Dynamics,

then the second-largest U.S. defense contractor. The secretary of the Navy, out of

concern about the appropriateness of certain indirect expenses that had been billed to

the government, directed General Dynamics to establish and enforce a rigorous code

of ethics for all employees that included sanctions for violators. The company turned

to a nonprofit consulting firm in Washington, D.C., the Ethics Resource Center, for

help in developing the code. As part of this process, an ethics office was also set up

and an ethics officer was hired. 9 In 1986, General Dynamics joined with other

defense industry companies in the Defense Industry Initiative (see www.dii.org) to

‘‘embrace and promote ethical business conduct.’’ The companies shared best prac-

tices, and these best practices provided much of the foundation for the U.S. Sentenc-

ing Commission requirements.

The 1991 U.S. Federal Sentencing Guidelines gave impetus to the move toward

establishing formal ethics programs in firms outside the defense industry. The guide-

lines also called for the assignment of specific high-level individuals with

CHAPTER 6 MANAGING ETHICS AND LEGAL COMPLIANCE 211

responsibility to oversee legal compliance standards. This requirement led to the

development of a brand new role—that of the corporate ethics officer.

Ethics and Compliance Officers

Until the mid-1980s, the title ‘‘ethics and compliance officer’’ didn’t exist in Ameri-

can business. Today, with a growing number of ethics and compliance practitioners

worldwide, these high-level executives have their own professional organization, the

Ethics and Compliance Officer Association (ECOA—see www.theecoa.org). The

association’s stated mission is ‘‘to promote ethical business practices, serving as a

forum for the exchange of information and strategies.’’ The organization began in

1991 when over 40 ethics and compliance officers met at the Center for Business

Ethics at Bentley University in Waltham, Massachusetts. The organization was offi-

cially launched later that year and began holding annual meetings in 1993. As of

2009, the ECOA has more than 1,300 members representing more than half of For-

tune 100 companies, nonprofits, municipalities, and international members from over

30 countries. The organization holds regular conferences, workshops, and webcasts

and provides a variety of classroom and distance learning opportunities for ethics

and compliance officers and their staff.

Many firms designate their legal counsel as the ethics officer. Others create a title

such as vice president or director of ethics, compliance, or business practices, direc-

tor of internal audit, ethics program coordinator, or just plain ethics officer. Most

firms locate the ethics officer at the corporate level, and these high-level executives

generally report to a senior executive, the CEO, the board of directors, the audit com-

mittee of the board, or some combination. These individuals are expected to provide

leadership and strategies for ensuring that the firm’s standards of business conduct

are communicated and upheld throughout the organization. At the time this book

went to press in early 2010, the U.S. Sentencing Commission had just proposed (for

public comment) the idea that the compliance officer should report directly to the

board of directors. If adopted, such a reporting structure would contribute to mitiga-

tion of a firm’s culpability at sentencing even if high-level executives were involved

in the illegal conduct.

INSIDERS VERSUS OUTSIDERS An ethics or compliance officer may be an

insider or someone brought in from the outside. We talked to past and present ethics

officers who represent both categories. It can sometimes be more difficult for an out-

sider to achieve credibility in the ethics or compliance role. But someone brought in

from outside the company has the advantage of being able to evaluate the situation

with a fresh eye. If change is needed, that person may be better able to guide the

organization through the change process. Most of those we interviewed believe

that, if available, a respected and trusted insider who knows the company’s culture

and people is usually the best choice. Results of a 1995 survey support the insider

preference. 10

Eighty-two percent of the firms responding to the question hired their

ethics officer from inside the firm. The very best situation may be when the ethics

212 SECTION III MANAGING ETHICS IN THE ORGANIZATION

officer is also a part of the senior management team or being groomed for an execu-

tive position.

At Lockheed Martin, ethics is taken so seriously that an assignment managing

an ethics office is part of the grooming process for executive positions that high-

potential employees receive. Lockheed has a vice president of ethics for the entire

corporation and five ethics directors—one for each of Lockheed’s five huge business

units. These positions report to the senior business and ethics executives in the busi-

ness units and are rotational. High-potential executives are recruited into these jobs

as a development experience; they serve for two to three years and then go back to

the businesses. Other high-potential employees replace them as ethics directors, and

the process continues. This is a novel approach to enhancing an ethics program and

grooming executives, and it should go a long way toward truly integrating ethics and

integrity into how the business is run. Lockheed will soon have a full cadre of execu-

tive-level employees who have served the company as ethics officers. One employee

involved in this process is Srinivas Dixit, who currently (2010) is the director of

ethics and business conduct for Lockheed Martin Electronic Systems in Bethesda,

Maryland. Dixit holds an undergraduate degree in engineering and an MBA, and

he was working in business operations in Lockheed’s finance area when he was

tapped for the ethics director job in late 2008. Now he is managing investigations,

overseeing ethics and compliance training, tracking metrics through surveys and

other studies, and looking for trends in this area. He is also talking to leaders, work-

ing with them to integrate ethics and compliance into the business by creating a

‘‘culture of trust’’ throughout the organization. What has Dixit learned in his new

job? ‘‘I’ve learned how seriously Lockheed integrates ethics into the business. Ethics

is fundamental to who we are and what we do. Integrity is at the beginning, middle,

and end of every message our senior leaders send. This job has shown me how seri-

ously we take ethics—how much we respect people, and how much time and care we

take in reaching decisions.’’

ETHICS OFFICER BACKGROUND The job of ethics officer has been called ‘‘the

newest profession in American business.’’ 11

Individuals holding this position come

from many backgrounds. With insiders, the job is often assigned to someone in a staff

function (e.g., someone in the corporate secretary’s office, office of the legal counsel,

audit, or human resources). According to past ethics officer surveys, law was the

most common background. That is true of most of our interviewees as well. Interest-

ingly, some people believe that lawyers shouldn’t be considered for the job, because

corporate lawyers are hired to defend the corporation and can’t objectively handle an

ethical issue that calls the corporation’s own behavior into question. But the ethics

officers we interviewed agreed that the most important thing is earning other employ-

ees’ respect as being fair, trustworthy, credible, and discreet. The ethics program co-

ordinator at USAA, Earnie Broughton, has training in industrial/organizational

psychology and experience as a human resources generalist and line executive. Such

a background is less common among ethics officers. But it’s useful in an organization

that is committed to making ethics management the responsibility of everyone from

CHAPTER 6 MANAGING ETHICS AND LEGAL COMPLIANCE 213

the CEO down. In fact, as a statement of commitment and accountability that any

ethics officer would welcome, USAA’s CEO identifies himself as the chief ethics

officer. Broughton’s office oversees the code and conflict of interest policy, ethics

training, communication, and support. But at USAA, every executive, manager, and

supervisor is assigned responsibility for ethics within his or her own area. Broughton

works closely with the ‘‘Ethics Council,’’ a group of senior executives who meet

regularly to talk about the ethics program and provide company-wide guidance on

ethics issues.

The Ethics Infrastructure

Ethics offices can be centralized, decentralized, or some combination of both. The

decision to centralize or decentralize may depend on the overall structure of the firm.

For example, if the firm’s other staff functions are highly decentralized, it may be

difficult to centralize the ethics function. The structuring decision may also depend

on whether different business units have very different ethics management needs.

For example, if one division of a firm deals in government contracts and others do

not, that division may need a different approach that emphasizes compliance with

government contracting regulations. So local ethics offices might better meet the

needs of different units that are in different businesses. However, decentralized ethics

offices can be difficult to manage effectively because they must communicate with

each other constantly to ensure consistency and commitment to the organization’s

key values.

Even where different units have different requirements, it’s usually helpful to have

a central office that coordinates ethics and compliance activities and ensures manage-

ment support for those activities. Most large organizations, such as the ones we talked

with, have a headquarters ethics office that functions as the central point of communi-

cations for ethics and compliance activities. For example, the corporate ethics office at

Lockheed Martin has a staff of approximately nine people, led by Alice Eldridge, the

vice president of ethics and business conduct. In addition, each of the four large busi-

ness areas and corporate enterprise operations has a full-time ethics director who has

responsibility for overseeing ethics and business conduct in his or her business areas.

These ethics directors, following a matrix reporting structure, report to Eldridge as well

as to an executive vice president for their business area. Eldridge reports directly to the

chairman and chief executive officer. In addition, Eldridge reports (in written and oral

form) to the Ethics and Corporate Responsibilities Committee of the corporation’s

board of directors at certain intervals during the year.

Ethics officers seem to agree that, whatever other reporting relationships exist,

the ethics officer should have a direct reporting relationship to the CEO. They were

particularly concerned about the ethics function being ‘‘stuck’’ under law, human re-

sources, audit, or finance, where it would be just another part of the ‘‘silo mentality’’

that still exists in many organizations. Ethics would then be perceived as audit’s job

or HR’s job rather than as part of the total culture. The person who leads the ethics

office is in a much better position to ‘‘press the envelope’’ if he or she reports directly

214 SECTION III MANAGING ETHICS IN THE ORGANIZATION

to the CEO. In fact, as with USAA, the best situation is likely when the CEO thinks

those letters stand for the ‘‘chief ethics officer’’ as well as chief executive officer. In

that situation the CEO, with assistance from other individuals, takes responsibility for

managing ethics.

The Corporate Ethics Committee

In some organizations, ethics is managed by a corporate committee staffed by senior-

level managers from a variety of functional areas. This committee is set up to provide

ethical oversight and policy guidance for CEO and management decisions. 12

It also

represents an affirmation that top management really cares about ethics.

At Lockheed Martin, the Ethics and Business Conduct Steering Committee

meets once every quarter and has done so since 1995. The committee provides the

organization with strategic direction and oversight on matters of ethics and business

conduct. Each business area and business unit has also established a steering commit-

tee to oversee its ethics and business conduct operations. Members of the corporate

committee include the general counsel (committee chairman), executives of large

operating entities, and vice presidents from functional areas such as human resources,

finance, audit, and communications. The two-way communication between the ethics

office and these senior executives is essential. It gives the ethics office information

about what concerns senior-level management, and it gives the firm’s leadership

information about the types of issues that are coming into the ethics office from

employees. The group’s role is viewed as strategic. The steering committees at all

levels of the corporation review the ethics awareness training and business conduct

compliance training programs, metrics on investigations and requests for guidance,

trends, employee survey results, and matters referred by the business areas and busi-

ness units.

COMMUNICATING ETHICS

Within the ethics infrastructure, good communication—downward, upward, and two-

way—is essential if an organization is to have a strong, aligned ethics culture. The

organization must evaluate the current state of ethics communication and initiatives.

It must communicate its values, standards, and policies in a variety of formal and

informal ways that meet its employees’ needs. These communication efforts should

be synergistic, clear, consistent, and credible. They also need to be executed in a

variety of media, because people learn things in different ways. In general, the old

advice to speechwriters still holds. ‘‘Tell ’em what you’re going to tell ’em, then tell

’em, then tell ’em what you told ’em.’’ In addition to receiving downward communi-

cation from management, employees must also have opportunities to communicate

their ethical concerns upward. Finally, an open communication environment must be

created that says it’s okay to ask questions, and it’s okay to talk about ethics. In the

following section, we begin with some corporate communications basics—principles

that should guide all ethics communication initiatives.

CHAPTER 6 MANAGING ETHICS AND LEGAL COMPLIANCE 215

A number of the ethics officers we interviewed were sensitive to the negativity

sometimes attached to the word ethics. Employees can get defensive when they hear

this word. They think to themselves, ‘‘Why are you here talking to me about ethics?

Mine are fine.’’ Kent Druyvesteyn, former ethics officer at General Dynamics, put it

this way. ‘‘Using the word ‘ethics’ unfortunately implies that somebody has a defi-

ciency. So, I would urge you not to use that word at least until you can make clear

what you mean by it.’’ This negative reaction to the word ethics may be more of a

problem at some organizations than at others. Again, it depends on the culture of the

firm. Companies have used the term values or business conduct or business practices

successfully. The key is to know your own company and use terminology that sounds

authentic within your organization’s culture.

Basic Communications Principles

ALIGN THE FORMAL AND INFORMAL COMMUNICATION SYSTEMS When

most people think of a corporate communication system, they think of the obvious—

the company newspaper, website, and annual report. However, like culture, a corpo-

rate communication system consists of formal and informal components. Formal

communications include all formal written and electronic communication—newspa-

pers, magazines, memos, recruiting literature, policy manuals, annual reports, web-

sites, and advertising—as well as formalized oral communication such as meetings

and speeches. But perhaps the most powerful component in a corporation’s commu-

nication system is an informal one known as the grapevine.

The grapevine—a continual stream of information among employees about

‘‘what’s really going on’’—exists in every organization. It contains news, rumors,

impressions, and perceptions. Surprisingly, research has shown that from 70 to 90

percent of the information that passes through the grapevine is accurate. 13

In survey

after survey of employees in numerous and varied businesses, the grapevine is where

they said they received most of their information about their employer. (In those

same surveys, most people said they would rather receive information from their

managers.) The grapevine can be examined to shed light on a corporation’s credibil-

ity since most employees are plugged into it, it provides information fast and contin-

ually, and it contains the ‘‘inside’’ scoop on corporate events.

One way to determine corporate credibility on various issues—especially

ethics—is to compare the messages on the formal and informal communications sys-

tems. For example, suppose that BIG Company has a policy prohibiting employees

from entertaining customers excessively. The policy is spelled out in a manual, and

the president of BIG has reinforced the policy in speeches to employees. Now imag-

ine that BIG’s head of marketing repeatedly wines and dines clients. The costs of the

lavish entertainment are detailed in expense reports that are approved by manage-

ment and processed by clerical and financial control employees. In addition, other

employees are invited along when the clients are entertained, and still more employ-

ees observe the head of marketing entertaining guests in expensive restaurants.

Regardless of how strongly BIG’s formal communication system states the official

216 SECTION III MANAGING ETHICS IN THE ORGANIZATION

policy, the informal communication system—the grapevine—will communicate

what’s really going on: BIG is saying one thing and doing another. The company

says it prohibits lavish entertainment, yet it condones that forbidden behavior in at

least one high-level employee. As a result, BIG’s ethics culture is out of alignment

and it has no corporate credibility on the subject of customer entertainment. Further-

more, its credibility on other ethical issues is probably suspect.

Now imagine another situation. LITTLE Company has a strongly worded policy

regarding sexual harassment. Moreover, LITTLE’s senior executives have frequently

stated that sexual harassment will not be tolerated. Suppose a manager, Pat, is

accused of sexual harassment. The charge is investigated, found to be accurate, and

Pat is fired. The exact details of the incident may not be on the grapevine, but in

most cases, just the bare bones of that story will send a strong message. The messages

on the grapevine will match what’s said by LITTLE’s formal communication system.

Employees will get the word very quickly that LITTLE means business on the issue

of sexual harassment, and the corporation will have increased its credibility by

‘‘walking the ethics talk.’’

The importance of informal communications can’t be overstated. Since truth and

honesty are at the core of any ethics effort, if a company is saying one thing and

doing another—if the messages on its formal communication system and its grape-

vine don’t match—it has little or no credibility and probably shouldn’t attempt a for-

mal ethics communication effort until it has regained its credibility. How can you

compare the formal and informal messages? Ask employees. Employee surveys and

focus groups can provide feedback that will serve as the beginning of an effective

comparison. How does an organization establish or regain credibility? Designing

consistent policies and enforcing those policies are the only route an organization

can take to gain credibility on ethics issues. If policies are enforced for only part of

the employee population, or if there are different rules and treatment for different

employees, there’s little an organization can do to gain credibility until consistency

is established.

ANALYZE THE AUDIENCE The first thing to do when designing a communication

program is to analyze the needs of your audience. Consider what employees already

know, what they need to know, what biases and abilities they have, what the desired

and required behaviors look like, when they should be asking questions, and where

they can go to report their concerns and to ask for help.

When designing ethics communication for a typical employee population, orga-

nizations need to consider three kinds of people. (Because the terms are easy to visu-

alize and remember, we use military jargon to describe the three types.)

Good Soldiers Group I includes the ‘‘good soldiers.’’ These people understand

and follow the rules and policies of the organization, and they have good ethical com-

passes. They have the judgment or experience required to discern the difference

between right and wrong, and they have the moral grounding to do the right thing.

Be careful to note that these aren’t just soldiers who follow orders, right or wrong.

CHAPTER 6 MANAGING ETHICS AND LEGAL COMPLIANCE 217

They know that good soldiers are expected to question an order they believe to be

illegal or morally wrong, and they would do so.

Loose Cannons In Group II are the ‘‘loose cannons’’—these people may have

good ethical compasses, but they don’t know their corporation’s policies. They may

not even be familiar with general ethical standards in business. Loose cannons may

be inexperienced; or they may have transferred from another, unrelated industry with

very different norms; or they may never have read a policy manual. Whatever the

reason, loose cannons may be well meaning, but they’re naive. Without guidance,

loose cannons may not even consider ethics in the business environment.

Grenades People in Group III are ‘‘grenades,’’ and they’re neither ignorant nor

benign. These employees may or may not know the rules, but they don’t care either

way. They have their own agenda, and they lack any company or professional

loyalty. We call them grenades because their activities can blow up suddenly and

severely damage the organization.

Although the communication needs of the three groups overlap, the emphasis for

each specific group is clear. Good soldiers need support because good people often feel

pressured to compromise in order to ‘‘fit in.’’ Good soldiers need to know that their

instincts are right and their behavior is not the exception; in fact, it represents the organi-

zational model. Loose cannons need to be educated; they need to know and understand

basic norms of ethical conduct and specific company policy and standards. Grenades

need to know unequivocally that ethical lapses will not be tolerated. They need to see

good behavior rewarded and ethical lapses dealt with swiftly, consistently, and firmly.

There are probably only a few grenades in any organization. But they surely

exist everywhere, and the system must be prepared to deal with them. Good soldiers

may account for a substantial portion of employees, but perhaps not the majority.

Since very few employees ever read a policy manual cover to cover, most people

learn policy on a need-to-know basis. It’s safest to assume that most employees fit

into the loose cannon category. The challenge in designing effective ethics communi-

cation programs is meeting the needs of all types of employees.

This focus on the ethics audience assumes that most employees don’t come to

the organization perfectly principled and completely prepared to make the right deci-

sion in every situation. Recall from earlier chapters that most employees are highly

susceptible to influence from outside themselves, so the organization has to provide

guidance—and, despite advances, the perfect integrity test hasn’t been invented.

Since polygraphs were outlawed for most types of employee screening in the United

States, more organizations have turned to paper-and-pencil honesty or integrity tests

to screen prospective employees. Most of these tests attempt to predict the prospec-

tive employee’s inclination to steal from the organization, although others have a

more general focus on workplace deviance. Integrity tests have been evaluated by

the American Psychological Association and the government’s Office of Technology

Assessment. The two organizations’ reports generally agree that research on integrity

218 SECTION III MANAGING ETHICS IN THE ORGANIZATION

tests is improving and that evidence supporting the tests’ ability to predict dishonest

behavior has increased. 14

Nevertheless, many problems remain, and organizations

will continue to have imperfect employees who need guidance on ethical issues.

Evaluating the Current State of Ethics Communications

Before beginning the actual design of an ethics communication program, it’s essen-

tial to conduct an evaluation that asks the following questions.

WHAT KINDS OF ETHICAL DILEMMAS ARE EMPLOYEES LIKELY TO ENCOUNTER?

In addition to common ethical dilemmas faced by employees everywhere, organiza-

tions need to identify the kinds of issues and dilemmas that might be unique to their

particular industry. For example, a chemical company needs to pay special attention to

environmental and safety dilemmas. A financial firm should pay extremely close atten-

tion to fiduciary, confidentiality, and conflict-of-interest issues. A manufacturing com-

pany may have to look at the ethical issues involved in worker safety, product quality,

product liability, and labor relations. Along with identifying issues specific to their

industry, companies need to examine the various jobs within their organization to un-

cover what specific professional dilemmas their communication program will have to

address. For example, an internal auditor faces one set of dilemmas, whereas a manu-

facturing supervisor faces an entirely different set. Once these dilemmas are identified,

an organization can develop a program that’s useful for employees—one that shows

them how to deal with their own most common dilemmas.

WHAT DON’T EMPLOYEES KNOW? Is the company hiring numerous midcareer

hires who may come from other industries with different standards of conduct? Does

the company regularly hire large numbers of recent college or business school gradu-

ates who may have little knowledge of business standards, much less specific corpo-

rate policy or industry standards? The communication program needs to target the

specific needs of these different groups.

HOW ARE POLICIES CURRENTLY COMMUNICATED? How is policy communi-

cated now? Does the policy manual weigh in at 40 pounds, or is it online and easy to

search? When a manager has a policy question, what does he or she do—look it up in

the manual, ask human resources, ask a colleague, search online resources, or guess?

Is corporate policy ever discussed in orientation or training programs? No one is ever

going to memorize a policy manual. Therefore, an ethics communication program

needs to take a ‘‘snapshot’’ of key policies and concentrate on communicating them.

Organizations also need to send a clear message that employees need to know when

to ask questions and that the organization encourages employees to inquire. Compa-

nies generally do a very good job of telling new hires how to succeed; what they

usually don’t do nearly as well is telling new hires how they’re going to fail or get

fired or worse. It’s vital for new employees to understand their employer’s standards.

What does the company expect from them?

CHAPTER 6 MANAGING ETHICS AND LEGAL COMPLIANCE 219

WHAT COMMUNICATION CHANNELS EXIST? How do employees receive mes-

sages from management? How does management receive messages from employees?

Is ‘‘management by walking around’’ a common practice, or is senior management

isolated from most employees? Is there a suggestion program? If so, do suggestions

get responses? Are employees generally comfortable approaching their managers

with problems, concerns, and questions? Is there a grievance process or a whistle-

blowing procedure? Do most employees know where to go for help if their managers

are unavailable or if their manager is part of the problem? Are human resources,

legal, and audit professionals accessible to most employees? Analyzing the answers

to these questions will give an organization a good idea of where effective communi-

cation channels exist, where they don’t, and where to build new ones.

Multiple Communication Channels for Formal Ethics Communication

The company’s ethics message can and should be communicated in a variety of

ways. The most obvious ethics communication channels include a mission or values

statement, a code of conduct, policy statements, a formal process for reporting con-

cerns or observed misconduct, and communications from leaders. In addition to these

channels, the ethics message needs to be reinforced in all formal communication

materials, including recruiting and orientation materials, newsletters, magazines,

annual reports, and websites. The following are some types of communication mate-

rials that can be used to send an ethics message.

WEBSITES The company’s website is an important source of information about the

company and its values and policies. Many companies are hesitant to include ethics

information on their external website and instead use their firm’s intranet to convey

the information. But stakeholders such as investors, potential employees, customers,

and suppliers are likely to use the company’s website to gather information about the

company. So, if ethics is important to these relationships, it should be included on the

external site. For example, Lockheed Martin provides a large amount of information

about ethics on its external website (www.lockheedmartin.com): its ethical princi-

ples, code of conduct, annual ethics awareness training, information about compli-

ance training, information about how the ethics process works, and information for

suppliers and other business partners who are asked to be guided by high ethical stan-

dards and to respect the restrictions the firm places on its employees with regard to

such issues as giving and receiving gifts. The code, ‘‘Setting the Standard,’’ is trans-

lated into 21 languages. United Technologies (www.utc.com) also provides informa-

tion about ethics on its website, including the code and other brochures in portable

document format (PDF). The information is also available in multiple languages.

RECRUITING BROCHURES These can include the mission or values statement, a

discussion of corporate values, and a description of how people in the organization

succeed and fail. Ethical conduct can be highlighted. Many organizations also have a

220 SECTION III MANAGING ETHICS IN THE ORGANIZATION

website for those interested in finding out about careers within the firm and applying

for jobs.

CAMPUS RECRUITING At Lockheed Martin the ethics office participates with uni-

versity relations for on-campus recruiting. Ethics officers travel to college and

university campuses across the country to assist in recruiting and to speak about the

Lockheed Martin ethics program. In addition, ethics blogs are posted twice a month

on the ‘‘LMCampus ConX’’ social networking site to raise awareness about corpo-

rate ethics so that students can better understand the importance of business ethics

and be better prepared to enter the workforce.

ORIENTATION MEETINGS AND MATERIALS Orientation materials can include

the mission or values statement, descriptions of common ethical dilemmas and ad-

vice for handling them, explanations of resources to help employees make ethical

decisions, and instructions on how to raise an ethical issue or report an ethical con-

cern. Organizations should pay particular attention to how their orientation meetings

communicate values and expectations. New employees are eager to learn about their

new employer, and orientations are a wonderful venue for communicating what an

organization stands for and what it expects of employees. How not to introduce val-

ues and ethics during an orientation might best be illustrated by the manufacturing

company’s general counsel we heard about who, when asked to address new hires on

the company’s ethics and compliance program, simply read the code of conduct

aloud to a group of new employees. (Yawn.)

NEWSLETTERS AND MAGAZINES These materials can be print based or web

based. They may include the mission statement, stories about corporate ‘‘heroes’’—

employees who illustrate the corporate values—and features that describe ethical

dilemmas and include comments from employees and managers about how they

would deal with the problems. Some companies regularly publish lists of the types of

ethical or legal violations they have addressed and how they addressed them. For

example, the communication may say that, in the last six months, the company dealt

with a particular number of reports of Internet pornography, bribery, time reporting,

travel charge reporting, lying to customers, or abusive supervision. They may say

how many of these resulted in a variety of actions ranging from warnings to termina-

tions. Such communication helps keep the ethical culture alive and lets employees

know that the company means what it says about the importance of ethics. These

kinds of regular communications can also be targeted to specific groups of employees

with specific needs.

BOOKLETS These materials can vary given employees’ need for information in

particular areas of the business. The brief brochures can also be easily updated

or added to, thus making the program adaptable to the dynamic business

environment.

CHAPTER 6 MANAGING ETHICS AND LEGAL COMPLIANCE 221

Interactive Approaches to Ethics Communication at USAA

USAA has developed a novel approach to ethics communication based on a ‘‘mini–

case study’’ approach. It gives employees an opportunity to learn about ‘‘real’’ ethics

cases in an ongoing manner, and it sustains the focus on ethics in the organization.

The ethics office relates an ethics case gleaned from news and media and presents

it on the corporate intranet in a ‘‘case file format.’’ Each story includes a ‘‘subject,’’ the

facts of the case, and the outcome. Employees comment on the story and reflect on its

meaning and relevance within the context of USAA’s culture and values.

Consider what this kind of communication tool can accomplish. Reading

employee comments could help establish a new norm or standard of behavior in the

organization. Reading the replies also offers rationales that individual employees

may not have thought about on their own and creates expectations about role respon-

sibilities. So, by printing the appropriate replies and supplementing them with good

information about expectations and available resources, the ethics office can

reinforce many important messages on an ongoing basis.

A similar system was introduced in the early 1990s at Texas Instruments, but in this

system, employees were encouraged to send in questions. This internal corporate com-

munication tool, called ‘‘Instant Experience,’’ allowed employees to raise timely issues

quickly and without a lot of bureaucracy, and it provided the ethics office with a constant

line to the ethical pulse of the organization. The idea was the brainchild of Glen

Coleman, a retired Air Force helicopter pilot and an aerospace engineer who worked for

TI’s ethics office at the time. Coleman admitted that while in Vietnam, he and his fellow

helicopter pilots sometimes made potentially life-threatening mistakes. On their return,

they freely entered their ‘‘stupid mistakes’’ into a book they called ‘‘Instant Experi-

ence,’’ so that their buddies wouldn’t make the same mistakes and lives could be saved.

In a variation of the idea that not everyone should have to get burned to find out

that the stove is hot, Coleman reasoned that the ethics office could be a clearinghouse

for ethical experiences that members of the organization were willing to share with

others. As a result, these ‘‘instant experiences’’ were regularly transmitted to all

employees via an e-mail communication system. The experiences were retained on

the system so that new employees could get up to speed and ongoing employees

could check the system whenever they wished.

Here’s an example of an anonymous question posed by a TI employee and then

posted on the communication system.

Suppose I’m in a restaurant and I happen to overhear a conversation from

behind me. It’s two TI competitors discussing sensitive, competitive

information that would be very valuable to TI. What do I do? Continue

to listen? Put my fingers in my ears? Tell them to stop? And what should

I do with the information that I’ve already heard? Forget it and pretend it

never happened? Mark it TI STRICTLY PRIVATE and distribute it?

I didn’t go out looking for the information and I couldn’t change my

table location to get away from the conversation. It seems a little ridicu-

lous to just throw away an opportunity to use valuable information that

222 SECTION III MANAGING ETHICS IN THE ORGANIZATION

I’ve acquired but didn’t solicit in any way. What’s the right course

of action?

And, here’s how Carl Skooglund, TI’s ethics director at the time, responded:

There is nothing illegal or unethical about accidentally being in the right

place at the right time and overhearing a competitor’s conversation. They

must accept the responsibility for irresponsibly discussing sensitive infor-

mation in a public place. If you have overheard the conversation, your best

course of action is to document to your best ability what you heard and

notify TI Legal, telling them how you acquired it. The TI employee who

raised this question is correct. It would be ridiculous to pretend that you

never heard the information. Under these circumstances you can share the

information with TI. The competitor must accept responsibility for his

carelessness. Our ethical principles do not exclude common sense.

Skooglund’s response then took the issue a step further, inviting dialogue by ask-

ing TI employees if the response should be different if the TI employee had inten-

tionally sat at a table adjacent to known competitors. Many employees responded,

and over 95 percent of the responses agreed that intentional eavesdropping was

clearly unethical. Here are some of their responses:

‘‘We are not in the spy business. It’s totally unethical.’’

‘‘I was disappointed that you would even ask us this.’’

‘‘Spying is spying.’’

‘‘What happened to the golden rule?’’

‘‘My grandmother told me that if something makes you feel guilty, don’t do it.’’

‘‘If our customers knew about this, would their opinion of us suffer?’’

‘‘I would be ashamed.’’

‘‘It’s unmitigatedly unethical.’’

‘‘Would I be proud to have my TI badge on?’’

‘‘Let’s leave trickery to magicians.’’

‘‘Stay far enough away from legal limits so that TI’s character is never

questioned.’’

Skooglund agreed with the large majority of responses and assured the respon-

dents that their ethical compasses were pointing in the right direction. This Instant

Experience system allowed employees to openly share their ethics-related questions

and experiences, and everyone in the organization learned from the open exchange.

In an organization without such a system, this individual may have struggled silently

with the issue or may have asked a few peers or a manager for advice. But with the

system, the entire organization can learn from one employee’s experience.

CHAPTER 6 MANAGING ETHICS AND LEGAL COMPLIANCE 223

In addition to the weekly transmissions and interactions, a collection of the weekly

articles was retained on the Instant Experience system as an archive with a chronologi-

cal and a subject index. A survey of TI employees found that 30 to 40 percent were

reading it every week, and 70 to 80 percent read it at least monthly. Supervisors were

also encouraged to print the messages and post them on a bulletin board.

This system was particularly effective because it fit TI’s culture and was based

on sound communication principles. First, electronic communication was an essential

part of the high-tech TI culture, so e-mail ethics discussions were a natural extension

of that culture. Second, e-mail is appropriate for ‘‘ethics’’ discussions because it

allows for interaction with reflection. Ethical issues generally require some introspec-

tion, perhaps even a trip to the file cabinet to check the code of conduct. The Instant

Experience system allowed employees to think about the issue and then participate in

relatively informal discussions with other employees. Finally, research suggests that

people are less inhibited when communicating electronically. They may be more

willing to discuss sensitive ethical issues electronically than they would be face-to-

face, thus contributing to the ‘‘it’s okay to talk about ethics’’ atmosphere.

Mission or Values Statements

In recent years, many corporations have developed mission or values statements. A

mission statement, values statement, or credo is a succinct description of ‘‘how we do

business’’—the corporate principles and values that guide how business is to be con-

ducted in an organization. A mission statement is a short description of the organiza-

tion’s reason for existence—a sort of ‘‘here’s what we do.’’ Values statements are the

next step in the process of explaining an organization to the world—‘‘and here’s how

we do it’’—a codification of essential corporate behavior. It’s a sort of ‘‘Ten Com-

mandments’’ for an organization. If it’s to be effective, it should be short, memora-

ble, and in plain language so that everyone can be clear about its message. It’s also

essential that the organization’s own employees have input because a mission state-

ment and values statement must accurately reflect the organizational culture. Some-

thing scribed by outsiders just won’t ring true and is likely to end up as the subject of

a Dilbert cartoon. But statements that develop out of the firm’s true values and his-

tory can be mainstays of the corporate culture. Merck posts its values statement

prominently on its website (www.merck.com):

Our Values

Our business is preserving and improving human life. We also work to

improve animal health. All of our actions must be measured by our suc-

cess in achieving these goals. We value, above all, our ability to serve

everyone who can benefit from the appropriate use of our products and

services, thereby providing lasting consumer satisfaction.

We are committed to the highest standards of ethics and integrity.

We are responsible to our customers, to Merck employees and their

224 SECTION III MANAGING ETHICS IN THE ORGANIZATION

families, to the environments we inhabit, and to the societies we serve

worldwide. In discharging our responsibilities, we do not take profes-

sional or ethical shortcuts. Our interactions with all segments of society

must be transparent and reflect the high standards we profess.

We are dedicated to the highest level of scientific excellence and

commit our research to improving human and animal health and the

quality of life. We strive to identify the most critical needs of con-

sumers and customers, and we devote our resources to meeting those

needs.

We expect profits, but only from work that satisfies customer needs

and benefits humanity. This depends on maintaining a financial position

that invites investment in leading-edge research and that makes it possi-

ble to effectively deliver the results of that research.

Our ability to excel depends on the integrity, knowledge, imagina-

tion, skill, diversity and teamwork of our employees. To this end, we

strive to create an environment of mutual respect, encouragement and

teamwork. We also strive to reward commitment and performance and

be responsive to the needs of our employees and their families.

Obviously, it’s possible to have meaningless values statements when the words

are posted on websites and bulletin boards but aren’t really a part of the organiza-

tional culture. To be meaningful, corporate values must guide corporate and individ-

ual decision making on a regular basis. But Merck employees tell us that these values

are ‘‘drilled into them’’ and used on a regular basis. Also, the role of the ‘‘customer

first’’ value that guided Johnson & Johnson’s decision making in the Tylenol crisis

(see Chapter 10) is perhaps the most famous single example of a corporate value

being meaningfully applied.

What happens when a company ignores the importance of having in place a mis-

sion and vision and values? That was the situation at Adelphia, the telecommunica-

tions/cable company that imploded in 2002. The Rigas family, who founded and

managed the organization, ran the company like a mom-and-mop corner store, even

after the company—mainly through a series of acquisitions—grew to 15,000 employ-

ees. In 2002, the founder and CEO, John Rigas, and his sons were indicted for looting

hundreds of millions of dollars from the company’s coffers and concealing the true

debt load from investors. 15

When the new management team took over, they were

surprised to find that Adelphia had no guiding principles, no mission, no vision, no

ethics, no code—nothing! Ray Dravesky was soon hired to head communication at

Adelphia, and his first project was to get the company back on track by helping the

executive team to create and communicate a new mission, vision, and code of con-

duct. Because the company had filed for bankruptcy, the ethics project had to be cre-

ated on a shoestring. Within weeks, however, the company launched its new vision

and code of conduct and installed an employee ethics hotline. Employee satisfaction

scores later indicated that employees—after living in an ethics vacuum for years—

were pleased to receive this kind of direction from the top of the company. Although

CHAPTER 6 MANAGING ETHICS AND LEGAL COMPLIANCE 225

the company was purchased shortly after, employees throughout the company were

pleased with the new direction these formal statements had established.

Organizational Policy

Policy—the ‘‘rules of the organization’’—is critical to any company, and most orga-

nizations create a policy manual or an intranet site to house all relevant company

rules. Generally, policy manuals and websites describe not only laws and regulations

pertaining to the company and its industry but also all company policy, including

human resources policy. Although it’s critical for a corporation to define its policies

and communicate them—it’s a stipulation of the U.S. Sentencing Guidelines—most

employees don’t read every page of a manual or website. Employees consider policy

manuals and websites to be for reference purposes only. As a result, employees con-

sult policy manuals in the same way they use a dictionary—periodically and on a

need-to-know basis. Many managers never consult a policy manual, however—it’s

much easier to ask someone than to look up the rules in a voluminous book or

website—and, depending on whom they ask, they may or may not get the right answer.

The very nature of policy—it’s usually voluminous and written in legalese—

makes it a poor way to communicate important rules. Also, since all policy is

detailed, all policy may be viewed as having the same importance. Obviously, some

policies are much more important than others and should receive special emphasis.

When you’re designing policy communication, first analyze the audience. Who

needs to know all the policy? Does some corporate policy apply only to certain

employees? What do employees really need to know, and what’s nice for them to

know? Here are some guidelines to follow.

COMMUNICATE RELEVANT RULES TO THE PEOPLE WHO NEED THEM

Although much of a firm’s policy applies to everyone, surely some policy applies

only to specific employee groups. For example, if accountants in the organization

need specific policy, either separate it from the main manual or site under a specific

heading, or leave it out and distribute accounting policy only to accountants. If some

policy applies to all employees, it can be incorporated into the code of conduct.

PRIORITIZE POLICY The material describing confidentiality is more important than

a description of how to code a time sheet for sick time. Policy should be presented in

a way that lets employees see, at a glance, what the most important rules are.

MAKE IT UNDERSTANDABLE First, eliminate the legalese—only lawyers like

legalese; the rest of us like simple English. Second, tell employees what the policy

means. Most policy prohibits conflicts of interest, yet few employees can define what

a conflict is. Give examples of conflicts, and tell employees what a conflict looks like.

If people can’t tell you what a conflict is, it will be difficult for them to avoid one.

MAKE POLICY COME ALIVE Effective communication occurs not when you send

the message, but when people receive it and understand it. Important policy needs to

226 SECTION III MANAGING ETHICS IN THE ORGANIZATION

be communicated in creative ways that highlight important rules. Policy also needs

to be communicated in a variety of venues: in person, in staff meetings, in orientation

programs, in training sessions—wherever there’s an opportunity.

Codes of Conduct

A code of conduct is not a substitute for an ethics program; a code is only the start of

an ethics effort. Codes come up frequently because most ethics programs, good or

bad, have them. Codes vary substantially in length, content, and readability; but

they’re generally designed to be the main road map, the ground rules for ethical con-

duct within the organization.

It’s probably fair to say that the longer the code, the less likely employees are to

read it. On the other hand, the shorter the code, the broader and more abstract the

guidelines will be. Reducing the number of pages represents acknowledgment that

the company can’t have rules to cover the hundreds of choices employees make every

day. Rather, a focus on the values that should guide decision making can help

employees make the best decisions in a wide variety of situations.

Many organizations deal with a longer code by dividing it into parts. The first

part provides the broad guiding principles. These are followed by a more detailed

section that includes more specific application to cases, answers to commonly asked

questions, and reference to more detailed policy manuals. Some organizations create

separate booklets, as supplements to a more general code, for workers in particular

functions such as purchasing or human resources management. These booklets can

provide details and answers to the questions likely to arise in that particular type of

job, and the individuals in that job are more likely to read those details.

Code content may vary depending on the industry and the degree to which the

firm has entered the global marketplace. Specific issues are addressed depending on

the industry. Firms in the defense industry carefully outline the guidelines for charg-

ing one’s time to particular government projects. If the firm is global, the code almost

certainly deals with issues such as bribery. We’ll talk more about this in the next

chapter.

If the code is to be taken seriously, it should be updated regularly and redistrib-

uted throughout the organization, and many companies circulate such a code every

year or two. Also, many organizations ask employees to sign a statement acknowl-

edging that they have read the company code and abided by it during the previous

year. The real test is whether it is regularly used. For example, in decision-making

meetings, if managers regularly refer to the code’s guidelines, employees will learn

that the code is vital to how important decisions are made.

Communicating Senior Management Commitment to Ethics

In Corporate Culture and Performance, Kotter and Heskett 16

pointed to one factor

that could turn around a company that was heading in the wrong direction—a strong

CHAPTER 6 MANAGING ETHICS AND LEGAL COMPLIANCE 227

leader who could communicate the culture. They explained how the top managers of

great companies lead.

Visions and strategies were communicated with words—spoken simply,

directly, and often—and with deeds . . . they encouraged people to

engage in a dialogue with them, not allowing the communication to flow

in one direction only. In almost all cases, the leaders became living

embodiments of the cultures they desired. The values and practices they

wanted infused into their firms were on display in their daily behavior; in

the questions they asked at meetings, in how they spent their time, in the

decisions they made. These actions gave credibility to their words. The

behavior made it clear to others that their speeches were serious. And

successes, which seemed to result from that behavior, made it clear that

the practices were sensible.

Without the buy-in and active support of senior management, ethics initiatives are

doomed. But senior managers don’t have a great track record in communicating a

vision, ethical or otherwise. In a survey of professional and management employees,

respondents revealed a lack of trust in their senior executives. 17

Most said that their

company’s leaders failed to communicate a ‘‘clear understanding of a corporate

vision, mission, and goals.’’ They also said that they trust their top management only

about 55 percent of the time. 18 We suspect that the number may be even lower today,

given recent corporate scandals. An indication of falling trust levels comes from a

2002 Watson Wyatt survey that reported just 39 percent of employees trust their sen-

ior leaders. The study also found that employee trust and financial performance are

closely linked. Companies with high trust levels have three times the rate of share-

holder returns as compared to companies with low trust levels, measured over a

three-year period. 19

Nevertheless, most employees want to hear from senior executives. Another

study of 14,250 employees in 17 companies in the United States and Canada found

that ‘‘62 percent of employees list top executives as their preferred source of infor-

mation, but only 15 percent say they actually get their company news from this

source.’’ 20

What can senior managers do to establish better communication and more trust

with employees? How can they begin to build an organization in which ethics are

valued? They can take a look at the advice that Peters and Waterman 21

offered in

their classic book, In Search of Excellence. ‘‘An effective leader must be the master

of two ends of the spectrum: ideas at the highest level of abstraction and actions at

the most mundane level of detail. The value-shaping leader is concerned, on the one

hand, with soaring, lofty visions that will generate excitement and enthusiasm. . . .

On the other hand, it seems the only way to instill enthusiasm is through scores

of daily events.’’ With this advice in mind, here are some concrete steps senior

managers can take:

228 SECTION III MANAGING ETHICS IN THE ORGANIZATION

& Set high standards and communicate them loudly and repeatedly in public

and in private. Be known for the consistency of your standards. Never let

your standards be a mystery.

& Act swiftly and firmly when someone violates the standards. Be consistent—

don’t have special rules for special people.

& Insist on complete candor from your direct reports. Tell them that you don’t

want to be protected from bad news.

& Never, never shoot the messenger of ‘‘bad news,’’ or it will be the last one

who reports problems to you. And if you don’t know about problems, you

can’t fix them.

& Talk to a wide variety of employees on different levels and in different loca-

tions. Get out there and find out what’s really going on. Don’t be satisfied

with others’ interpretations.

& In a crisis, take responsibility, be accessible, and be honest. Take the high

road. If you do, the company will probably pull through the crisis with a

minimum of damage. This is one reason why Johnson & Johnson received

such high marks for its handling of the Tylenol crisis and why Exxon

received bad marks for its handling of the Valdez oil spill (CEO Lawrence

Rawls didn’t visit Alaska until three weeks after the incident). You’ll read

more about these two crises in Chapter 10.

& Finally, put your money where your mouth is—fund and support ethics ini-

tiatives. Without supporting systems, most corporate value statements are

collections of empty platitudes that only increase organizational cynicism. 22

To develop ethics initiatives, get help from your communications and train-

ing professionals. Don’t leave your ethics strategy just to the lawyers.

At Merck, the CEO, Dick Clark, is very vocal about the ethics program and very

supportive of its efforts. In frequent face-to-face meetings with employees in the

United States and overseas, he routinely weaves in messages about ethics—that re-

sults are important, but how the results are obtained is equally important.

At many firms, the code of conduct is introduced with a message from the senior

executive. At UTC, Louis Chênevert, president and chief executive officer, intro-

duces the company code with the following message:

Dear UTC Colleague: The UTC Code of Ethics does not merely require

compliance with laws. It embodies a commitment to positive behaviors

that build trust, promote respect, and demonstrate integrity . . . Working

together, we can assure that ethics are at the foundation of our perform-

ance culture.

The message goes on to introduce the code and the business practices/compliance

infrastructure.

CHAPTER 6 MANAGING ETHICS AND LEGAL COMPLIANCE 229

At Lockheed Martin, the corporation has instituted the annual Chairman’s

Award. The Chairman’s Award recognizes a single employee or a group of Lockheed

Martin employees for extraordinary actions or behavior that exemplify the corpora-

tion’s commitment to ethical business conduct and integrity. The award is presented

at the annual senior leadership meeting of the top 250 executives in the corporation.

Nominations come from these senior leaders, who are encouraged to designate some-

one from their organization each year. The first winner in 2002 was Ron Covais, a

vice president in business development. He was recognized for demonstrating the

highest standards for integrity and ethical business conduct during the bidding phase

of a significant new business opportunity with a foreign customer. Covais demon-

strated the corporation’s values and set the standards with an international customer

and the U.S. government by his willingness to walk away from an important contract.

Covais had received an inappropriate ‘‘request for payment’’ by a foreign official.

Lockheed Martin employees are expected to reject such bribes, and Covais did. By

itself, rejecting the bribe was considered routine and would not have merited the

award. But Covais halted the bidding process (placing at risk an important contract),

reported the problem to senior officials, and worked with both U.S. government

officials and the foreign government to have the foreign official removed from the

decision-making process. The customer subsequently agreed to conduct a new bid-

ding process on ethical terms. Covais’s action and his award were publicized, color

photos and all, in Lockheed Martin Today, the company newspaper that goes to every

employee. The other nominees, one from each business area and from corporate

organizations, were also named in the story. And every top corporate executive

witnessed the chairman giving the award. The tradition of honoring commitment to

the highest level of integrity has continued since that time.

Think about the impact of such an event on the ethical culture. Every senior

leader must expend effort each year to find employees who demonstrate exemplary

ethical conduct. The award ceremony itself is exactly the kind of ‘‘ritual’’ that helps

create an ethical culture. As the stories become part of the organization’s cultural

lore, its impact grows as the stories accumulate over time. This impact is particularly

important to a company like Lockheed Martin, which has scandal in its past.

Misconduct by one of Lockheed Martin’s predecessor companies contributed to pas-

sage of the antibribery Foreign Corrupt Practices Act (discussed in Chapter 11). It has

become very important to the senior leadership of the firm to counteract any percep-

tion that the organization is unethical.

ETHICS TRAINING PROGRAMS Values statements, policy manuals, and conduct

codes aren’t enough. Organizations that are serious about ethics distribute these

materials widely and then provide training in their meaning and application. Effec-

tive training programs are ongoing efforts to teach everyone from new recruits to

high-level managers. In Chapter 1 we discussed whether ethics can be taught; we

hope that by now, you’re quite convinced that it can. Ethics in organizations is about

awareness of ethical issues and knowledge of appropriate conduct, and these ideas

can and must be taught to employees at all levels.

230 SECTION III MANAGING ETHICS IN THE ORGANIZATION

Training should be designed to suit the group of individuals being trained. A new

employee needs different training than a manager who has been with the firm for 10

years. An assembly-line worker might require only an hour of training, with regular

refresher sessions, whereas a manager might require several days of training that ad-

dress a variety of issues. Furthermore, training needs to be based on program goals. Is

the training supposed to increase awareness of ethical issues, convey knowledge of

laws and policies, change attitudes or behaviors? Finally, ethics training need not—

and probably should not—be solely the province of the ethics office. Ethics training

should be incorporated into leadership development and other programs so that it

becomes integrated more fully into the culture of the organization.

TRAINING NEW RECRUITS Many firms provide ethics training through new

employee orientation. For example, to set the stage properly, every new Lockheed

Martin employee gets a briefing on ethical and legal issues as part of the first day on

the job. This training is complemented throughout each year of employment, with the

intent of setting the stage properly from the first day.

TRAINING EXISTING EMPLOYEES Training is also provided to existing employ-

ees and takes a variety of forms. Some companies provide a basic ethics training

module to all employees. For example, Staples provides all employees with case-

based, online ethics training (developed by Staples ethics professionals and availa-

ble in 14 languages). At Lockheed Martin, every employee participates in annual

awareness training. This training focuses on the firm’s ethics, diversity, and

leadership values and how employees can and should apply these values to their

work. Each year, the ethics office staff is challenged to make the training different

and memorable—something that employees will discuss with each other after

leaving the training session.

The 2009 training, entitled ‘‘A Culture of Trust,’’ focuses on the corporation’s

values, commitment to diversity, and leadership imperatives. The session begins with

an introductory video in which the chairman and chief executive officer emphasizes

the Lockheed Martin vision and how ethics and business conduct is integral to the

company’s success. The training is video based and contains nine case scenarios, each

one highlighting different ethical dilemmas including records falsification, time-card

fraud, and intercompany relationships. Not all of the scenarios have clear-cut answers,

because the intent is to stimulate conversation during and after the session. Each train-

ing session contains from 5 to 25 people and is led by the department manager or an

ethics officer. The annual training kicks off in early May, when chairman and chief

executive officer Robert J. Stevens trains his staff. Each member of the executive staff

then trains her or his employees, and the process continues until October, by which

time all 140,000 employees will have been trained. This annual ethics awareness train-

ing has become integral to the Lockheed Martin culture. People expect it and look

forward to what the ethics staff will create each year. One limitation of this training is

that, depending on the length of the dialogue regarding the cases, teams can get

through only three or four of the case scenarios in a single training session.

CHAPTER 6 MANAGING ETHICS AND LEGAL COMPLIANCE 231

To complement its annual ethics awareness training, Lockheed Martin launched

an initiative called ‘‘The Integrity Minute,’’ a series of short (about one minute) video

messages sent to employees via e-mail. Each series contains three or four episodes on

a central ethics theme. The episodes, which are sent in consecutive weeks, contain a

cliff-hanger to maintain employee interest in the series.

Another awareness initiative at Lockheed Martin is the Ethics Arts and Film

Festival. All employees are invited to participate in a celebration of the creative arts

to promote ethics, diversity, and good leadership. The entries come from across all

business areas, both domestically and internationally. Participants use a variety

of creative media to produce posters, videos, photographs, poems and other works of

art with a focus on ethics, diversity, and leadership. Employees use their own

resources, on their own time and away from the office, to prepare their submissions.

Most of the submissions are team entries that provide work groups with a team-

building opportunity. An independent panel of judges selects the top entries, and the

winners are invited to a recognition event.

USAA has used an employee training approach called facilitated dialogue. The

approach is best used in groups of 12 to 15 people, but it can be effective in groups as

large as 30 to 50. In these training sessions, employees are first given a virtual tour of

the company’s intranet website and an introduction to the code of conduct. Then,

participants are given customized scenarios that are relevant to their own work area.

The groups discuss each scenario and refer to the website when they have questions.

The purpose is to familiarize them with the website and how it can be used to answer

questions that arise in their work as well as to promote other ethics resources.

Staples created ‘‘meetings to go’’ for its managers to use in spreading the ethics

message across the organization. The meeting-to-go kit contains PowerPoint presen-

tations, talking points, interactive exercises, and more. This approach has proven

effective in training employees because it brings the ethics message close to home,

and it’s delivered by someone the employees trust—their manager, who can answer

questions about how corporate policy and values apply in their unique corner of the

company. In addition to this training, Staples is introducing anticorruption workshops

globally in 2010. These workshops are tailored to various parts of the world and their

unique ethical challenges.

TOP MANAGEMENT INVOLVEMENT IN TRAINING When organizations conduct

ethics training for the first time, many of them begin the training at the top of the

organization. Cascading is a term frequently used to describe ethics initiatives that

begin at the top of the organization and work their way down, level by level. This

technique is often used because of the importance of leadership to the credibility of

ethics training. Each leader trains his or her direct reports, modeling the expected

training behavior and the necessary commitment to integrity.

LOCAL MANAGEMENT INVOLVEMENT IN TRAINING Many organizations rec-

ommend having local management conduct the ethics training, using common every-

day ethical dilemmas as the basis for discussion. Training sessions are thought to be

232 SECTION III MANAGING ETHICS IN THE ORGANIZATION

more useful and effective if they address real ethical issues that people face every day

in their own work setting. Examples of calls that have come in to the ethics office can

be used as the basis for training. Employees make ethical decisions every day. Any-

body who reports the time that they work—or decides how to divide their time across

different government contracts, or decides whether they are going to engage in some

kind of an outside business activity that might be in conflict with their job, or has to

decide what to tell a customer about a delayed order—is making an ethical decision.

Using common everyday issues in training gives employees a feeling of comfort that

the issue they’ve faced has been a problem for others and that they’re not some

screwball who is worrying about something that doesn’t matter.

CREATING A DIALOGUE At USAA, the ethics office held an annual strategic plan-

ning conference with 30 to 35 ethics facilitators and other invited guests from across

the enterprise. The session was modeled on a large group dialogue technique known

as Appreciative Inquiry (developed by David Cooperrider and Suresh Srivastva at

Case Western’s Weatherhead School of Management). The session facilitator asked

the participants to pair up and think about and share with their partner some positive,

memorable, peak ethics experiences they have had in their lives with their interview

partner. Then, in groups, the participants thought about the conditions under which

these kinds of peak experiences might happen more regularly. Finally, they consid-

ered what USAA might do to make such experiences even more the norm in the

organization than they are today. Participants found the focus on the positive (rather

than problems and deficiencies) particularly energizing. And their discussions led to

some very specific suggestions that have been implemented.

USAA has also applied other large group dialogue methods, such as ‘‘World

Caf!e,’’ to ethics training. World Caf!e was developed by Juanita Brown and David

Isaacs in 1995. It involves developing provocative questions about topics that matter

to people and establishing a relaxed, coffee-shop-like environment to contain and

focus the conversations. The best questions promote accountability; for example,

‘‘What is the one thing I could do tomorrow that would promote ethics in the area I

work?’’ Employees talk about ethics in small groups and then reconvene in a larger

group to process and apply insights. Participants find the dialogue both empowering

and transforming.

A TRAINING MODEL: THE ETHICS GAME A powerful method of communicating

a corporate ethics message is through an ethics game. Katherine Nelson, coauthor of

this book, created the first corporate ethics game, ‘‘The Work Ethic: An Exercise in

Integrity,’’ when she was head of human resources communication at Citicorp in the

late 1980s.

The game worked like this: A group of employees were divided into teams; a

facilitator then positioned the exercise with the following messages:

‘‘We’re playing a game about ethics because we want to make sure we

get your attention. Integrity is critical here.’’

CHAPTER 6 MANAGING ETHICS AND LEGAL COMPLIANCE 233

‘‘This is an opportunity for you to practice making ethical decisions

in a risk-free environment.’’

‘‘We’re doing this to give you an overview of corporate policy and

how things are done here. We’re also going to outline all of the resources

available to you if you think you’d like some help or advice if you’re

faced with an ethical dilemma.’’

A facilitator presented the teams with a series of ethical dilemmas related to such

topics as sexual harassment, reporting ethical concerns, responsibilities of customers,

the need for confidentiality, and conflicts of interest. The ethical dilemmas were writ-

ten so that there was no clearly right answer.

For each issue, the teams took a few minutes to discuss what they considered to be

appropriate action. Then, based on a consensus among team members, they chose one

of four possible courses of action. Once the teams decided, the facilitator played

devil’s advocate and questioned the entire group about why they voted the way they

did. The discussions could get very heated, as participants and teams loudly defended

their positions. The facilitator then revealed the scores for each course of action (scores

are predetermined, preferably by the management of the organization where the game

is being played). If the participants disagreed with the scores, they could take them to

an appeals board of senior managers. Again, the discussions could get quite impas-

sioned and lively. And the competition for the best scores kept interest high.

The senior management appeals board was one of the most important aspects of

the ethics game. The very presence of senior managers for 90 minutes or so sent a

strong message that integrity and ethics must be important in this company, or all

these executives wouldn’t be spending so much time talking about it. In addition,

when discussing an appeal, the appeals board often communicated the ethics message

about company standards and expectations more powerfully than any other element

of the ethics program.. Along the way, employees could see how senior managers

worked through an ethical dilemma and what factors they considered important in

making decisions.

Groups could disagree with the scoring of a question and appeal to the senior

managers, who had the power to change scores if they heard a good argument for

that. This process somehow ‘‘stamped’’ participating managers as approachable.

Managers who participated in appeals boards frequently reported a marked increase

in the number of employees seeking them out and asking for advice. One manager

described how he had been stopped in hallways, restrooms, cafeterias, and even on

the street to be asked advice by employees who had seen him as a judge on an ethics

game appeals board. Most companies would do just about anything to have their

employees seek advice from managers on ethical issues.

Senior managers also learned a lot by participating in the game, which gave

employees an opportunity to raise issues directly to management. In one session, sev-

eral male managers were made aware of how offensive young female trainees found

any kind of sexual stereotyping. The young women were so determined to let

234 SECTION III MANAGING ETHICS IN THE ORGANIZATION

management know how strongly they felt on this issue that the women continued the

discussion face-to-face with the executives at a reception after the game had offi-

cially ended.

Since the game usually raised more questions than it answered, it was crucial to

debrief the group. At the end of the game, the facilitator gave advice on how to solve

ethical dilemmas and outlined the resources available to help employees if they

found themselves in need of advice.

The ethics game met many communication and training goals, but it was

especially effective in raising awareness, creating a dialogue, and describing

expected dilemmas and how employees might handle them. However, for an ethics

program to be effective over the long term, training and communications should

continue over time. A game is an excellent beginning and can be used repeatedly

with different dilemmas. However, it can’t exist in a vacuum or be all things to all

people. It needs to be part of an integrated ethics program with other media and

complementary messages.

Although some may view an ethics game as heresy, those who have seen this type

of training program in action are quickly convinced of its effectiveness. Other compa-

nies have developed their own versions of the game and have used them successfully.

For example, years ago, Lockheed Martin developed an ethics game modeled after

the Citicorp game, but with a twist. At the time, the company received permission

from Scott Adams, author of the Dilbert cartoons (popular with employees), to use the

Dilbert character in their game. Then Chairman of the Board Norm Augustine

appeared with Dilbert in an introductory video, and the game included a humorous

‘‘Dogbert answer’’ to each ethical question. With the introduction several years ago of

online ethics training, the Citicorp format featuring a series of scenarios with scored

answers has become increasingly popular with a wide range of companies.

Formal and Informal Systems to Resolve Questions and Report Ethical Concerns

An organization with a strong ethical culture is one where employees feel free to

speak openly about ethical issues, question authority figures, and report concerns,

and where managers are approachable and listen to their people. This may be the

most important thing an organization can do to open up the communication lines and

set up an environment of candor. Make sure people feel they can discuss their opin-

ions, their ideas, and their thoughts openly. Most important, set up an environment

where people feel they can sincerely bring up and resolve problems without being

embarrassed or fearing retribution. The first time you shoot the messenger who brings

you bad news, you’ve taken the first step toward squelching ethics in the organiza-

tion. News of the ‘‘dead messenger’’ will spread like wildfire on your organization’s

grapevine.

Although most organizations encourage employees to bring their concerns to

their immediate supervisor first, employees sometimes want to ask a question anony-

mously, or they may have a concern about their supervisor’s behavior. Also, the U.S.

CHAPTER 6 MANAGING ETHICS AND LEGAL COMPLIANCE 235

Sentencing Guidelines require that organizations ‘‘take reasonable steps to achieve

compliance with written standards through monitoring, auditing, and other systems

designed to detect criminal conduct, including a reporting system free of retribution

to employees who report criminal conduct.’’ As a result, many firms have established

a more formal system for raising concerns. This generally takes the form of a tele-

phone line employees can call to ask for help in resolving an ethical dilemma or to

report an ethical problem or behavior they’ve observed in the organization. A number

of names have emerged for these reporting systems—‘‘Communication Lines,’’

‘‘Guideline,’’ ‘‘Open Line,’’ ‘‘Helpline,’’ ‘‘Hotline,’’ and ‘‘Ethics Action Line.’’

These phone lines generally ring in the ethics office if there is one. For example, at

Lockheed Martin, the Corporate Ethics helpline is available during regular working

hours, and employees can leave a voice message 24 hours a day. In addition to the

helpline, Lockheed Martin provides an e-mail option, a web-based ‘‘Ask-Us’’ chan-

nel, a fax number, and a postal address that employees may use to submit ethical

concerns. Each business unit advertises the local ethics program on posters that

include a photo of the site ethics officer and the phone number for the ethics helpline.

Lockheed Martin also recently introduced its Planet Ethics Blog, which encourages

employees to engage in a dialogue about ethics. Some large organizations provide

separate reporting lines for each business unit. In a few firms, the line actually rings

on the chairman’s desk. Other firms have hired an outside consulting firm or law firm

to take the calls at a toll-free number and then transfer the information to the com-

pany. 23

That system is especially prevalent in many global firms, where a call can

come at any time of the day or night because of time zone differences.

We believe that, where possible, it’s best for ethics office staff to talk with call-

ers directly. As ethics office staff, they need to be in touch with what’s going on in

the organization. If they delegate the task, they lose the tone and perspective of the

callers. For example, the nonverbal clues that come through on the phone can easily

get lost in a paper report. One way to handle this is to answer calls during business

hours and then contract with an outside firm for after-hours capability. Around-the-

clock answering capability is essential for a global business. The ethics office can

explain the decision to hire an outside contractor to employees as its solution to han-

dling calls from around the globe. Organizations that have experience with telephone

reporting lines find that most of the calls represent requests for clarification. The indi-

vidual says, ‘‘Here’s what I want to do. Is it okay? Does it follow procedure?’’ Most

of the calls in many organizations represent HR-related issues, such as fairness con-

cerns. Some are relatively routine. But occasionally calls come in that represent seri-

ous breaches of the code of conduct or even illegal conduct. Managing these lines is

no small feat. It’s not unusual for a company hotline to receive thousands of calls per

year. One ethics officer reported that 90 percent of the calls to his company’s hotline

were to report HR-related issues. ‘‘But many of the other 10 percent were issues of

great interest to us and it’s well worth dealing with all of the HR issues to get to the

others,’’ he said.

One concern often raised about these reporting lines is that individuals will make

invalid reports—‘‘tattling’’ on people they don’t like. But that’s not the experience of

236 SECTION III MANAGING ETHICS IN THE ORGANIZATION

the ethics officers we interviewed. Most people call about valid issues. Although

their motives may not always be noble, the content is usually correct. Most of the

people who use the communication line are using it because they sincerely have a

question or concern about something they think is wrong. It’s one reason that confi-

dentiality is so important within the entire reporting and investigative system. The

identity of both the reporter and the alleged violator must be protected throughout

the process. The alleged violator must be protected because allegations can result

from simple misunderstandings. The reporter must be protected from any retaliation

from the accused.

Another relevant question concerns how to interpret the meaning of the number

of calls and letters. Obviously, if an organization institutes and promotes an easy way

to ask questions, express concerns, and report violations, the number of calls should

increase dramatically. Does this mean that there are more ethical problems? Probably

not. The executives who run these programs generally interpret such increases as

evidence that their programs are working. However, in an ideal world, the ethics

office should aim to put itself out of business. In other words, ethical conduct should

become so institutionalized that there would be no reason for people to call. They

would handle issues locally, with their managers. Like the old ad about a Maytag

repairman, the ethics officer would have a very boring job. On the other hand, a quiet

telephone may also signal a number of other positive or negative conditions:

& Lack of concern or recognition of ethical problems (negative)

& An intimidating environment where people fear retribution (negative)

& Good problem solving at the local level (positive)

& No one knowing the ethics office exists (negative)

Ultimately, it’s up to the ethics office to devise ways to determine what the numbers

and changes in the numbers mean.

At USAA, Earnie Broughton monitors the Helpline for information about pro-

gram effectiveness. He prefers to see a relatively low and stable level of allegations of

misconduct and a higher level of advisory questions. That means that people are call-

ing the Helpline for advice—which is a good thing. The question remaining is whether

employees are aware of and willing to use the resources that are made available to

them. USAA conducts a periodic Intranet survey of randomly selected employees in

order to determine their awareness of the ethics office and related resources, their like-

lihood to use those services, and if they are not likely to use them, why not.

Confidentiality and protection of reporters remains an important issue. Some

firms use outside individuals, often called ombudspersons, who may answer the

reporting line, provide information, investigate complaints, serve in an alternative

dispute resolution role, and report problems to a corporate compliance or audit com-

mittee while maintaining the confidentiality of the reporter. 24

Whether a telephone line, an ombudsperson, or some other formal procedure is

most appropriate for a particular corporate culture, the important thing is to have

CHAPTER 6 MANAGING ETHICS AND LEGAL COMPLIANCE 237

some way for employees to raise issues without fear of retribution. If there’s no way

for employees to raise issues without such fear, the first time an executive hears about

a problem may be from a district attorney, a regulator, or a newspaper reporter.

Finally, each of the firms we talked with has a system for investigating reports of

misconduct. These are multistage processes that can be quite complex, depending on

the seriousness of the allegation. Obviously, facts must be gathered to determine

whether the allegation can be verified. Confidentiality must be maintained throughout

these investigations, and they must be coordinated with other parts of the organiza-

tion such as the legal, audit, security, or human resources department, depending on

the problem. Then, based on a thorough analysis of the findings, recommendations

must be made and actions taken to discipline employees and/or correct systemic

problems in the organization.

USING THE REWARD SYSTEM TO REINFORCE THE ETHICS MESSAGE

Recall from Chapter 5 that the reward system is vital to alignment in an ethical cul-

ture. At Lockheed Martin, the Performance Management Process rates employees not

just on results of the job such as increased sales or profits. Employees are also rated

on how you got there through attributes that include ethics, excellence, integrity, and

people and teamwork. Each of these attributes is explicitly defined. For example,

ethics is defined as: ‘‘Is honest and forthright; Embraces truthfulness; Knows regula-

tions, rules, policies, and compliance requirements, and actively demonstrates com-

pliance; Always does the right thing.’’ Integrity is defined as ‘‘Acts with integrity;

Walks the talk; Is reliable, and holds self accountable for actions and results; Is a

good steward of Lockheed Martin resources; Credits others’ contributions as appro-

priate.’’ The People and Teamwork attribute is defined as ‘‘Treats others with respect

and dignity; Values and encourages diverse perspectives; Consistently professional

in all dealings with others, and demonstrates good interpersonal skills; Builds trust

through interactions; Partners with others in setting priorities, solving problems, and

improving quality; Demonstrates continuous, consistent, and clear communications;

Actively listens.’’

Managers are asked to provide specific behavioral examples of each attribute.

They are required to base their salary increase recommendations on these attributes

(along with bottom-line performance expectations) and to put those recommenda-

tions in writing.

At Staples, 40 percent of every employees’ performance appraisal is devoted to

how an employee did his or her job. Measuring the how and not just the what (results

achieved) is an excellent and proven way to drive desired behavior and discourage

unethical behavior.

At Otis Elevator Company (a subsidiary of United Technologies Corporation),

Stephen Page, then president and now retired as UTC’s vice chairman, wrote a letter

to employees making it clear that Otis seriously disciplines breaches of integrity. In

his words:

238 SECTION III MANAGING ETHICS IN THE ORGANIZATION

Our company is making substantial changes in the way we do business.

I am writing today to highlight what has not changed, and never will

change: our commitment to the highest ethical standards and business

practices.

We know that Otis employees are honest, mature, independent, and

scrupulous in their conduct at work. We know that Otis employees care

about ethics and our company’s reputation. And we know that employees

support sanctions for any colleague whose behavior shows he or she does

not hold these fundamental Otis values.

Our ethics program grows out of this knowledge. We provide train-

ing and communications programs to all employees in our Code of

Ethics, which offers guidance in how to behave in specific business situa-

tions. Through our worldwide network of business practices officers

(BPOs), we also provide expert advice to employees who have questions

or who face ethical dilemmas.

But for those few who do not care about ethics; who think they can

cut corners; who violate the law, our policies or our standards, there is no

place in Otis. To our regret, we have had to terminate the employment

of nearly a dozen colleagues this year alone for violations of our Code of

Ethics—a record that is simply unacceptable. Unlawful or unethical con-

duct can only harm our company and we will take whatever actions are

necessary to prevent that from happening.

Our actions reflect our fundamental belief: Otis would rather lose

business than compromise our standards of conduct.

Please take this opportunity to refresh your knowledge of our Code

of Ethics, and to recommit yourself to its guidelines and principles. We

have so much to be proud of at Otis, and our reputation as an ethical

company stands in the first rank of our accomplishments. We are deter-

mined to protect this priceless asset.

Thank you for your continued support.

This letter confirms the company’s willingness to take firm action to uphold

standards through discipline when necessary, and it is likely welcomed by the com-

pany’s many ethical employees (see Chapters 7 and 8 for information about the

appropriate use of discipline).

EVALUATING THE ETHICS PROGRAM

Many organizations have committed significant resources to their ethics efforts—

hiring high-level executives, developing values statements and codes, designing

and implementing training programs, and more. But few organizations have system-

atically evaluated these efforts, because doing so presents many challenges. For

example, as suggested earlier, more calls to the telephone line can mean different

CHAPTER 6 MANAGING ETHICS AND LEGAL COMPLIANCE 239

things and can be interpreted in a variety of ways. And asking employees at an ethics

training program whether they ‘‘liked’’ it or not doesn’t tell you much about the qual-

ity of the ethics program. Many employees will respond affirmatively just because

they liked the idea of a few hours or a day away from the office. Whether or not they

liked it should be secondary. The most important question should be whether the

program is accomplishing its goals.

Otis has gone the extra mile in the area of evaluation. It has over a million

elevators in operation in more than 200 countries around the world! You may not

have thought much about it, but all of us depend on the integrity of a company that

provides many of the elevators we ride daily. As part of a toolkit provided to each of

its companies, Otis requires a self-assessment process that involves regular evalua-

tions of program effectiveness including training, communication, work practices

reviews, instances of misconduct, corrective actions, reports, and records. Companies

are also asked to identify the strengths and weaknesses of their programs and to im-

plement changes to overcome weaknesses. Finally, they are asked to share their suc-

cesses, program strengths, and lessons learned with the rest of Otis.

Organizations that are members of the Defense Industry Initiative (DII) are often

at the forefront on evaluation because the DII asks each of its member organizations

each year to certify that the firm is complying with the six DII principles. These self-

certifications are available to all members, and a report is published and sent to the

U.S. Congress annually.

Surveys

Surveys are probably the most common approach to evaluation. Many organizations

already conduct regular employee attitude surveys; some have added ethics to the list

of survey topics, and some conduct separate ethics surveys. Surveys can target

knowledge, attitudes, skills, and behaviors. For example, if ethics training has been

recently required of all employees, surveys can evaluate the extent to which employ-

ees understand the company’s expectations and standards. Baseline data can be col-

lected before ethics training is begun, and then again several months after it’s

completed, to analyze whether positive change has occurred. Surveys can help

evaluate employees’ skill at recognizing and resolving ethical issues, and they can

measure the extent to which employees observe unethical conduct in the organiza-

tion. Finally, attitudes toward ethics management programs and processes can be

evaluated. It’s important to survey regularly so that changes and progress can

be evaluated. A final suggestion about surveys—don’t ask questions if you’re not

willing to accept the answer. Employees will expect action based on survey results.

If you’ve asked them to take the time to complete a survey, you should communicate

the results and planned action.

The most famous ethics-related survey is likely Johnson & Johnson’s Credo

survey. Then Chairman James Burke had been on the board of IBM Corporation in

the 1980s and became impressed with IBM’s employee survey program. He decided

240 SECTION III MANAGING ETHICS IN THE ORGANIZATION

that one way to keep the Johnson & Johnson Credo alive would be to survey employ-

ees about how the company was doing relative to the Credo. The survey went

through a number of iterations after being tested on employees at a variety of loca-

tions. The first survey was conducted in the United States in 1986–87. The first

international survey was conducted the following year. The first part of the survey

contains 118 items and takes about 25 minutes to complete. It asks employees to

rate things such as the company’s ‘‘customer orientation’’ on five-point scales.

The second section is open-ended for written comments. One of the findings

has been the impact of top leadership and corporate culture on survey results.

For example, former Chairman Burke had emphasized the customer above all. Presi-

dent David Clare emphasized safety first. In an analysis of the survey results, ratings

on these two survey dimensions were highest. Most of all, the survey is viewed as

a way to keep the Credo alive, a way of ‘‘closing the loop on this thing called

the Credo.’’ 25

Lockheed Martin conducts an employee survey every two years, so that the firm

can gauge whether ethical principles are being applied and whether employees have

observed wrongdoing—and, if so, whether they have reported it. The survey is

moving to an annual basis and has been combined with the company’s employee

perspectives and diversity survey. The survey allows the firm to assess its culture,

determine the impact of ethics programs, and point out areas in need of attention. All

140,000 employees are asked to participate in the voluntary survey, for which the

participation rate has increased over the years. Results of the survey are shared with

employees, and in many instances it is used to gauge the health of departments down

to the first-line managers.

In 2007, the ethics and employee perspectives surveys were combined for the

first time and results were benchmarked with data from the DII and the Mayflower

Group, a consortium of blue-chip companies. More than 80 percent of the

Mayflower Group’s member companies are included in the Fortune magazine list of

the most admired companies in America. The ethics survey measurements include

pressure to compromise standards, observed/reported misconduct, and commitment

to ethics. Most survey results were positive and consistent with favorable results

from the 2005 survey. For example, a high percentage of employees reported that

they know what constitutes ethical business conduct, how to obtain guidance on eth-

ical issues, and how to report misconduct.

The 2007 results demonstrated that Lockheed Martin continued to progress on

key metrics. Specifically, the percentage of people who believe they observed mis-

conduct reduced by three percentage points, and perceived pressure to commit

misconduct was down to two percent of the total surveyed population. In general,

employees indicated that management will act on reports, and managers are held

accountable for their conduct. Where areas of concern were noted, action plans

were developed by the business unit leadership; where particular business units

showed strong positive results, they were studied for best practices that contributed

to the results.

CHAPTER 6 MANAGING ETHICS AND LEGAL COMPLIANCE 241

VALUES OR COMPLIANCE APPROACHES

Formal corporate ethics initiatives can be categorized as emphasizing either a values or

a compliance approach to managing ethics. The values approach is proactive and aspi-

rational. It emphasizes expected behavior and an effort to achieve high standards repre-

sented by the spirit of the law and organizational values. It relies on such techniques as

leader communication and role modeling to affirm the organization’s commitment to

its stated ethical values and goals. Employees learn that these are not empty words, but

words that organizational leaders believe and live by. Ethics becomes a point of pride

in the organization: ‘‘We’re so good we don’t have to cheat!’’ The response to a values-

oriented program is generally good until violations occur. Then, employees expect that

commitment to be backed up with sanctions against the violators.

With a compliance emphasis, the focus is more on required behavior—obeying

the letter of the law rather than aspiring to lofty ethical principles. Disciplinary pro-

cedures for violators are also important to compliance efforts. Many organizations

that are motivated by the U.S. Sentencing Guidelines and Sarbanes-Oxley legislation

mandate a compliance approach. Employees are told that compliance with the law

is essential and that employees who break the law will be punished. The danger with

a compliance-only focus is the possibility that employees will believe anything

goes as long as there isn’t a rule against it, or that the company is interested only in

protecting itself, not in helping them.

An effective program should have both values and compliance components.

By themselves, abstract values statements can appear hypocritical to employees.

‘‘Management makes these lofty statements, but they don’t tell us what we

should do.’’ Values must be translated into rules for behavior; and to give the rules

meaning, violators must be disciplined. Employees welcome information that

reduces ambiguity about what they can and can’t do. And if enforcement is applied

consistently across all organizational levels, they are likely to perceive the system as

fair and just.

On the other hand, employees often view a strictly compliance-oriented pro-

gram with cynicism. Without a strong values base, compliance programs seem to

focus on catching employees doing something wrong rather than on aspiring

to do things right. Employees translate this emphasis into mistrust and a CYA

approach. Either ‘‘the organization doesn’t trust its employees,’’ or ‘‘the organi-

zation is just out to protect its own behind.’’ The best programs aim to focus on

aspiring to a set of values first and foremost, supported by just and fair enforce-

ment of the rules.

At Merck, development of a formal ethics program was driven by its long-

standing values-based culture. Interestingly, Merck did not have a formal ethics

code until 1999. In rolling out the code initiative, the firm was careful to posi-

tion it as simply a continuation of the good things the company was already

doing. It also worked hard to get participation and buy-in through focus groups

and surveys. This is typical of values-based programs where employee buy-in

and support are essential.

242 SECTION III MANAGING ETHICS IN THE ORGANIZATION

GLOBALIZING AN ETHICS PROGRAM

In Chapter 11, we’ll talk about business ethics in a global environment. What sets

United Technologies Corporation (UTC) apart is the truly global extent of its ethics

and compliance efforts. Recall that UTC has over 200,000 employees, more than half

outside the United States, and a presence in more than 180 countries. Imagine how

difficult it must be to design systems and programs to effectively reach such a wide

audience across multiple cultures. UTC’s program rests on three coordinated efforts:

management engagement, the Ombudsman/DIALOG program, and a worldwide

business practices organization.

Management engagement is the keystone, because no ‘‘program’’ succeeds with-

out direct management support. At UTC, managers are evaluated on an ‘‘ethics com-

petency’’ that is based on behaviors identified by the research of the Ethics Resource

Center as well as on a complementary set of ethics objectives. The ethics objectives

cascade through management from the CEO and require ongoing communications,

training of employees, continuous improvements in control systems, and efforts to

improve the ethics score on the biennial employee survey. UTC policy states speci-

fically that the business leaders are responsible for fostering a culture of ethical

conduct, encouraging open communications, and instilling a commitment to the

code of ethics. Both the competency and the objectives are evaluated through

the company’s ‘‘Performance Feedback Tool,’’ which was developed by the human

resources department.

The Ombudsman/DIALOG program at UTC is an alternative communications

channel for raising issues to management. Created in 1986, it fields questions or con-

cerns on essentially any subject. Ombudsman/DIALOG is a confidential channel that

does not reveal the user’s identity; it serves as a neutral intermediary between

employees and management by advocating only for clear communication, it works

independently of management, and it performs under the standards of the Interna-

tional Ombudsman Association. Inquiries come via phone contacts through toll-free

calling, or via written contacts, through either postage-paid mailers or an encrypted,

web-based system. UTC has three ombudsmen who handle more complex issues,

including those with legal implications. Less complex issues are managed by

DIALOG coordinators who work directly under the supervision of the ombudsmen.

Users of Ombudsman/DIALOG can choose to remain completely anonymous to the

organization, and the company goes to great lengths to keep this commitment. For

example, an assistant to a senior business-unit executive called with concerns about

expense report behavior. If investigated openly, the source of the information would

have been identifiable. Instead, the company audited all expense reports of people

at the same level, as a routine review. In that way, they protected the reporter’s iden-

tity. They found the problem, fired the executive, and no one was the wiser. However,

the ombudsmen do not conduct investigations. If the issue requires investigation

or intervention, it is turned over to people in other areas (e.g., human resources,

business practices) for further action. Ultimately, the ombudsman or DIALOG

coordinator reviews the answer from the company. If it doesn’t completely and

CHAPTER 6 MANAGING ETHICS AND LEGAL COMPLIANCE 243

fairly address all of the issues raised by the employee, it goes back to management

with the suggestion that it be fixed. Ombudsman/DIALOG receives more than

3,500 inquiries per year, from around the world, and makes translators readily

available. Over the past five years, with respect to those Ombudsman/DIALOG

inquiries requesting change, about half resulted in change. Moreover, in recent

years, more than half of all Ombudsman/DIALOG inquiries came from outside the

United States.

The business practices organization is led by Michael Monts, a lawyer who was

an attorney for the U.S. Navy and the Department of Defense and who then held a

variety of significant positions at UTC before becoming vice president for business

practices in early 2005. Monts is one of the company’s top executives. He reports to

the senior vice president and general counsel as well as to the audit committee of the

board of directors, with whom he meets four times per year. He has a small staff at

headquarters, and he supervises a network of more than 400 business practices offi-

cers (BPOs), who are embedded in UTC businesses around the globe. Overall, about

30 BPOs are full-time. Three of those are area BPOs reporting to headquarters, one

each located in Europe, Asia-Pacific, and the Americas, and six serve as the business

practices leaders at UTC’s major businesses. Monts participates in selecting and

appointing the BPOs as well as in evaluating their performance, and he can veto

appointments. Most have at least several years of experience in the company and are

familiar with internal controls and the company culture. They are considered high-

potential people who generally come from staff functions such as finance or safety.

Good communication skills are considered a must for business practices staff, along

with the ability to take the ball and run with it when a problem arises. UTC has a

BPO Handbook, an investigations handbook, standard work for case management,

an online case management system, toolkits for communications and risk manage-

ment, and an online knowledge management system. In addition, UTC has a standard

curriculum for training BPOs, which includes written materials, online modules,

WebEx meetings, and regional conferences. BPOs serve for about two or three years,

a turnover rate that is considered to be both a boon and a bane. It’s a boon because

these individuals bring fresh ideas and energy to the function, and they take their

business practices experience with them to their future roles, becoming continuing

champions for the business practices organization. It’s a bane because training new

people is a constant challenge.

The business practices unit manages UTC’s code of ethics (in place since 1990),

a companion policy statement on doing business with the U.S. government, and the

corporate policy manual. The code applies to UTC employees worldwide and

includes sections that specifically address ethical issues relating to doing business

abroad. But the code is not ethnocentric, so it allows for some adaptation to the

cultural mores of different cultures. It is made clear, however, that this flexibility

does not permit violations of U.S. or local laws, and the code states that UTC will

not facilitate illegal conduct or fraud by others, regardless of local norms. In 2008, a

total of 357 employees were discharged for violations of the code of ethics.

244 SECTION III MANAGING ETHICS IN THE ORGANIZATION

CONCLUSION

This chapter has offered specifics about how ethics is managed in large business

organizations. Large businesses that are committed to ethics are likely to have formal

ethics management systems such as an ethics office, ethics officer, explicit ethics

training, a telephone counseling/reporting line, and a system for investigating and

following up on reports of misconduct. However, the specifics of these systems vary

with the context and culture of the firm. Some companies in highly regulated indus-

tries may focus more on legal compliance. Others that have a long-standing values-

based culture will want to make sure that the ethics management system is designed

with a heavy emphasis on values and aspirations. Research has found that the best

of these formal ethics management programs have an overarching values-based

approach that incorporates legal compliance within the framework of a broader set of

company values. Smaller firms with a strong commitment to ethics are less likely to

have separate formal ethics management structures and systems. Whether an organi-

zation is large or small, the keys to effective ethics management are commitment to

ethics from the very top, involvement of leaders and employees at every level, and

recognition that ethics management is an ongoing effort requiring continuous

reinforcement and integration into the larger corporate culture.

DISCUSSION QUESTIONS

1. Think about the impact of the U.S. Sentencing Guidelines. Would organizations

have tried to drive ethical behavior among employees without government

encouragement?

2. After reading about how a number of large companies try to encourage ethical

behavior, what stands out? What approach is most unique? Which one do you

think is most effective? Which one would make the biggest impression on you

if you were an employee?

3. Imagine that it’s your responsibility to select an ethics officer for your organiza-

tion. What qualities, background, and experience would you look for? Would

you ever be interested in such a position? Why or why not?

4. What are the advantages of having an ethics office or officer report to a com-

pany’s chief executive officer, the legal department, human resources, or audit?

What are the disadvantages?

5. Think about an organization where you’ve worked. What kinds of ethical di-

lemmas are unique to that organization? To that industry? What might be the

best way to prepare employees to deal with those dilemmas?

6. Think about all of the communication opportunities provided by social media.

How could an organization use social media like Facebook, Twitter, and the

like to promote ethical behavior and communicate the organization’s values?

What are the advantages and dangers of those media?

CHAPTER 6 MANAGING ETHICS AND LEGAL COMPLIANCE 245

7. Which of the following exist in an organization where you’ve worked: mission

or values statement, policy manual, code of conduct, ethics training (who con-

ducts it), hotline? Were they consistent and credible?

8. Is senior management committed to ethics? How do you know? What could

they do differently or better?

9. Are leaders at all levels held accountable for their ethical conduct? If so, how?

If not, why not? What would you recommend?

10. What recommendations would you make for handling frivolous calls to the

hotline?

11. Does the organization evaluate its ethics initiatives? How? If not, why not?

12. Would you characterize the ethics efforts in this organization as taking a values,

compliance, or combination approach? Is it effective? How could it be improved?

13. How would you raise an ethical concern in this organization? List all of the

resources available to you. Which ones would you be likely to use? Why or

why not?

14. Imagine that you’re the CEO of a small manufacturing company. An employee

has dumped toxic waste in a nearby stream. Who would you call into your office,

and what would you want to know? Develop a short-term and long-term action

plan for dealing with the crisis. Who would you communicate with and why?

15. Evaluate the ethics program at your organization from the perspective of ‘‘fit.’’

Has the ethics program been designed to fit the organization’s overall culture?

If so, how? If not, what could be done to make the program a better fit?

16. Think about your own positive, memorable, ‘‘peak experiences’’ when it comes

to ethics. Be prepared to discuss them with others in your class and to think

about the conditions that would make it possible for such experiences to happen

more regularly at work. Or, if you don’t have much work experience yourself,

interview someone who has, and ask these questions. Be prepared to report on

what you learned from the interview.

SHORT CASE

WHAT’S WRONG WITH THIS PICTURE?

You’re a management consultant who has been asked by Green Company to help

design an ethics communication and training program for all Green Company

employees. Your meetings to date have been with the head of human resources, and

your contract with the company has been negotiated with him. Once the papers have

been signed, you begin your research and are quickly stymied by Green’s corporate

counsel. He says you will not be allowed to ask employees about ethical dilemmas

that have occurred at Green. He specifically asks you to get your information from

other sources such as press accounts of problems in the industry, or from other

246 SECTION III MANAGING ETHICS IN THE ORGANIZATION

organizations you’ve worked with. In addition, the head of human resources has told

you that you’ll be unable to meet the three most senior executives because they’re

busy negotiating a large acquisition. You will have access to other high-level manag-

ers who can tell you what they think the seniors want. You’re instructed to write a

code of conduct for the company and a mission statement, and to prepare presenta-

tions for the senior managers to give to employees sometime next month on corporate

expectations and values.

Case Questions

1. Based on what you know about developing ethical cultures and programs,

identify the problems presented by this case.

2. Why do you think the corporate counsel has responded in this way? What

will be your response to him, if any?

3. As a consultant, what are your ethical obligations, if any?

4. How will you proceed?

CASE

IMPROVING AN ETHICAL CULTURE AT GEORGIA-PACIFIC

Integrating an acquired company into an existing organization is one of the most

challenging tasks any company faces. Read about the AOL/Time Warner marriage

to learn how a merger or acquisition can go wrong. Read the following to learn about

a successful integration. This is a fascinating case of how privately held Koch Indus-

tries acquired Georgia-Pacific, a public company, and how Koch immediately took

steps to transfer its unique and highly ethical culture to its newest ‘‘family member.’’

When privately held Koch Industries acquired Georgia-Pacific—a large con-

sumer products, building products, and packaging company—in 2005, the job of

transitioning the company to the Koch compliance and ethics focus was led by Tom

Butz, one of a small number of executives Koch sent to the newly acquired company.

Butz is quick to say that he wasn’t the key to the transition. Nor was the expert team

he assembled to help with the efforts—some team members were brought in from

other Koch companies, and some of them were Georgia-Pacific leaders in compli-

ance and ethics who stayed and/or were promoted into key positions. ‘‘The key,’’

Butz says, ‘‘was the commitment from leadership across the company to our vision

for compliance and to building the desired culture.’’ That’s in sharp contrast to the

historic practices of many companies: first focus only on building the guidelines,

training tools, and related efforts for a compliance and ethics program, and then turn

to ‘‘rolling out’’ all of those pieces to the company. Instead, for Georgia-Pacific, the

highest priority was to build understanding of, and commitment to, the vision and

necessary culture for compliance and ethics—first among that senior leadership team

and then the entire organization. Butz adds, ‘‘Proactively advancing vision and

CHAPTER 6 MANAGING ETHICS AND LEGAL COMPLIANCE 247

culture in an organization is very difficult. It is a job that is never really done, and

since even a single decision can be problematic it is not a guarantee that you’ll never

have issues. That said, we believe these critical elements are essential to long-term

success.’’

At Georgia-Pacific and other Koch companies, that focus on compliance and

ethics (which includes environmental, health, and safety issues) is fundamental to

how the company is run. Few companies integrate compliance and ethics into day-

to-day operations and the very culture of the company as Georgia-Pacific has done.

The efforts of Georgia-Pacific and other Koch companies stem from the very core

of the companies’ philosophy—Market-Based Managementj. MBMj is a holistic

approach to management that enables organizations to succeed long term by applying

the same principles inside the company that allow free societies to prosper.

In this philosophy, successful companies create value by providing products or

services that customers value more highly than available alternatives, and they do

this while consuming fewer resources, leaving more resources available to satisfy

other needs in society. Value creation involves making people’s lives better. It is con-

tributing to prosperity in society.

In short, MBM focuses not on short-term profit as many other companies are

forced to do (although it is considered one strong indicator of success) but on long-

term value creation.

With that mindset, it is easy to see why compliance and ethics is so integral to

Georgia-Pacific and other Koch companies. It is far from just a necessary expense of

doing business as other companies might view it. Instead, excellent performance

across the range of compliance and ethics is an advantage that actually helps drive

greater long-term value for the company and for society.

Inside the company, MBM is applied through five dimensions:

Vision: Determining where and how the organization can create the greatest

long-term value.

Virtue and Talents: Helping ensure that people with the right values, skills,

diverse backgrounds and capabilities are hired, retained, and developed.

Knowledge Processes: Creating, acquiring, sharing, and applying relevant

knowledge, challenging the status quo, and measuring and tracking profitability.

Decision Rights: Ensuring the right people are in the right roles with the right

authority to make decisions, and holding them accountable.

Incentives: Rewarding people according to the value they create for the

organization.

MBM, in turn, requires a culture centered on specific attributes. These attributes set

the standards for evaluating policies, practices, and conduct; establishing norms of

behavior; and building the shared values that guide individual actions. These MBM

Guiding Principles are as follows.

248 SECTION III MANAGING ETHICS IN THE ORGANIZATION

Integrity: Conduct all affairs lawfully and with integrity.

Compliance: Strive for 10,000 percent compliance, with 100 percent of employ-

ees fully complying 100 percent of the time. Ensure excellence in environmen-

tal, safety, and all other areas of compliance. Stop, think, and ask.

Value Creation: Create real, long-term value by the economic means. Under-

stand, develop, and apply MBM to achieve superior results. Eliminate waste.

Principled Entrepreneurship TM

: Demonstrate the sense of urgency, discipline,

accountability, judgment, initiative, economic and critical thinking skills, and

the risk-taking mentality necessary to generate the greatest contribution to the

company and society.

Customer Focus: Understand and develop relationships with customers to prof-

itably anticipate and satisfy their needs.

Knowledge: Seek and use the best knowledge and proactively share your knowl-

edge while embracing a challenge process. Measure profitability wherever

practical.

Change: Embrace change. Envision what could be, challenge the status quo, and

drive creative destruction.

Humility: Practice humility and intellectual honesty. Constantly seek to under-

stand and constructively deal with reality to create real value and achieve per-

sonal improvement.

Respect: Treat others with dignity, respect, honesty, and sensitivity. Appreciate

the value of diversity. Encourage and practice teamwork.

Fulfillment: Produce results that create value to realize your full potential and

find fulfillment in your work.

Company executives quickly point out the importance of the guiding principles, start-

ing with integrity and compliance. These are considered necessary, but not sufficient,

conditions for long-term success (which requires creating true value). In other words,

Georgia-Pacific and other Koch companies are not interested in profits or growth

obtained without integrity, full compliance, and excellence in all aspects of managing

the environment, health, and safety (EHS). Georgia-Pacific and Koch executives

readily admit that lots of companies have similar guiding principles. The difference

is how those principles are integrated into running the company and the unwavering

commitment to those principles. For example, at Georgia-Pacific and Koch compa-

nies, adherence to the guiding principles begins at the recruitment and hiring process.

Hiring managers are trained on a selection process that focuses on finding people

who have the skills and knowledge to do the job and, more importantly, share a set

of values and beliefs consistent with the company principles. And it doesn’t stop at

the hiring process. Performance on those principles is also a key part of every per-

son’s performance reviews and compensation. In other words, it’s not just what you

accomplish but how that matters.

CHAPTER 6 MANAGING ETHICS AND LEGAL COMPLIANCE 249

What does all this mean? To use our earlier analogy about bad apples and bad

barrels, Georgia-Pacific and Koch companies believe strongly that you need both: a

focus on finding and retaining the good apples and building systems, tools, and pro-

cesses—the good barrels—to make sure these employees can contribute at their full-

est potential to create real, long-term value. At the same time, managers must focus

on the inevitable—that there may be a few bad apples who choose to conduct busi-

ness inconsistent with the company’s principles, in spite of best efforts with training

and tools provided, and therefore must be dismissed. That, of course is easier said

than done. Early on in the transition with Georgia-Pacific, the new leadership had to

deal with a few employees and managers, and even some executives, whose deliber-

ate actions were inconsistent with the company’s principles and philosophy. A few

ultimately were let go, and the company grapevine became ripe with discussion of

dismissals that were not understood.

‘‘Frankly, we got behind in efforts to communicate with senior leaders about these

situations and how they were consistent with our philosophy and focus,’’ Butz says.

Working with the communications team at the company, Butz scheduled a series of

meetings with company leaders to better articulate expectations and the desired cul-

ture. Butz spoke to each group using real-life examples (without names, of course) to

help illustrate the practical application of MBM and the guiding principles. ‘‘We pro-

vided a series of SBOs (situations, behaviors and outcomes),’’ Butz explains. Bad deci-

sions, he continues, come from either gaps in knowledge and skills or gaps in values

and beliefs. For knowledge and skills gaps, employees may get more training or better

tools. For values and beliefs gaps, employees may be dismissed—even top-performing

employees. ‘‘When these leaders understood the details in each situation, not only did

they agree we were consistently applying our principles, but also believed that we can

get real results if we drive behavior consistent with those principles,’’ Butz says.

‘‘One manager even told me that after he had to dismiss one of his top-perform-

ing employees for making a decision the employee knew was wrong, an example of a

values and beliefs gap, the manager had a few sleepless nights wondering if he

wanted to stay at the company. In the end, he decided that this was exactly the kind

of company he wanted to work for—one that said integrity was the most important

thing and acted that way.’’

Truly, compliance with the law, ethical behavior, and superior EHS performance

are fundamental expectations of all Georgia-Pacific employees. Leaders must com-

mit to this compliance priority and lead through actions, not just words. The company

sets very clear and demanding expectations on leaders. They must use MBM to

establish a vision for the compliance and ethics expectations for their group, address

gaps to develop the MBM culture, identify and manage risk relevant to their busi-

nesses, and work on continuous improvement. Once the culture—as part of the larger

MBM culture—begins to take hold, the compliance systems, standards, and programs

designed to help leaders and employees achieve and sustain compliance excellence

are used to obtain real results, becoming effective perhaps for the first time.

These begin with the Georgia-Pacific Code of Conduct handbook for all employ-

ees, but don’t end there. The company has more than 50 specific corporate

250 SECTION III MANAGING ETHICS IN THE ORGANIZATION

compliance standards that are translated into multiple languages to support employ-

ees around the world. These standards address commercial, environmental, and

health and safety areas. Each standard is designed as a tool to help employees iden-

tify and manage risk and make the right decision. Each standard has an assigned

owner who is responsible for a structured process that includes periodic risk assess-

ment, training delivery, implementation and tracking, audits, and self-assessment

within the business and functional unit. Taken together, these compliance systems,

standards and programs are all tools that help reinforce the culture and support

Georgia-Pacific business units in achieving the vision of compliance and ethics

excellence. Simply put, they are incorporated into how the company is run.

A comprehensive, strategic communications plan helps drive understanding and

commitment to compliance and ethics efforts across the company. Key messages are

echoed in town hall meetings, company television broadcasts, intranet videos,

e-mails to employees, and newsletter articles. Among other issues, those communica-

tions stress that Georgia-Pacific employees who encounter an issue or decision that

does not feel right are expected to discuss and challenge the situation—to ‘‘stop,

think and ask’’—in order to make the right decision that supports the values and prin-

ciples of the company. Most important, Georgia-Pacific’s program strives for contin-

uous improvement through the use of a risk management system that leverages the

skills and knowledge of people across the company to improve in all areas. The

process facilitates continuous improvement, through a plan-do-check-adjust model,

to achieve the goal of superior performance.

Ultimately, the vision, culture development, and management system help

Georgia-Pacific employees achieve compliance and ethics excellence. This means the

company strives not only to meet legal requirements and company standards but also to

go beyond those levels. For example, the Georgia-Pacific code of conduct not only

prohibits unethical behaviors but also cautions employees to avoid activities that could

have just the appearance of illegal or unethical conduct. These are not easy standards,

and they aren’t meant to be, but they are standards that Georgia-Pacific and other Koch

companies believe are essential to creating real, long-term value for consumers, cus-

tomers, employees, and the communities where the company operates.

Case Study Questions

1. What behavior do you think a system such as Market-Based Management

might drive?

2. The case describes how a number of senior managers were dismissed after

the acquisition. How could employees interpret this? Does this help drive

ethical culture?

3. What is more challenging to fix: a knowledge gap or a values gap?

4. What could a hiring manager ask a candidate to determine if there’s a good

fit between the values of the organization and the candidate?

5. What do you think are the strongest benefits of this approach?

CHAPTER 6 MANAGING ETHICS AND LEGAL COMPLIANCE 251

APPENDIX

How Fines Are Determined under the U.S. Sentencing Guidelines

For more details, see www.ussc.gov.

Part 8C1.1 of the guidelines states that ‘‘If, upon consideration of the nature and

circumstances of the offense and the history and characteristics of the organization,

the court determines that the organization operated primarily for a criminal purpose

or primarily by criminal means, the fine shall be set at an amount (subject to the

statutory maximum) sufficient to divest the organization of all its net assets.’’

Factors That Can Increase or Decrease Culpability Scores

Aggravating Factors: Result in an increase to the base level of 5

" The size of the organization coupled with the degree of participation, tolerance, or

disregard for the criminal conduct by ‘‘high level personnel’’ or ‘‘substantial authority

personnel.’’ In a firm with greater than 5,000 employees, this factor can result in an

increase of as much as 5 points.

" Prior history: Organizations that have been either civilly or criminally adjudicated to

have committed similar conduct within the past five years can have up to 2 points

added.

" Obstructing, impeding, (or attempting to obstruct or impede) during the investiga-

tion, prosecution, or something can result in 3 points added.

Mitigating Factors: Result in decreases from the base level of 5

" Having an effective program to prevent and detect violations of the law can result in

a downward departure of 3 points.

" Self-reporting, cooperating, and accepting responsibility for the criminal conduct

can result in a downward departure of 5 points.

Table A.1 Method for Determining Minimum and Maximum Fines

Culpability Score Minimum Multiplier Maximum Multiplier

10 or more 2.00 4.00

9 1.80 3.60

8 1.60 3.20

7 1.40 2.80

6 1.20 2.40

5 1.00 2.00

4 0.80 1.60

3 0.60 1.20

2 0.40 0.80

1 0.20 0.40

0 or less 0.05 0.20

252 SECTION III MANAGING ETHICS IN THE ORGANIZATION

If that is not the case, penalties are based on a base fine and the ‘‘culpability

score’’ assigned by the court. The base fine is the greatest of the following: the pretax

gain from the crime, the amount of intentional loss inflicted on the victims, and an

amount based on the Sentencing Commission’s ranking of the seriousness of the

crime (ranging from $5,000 to $72.5 million). This amount is then multiplied by a

number that depends on the culpability score. The culpability score ranges from 0 to

10, and the multipliers range from 0.05 to 4.

Every defendant starts at a culpability score of 5 and can move up or down

depending on aggravating or mitigating factors (see Table A.1). The presence of

aggravating factors can cause the culpability score to increase. These aggravating

factors include (1) organizational size, combined with the degree of participation,

tolerance, or disregard for the criminal conduct by high-level personnel or substantial

authority personnel in the firm; (2) prior history of similar criminal conduct; and

(3) role in obstructing or impeding an investigation.

The presence of mitigating factors, however, can cause the culpability score to

drop. To decrease the culpability score, the organization must have in place an

‘‘effective program to prevent and detect violations of the law.’’ If the court deter-

mines that the organization has such a program, 3 points can be removed from the

base culpability score of 5. Besides having an effective compliance program in place,

the culpability score can be substantially reduced if the organization reports the

criminal conduct promptly after becoming aware of the offense and before govern-

ment investigation. According to the guidelines, an organization that reports its own

misconduct, cooperates with authorities, and accepts responsibility can have as many

as 5 points subtracted from the base culpability level of 5.

The mitigating factors that reduce the culpability score have important implica-

tions for the way companies manage ethical conduct. For example, many believe that

overseeing an ‘‘effective’’ program for preventing and detecting legal violations is a

full-time job for at least one person. It would likely involve the development of a

conduct code, training programs, scrutiny of performance management systems, the

development of communication systems, detection systems, and so on. Many of these

elements have been described in this chapter.

NOTES

1. G. Weaver, L. K. Trevi~no, and P. Cochran, ‘‘Corporate Ethics Programs as Control Systems:

Managerial and Institutional Influences,’’ Unpublished working paper, 1998.

2. S. A. Reiss, Speech given at the Conference Board meeting on business ethics, 1992.

3. United States of America v. David D’Lorenzo, 96-CV-1203, U.S. Dist. Ct., 1996.

4. J. A. Byrne, ‘‘Fall from Grace,’’ Business Week, 12 August 2002, 50–56.

5. J. M. Kaplan, ‘‘The Sentencing Guidelines: The First Ten Years,’’ Ethikos and Corporate Conduct

Quarterly 15, no. 3 (2001): 1–4.

6. D. Murphy, ‘‘The Federal Sentencing Guidelines for Organizations: A Decade of Promoting

Compliance and Ethics,’’ Iowa Law Review 87 (2002): 697–719.

7. Governance, Ethics, and the Sentencing Guidelines: A Call for Self-Governing Cultures (Los

Angeles: LRN, 2004).

CHAPTER 6 MANAGING ETHICS AND LEGAL COMPLIANCE 253

8. Staples Corporate Soul Report, 2007, 2. http://www.staples.com/sbd/img/content/soul/pdf/2007_

staples_soul_report.pdf.

9. Personal communication, Kent Druyvesteyn, 1994.

10. G. Weaver, L. K. Trevi~no, and P. Cochran, ‘‘Corporate Ethics Practices in the Mid-1990s: An

Empirical Study of the Fortune 1000,’’ Journal of Business Ethics 18, no. 3 (1999): 283–94.

11. N. K. Austin, ‘‘The New Corporate Watchdogs,’’ Working Woman, January 1994, 19–20.

12. P. L. Towne, ‘‘Training Employees and Communicating Ethical Standards,’’ in Corporate Ethics:

Developing New Standards of Accountability, Conference Board Report No. 980 (New York: The

Conference Board, 1991), 25–26.

13. D. G. Simmons, ‘‘The Nature of the Organizational Grapevine,’’ Supervisory Management, Novem-

ber 1985, 39–42.

14. T. DeAngelis, ‘‘Honesty Tests Weigh in with Improved Ratings,’’ APA Monitor 7 (1991); D. S. Ones,

C. Ziswesvaran, and F. Schmidt, ‘‘Comprehensive Meta-analysis of Integrity Test Validities:

Findings and Implications for Personal Selection and Theories of Job Performance,’’ Journal of

Applied Psychology 78 (1993): 679–703; P. R. Sackett, L. R. Burris, and C. Callahan, ‘‘Integrity

Testing for Personal Selection: An Update,’’ Personal Psychology 42 (1989): 491–529.

15. R. Farzad, ‘‘Jail Terms for 2 at Top of Adelphia,’’ New York Times, 21 June 2005, C1.

16. J. P. Kotter and J. L. Heskett, Corporate Culture and Performance (New York: Free Press, 1992).

17. A. L. Smith, Innovative Employee Communication: A New Approach to Improving Trust, Teamwork

and Performance (Englewood Cliffs, NJ: Prentice-Hall, 1991).

18. Ibid.

19. ‘‘CEOs Are Getting Younger but Employees Don’t Trust Them,’’ HRM Guide Network, Human

Resource Management, March 5, 2003, www.hrmguide.com.

20. A. L. Smith, Innovative Employee Communication: A New Approach to Improving Trust, Teamwork

and Performance (Englewood Cliffs, NJ: Prentice-Hall, 1991).

21. T. J. Peters and R. H. Waterman Jr., In Search of Excellence: Lessons from America’s Best-Run

Companies (New York: Harper & Row, 1982).

22. M. Hammer and J. Champy, Reengineering the Corporation: A Manifesto for Corporate Revolution

(New York: HarperCollins, 1993).

23. J. M. Powell, ‘‘Pinkerton Responds to the Federal Sentencing Guidelines,’’ Corporate Conduct

Quarterly 3, no. 1 (1994): 10.

24. S. S. Miller, ‘‘The Ombudsperson,’’ in Corporate Ethics: Developing New Standards of

Accountability, Conference Board Report No. 980 (New York: The Conference Board, 1991), 29–30.

25. ‘‘Johnson & Johnson’s Credo Survey: Genesis and Evolution,’’ Ethikos 7, no. 2 (1993): 2.

254 SECTION III MANAGING ETHICS IN THE ORGANIZATION

C H A P T E R7

MANAGING FOR ETHICAL

CONDUCT

INTRODUCTION

We talked (in Chapter 3) about how most employees look outside themselves

(to leaders and others) for guidance about how to behave. We have also discussed

ethical culture and how organizations, especially large ones, manage ethics and legal

compliance. Within this broad organizational context, managers oversee employee

behavior every day, and they can have enormous influence on employee behavior.

Therefore managers need simple and practical tools for managing the ethical conduct

of their direct reports in the context of the broader organizational culture. This chap-

ter introduces some basic management concepts that provide a foundation for under-

standing how to manage in a way that increases the probability that employees will

behave ethically. These principles can be applied at the department level or at the

level of the entire organization. Consistent with the focus of the book, each section

concludes with practical implications for managers. Underlying our recommenda-

tions to managers are three key assumptions:

1. Managers want to be ethical.

2. Managers want their subordinates to be ethical.

3. Based on their experience, managers will have insight into the unique ethical

requirements of the job.

IN BUSINESS, ETHICS IS ABOUT BEHAVIOR

In business, when people talk about ethics, they’re talking about behavior. In this con-

text, ethics isn’t mysterious or unusual, nor does it depend on the individual’s innate

goodness, religious conviction, or philosophical understanding (or lack of these qualit-

ies). In work situations every day, people face ethical dilemmas—questions of right

and wrong where values are in conflict. Should I hire, fire, promote, or demote this

individual? Should I offer or accept a gift in this or that situation? How should I

respond when my supervisor asks me to act against my own beliefs? 1

255

The study of ethical behavior in business involves understanding the factors that

influence how people behave in these situations. Although we’ve seen (in Chapter 3)

that internal factors such as individual moral development are important, we know

that for most people ethical conduct depends largely on external factors such as the

rules of the work context, rewards and punishments, what peers are doing, what

authority figures expect, the roles people are asked to play, and more. In this chapter,

we’re focusing on these factors because they’re the ones managers can have the most

influence on. Once managers understand how management principles apply to ethical

conduct, they can manage ethical behavior more proactively and effectively. On the

other hand, if managers fool themselves into thinking that ethical conduct is deter-

mined exclusively by some mysterious character trait, they’ll throw up their hands

and walk away from situations they could proactively manage. Or they’ll think that

simply getting rid of a ‘‘bad apple’’ will make unethical conduct stop. This kind of

thinking is a cop-out. Unethical behavior is rarely as simple as a bad apple. It’s often

something about the work environment that allows the bad apple to behave badly.

And the work environment is managers’ responsibility. Top managers are responsible

for the broad organizational culture (as we saw in Chapter 5). In most cases, though,

lower-level managers can do a lot to influence the subordinates in their own depart-

ments—and that’s what this chapter is about.

Practical Advice for Managers: Ethical Behavior

What are the practical implications for managers? First, think of ethics in concrete

behavioral terms. Specifically, what kind of behavior are you looking for in your sub-

ordinates, and how can you create a departmental work context that will support that

behavior? Specifying concrete expectations for ethical behavior means going beyond

abstract statements, such as ‘‘integrity is important here’’ to more concrete state-

ments, such as ‘‘I expect sales representatives to be absolutely honest with our cus-

tomers about such things as the characteristics of our products and our ability to

deliver by a certain date.’’ Providing a reason for these expectations is also important.

‘‘We’re interested in building long-term relationships with our customers. We want

them to think of us as their most trusted supplier.’’ Finally, it’s the manager’s respon-

sibility to create a work environment that supports ethical behavior and discourages

unethical behavior just as much as it’s the manager’s responsibility to manage for

productivity or quality. Don’t just set ethical behavior goals. Follow up to make sure

that they’re achievable and that they’re being met, and model ethical conduct your-

self. Your people will pay more attention to what you do than to what you say. Take

advantage of opportunities to demonstrate the ethical conduct you expect.

OUR MULTIPLE ETHICAL SELVES

To understand ethics at work, we must understand that people are socialized to accept

different behavior depending on the context. Cultural anthropologists have known for

years that we have multiple selves and that we behave differently depending on the

256 SECTION III MANAGING ETHICS IN THE ORGANIZATION

situation we confront. 2 Children in our society are taught very early that it’s all right

to be loud and boisterous on the playground, but they must be reverent at the church,

synagogue, temple, or mosque. Table manners are important when visiting, but eat-

ing with one’s fingers may be acceptable at home. As adults, we play highly differen-

tiated roles, and we assume that each social context presents different behavioral

expectations. Football players are expected to tackle each other deliberately and

aggressively on the playing field, but they would be arrested for such behavior on the

street. Businesspeople are expected to be aggressive against competitors but gentle

with their spouses and children. Game jargon is often applied to business dealings—

like the term playing field, which makes the business dealings seem like a game and

therefore less subject to moral scrutiny. One ‘‘bluffs’’ and conceals information in

business negotiations the same way one bluffs in a poker game. Bluffing sounds a

lot better than lying (the word lying would raise ethical awareness, as discussed in

Chapter 3), and the game analogy helps distinguish business behavior from morality

in other situations. Although we might prefer to think that we take a single ethical

self from situation to situation, reality suggests that most people behave differently in

different contexts. This means that we can and often do have multiple ethical selves.

The Kenneth Lay Example

Kenneth Lay, former chairman of Enron Corporation (until he was forced out by

the firm’s creditors in 2002), exemplifies the concept of multiple ethical selves. A

Newsweek article written after Enron’s bankruptcy described the paradox that was

Ken Lay. 3 First, we see the affable leader who was loved and admired by Enron

employees. Even Sherron Watkins, the Enron whistle-blower who brought Lay her

concerns about the accounting problems and was rebuffed, described Lay as a man

of integrity. He grew up a poor preacher’s son who pulled himself up by his boot-

straps and eventually won the Horatio Alger Award (designed to foster entrepreneur-

ship and honor the American dream of success through hard work). At the University

of Missouri, he was president of a dry fraternity and went on to earn a Ph.D. in

economics. He created Enron, and by 2000 it was the seventh largest company in the

United States in terms of revenue. Despite becoming quite rich, he never flaunted his

wealth. He drove an old Cadillac and used rental cars rather than limos when travel-

ing. He was highly philanthropic in the Houston community. He talked about making

Houston a world-class city and worked to make that happen, spreading his largesse to

the ballet, symphony, museums, the United Way, the NAACP—you name it. He was

even discussed as a possible mayoral candidate.

But Lay had another side. He has been described as an arrogant gambler who

valued risk taking and boosting the firm’s stock price above all. He transformed

Enron from the 1980s merger of two old-fashioned pipeline companies into a huge

energy trader. Enron ‘‘became a giant casino, taking positions, hedging, betting

on winners and losers.’’ 4 Interestingly, the merger deal was financed by Michael

Milliken, 1980s junk-bond trader and one of Lay’s heroes (even though Milliken had

done jail time for financial fraud). Lay fired Enron’s conservative accounting firm,

CHAPTER 7 MANAGING FOR ETHICAL CONDUCT 257

Deloitte Haskins Sells, early on because they were ‘‘not as creative and imaginative’’

as he wished, and he replaced them with Arthur Andersen. He created a corporate

culture that was described by insiders as ‘‘cutthroat’’ and ‘‘vicious,’’ and hired Ivy

League ‘‘hot shot risk takers’’ like Jeff Skilling (CEO) and Andrew Fastow (CFO) to

run it. People who didn’t make their numbers were quickly fired, and a large internal

security force came to be feared by employees. Lay was also a political pro. He

gave generously to political candidates and received favors in return, including

exemptions from a variety of local and state regulations; his reach extended all

the way to the White House. As the largest single contributor to George W. Bush’s

presidential campaign, Lay and other Enron officials met at least six times with

Vice President Richard Cheney and his aides while the vice president headed the

National Energy Policy Development Group and formulated the Bush administra-

tion’s energy policy. 5

After CEO Jeff Skilling resigned in August 2001, Lay told employees that the

company’s upcoming financials looked fine and encouraged them to ‘‘talk up the

stock and talk positively about Enron to your family and friends.’’ In an online dis-

cussion, he told employees that he had been buying stock himself. In fact, he had

bought about $4 million worth, but what he failed to mention was that he had sold

$24 million worth in the previous few months. Those who heeded his suggestion to

buy or hold saw their retirement plans wiped out and were furious when they learned

that Lay had been unloading his own stock for years. According to Newsweek,

although he claims that he was deceived by unscrupulous subordinates, 6 Lay had to

know about Enron’s ‘‘elaborate schemes to hide losses and debts’’—the off-the-

books partnerships that no one, including stock analysts, really understood.

‘‘The difference between ‘‘lie’’ and ‘‘lay’’

Has fallen into deep decay.

But now we know from Enron’s shame

That Lay and ‘‘lie’’ are just the same’’ 7

So was Kenneth Lay ethical or unethical? Had he lived (in 2006 he died of a

heart attack at age 64—after being found guilty, but before being sentenced), perhaps

he would have written a book that would have helped us understand his motivations

and behaviors. But we’ll never know. We suspect the answer is that, like many peo-

ple, he had multiple ethical selves. In some areas of his life he did good, ethical

things, including his many philanthropic efforts. But philanthropy shouldn’t be equa-

ted with ethical conduct in daily business dealings. In fact, if he felt responsibility for

what happened, wouldn’t he have turned over at least some of his estimated $20 mil-

lion net worth to help those who lost so much?

A prominent victim of the Enron bankruptcy was Cliff Baxter, Enron’s 43-year-

old former vice chairman, who committed suicide following Enron’s collapse. We

can only speculate about the reason, but a clash of his multiple ethical selves may

have played a role. Those who knew him described Baxter as a family man who bal-

anced his home and work lives. He was certainly instrumental in creating the massive

258 SECTION III MANAGING ETHICS IN THE ORGANIZATION

Enron fortune in the 1990s. Over time, however, he clashed with Andrew Fastow and

openly criticized the firm’s involvement in financial deals he considered to be ques-

tionable and inappropriate. Upon realizing he couldn’t influence what was happen-

ing, Baxter left the company in May 2001 (citing a desire to spend more time with

his family). We will likely never know for sure why he committed suicide. Friends

said he was ‘‘devastated by the company’s demise.’’ He may have felt responsible

for the many employees who lost their life savings in the collapse that could have

been prevented. It’s possible that the ethical self who cared about those employees

could no longer live with the self who contributed to their pain. 8

The Dennis Levine Example

Now for an example of someone lower in the organizational hierarchy. Dennis

Levine’s personal account of his insider trading activities, which resulted in his arrest

and imprisonment in the 1980s, also suggests multiple ethical selves. He described

himself as a good son, husband, and father, and a man who had been encouraged by

his parents to ‘‘play straight.’’ ‘‘I come from a strong, old-fashioned family . . . [my

father] taught me to work hard, believe in myself, and persevere . . . as a kid I

always worked.’’ 9 Levine’s wife, Laurie, had no idea that he had been secretly and

illegally trading in stocks for years. In fact, the family lived in a cramped one-

bedroom apartment for nearly three years after their son was born despite Levine’s

huge insider trading profits. That someone is ‘‘from a good family’’ or is ‘‘a family

man or woman’’ is no guarantee of ethical behavior in the office. At the office, the

manager is dealing with the ‘‘office self,’’ who may be very different from the

‘‘family self’’ or the ‘‘religious self.’’

Levine was a good son, husband, and father. But he separated his family self

from his insider trading self. Why was his insider trading self allowed to exist? We

can only speculate that this office self fit into an environment where peers were cross-

ing the ethical line and not getting caught. Most important, his continuing huge prof-

its led Levine into a downward spiral of unethical behavior that he found difficult to

stop despite his recognition that it was illegal.

Practical Advice for Managers: Multiple Ethical Selves

So what should managers do? First, it’s important to evaluate the organizational envi-

ronment. As a lower- or middle-level manager, you can do little to influence that

environment. If senior executives are creating a cutthroat, Darwinian culture where only

bottom-line results count, it’s probably time to look elsewhere for a job. Chapter 5 pro-

vides information about how to conduct an ‘‘ethical culture audit’’ that can help you

make that tough decision. But let’s assume that senior management is supportive. It is

then up to you to contribute to the larger organizational culture by creating a work envi-

ronment that supports ethical conduct and integrity for the people you manage. Integrity

is defined as ‘‘that quality or state of being complete, whole, or undivided.’’ Individuals

of strong character and high integrity are thought to be consistent and ethical across

CHAPTER 7 MANAGING FOR ETHICAL CONDUCT 259

contexts. So the ultimate goal is to bring these multiple ethical selves together—to sup-

port the idea that an individual can be consistent—and make the individual as ethical at

the office as he or she is at home. Managers should pursue that goal with the practical

understanding that many people find it quite possible to divide themselves into multiple

ethical selves and to behave differently in different life contexts.

Begin by analyzing yourself. Is your office self consistent with your personal

ethical self? If not, what will be required to bring the two together? Again, you’re an

important role model for your subordinates. If you’re clearly a ‘‘whole’’ person of

integrity, they’re more likely to aspire to ‘‘wholeness’’ themselves.

Next, think about those who report to you. Make no assumptions about ethics at

work based on a person’s background, religious affiliation, family life, or good deeds in

the community. Instead, find out what norms and expectations guide their work selves,

and make sure that these influences support ethical behavior. You can learn a great deal

simply by keeping your eyes and ears wide open. Of course, the best way to find out

how your people think about these issues is to ask them, either in person or in survey

form. You may be surprised what they’ll tell you. And you’re sending an important

symbolic message about what concerns you just by asking. Do employees feel, as many

surveys have suggested, that they must compromise their personal ethics to get ahead in

your organization? If so, what do they think can be done about it?

Find out what influences their thoughts and behavior in ethical dilemma

situations. Find out what inhibits them from being the best they can be, from doing

the right thing. You can base your questions on real or hypothetical situations. Most

supervisors have never bothered to ask such questions. Is it any wonder then that

most subordinates end up believing that their managers don’t really care about

ethics? Once you’ve had this type of discussion, it’s essential for you to follow

up in ways that support ethical conduct. A number of practical ideas for how to do

that follow.

REWARDS AND DISCIPLINE

People Do What’s Rewarded and Avoid Doing What’s Punished

In Chapter 5 and our discussion of ethical culture, we discussed the importance of per-

formance management systems and the signals they send about what the organization

cares about (because it signals what the organization measures, rewards, and disci-

plines). Managers implement those systems through their application of rewards and

discipline every day. Rewards and discipline are probably the most important influences

on people’s behavior at work. Most managers can probably recite a few basics recalled

from a college psychology or management class. For example, most of us remember

something about reinforcement theory—people are more likely to behave in ways

that are rewarded, and they’re less likely to do what’s punished. In fact, people in

work organizations are constantly on the lookout for information about rewards and

punishments—especially if this information isn’t explicit. In fact, the more ambiguous

260 SECTION III MANAGING ETHICS IN THE ORGANIZATION

the situation, the more people search for clues. They know that to be successful at work,

they’ll have to determine what’s rewarded and do those things while avoiding behaviors

that are punished. Remember this simple adage: what gets rewarded gets done! Finan-

cial industry employees were rewarded handsomely for creating and selling risky mort-

gages and mortgage-backed securities. They did this without much attention to the risks

to customers or the system as a whole.

People Will Go the Extra Mile to Achieve Goals Set by Managers

In combination with rewards, goal setting is a powerful motivational tool. Rewards

are often tied to explicit goals (Sandy will win a trip to the Caribbean if she hits a

particular sales target within a particular period of time). Goals focus attention on the

desired outcome (the sales target and vacation), and they lead individuals to strate-

gize about how to achieve the goals that have been set. That is generally considered

to be a good thing. Meeting the goal makes Sandy feel good (providing psychological

benefits), and it results in a significant valued reward.

Researchers are beginning to understand more about how people think about

goals, what they will do to achieve goals, and what happens when they fall short of

achieving a goal.

For example, intense focus on attaining a task goal can distract people from other

goals, such as ethical goals. Consider the goals that Lee Iacocca set for design and

production of the Ford Pinto—recall from the Pinto fires case (Chapter 2) that goals

were set—the car had to weigh less than 2,000 pounds and cost less than $2,000. An

intense organizational focus on striving for those goals may have contributed to

shortcuts and safety problems. Apparently, Iacocca had not set explicit safety goals

to accompany these challenging production goals. Thus the employees involved

focused on achieving the stated weight and price goals without giving equivalent

attention to safety. Researchers have found that employees may be less likely to

report problems to management if they are intently focused on achieving a task. 10

In

addition, attempting to achieve a task goal increases risky behavior while falling short

of the goal can lead to increased lying about performance. 11

Imagine that a claims

handler at an insurance company is assigned an explicit goal to close a certain num-

ber of claims within a particular period of time and is offered a financial reward for

doing so. He’s likely to find ways to reach that goal even if it means denying some

legitimate claims, and he’ll be less likely to report concerns about legitimate claims

being denied. On the other hand, setting goals for ethical performance can make a

difference. For example, one study found that participants who were given a goal to

revise a paragraph from their boss were more likely to correct misinformation if they

were given an explicit goal to ensure the accuracy and truth of the information. 12

Incentives and goals are popular with managers because they work well to moti-

vate behavior. But managers often fail to recognize the potential of goals and incen-

tives to motivate unethical behavior if not used thoughtfully. Let’s look at a more

specific example.

CHAPTER 7 MANAGING FOR ETHICAL CONDUCT 261

How Goals Combined With Rewards Can Encourage Unethical Behavior

THE ELECTRONICS APPLIANCE SALES EXAMPLE Suppose an electronic appli-

ance store has a sales force that is paid on the basis of a modest salary plus commis-

sion. In other words, the salespeople are paid a percentage of the items they sell. The

company frequently advertises specials on certain television models in the local

newspaper—and, of course, people come into the store asking about those models.

But because of the lower profit margin on these sale items, the company also lowers

its salespeople’s commission on these models. The higher rewards (i.e., higher com-

missions) come with sales of models that aren’t on special. The company prefers to

sell the higher-priced models but advertises the lower-priced ones to get customers

into the store. The company has set sales goals for each salesperson, and the goals

are higher for the higher-priced models. The company offers little sales training.

New salespeople spend a day or so working with the store manager and then are

pretty much on their own. The manager doesn’t seem to care how sales are made—

just that they are made. The manager’s own commissions are based on store sales.

If the salespeople value money (and their jobs), and let’s assume that they do,

they’ll be motivated to sell more of the higher-priced models. They can do this in a

variety of ways. For example, they might point out that some of these models have

features that the sale models don’t have. Some customers will probably listen to the

advice and buy the more expensive models. As buyers listen and go through with the

purchase, the connection between selling higher-priced items and positive outcomes

(commissions, praise from the manager) becomes stronger for salespeople, and their

motivation to sell more of these items grows.

Still, lots of folks will probably insist on buying the sale models. To sell more of

the higher-priced models, a salesperson might try stressing the advantages of the

high-priced model’s features even when the customer doesn’t need them. The sales-

person may find that a good number of people go along with this sales tactic. The

salesperson then receives more rewards—higher commissions, more praise from the

manager—and no obvious negative outcomes. This behavior can even be justified, or

at least rationalized. These customers are getting features they wouldn’t otherwise

get, right? And the salesperson doesn’t know much about their finances or personal

life, so there would be no way to know (without asking) if spending more money

really had negative consequences for the customer.

Things are going so well that the salesperson might now be tempted to go a bit

further—perhaps playing with the controls to make it look as if the picture on the sale

TV is a bit fuzzier than the picture on the more expensive models. That makes it even

easier to sell the more expensive models.

Explained this way, the connection between goals, rewards, and unethical behav-

ior seems pretty clear. Although no one was explicitly telling salespeople to be un-

ethical, the motivating factors were there: management set higher sales goals for

higher-priced models and rewarded the sale of these models with higher commis-

sions. The store manager didn’t seem to care how the sales got made and may not

have objected to the salesperson playing with the controls to deceive customers.

262 SECTION III MANAGING ETHICS IN THE ORGANIZATION

Management wanted to sell higher-priced models and set higher sales goals for

those models. But the exclusive focus on goals frequently obscures the method of

reaching a goal. If managers are concerned about ethical conduct, it’s essential that

they focus at least as much on how the goal is being achieved. They must let their

workers know that they’re interested in ethical means as well as ends and that they

plan to evaluate both. If individuals are rewarded for meeting goals no matter what

methods are used, they’re much more likely to try methods that cross the line

between ethical and unethical behavior.

Many people have told us of their experience with managers who say something

like this: ‘‘I don’t care how you do it, just do it.’’ Or ‘‘I don’t want to know how you

meet the goal, just meet it.’’ These statements are clearly giving permission to use

any means necessary (ethical or unethical) to meet the goal. Managers who have

uttered these words shouldn’t be surprised to find that unethical behavior is often the

result. Goal setting and incentives combine to create the most effective motivational

method available to managers. Set challenging and achievable goals, reward people

for meeting them, and people will go to great lengths to achieve the goals that have

been set. That’s why responsible managers need to be clear about the importance of

using only ethical means to achieve the goals they have set for their employees. The

statement, ‘‘I don’t care how you do it, just get it done,’’ should send up a huge red

flag that triggers ethical awareness. Managers shouldn’t say it, and workers should

beware of ethical land mines if they hear it.

Practical Advice for Managers: Goals, Rewards and Discipline

First, remember that people do what’s rewarded. And these rewards don’t have to be

explicit. The electronics store in our example would probably never have dreamed of

saying that it was rewarding salespersons for being unethical. In fact, they weren’t

doing this explicitly. But if the designers of the motivational plan had thought care-

fully about the plan’s potential effects (and it’s their responsibility to do so), they

might very well have identified its fatal flaw—it focuses on ends only and leaves it to

the salespeople to figure out the means (how to accomplish the goals). Managers are

more likely to identify these flaws in advance if they put themselves in their employ-

ees’ shoes. Think about what the average individual would be likely to do given

the rewards. What kinds of attitudes and behaviors are being rewarded explicitly or

implicitly? How can you find out? Ask your staff. If you have good, open communi-

cation with them, they’ll tell you.

Second, think carefully about the goals you’ve set for your employees. Combin-

ing specific, challenging, and achievable goals with rewards for achieving them is a

powerful motivational tool. People set their sights on those goals and work hard to

reach them. It’s up to the manager to think about the likely behavioral outcomes and

potential unintended consequences. Again, put yourself in employees’ shoes and ask

yourself what those consequences might be. Also ask yourself whether you have set

goals for ethical conduct (e.g., safety, honesty with customers) as well as for bottom-

line performance (e.g., number of TVs sold) that focuses on means (building trusting

CHAPTER 7 MANAGING FOR ETHICAL CONDUCT 263

customer relationships) as well as ends. Are you measuring and rewarding both? We

believe in an ethical ‘‘Pygmalion effect.’’ In tests of the more general Pygmalion

effect, researchers have found that people in school and work settings generally live

up to the expectations that are set for them, whether they’re high or low. 13

Students

and workers perform better in response to a teacher’s or supervisor’s high expect-

ations, but they fall behind if they’re expected to fail. With the ethical Pygmalion

effect, expectations for ethical behavior (as well as performance) are set high, and

people are expected to fulfill them. This ethical Pygmalion effect appeals to people’s

desire to do what’s right. It is also likely to get people to think about how they

achieve their goals, not just whether they’ve achieved them.

Recognize the Power of Indirect Rewards and Punishments

It’s important to recognize that workers don’t have to be personally rewarded (or

punished) for the message to have an impact. A powerful extension of reinforcement

theory is social learning theory. 14

According to social learning theory, people learn

from observing the rewards and punishments of others. Imagine if we had to touch a

hot stove to learn that we’ll get burned if we do so! Luckily, we can observe others to

learn most of what we need to know about what works and what doesn’t in life and at

work. So workers’ behavior is influenced even when they don’t experience a reward

or punishment themselves. If they see that others get away with lying, cheating, or

stealing—or worse yet, if they see those individuals getting promotions or big

bonuses—they’re much more likely to try such behaviors themselves. On the other

hand, if they see that someone is quickly dismissed for lying to a customer, they learn

that such behavior is unacceptable.

THE TAILHOOK EXAMPLE As an example of how people learn about rewards and

punishments by observing others, consider the 1991 Tailhook scandal. The Tailhook

Association is a nonprofit organization of naval aviators that, in 1991, had formal ties

with the U.S. Navy. According to many insiders, the type of sexual harassment (of

some 90 women) that occurred at the annual Tailhook Association meeting held in

the Las Vegas Hilton in 1991 had been implicitly rewarded (or at least not punished)

in the Navy for some time. These sexual harassment rituals were regular events that

the male participants experienced as fun (rewarding). The Navy brass was known to

turn a blind eye to reports, responding with a ‘‘boys will be boys’’ attitude. Investiga-

tions were torturously slow and resulted in little, if any, punishment. The reward sys-

tem became well known, and therefore the men continued to engage in these

‘‘rewarding’’ behaviors that weren’t punished.

Many people (especially women) looked to the Navy’s reaction to the Tailhook

scandal as an opportunity to change the messages being sent about the acceptability

or unacceptability of such conduct. Some early signs were encouraging, but the

longer-term results disappointed many women. The secretary of the Navy resigned

his post at the outset of the scandal, and the Navy severed ties with the Tailhook

264 SECTION III MANAGING ETHICS IN THE ORGANIZATION

Association in late 1991. Investigations of potential criminal misconduct were also

launched. However, the Navy’s discussions with 1,500 men resulted in only two sus-

pects. When the Pentagon took over, 140 aviators were accused of indecent exposure,

assault, or lying under oath. However, only 80 of these individuals were ever fined or

even moderately disciplined. None of those involved in the assault of the 90 women

was court-martialed or seriously disciplined. Perhaps most significant, in early 1994

the young woman who filed the first complaint, Lieutenant Paula Coughlin, resigned

from the Navy, explaining that Tailhook ‘‘and the covert attacks on me that followed

have stripped me of my ability to serve.’’ 15

Lieutenant Coughlin left amid ‘‘rumor

mongering by officers trying to impugn her credibility’’ and with a ‘‘stack of hate

mail.’’ However, also in 1994, a federal jury awarded Lieutenant Coughlin $1.7 mil-

lion in compensatory damages and $5 million in punitive damages and held the

Hilton Hotel responsible. 16

The Navy’s top admiral, Frank B. Kelso, retired two

months early to praise from the Defense Secretary for being a man of the highest

integrity. The Tailhook Association continues to hold an annual convention, but it is

now a much tamer affair. In 1999, after an investigation of the Tailhook Association

and its 1999 convention in Reno, the Navy restored its ties with the organization. Sec-

retary of the Navy Richard Danzig said, ‘‘The shameful events of the Tailhook Con-

vention in 1991 led to a withdrawal of our support for the Association. Over the past

eight years, however, the Association took a number of constructive steps that war-

ranted a review of its status . . . [and] we’ve concluded that the time is right to restore

ties.’’ The association has committed itself to prevent the type of misconduct that

occurred in 1991. (See www.tailhook.org for more information on the association.)

The message to Navy men (and women) has clearly been mixed. Yes, the event

caused a lot of turmoil, probably enough to suggest to Navy men that assaulting their

female colleagues was not going to be as ‘‘rewarding’’ as it used to be. In fact, mem-

bership in the Tailhook Association dropped dramatically after the incident, espe-

cially among younger members. 17

Moreover, several admirals have been discharged

for inappropriate sexual behavior committed since Tailhook. Sexual harassment sen-

sitivity training is now required in the Navy. But in 1996 Newsweek reported that in

the four years after Tailhook, the Navy received more than 1,000 harassment com-

plaints and more than 3,500 charges of indecent assault. Women still complained

that they faced reprisals for filing complaints. 18

To sum up, organizations send

a powerful message to all personnel every time a decision is made to respond to a

sexual harassment complaint. Everyone watches and learns from what happens to the

perpetrators and to the victims.

The problem with sexual harassment goes beyond the Navy. In 2005, the Washing-

ton Post reported results of a survey that found more than half of the women studying

at all three military academies had experienced sexual harassment of some kind. One in

seven reported being sexually assaulted, but few had reported any of the incidents. Rea-

sons included fear of retaliation, privacy concerns, loyalty to classmates, and concern

about being punished for their own behavior (such as underage drinking). 19

Managers, take note of the messages you’re implicitly sending to all of your work-

ers by what you reward and punish (or fail to punish). Employees are constantly on the

CHAPTER 7 MANAGING FOR ETHICAL CONDUCT 265

lookout for these cues. They want to know what’s okay and not okay in your work

environment. If they observe that people advance by stepping on others, lying to cus-

tomers, and falsifying reports, they’ll be more inclined to do so because they will have

learned that such behavior is rewarded. If they see sexual harassment go undisciplined,

they may feel free to engage in it themselves. If they see those who report misconduct

suffering reprisal, they won’t risk reporting problem behavior. So if you become aware

of unethical behavior in your group, chances are that it’s being rewarded somehow. Ask

yourself how the system might be intentionally or unintentionally rewarding the un-

desired behavior, and take responsibility for changing it. On the other hand, if unethical

individuals are dismissed, and persons of integrity advance, the ethical lesson is also

clear. Integrity is valued and unethical behavior won’t be tolerated.

Can Managers Really Reward Ethical Behavior?

For years, management writers have preached that whenever possible, managers

should use rewards instead of punishment—that punishment is inherently a bad man-

agement practice. This idea, good as it sounds, may be impractical when the goal is to

encourage ethical behavior and discourage unethical behavior. Relying on rewards

means rewarding ethical behavior. So let’s think about how a manager might regu-

larly reward routine ethical behavior. Perhaps he or she could give awards or bonuses

to those whose expense reports were honest and accurate or to those managers who

didn’t harass their secretaries. Does this seem ridiculous to you? Of course it does.

Workers don’t expect to be rewarded for behaviors that are expected of everyone—

for simply doing the right thing every day. So in the short term, it’s quite difficult to

reward routine ethical behavior. However, as we noted in Chapter 6, some organiza-

tions do reward extraordinary ethical behavior that goes above and beyond the rou-

tine. Doing so sends a powerful message to everyone that such extraordinary

behavior is highly valued in the organization.

If we switch to longer-term thinking, there should be rewards for doing the right

thing. For example, most people know how to get ahead in their own organization. As

we noted in our discussion of ethical culture, large organizations have performance

management systems that provide regular feedback to employees about their per-

formance. This information is used to make important decisions about pay and pro-

motion. Is information about integrity incorporated into those systems? Is it weighted

heavily enough to make the point that integrity matters at least as much as bottom-

line performance if an employee wants to advance in the organization? Or do people

get highly compensated and promoted despite ethical lapses? If so, the message is

clear. If you want to get ahead around here, you have to do whatever it takes. People

who advance are likely the ones who have decided to go along to get along or, worse

yet, the ones who stepped on others along the way. On the other hand, are those who

have advanced to the highest levels known for their integrity? If so, the organization

is sending a message about the importance of integrity. Rewards may be a limited

tool for influencing specific ethical behaviors today or tomorrow, but they should be

used to set the tone for what’s expected and rewarded in the long term.

266 SECTION III MANAGING ETHICS IN THE ORGANIZATION

What about the Role of Discipline?

As for discipline, we all know that managers sometimes have to discipline errant

subordinates, just as responsible parents are expected to discipline unruly children.

It’s an essential part of the manager’s job to step in when an employee is headed

down the wrong path. In fact, it can be a real gift to give an employee a heads-up and

the opportunity to correct bad behavior and avoid severe negative consequences later.

We also know that discipline works. If people expect their misconduct to be detected

and punished, they’re less likely to engage in it. So if it works, why not use it? Well,

it turns out that managers are often told to avoid punishment and to rely on rewards as

much as possible because of a belief that employees will automatically react badly to

punishment. They’ll dislike the supervisor or engage in sabotage to retaliate. But we

now know that discipline can produce good results when it’s carried out in a particu-

lar way—when workers perceive it as fair.

If we examine the idea that punishment should be avoided, we find that it’s based

on old psychological research that was conducted on rats and small children. It has

little to do with adults in work settings who can distinguish discipline that’s fair (i.e.,

punishment that is deserved and fairly administered) from discipline that’s unfair.

Have you ever heard an adult say, ‘‘I had it coming; I deserved it’’? As Dennis Lev-

ine said of his arrest and imprisonment for insider trading, ‘‘I’ve gained an abiding

respect for the fairness of our system of justice. . . . When I broke the law, I was

punished. The system works.’’ He also said, ‘‘My former life was destroyed because

I figured the odds were a thousand to one against my getting caught.’’ 20

If he had

thought he would be caught and punished, the odds would have been reversed,

and he may never have cut an insider trading deal. Once caught and punished, he

acknowledged that the punishment was just.

Discipline should be administered fairly. Research evidence suggests that pun-

ishment results in more positive outcomes (e.g., the behavior improves and the

employee becomes a better corporate citizen) if the recipient perceives it to be fair. 21

These positive outcomes are linked primarily to the appropriate severity of the pun-

ishment and employee input. The punishment should ‘‘fit the crime,’’ and it should be

consistent with what others have received for similar infractions. It’s also important

that you give the employee an opportunity for input—to explain his or her side of the

story. In addition, the disciplined worker is more likely to respond positively to the

punishment if you approach it in a constructive fashion and carefully explain the rea-

sons for the punishment. Finally, if you punish, do it in private. Punishment can be a

humiliating experience, and public punishment adds insult to injury.

Recognize the indirect effects of punishment. The punished employee should not

be the manager’s only concern. Social learning theory suggests that other workers

will be affected as well. Remember, we learn a great deal from observing the rewards

and punishments of others. But if the punishment occurs in private, how will others

know about it? Anyone who has worked in a real organization knows about the

grapevine, the communication network that flashes organizational news throughout a

department or company. Good managers are aware of the power of the grapevine and

CHAPTER 7 MANAGING FOR ETHICAL CONDUCT 267

rely on it to transmit important information. Research has discovered that when peo-

ple are aware that unethical behavior has taken place, they want the violators to be

punished. 22

People want to believe that their workplace is ‘‘just’’—that the organiza-

tion rewards good guys and punishes bad guys. They also want to feel that they aren’t

suckers who, in a sense, are being punished for following the rules when others get

away with breaking them. This is an important reason that managers must discipline

unethical behavior when it occurs. There must be no exceptions. High-level rule vio-

lators must be held to the same standards. By clearly disciplining all rule violators,

managers send an unequivocal message to the violator and all observers that this be-

havior won’t be tolerated. They also support the notion that the company is a just

place to work, where the rules are enforced fairly and consistently.

Imagine how the honest employees at Enron must have felt—long before the

public implosion of the company in 2001—when two Enron energy traders in New

York made massive fraudulent energy trades and siphoned off company money into

their own personal accounts in the mid-1980s. In short, the traders had kept two sets

of books and had routinely destroyed records to obliterate any paper trail. When

Enron’s board heard of these shenanigans, CEO Ken Lay said openly at a board

meeting that the two traders ‘‘made too much money to let them go.’’ So the trading

crooks were allowed to stay on, until an internal investigator discovered the magni-

tude of the fraud and the company took an $85 million charge to after-tax earnings to

cover losses. Lay complained at an all-employee meeting that he never knew about

these activities. Later, a lawyer involved in a lawsuit against the company said, ‘‘Any

honest competent management, confronted with the conduct of Borget and Mas-

troeni, as revealed to Enron’s senior management in January 1987, would have fired

these gentlemen without delay.’’ 23

It makes us wonder if Enron’s later difficulties

could have been avoided if only the executive team had regularly disciplined the

company’s rogue employees.

In his book Father Son & Co.; My Life at IBM and Beyond (1990), Thomas

Watson Jr., the son of IBM’s founder, described his experiences in running the

company for almost 20 years at a time when IBM dominated the computer industry.

Watson also discussed the importance of imposing swift, severe punishment for

breaches of integrity as well as the indirect effects of punishing or not punishing. He

said, ‘‘If a manager does something unethical, he should be fired just as surely as a

factory worker. This is the wholesome use of the boss’s power.’’ But, as he explains

in the following excerpt, his managers didn’t always follow his advice.

On one occasion some managers in one of our plants started a chain letter

involving U.S. savings bonds. The idea was that one manager would

write to five other managers, and each of those would write to five more,

who would each send some bonds back to the first guy and write to five

more, and so on. Pretty soon they ran out of managers and got down to

employees. It ended up that the employees felt pressure to join the chain

letter and pay off the managers. I got a complaint about this and brought

it to the attention of the head of the division. I expected him to say, at a

268 SECTION III MANAGING ETHICS IN THE ORGANIZATION

minimum, ‘‘We’ve got to fire a couple of guys, I’ll handle it.’’ Instead, he

simply said, ‘‘Well, it was a mistake.’’ I couldn’t convince him to fire

anybody. Now, you could admire him for defending the team, but I think

there is a time when integrity should take the rudder from team loyalty.

All the same, I didn’t pursue the matter any further, and my failure to act

came back to haunt me.

A couple of years later in that same division, a manager fired a low-

level employee who had been stealing engineering diagrams and selling

them to a competitor. Firing him would have been fine, except that the

manager handled it in a brutal way. The employee in question had one

thing in his life that he was proud of—his commission in the U.S. Army

Reserve, where he held the rank of major. Instead of simply going to the

man’s house and telling him, ‘‘You swiped the drawings and we’re going

to fire you,’’ the manager picked a week when the fellow was in military

camp to lower the boom. Somehow the military authorities got involved

as well, and the man was stripped of his commission. The humiliation

caused him to become insanely angry, and for the next few years he

devoted himself to making me uncomfortable. He sent pictures of Tom

Watson Jr. behind bars to his senators and his congressman and to every

justice of the Supreme Court. And he kept harking back to that chain

letter, because he knew we had tolerated the men responsible for it. Even-

tually he simmered down, but the incident really taught me a lesson.

After that I simply fired managers when they broke rules of integrity. I

did it in perhaps a dozen cases, including a couple involving senior

executives. I had to overrule a lot of people each time, who would argue

that we should merely demote the man, or transfer him, or that the

business would fall apart without him. But the company was invariably

better off for the decision and the example. 24

Sometimes employees are punished for trying to do the right thing. For example,

Owen Cheevers was an experienced researcher at the Bank of Montreal who wrote an

honest report expressing his concerns about the radio industry. Investment bankers at

the firm asked him to make his report more positive. When he refused to write a more

glowing report, Cheevers was fired. Obviously, such punishment sends a powerful

message to all other employees who are aware of it—go along or be fired. 25

Practical Advice for Managers: Discipline

Tom Watson learned the hard way what can happen when breaches of integrity aren’t

disciplined swiftly and severely. Workers have long memories about incidents such

as the chain letter and how management handles them. They tuck that sort of infor-

mation away for later use. When the IBM employee who stole the engineering draw-

ings was fired in a particularly humiliating way, he was outraged. His severe and

CHAPTER 7 MANAGING FOR ETHICAL CONDUCT 269

public punishment seemed particularly unfair when compared with the way others

had been treated. And he reacted in ways that managers are told to expect from pun-

ished employees. He was angry at the punisher and the organization.

The important point about discipline is that adults differentiate between fair and

unfair punishment. If you use punishment consistently to enforce the rules, employ-

ees will expect to be punished when they break them. However, they expect punish-

ment that fits the crime and that is consistent with how others have been treated. In

most cases, if you impose discipline fairly, the problem behavior improves and the

subordinate goes on to be a productive organizational citizen.

Remember that you should be concerned about observers who pay a great deal of

attention to how rule violations are handled. When the chain letter offenders weren’t

severely disciplined, an implicit message was sent to all who were aware of the

scheme, and expectations were set up for how management would respond to future

breaches of integrity. A just organization is one that disciplines rule violations fairly

and consistently and doesn’t punish people who try to do the right thing. Workers

expect managers to discipline fairly, and they’re morally outraged when management

doesn’t do its job.

‘‘EVERYONE’S DOING IT’’

People Follow Group Norms

‘‘Everyone’s doing it’’ is the refrain so frequently used to encourage (and rationalize or

justify) unethical behavior. We’ve all heard it. From fraternity brothers who are

expected to advise their peers about the content of exams to college football players

who accept booster money to waiters and waitresses who don’t claim all of their tip

income for tax purposes to auditors who sign off on financial statements that haven’t

been thoroughly checked to insider traders who share secrets about upcoming financial

deals, individuals are much more likely to engage in unethical behavior if they’re con-

vinced that others are doing it too. It lets them off the hook by providing an acceptable

justification and rationale for the behavior. Also, recall what you learned about ethical

awareness in Chapter 3. People are more likely to recognize issues as being ethical ones

if there is social consensus in the group that the issue raises ethical concerns. But if

‘‘everyone is doing it,’’ social consensus is low (everyone seems to agree that the

behavior is not a problem) and it’s more likely that ethical concerns just won’t come up.

Rationalizing Unethical Behavior

For some behaviors, the refrain ‘‘everyone is doing it’’ is used primarily to rationalize

behavior that’s guided by unethical norms. The employee who inflates his or her

expense reports believes that it’s justified first because everyone else is doing it (and

getting away with it, too). Within the group, inflating expenses may also be explained

as a way of compensating for the extra hours spent away from home, to pay for the

270 SECTION III MANAGING ETHICS IN THE ORGANIZATION

drink at the bar or a movie, or to cover other expenses that aren’t deductible under the

organization’s formal travel cost reimbursement policy. These rationalizations are often

explicitly or implicitly supported by the boss, who suggests the behavior or engages in

it himself or herself. Either way, the manager sends a powerful message that it’s okay

to bend the rules, and that message can easily be generalized to other rules in the

organization.

A better way to manage the process is to state the rules clearly and then enforce

them. In other words, if it seems reasonable to reimburse a traveling employee for a

drink at the bar, a movie, or a telephone call home, then change the rules so that these

expenses can be legally reimbursed under the organization’s formal travel policy.

Then abuses of the system can be disciplined.

Pressure to Go Along

For other behaviors, the ‘‘everyone is doing it’’ refrain represents not just a rational-

ization but actual pressure to go along with the crowd. The argument is used to

encourage those who are reluctant. ‘‘Aw, c’mon, everybody does it!’’ Not going

along puts the individual in the uncomfortable spot of being perceived as some sort

of goody-goody who is highly ethical but also unlikable, and certainly not someone

who can be trusted. The result can be ostracism from the group, and most of us would

rather go along than be ostracized. 26

Many individuals will go along with unethical

behavior because of their strong need to be accepted. If left to their own devices, they

might very well follow the rules. But in the group situation, they feel that they have

no choice but to comply, or at least to remain silent about what others are doing.

Practical Advice for Managers: Group Norms

So what does the notion of group norms mean for the manager? Above all, you must

be acutely aware of the power of group norms (informal standards of behavior),

which aren’t always consistent with the formal, written rules.

Group norms represent what’s really happening in the group, and you must be in

touch with this reality. Any new employee will be quickly schooled in ‘‘the way we do

things in this group’’ and will be expected to go along. Loyalty to the group may be the

most powerful norm and one that’s extremely difficult to counteract. If the group norms

support ethical behavior, you have no problem; but if they don’t, you face a particularly

tough situation. If the group is strong and cohesive, one approach you can use is to

identify the informal group leader and attempt to influence that individual, hoping she

or he will influence the others. It’s also important to consider the reward system. Norms

often arise to support behaviors that are implicitly rewarded. If people are doing some-

thing, it’s usually because they find it rewarding and the system somehow encourages

it. Changes in the reward system can lead to changes in group norms.

THE SLADE COMPANY CASE EXAMPLE A classic organizational behavior case

explains how a highly productive manufacturing work group with a strong informal

CHAPTER 7 MANAGING FOR ETHICAL CONDUCT 271

leader has created a problematic group norm for punching in and out at the time

clock. After the foreman leaves, all but one of the group members goes home. The

one person remaining behind punches out all of the other group members. The result

is that group members are paid for more hours than they actually work. On occasion,

when a group member is delayed in the morning, the group punches him in. But this

practice is carefully controlled, and the group has developed norms so that it is not

abused. Although the punch-out system seems to be clearly wrong, the case is com-

plicated because management admits that although pay is low, productivity in the

group is high. What’s more, the group is highly cohesive and very willing to work

hard when necessary to fulfill last-minute orders or solve unusual production prob-

lems. The workers also value the ability to have some control over the workday.

Finally, management has known about the practice for some time and has ignored it.

The solution to the case isn’t clear-cut. The case writers have suggested that

management might be better off leaving well enough alone. ‘‘If it ain’t broke, don’t

fix it.’’ However, we believe that this is impossible if the ethical dimensions of the

case are brought into focus. Leaving it alone implies tacit acceptance and approval of

rule breaking and sends that message not only to this work group but to all of the

others as well. Other groups that, for some reason, can’t manage to do the same (per-

haps because of less cohesion or because their supervisor stays later) will no doubt

resent the injustice. Management must also accept some responsibility for tacitly

approving this practice over a long period of time.

Remembering that people do what’s rewarded, we believe that the norm is most

likely to change via adjustments in the reward system. For example, moving to a five-

day salary (somewhat higher than their current average take-home pay) rather than

hourly pay would reward people for getting the job done rather than staying a certain

number of hours on weekdays. Group members could still be paid extra for weekend

overtime work when it’s available. If the late-arrival norm isn’t being abused, it

could be institutionalized. If someone must be late, a new rule could state that he or

she must inform someone in the work group by a certain time. As with absences, a

certain number of late arrivals would be allowed within a specified period. The

informal group leader should be involved in devising the solution through an appeal

to his or her concern for fairness to other workers in the organization.

PEOPLE FULFILL ASSIGNED ROLES

Roles are strong forces for guiding behavior, and workers are assigned roles that can

powerfully influence their behavior in ethical dilemma situations. Roles can reduce a

person’s sense of his or her individuality by focusing attention on the role and the

expectations that accompany it. It doesn’t really matter who fills the role. It’s the role

requirements that are important. This focus on the role reduces the individual’s

awareness of the self as an independent individual who is personally responsible for

an outcome. This psychological process is called deindividuation. 27

So the individual acts ‘‘in role’’ and does what’s expected. This is fine when

behaving in role means doing the right thing. But what happens when in-role

272 SECTION III MANAGING ETHICS IN THE ORGANIZATION

behavior involves behaving illegally or unethically? For example, aggression is part

of the police officer’s role. Sometimes, though, police officers step over the ethical

line; they become overly aggressive and assault suspects without cause. Several such

incidents have been videotaped by bystanders in recent years. Another important part

of the police officer role is loyalty to other police officers and protection of his or her

peers. Police officers often travel in pairs and must rely on each other in difficult, life-

threatening situations. Loyalty, protection, and trust within the ranks thus serve an

important, positive purpose. But loyalty can also end up supporting unethical behav-

ior when, for example, a fellow police officer is overly aggressive and a peer who

observes the conduct doesn’t report it.

Consider this example from an old television series. Two female police detec-

tives were part of a stakeout intended to catch one of their fellow police officers

stealing heroin. The detectives realized they were facing a complex moral dilemma

when the officer told them he was stealing the heroin for his mother, who was dying

of cancer and in severe pain. He had clearly broken the law, and the rules clearly said

that they must turn him in. But loyalty and protection were important parts of their

police role. Their colleague had good intentions—to help his dying mother. After

much discussion and individual soul searching, they decided to protect their col-

league and keep silent about what they knew. Although we may disagree about

whether they made the right decision, the point here is that the peer protection and

loyalty aspects of the police officer role were an important part of that decision.

The Zimbardo Prison Experiment

A powerful and widely cited social-psychological study illustrates the power of roles

to influence behavior. 28

The researchers created a prison environment in the base-

ment of the psychology building at Stanford University. Twenty-four psychologically

healthy subjects (people like us) were recruited and randomly assigned to play the

roles of prisoners or guards. General rules were provided regarding how to fulfill the

role, but subjects were left free to interact within those general guidelines. With the

cooperation of the local police, the guards were actually sent out to arrest the prison-

ers, book them, and transport them to their simulated cells. The prisoners were given

uniforms and were referred to by identification numbers. The guards were given

comfortable quarters and a recreation area. The guards wore uniforms and mirrored

sunglasses, and they worked standard eight-hour shifts during which they were given

a great deal of control over the prisoners (physical abuse was not allowed). With rare

exceptions, the guards enjoyed the social power and status of the guard role. Some

‘‘guards’’ were exhilarated by the experience and reinforced their guard role with

aggression, threats, and insults. The ‘‘prisoners’’ quickly began to show dramatic

signs of emotional change, including acute anxiety, helplessness, and passivity

verging on complete servility. Some became severely distressed and physically ill.

Although the experiment was originally scheduled to last two weeks, it was halted

after only six days due to concern about the prisoners’ well-being. ‘‘At the end of only

six days . . . it was no longer apparent to most of the subjects (or to us) where reality

CHAPTER 7 MANAGING FOR ETHICAL CONDUCT 273

ended and their roles began. The majority had indeed become prisoners or guards, no

longer able to clearly differentiate between role playing and the real self. There were

dramatic changes in virtually every aspect of their behavior, thinking, and feeling.’’ 29

After the experiment ended, guards expressed a combination of excitement and

dismay at the darker side of themselves that had emerged. The simulated situation

had become real very quickly, and both sides had readily assumed the roles expected

of them as members of their respective groups (prisoner or guard). This occurred

despite the other roles these individuals may have played in their ‘‘normal’’ lives just

days before. Finally, when individuals attempted to deviate from the role behavior,

the deviation was quickly suppressed by pressure to conform as expressed by other

group members. The experimental results were used to support the ‘‘situational’’

explanation for prison behavior. In other words, perfectly normal people behaved

cruelly and aggressively when placed in a role where these behaviors were either

expected or allowed.

The Zimbardo experiment can help us better understand the 2004 Abu Ghraib

prison scandal in Iraq. At Abu Ghraib, beginning in 2003, poorly trained American mili-

tary police officers (MPs) and civilian contractors tortured Iraqi captives in what had

ironically been one of Saddam Hussein’s most infamous prisons. The brutal torture

ranged from physical violence to verbal, psychological, and sexual abuse. The American

public became incensed when photographs of the abuse showed up on the Internet

thanks to one young military policeman, Joseph Darby. The most famous photos include

one of a supervisor giving a thumbs-up sign while standing next to a pyramid of hooded,

naked Iraqis. Another shows female Private Lyndie England leading a naked Iraqi

around on a leash. According to the Red Cross, most of the prisoners at Abu Ghraib had

committed no crime. They had just managed to be in the wrong place at the wrong time.

So what drove these Americans, men and women, to engage in such horrific behavior

and to laugh at the humiliation of other human beings? What happened at Abu Ghraib

was complex and likely caused by many factors. But at least some of them seem haunt-

ingly reminiscent of the Zimbardo experiment. The Abu Ghraib guards quickly donned

the role of prison police, and they relished the power over prisoners that accompanied

the role. This in-role behavior was likely enhanced further by intelligence officers’

encouragement to use more aggressive techniques to soften up the prisoners for interro-

gation and by praise when such techniques ‘‘worked.’’ 30

Roles at Work

But prisons aren’t your average work setting. How do the results of this experiment

apply to work organizations? People enter work organizations in a state of ‘‘role

readiness.’’ 31

In this state, they’re likely to engage in behaviors that are consistent

with their organizationally prescribed role, even if those behaviors violate other val-

ues they hold (another example of multiple ethical selves). A particularly interesting

example is provided by corporate professionals such as lawyers, physicians, and

accountants. Professionals are thought to adhere most closely to their professional

roles. In fact, this is part of the definition of a professional. Although there’s little

274 SECTION III MANAGING ETHICS IN THE ORGANIZATION

research evidence, much anecdotal evidence suggests that many corporate physi-

cians, lawyers, and accountants identify more closely with their organizational role.

For example, Johns Manville medical personnel conformed to corporate policy and

remained silent about asbestos exposure, despite the known medical dangers. 32

In

their dual roles of physician and organizational member, the latter took precedence.

The same can be said of auditors who are supposed to adhere to the ethical guidelines

of their professional organization, the American Institute of Certified Public

Accountants (AICPA). They are supposed to protect the public interest and report

financial irregularities they find. As we have learned from auditing scandals, how-

ever, the corporate organizational role seems to take over for many.

Conflicting Roles Can Lead to Unethical Behavior

In their jobs, people are sometimes expected to play different roles that may make

competing demands on them, causing internal conflict and stress that may be

resolved via unethical behavior such as lying. For example, professional nurses are

taught that patient education and patient advocacy are important aspects of the nurs-

ing role. Yet these nursing role expectations may conflict with physicians’ orders, or

they may be difficult to implement because of time pressures and paperwork that take

nurses away from patients. In a research study, nurses responded to various scenarios,

some of which placed them in role-conflict situations. 33

Those nurses who were in

role-conflict situations said they would be more likely to lie by misreporting their

behavior on the patient’s chart.

Managers must be aware that conflicting role demands can pressure workers to

be dishonest. The best way to avoid this type of dishonesty is to minimize conflicting

role demands. Ask your staff to analyze their jobs and to identify sources of conflict

that could cause them to feel they have to lie to you or someone else in order

to successfully accomplish some aspect of their job. Then, see if the job can be

redesigned to minimize these conflicts.

Roles Can Also Support Ethical Behavior

Roles can also work to support ethical behavior. For example, whistle-blowing

(reporting the misconduct of others) is sometimes prescribed for individuals in cer-

tain jobs. This makes a difficult behavior easier to carry out. A survey of internal

auditors found that whistle-blowing was more likely when the auditors saw reporting

as a prescribed job requirement. 34

Managers should consider the extent to which or-

ganizational roles encourage either ethical or unethical behavior. Obviously, those

that support and encourage unethical behavior should be changed. Those that encour-

age ethical behavior (e.g., whistle-blowing) should be bolstered. For example,

research has found that although reporting a peer’s misconduct is a distasteful and

difficult act, people are more likely to report a peer if doing so is explicitly made a

part of their role via an honor code or code of conduct. 35

In other words, if their role

requires them to report misconduct when they see it, they’re more likely to do so.

CHAPTER 7 MANAGING FOR ETHICAL CONDUCT 275

Many colleges and universities have honor codes that require students to report any

cheating they observe. The requirement makes it easier for the reporter because the

behavior becomes a duty, a role responsibility rather than a voluntary ethical act.

Practical Advice for Managers: Roles

The key concept for managers to understand is that roles influence behavior. Think

about the roles people play in your department or organization. What are the implica-

tions of their role expectations for ethical and unethical behavior? Do some individuals

experience conflicts between their roles? For example, are professionals torn between

their organizational and professional roles? Or do employees experience conflicts within

a role—for example, like nurses, who are supposed to play the conflicting roles of

patient advocate and subordinate to the physician? Again, the individuals who hold the

jobs are probably the best source of information about their role expectations and poten-

tial conflicts. Once you’ve analyzed roles and role conflicts, determine whether jobs

need to be altered to reduce conflict. If change isn’t possible, at least you can anticipate

the problems that are likely to arise for people in these jobs.

PEOPLE DO WHAT THEY’RE TOLD

In a 60 Minutes segment, Americans working for a Japanese company in the United

States reported that their supervisor told them to unpack machine tools manufactured

in and shipped from Japan, remove the ‘‘Manufactured in Japan’’ label, change a few

things, replace the label with a ‘‘Manufactured in the U.S.’’ label, and repack the

machine tools for shipping. These products were then shipped as if they had been

manufactured in the United States to, of all places, the American military (where

U.S. manufacture of machine tools was a requirement). An American accountant at

the firm finally blew the whistle; but when the workers who had been doing the

unpacking and repacking were asked why they did it, they replied that they were

doing what their supervisor had told them to do. One of the men who had attempted

to protest was told that he could find another job if he didn’t like it, so he continued

doing what he was told to do.

This is just one of many examples we could cite of workers at all levels doing

what they’re told by managers. Participants in the famous 1972 Watergate break-in

referred to their unquestioning obedience to superior orders in testimony before the

Senate investigating committee, as did Nazi SS officers in war crimes trials and par-

ticipants in the Iran-Contra affair. 36

Organizations (corporate, political, or military)

are authority structures whose members accept the idea that, to be members in good

standing, they must give up a certain amount of independence and autonomy. They

expect that managers will tell them what to do. That’s the managerial role. They also

assume that they should do what’s expected of them. That’s the subordinate role.

These assumptions and expectations allow organizations to avoid chaos and function

in an orderly way. In addition, individuals often feel that they owe the organization

and their manager their loyalty, thus further reinforcing the pressure to comply.

276 SECTION III MANAGING ETHICS IN THE ORGANIZATION

The Milgram Experiments

Probably the most famous social-psychological studies of all time were conducted by

Stanley Milgram in the 1960s. They provide uncomfortable insights into how normal

adults behave in authority situations. 37

Most adults will carry out the authority fig-

ure’s orders even if these orders are contrary to their personal beliefs about what’s

right and lead to harm of other human beings.

In a number of laboratory experiments, Milgram paid subjects recruited from the

New Haven, Connecticut, area to participate in a one-hour study on the effects of

punishment on learning. The subject was asked to play ‘‘teacher’’ in a learning

experiment; the ‘‘learner,’’ unbeknownst to the teacher/subject, was a member of the

research team. The learner was strapped into a chair with an electrode attached to his

or her wrist. The teacher/subject was seated at a shock generator and was told to pose

questions to the learner. Each time the learner provided an incorrect response to a

question, the teacher/subject was told to turn a dial to administer an increasingly

severe shock—though in fact no shocks were actually given. As the apparent

‘‘shocks’’ intensified, the learner verbally expressed scripted responses representing

increasing discomfort, finally screaming and then going silent. During the experi-

ments, many teacher/subjects would question the experimenter and express the desire

to stop. The experimenter, dressed in a white lab coat, would provide the following

scripted response, ‘‘Although the shocks may be painful, there is no permanent tissue

damage, so please go on.’’ If the teacher/subject continued to resist, the experimenter

would respond with three successive prods: ‘‘The experiment requires that you con-

tinue’’; ‘‘It is absolutely essential that you continue’’; ‘‘You have no choice, you must

go on.’’ If the teacher continued to resist, the experiment was finally terminated.

To the surprise of Milgram and other observers, about 60 percent of the

teacher/subjects in these experiments continued to the end, obeying the authority

figure’s instructions despite the conflict they felt and expressed. It’s not that they

felt okay about what they were doing. In fact, their emotional appeals to the experi-

menter suggested that they very much wanted to stop. But most of them didn’t.

They may have felt that refusing to continue would challenge the experimenter’s

authority, affect the legitimacy of the experiment, and cause embarrassment for

themselves. 38

They acted as if they were constrained to do as they were told by the

authority figure, rather than as independent adults who could end the experiment at

any time. We should also note that teacher/subjects who were at the principled

level of cognitive moral development (see Chapter 3) were more likely to chal-

lenge the experimenter’s authority as well as more likely to stop giving the electric

shocks. So, although some participants did resist the authority figure’s commands

to continue, most of them did not.

Do you think that people today are different somehow—that they would be less

susceptible to authority figure dictates? Jerry Burger, a psychology professor at Santa

Clara University carried out a partial replication of the original Milgram experiment

and published the results in 2009. 39 Much like Milgram had done, he recruited people

from the community. The recruitment process screened out individuals who might

CHAPTER 7 MANAGING FOR ETHICAL CONDUCT 277

have been familiar with the original Milgram experiments or whose screening sug-

gested that they might have a negative reaction to participating. In its design, the

study closely followed the original. The main difference was that, in keeping with

modern-day ethics rules about protecting human subjects in research, the experiment

was stopped when the ‘‘teacher’’ thought she or he had administered a 150-volt shock

(rather than continuing all the way to 450 volts, as in the original version). In the

original experiment, 150 volts appeared to be a turning point. Most subjects who

passed that point continued all the way up the shock generator. In the replication,

subjects were also told multiple times that they could leave at any time and keep the

$50 they were being paid. Once the experiment was completed, the ‘‘learner’’ imme-

diately entered the room and told the ‘‘teacher’’ that he or she was feeling fine.

Finally, the experimenter was a trained clinical psychologist who stopped the experi-

ment immediately at any sign of serious stress. Even with all of these changes, the

results were quite similar to those Milgram found more than 40 years ago. About

two-thirds of the ‘‘teacher’’ subjects continued to deliver shocks up to 150 volts.

No matter what the results, this is still an experiment that took place in a behav-

ioral laboratory. Do the findings apply in the real world? Apparently, yes. A few

years ago, ABC TV showcased a horrifying ‘‘real-world’’ version of the Milgram

experiment. A person posing as a police officer telephoned a McDonald’s in

2004 and told the assistant manager, Donna Summers, that a young woman employee

(whom he described) had stolen a purse and should be brought into the office. He also

claimed that he had Donna’s boss on another phone line. Once the employee was in

the office, the caller instructed the manager to take the employee’s cell phone and car

keys and have her remove her clothes and do jumping jacks in the nude. The manager

said that she needed to get back to the busy restaurant so the caller suggested that she

tap her middle-aged fianc!e, Walter Nix, to watch the employee. Nix followed further

phone instructions from the alleged police officer and ultimately, sexually abused the

young woman employee. The entire event was recorded on the restaurant’s surveil-

lance camera, and much of it was broadcast in the ABC special report. Nix was sen-

tenced to several years in prison for sexual assault. The caller was caught when

police discovered that he had used a telephone card bought at a Wal-Mart in Florida.

They identified the man using Wal-Mart’s surveillance cameras (he was a corrections

officer and the married father of five!) and he was arrested—but surprisingly, not

convicted. Donna Summers was fired and received probation. The victim also

brought a civil suit against McDonald’s which she won in late 2008 (the case is under

appeal). We share this story with you because it provides a too real (some might say

surreal) example of obedience to authority at two levels. First, the young woman

employee obeyed her boss’s instruction to hand over her keys, cell phone, and

clothes. It didn’t occur to her to resist these extraordinary requests, because they

were coming from an adult authority figure. Even more outrageous is the willingness

of Summers and Nix to harm another person simply because someone posing as a

police officer told them to do so. In the broadcast interview, Summers convincingly

claimed that she believed he was a police officer and that she was doing the

right thing.

278 SECTION III MANAGING ETHICS IN THE ORGANIZATION

Obedience to Authority at Work

The obedient behavior seen in the Milgram experiments and their modern counterparts

is similar to behavior observed again and again in work organizations. The notion of

legitimate authority is an accepted tenet of organizational life. In 1968, American mili-

tary men massacred hundreds of innocent civilians at My Lai, Vietnam. They didn’t ask

questions. They did what they were told to do despite the military’s efforts in training

soldiers to believe that it is their duty to disobey unjust authority.

More recently, Lyndie England, who was found guilty of prisoner abuse at Abu

Ghraib prison in Iraq, claimed that she and others were following orders of authori-

ties above her. In addition, such behavior is not limited to organizations we think of

as authoritarian such as the military. Individuals who testified to the U.S. Congress

about price-fixing practices in the electrical industry were asked why they didn’t

report these practices to higher authorities. They responded that they felt they

couldn’t because they reported to a prescribed superior only. 40

Roger Boisjoly, who

questioned the safety of the O-rings and attempted to convince managers to cancel

the launch of the space shuttle Challenger, never went outside the chain of command

at his company to protest. 41

So, as current or future work organization members, we

encourage you to stop and think hard when an authority figure asks you to do some-

thing that could harm another person or seems wrong in some other way. Think for

yourself—and as difficult as it might seem at the time, say no.

Practical Advice for Managers: Obedience to Authority

Managers must also realize the power they hold as authority figures in work organi-

zations. Old concepts die hard. And even today in team-oriented organizations, most

people will do as they’re told. Authority figures therefore must exhibit ethical behav-

ior, and they must send powerful signals that high ethical standards are expected of

everyone and that employees are expected to question authority figures if they

believe they are being asked to do something that is wrong. This message should

begin at the top of the organization and work its way down through every level.

Moreover, when unethical behavior is uncovered, the investigation must consider the

explicit or implicit messages being sent by authority figures. Don’t assume that the

individual acted alone and without influence. Our tendency is to try to isolate the

problem, find the one ‘‘culprit’’ (bad apple), and get on with our lives. But the culprit

may have been explicitly or implicitly encouraged by a superior, and this possibility

should be investigated and taken into account.

RESPONSIBILITY IS DIFFUSED IN ORGANIZATIONS

For a relationship to exist between what people think is right and what they do, they

must feel responsible for the consequences of their actions. 42

Therefore the sense of

personal responsibility is a prerequisite for moral action. If you yourself decided to

market a certain product that might hurt small children or the environment, you

CHAPTER 7 MANAGING FOR ETHICAL CONDUCT 279

would be much more likely to seriously consider the moral implications of the deci-

sion. But in organizations, the individual often becomes disconnected from the con-

sequences of his or her actions and doesn’t feel personally responsible for them.

Responsibility becomes diffused. No individual feels the need to take responsibility,

so in the end, no one does; and unethical behavior is more likely.

For at least four reasons, individuals may not feel personally responsible for their

organizational actions. Responsibility is diffused because it is taken away, shared

with others in decision-making groups, obscured by the organizational hierarchy, or

diluted by psychological distance to potential victims.

‘‘Don’t Worry—We’re Taking Care of Everything’’

At work, individuals are often encouraged to turn responsibility over to those at

higher levels. This behavior is related to our earlier discussion of obedience to

authority. But in this case, the individual is simply told not to worry—that the

problem or decision is someone else’s responsibility. For example, an individual

who expresses concern about a safety or environmental problem may be told, ‘‘We

appreciate your concern, but you don’t need to worry about it. We’re taking care of

everything.’’ This type of response absolves the subordinate of feelings of respon-

sibility for the consequences of the organization’s action. Someone, particularly

someone at a higher level, has taken the responsibility.

Even if the superiors are highly responsible and highly ethical, however, the act

of absolving subordinates of responsibility may have significant implications for their

subsequent ethical behavior. Because of the feeling that they must do as they’re told

by authority figures, most people feel they have no choice but to follow superiors’

orders. In this case, the orders are to hand over responsibility for decision making,

and the individual feels that she or he has no choice but to give it up. If this sort of

response becomes routine, individuals will come to believe that it isn’t their responsi-

bility to be on the lookout for ethical violations, and they may stop bringing potential

problems to the attention of superiors.

Diffusing Responsibility in Groups

Because important organizational decisions are often made in groups, responsibility

for the decision becomes diffused among all group members. No single individual

feels responsible. Diffusion of responsibility in groups is used to explain the results

of classic research on the likelihood that bystanders will help a seizure victim. 43

This

research suggests that when others are present, responsibility is diffused among all of

the bystanders and individuals are less likely to help.

Diffusion of responsibility also operates in group decision making through a pro-

cess known as groupthink, 44

which has been used to explain a number of historical

group decision-making disasters such as the Bay of Pigs fiasco in John F. Kennedy’s

presidential administration. Groupthink can occur in cohesive groups whose mem-

bers are committed to the group and have a strong desire to remain group members.

280 SECTION III MANAGING ETHICS IN THE ORGANIZATION

A major characteristic of groupthink is individual group members’ tendency to con-

form to the decision they think most of the group’s members prefer. Individual group

members may find it difficult to express disagreement and tend to censor themselves

even if they disagree with the group decision.

One important symptom of groupthink is the group’s ‘‘illusion of morality,’’ the

sense that the group simply wouldn’t do anything wrong. In a classic instructional

film on groupthink, a group of managers makes a decision to market a new drug

despite disturbing evidence that it may cause dangerous side effects. The illusion of

morality is expressed by a group member who states that the company has a well-

earned good reputation and would never do anything to hurt its customers.

Clearly, decisions with ethical overtones that are made in a group setting require

special attention. The manager must make sure that the ethical implications are identi-

fied and carefully analyzed. The group leader should be careful not to state his or her

preference up front, because group members will tend to censor their own beliefs to

conform with those of the leader. Other techniques can be used to make sure that alter-

native viewpoints are aired. For example, group members can be asked to provide

anonymous criticism of the decision being considered. Computer-based group decision

support systems often provide such a feature. An individual can be appointed to the role

of devil’s advocate, or multiple individuals can be appointed to voice multiple alterna-

tive perspectives. It’s easier for these individuals to take an alternative stance when it’s

their role to do so. Another alternative is to open the group to outside stakeholders who

would come in to present their concerns and perspectives.

Diffusing Responsibility by Dividing Responsibility

Responsibility in organizations is often so divided that individuals see themselves as

only a small cog in a large machine. Or they simply don’t have vital information that

would be required to make a good decision. Division of responsibility is essential for

the kind of specialization required in modern jobs. But this means that organizational

members often do their jobs with blinders on; they see only what’s directly ahead of

them, and no one sees (or takes responsibility for) the whole picture.

Scott Peck is a psychiatrist and author of the best-selling book, The Road Less

Traveled (1978). He was part of a group dispatched to study the 1968 My Lai massacre

in South Vietnam. At My Lai, American troops slaughtered a village of unarmed

women, children, and elderly men. The killing took all morning, and only one person,

an observant helicopter pilot, tried to stop it. Peck’s interviews with military people

revealed a bureaucratic organizational structure that allowed individuals to see only

their own narrow part of the problem, thereby allowing them to avoid feelings of

responsibility. When Peck wandered the halls of the Pentagon, questioning those involved

in directing the manufacture of napalm and its transportation to Vietnam as bombs, the

replies he received were something like the following: ‘‘We appreciate your problem

and your concerns, but we are not the department you want. We are in ordnance. We

supply the weapons, but we don’t determine how they’re used.’’ Down the hall, another

group suggested that the broad issues were also beyond their purview. ‘‘We simply

CHAPTER 7 MANAGING FOR ETHICAL CONDUCT 281

determine how the war will be conducted—not whether it will be conducted.’’ 45

Peck

termed this process ‘‘the fragmentation of conscience.’’ ‘‘Any group will remain inevi-

tably potentially conscienceless and evil until such time as each and every individual

holds himself or herself directly responsible for the behavior of the whole group—the

organism of which he or she is a part. We have not yet begun to arrive at that point.’’ 46

Research has documented the process of diffusing responsibility. In a variation on

the Milgram obedience-to-authority experiments discussed earlier, diffusion of responsi-

bility was simulated by dividing the teacher’s role between two people, a ‘‘transmitter’’

and an ‘‘executant.’’ The transmitter would inform the executant when a shock had to

be administered and at what level. The experiment found that transmitters were signifi-

cantly more likely to obey than executants. 47

One can imagine that it was easier for the

transmitter to rationalize his or her actions. ‘‘I didn’t actually do the harm—someone

else did.’’ This rationalization should become easier and easier, the greater the distance

between the individual decision maker and the actual outcome.

Diffusion of responsibility also occurs at a broader system level. Think about

September 11, 2001, and the discussions about whether the government should have

been able to ‘‘connect the dots’’ and anticipate the terrorist attacks. Different people

in different government agencies had extremely relevant information (about specific

terrorists, their activities in the United States such as flight training, and plans to fly

planes into other key structures such as the Eiffel Tower). But these agencies were

not set up to communicate with each other on a regular basis. In fact, some of them

(the CIA and FBI) were explicitly designed to operate independently because of con-

cerns about the power of an integrated agency. So the design of an organization (and

decisions about who communicates with whom) influences the nature of information

individuals receive in organizations and whether they can be held responsible.

Similarly, many individuals at multiple financial industry organizations contrib-

uted to the recent financial crisis. Realtors sold houses to people who couldn’t afford

them. Mortgage lenders created risky loans for these buyers. Investment bankers

securitized those loans. Ratings agencies scored the securities highly based upon past

performance. No one stepped back to consider that the system of continuously

increasing real estate prices was unsustainable and would eventually self-correct, if

not crash. So responsibility was widely diffused. The actions of single individuals

did not create the crisis, but the combined actions of many did. Therefore it is impor-

tant to consider how we can get individuals to think more broadly about the potential

consequences of their individual actions when combined with the actions of others.

Diffusing Responsibility by Creating Psychological Distance

Responsibility can also be diffused because of the psychological distance between

the decision maker and potential victims. 48

When potential victims are psychologi-

cally distant or out of sight, it’s more difficult to see oneself as responsible for any

negative outcomes. This principle was exemplified in further variations on the studies

of obedience to authority; in those studies, Milgram varied the closeness of the

282 SECTION III MANAGING ETHICS IN THE ORGANIZATION

learner ‘‘victim’’ to the teacher. 49

For example, when the learner was placed in the

same room with the teacher, the level of obedience dropped more than 20 percent (to

40 percent). In another variation, when the teacher was asked to physically force the

learner’s hand onto the shock plate, the obedience level dropped another 10 percent.

In these situations, as psychological distance decreased, the teacher felt personal

responsibility more strongly and was less likely to comply with the authority figure’s

demands to harm the learner.

In yet another variation on the obedience experiments, Milgram posed as an

ordinary man—not as a scientist in a white lab coat. When Milgram, dressed like an

ordinary man, conducted the experiments, obedience by the subjects dropped from 60

percent to 20 percent. The influence of a uniform (like a lab coat) on obedience is

startling. Brigadier General S.L.A. Marshall, a World War II combat historian,

described how soldiers in battle would, almost to a person, obey an order from a

commanding officer on the field to fire their weapons. When there was no leader

present on the field of battle, obedience to fire weapons fell to between 15 and 20

percent. Former U.S. Army Ranger, Lieutenant Colonel Dave Grossman, in his book

The Psychological Cost of Learning to Kill in War and Society (1995), wrote that to

persuade soldiers to overcome their consciences and their natural resistance to kill-

ing, ‘‘normal human beings had to be carefully taught, psychologically conditioned,

and commanded by authorities on the battlefield.’’ In other words, responsibility had

be diffused to authority figures, and people had to be made to feel psychologically

distant from their actions. 50

This research suggests that personal responsibility for the outcomes of our orga-

nizational decisions will be less clear in situations where the potential harm is far

removed or when an authority figure commands us to do something. For example,

when the plant is not in our community, but in Mexico or somewhere in Asia, poten-

tial negative consequences are more distant; we may feel less personal responsibility,

and we may be more willing to make decisions that would harm other people. Simi-

larly, when we see a decision as someone else’s responsibility (not my job), we are

more likely to go along with decisions that harm others.

Practical Advice for Managers: Personal Responsibility

People are much more likely to act ethically if they perceive themselves as personally

responsible for the outcomes of their decisions and actions. That means they also

need to have the relevant information. As a manager, you should make individual

responsibility a highly salient issue for yourself and others. Spell out the responsibili-

ties associated with specific positions, and hold individuals to those expectations.

When a worker brings up an ethical concern, don’t take it completely off his or her

hands. And don’t say that it’s someone else’s responsibility. If it becomes necessary

to do so, be sure to keep the concerned individual informed of the progress and out-

come of the decision.

When it comes to groups, make it clear that every group member will be held

personally responsible for the outcome of group decisions. Ask groups to present

CHAPTER 7 MANAGING FOR ETHICAL CONDUCT 283

minority reports or recommendations so that a communication mechanism exists for

those who don’t agree with the group. Appoint a devil’s advocate or multiple advo-

cates to question the assumptions of the group and the group’s decision.

Don’t forget to think about the design of your organization. How is the work

divided? Does the division of labor contribute to diffusion of responsibility by keep-

ing people in the dark about relevant facts? Does the organizational structure make

people feel like they’re just cogs in a bigger wheel? Encourage information and

responsibility sharing across bureaucratic divides.

The current movement to decrease levels in the organizational hierarchy may have

a positive side benefit. People find that they have to communicate more laterally—

across the organization. Also, with fewer levels, it should become more difficult for

organizational members to rationalize that higher-ups were responsible. Finally, per-

sonal visits to geographically distant work sites and personal contact with customers

should decrease psychological distance and increase the manager’s felt responsibility

for the outcomes of any decisions or actions that impact people in these locations.

CONCLUSION

You now have some important management concepts that can be applied to the man-

agement of ethical and unethical conduct. The remaining challenge is to analyze

yourself (or your manager) in relation to these ideas.

Am I Walking My Ethical Talk?

A common phrase used by today’s managers is ‘‘walking the talk.’’ If your intention

is to be an ethical manager, here are some questions to ask yourself to see if you’re

walking your ethical talk.

1. Do I talk about the ethical implications of decisions with the people who

report to me as well as with the job candidates I’m interested in hiring?

With my peers? With my manager?

2. Have I made it clear to the people who report to me that I don’t want to be

protected from bad news? Do they understand that they can tell me anything

without fear of retribution? Do my reports come to me with ethical

concerns?

3. Do I provide guidance on ethical decision making, and have I participated in

the ethics training of those who report to me?

4. When evaluating the performance of my staff, do I weight ethical goals at

least as highly as performance and quality goals? Do I focus on the means as

well as the ends in decision making and performance appraisals?

5. Do I reward ethical conduct and discipline unethical conduct?

6. Do I require my people to take responsibility for their decisions?

7. Do I support employees who challenge unjust authority?

284 SECTION III MANAGING ETHICS IN THE ORGANIZATION

8. What are the informal norms in my department? If my employees were

asked to list the ‘‘rules’’ of working for me, what would they say? Are any

of these problematic if ethical conduct is the goal?

9. If I were to die tomorrow, would the people who report to me say that I

had integrity? How would my peers describe me? And what would my man-

ager say?

The answers to these questions should form a sound beginning for understanding

and managing ethical behavior in your work group and within the broader ethical

culture.

DISCUSSION QUESTIONS

For the following questions, if you don’t have work experience, interview someone

who does and ask them these questions. Otherwise, ask them of yourself.

1. Have you ever been in a situation—especially a work situation—where the

norms supported a particular behavior, ethical or unethical, that you felt pres-

sured to go along with? Explain.

2. Have you ever been in a situation where the rewards explicitly or implicitly sup-

ported unethical conduct? Explain.

3. Can you think of situations in which unethical behavior was dealt with appropri-

ately (punished justly) or inappropriately? What were the reactions of others in

the organization?

4. What do you think would be appropriate punishment for those found guilty of

assault or indecent exposure in the Tailhook situation? Why?

5. Have you ever felt obligated to do something you felt was wrong because a per-

son in a position of authority told you to do it?

6. Think about how you might design work to maximize workers’ taking responsi-

bility for the consequences of their actions.

7. Evaluate yourself or a manager you know using the ‘‘do you walk your talk’’

questions above.

CASE

SEARS, ROEBUCK, AND CO.: THE AUTO CENTER SCANDAL

Sears, Roebuck, and Co. began in the late 1800s as a mail-order company that sold

farm supplies and other consumer items. Its first retail store opened in the mid-1920s.

Responding to changes in American society, such as the move from farms to facto-

ries and the presence of the automobile in many homes, hundreds of retail stores

CHAPTER 7 MANAGING FOR ETHICAL CONDUCT 285

opened over the years. The company expanded rapidly, and eventually it diversified

to include other businesses: insurance (Allstate Insurance), real estate (Coldwell

Banker), securities (Dean Witter Reynolds), and credit cards (Discover). Each of

these other businesses became its own division, in addition to the merchandising

group that included retail stores, appliances, and auto service centers. By the early

1990s, the company was reporting revenues and earnings in the billions of dollars. 51

Despite its long history of high earnings and its penetration into the U.S. market,

the Sears retail business began to experience serious financial difficulties in the

1980s. Discount retailers such as Wal-Mart were pulling ahead in market share, leav-

ing Sears lagging. Sears responded by adding non-Sears name brands and an ‘‘every-

day low price’’ policy. But despite these efforts, in 1990 Sears reported a 40 percent

decline in earnings, and its merchandising group dropped a whopping 60 percent!

Cost-cutting measures were planned, including the elimination of jobs and a focus on

profits at every level. 52

In 1991, Sears unveiled a productivity incentive plan to increase profits in its

auto centers nationwide. Auto mechanics had traditionally been paid an hourly wage

and were expected to meet production quotas. In 1991, the compensation plan was

changed to include a commission component. Mechanics were paid a base salary

plus a fixed dollar amount for meeting hourly production quotas. Auto service advi-

sors (the counter people who take orders, consult with mechanics, and advise custom-

ers) had traditionally been paid a salary. To increase sales, however, commissions

and product-specific sales quotas were introduced for them as well. For example, a

service advisor might be given the goal of selling a certain number of front-end align-

ments or brake repairs during each shift. 53

In June 1992, the California Department of Consumer Affairs accused Sears,

Roebuck, and Co. of violating the state’s Auto Repair Act and sought to revoke the

licenses of all Sears auto centers in California. The allegation resulted from an

increasing number of consumer complaints and an undercover investigation of brake

repairs. Other states quickly followed suit. Essentially, the charges alleged that Sears

Auto Centers had been systematically misleading customers and charging them for

unnecessary repairs. The California investigation attributed the problems to Sears

Auto Centers’ compensation system. 54

In response to the charges, Sears CEO and Chairman Edward A. Brennan called

a news conference to deny that any fraud had occurred, and he defended Sears’ focus

on preventive maintenance for older cars. He admitted to isolated errors, accepted

personal responsibility for creating an environment where ‘‘mistakes’’ had occurred,

and outlined the actions the company planned to take to resolve the issue. These

included

& Eliminating the incentive compensation program for service advisors

& Substituting commissions based on customer satisfaction

& Eliminating sales quotas for specific parts and repairs

& Substituting sales volume quotas

286 SECTION III MANAGING ETHICS IN THE ORGANIZATION

According to Brennan, ‘‘We have to have some way to measure performance.’’ 55

Sears also introduced ‘‘shopping audits’’ of its auto centers, during which

employees would pose as customers, and Brennan published a letter of explanation

to the company’s customers in the Wall Street Journal and USA Today on June 25,

1992.

Note that the compensation system for mechanics, based on number of tasks per-

formed and parts replaced, was maintained. In the summer of 1992, Chuck Fabbri, a

Sears mechanic from California, sent a letter about Sears’ wage policy for mechanics

to U.S. Senator Richard Bryan. Fabbri said:

It is my understanding that Sears is attempting to convince your commit-

tee that all inspections in their auto centers are now performed by

employees who are paid hourly and not on commission. This is not the

case. The truth is that the majority of employees performing inspections

are still on commission. . . .

The Service Advisors . . . sell the repair work to the customer. . . .

The repairs that they sell are not only based on their inspections, but to a

larger degree based on the recommendations of mechanics who are on

commission. . . .

On January 1, 1991, the mechanics, installers and tire changers had

their hourly wages cut to what Sears termed a fixed dollar amount, or

FDA per hour which varied depending on the classification. At present

the mechanic’s FDA amount is $3.25 which, based on current Sears

minimum production quotas, is 17% of my earnings. What this means is

that for every hour of work, as defined by Sears, that I complete, I receive

$3.25 plus my hourly base pay. If I do two hours worth of work in one

hour I receive an additional $3.25 therefore increasing my earnings.

Sears calls this type of compensation incentive pay or piecework;

however, a rose by any other name is still a rose. This is commission

plain and simple. The faster I get the work done the more money I make,

and as intended, Sears’ profits increase. It is therefore obvious to increase

his earnings, a mechanic might cut corners on, or eliminate altogether,

procedures required to complete the repair correction. In addition to this,

since the mechanic often inspects or performs the diagnosis, he has the

ideal opportunity to oversell or recommend more repair work than is

needed. This would be especially tempting if it has been a slow day or

week. In part greed may create this less than ethical situation, but high

pressure to meet quotas by Sears’ management also presents a significant

contribution. I have recently been threatened with termination if my pro-

duction didn’t at least equal Sears’ minimum quotas. I might add that

prior to this new wage policy, management had only positive response to

my production, and my record proves this. . . .

There is no doubt in my mind that before their auto center employees

were put on commission Sears enjoyed the trust of its customers. Today

CHAPTER 7 MANAGING FOR ETHICAL CONDUCT 287

presents a different story. The solution is obvious not only for Sears, but

for the industry. 56

Sears agreed to a multimillion-dollar settlement with the state of California and

the 41 other states that had filed similar charges. The company was placed on three-

year probation in California. It also settled a number of consumer class-action suits.

In July 1992, the U.S. Congress held hearings on fraud in the auto repair industry.

The long-term impact of the scandal is unclear. Sears has now sold off its securi-

ties firm, the Discover card, most of its real estate and mortgage business, and

20 percent of Allstate Insurance. At the end of 1992, auto center sales lagged behind

prior levels. 57

Also in 1992, Business Week reported that employees in other areas of

Sears’ business, such as insurance and appliance sales, were feeling the same kinds of

pressures from sales quotas. 58

Case Questions

1. Identify the ethical issues involved in the case from a consequentialist and deon-

tological perspective (refer to Chapter 2).

2. Identify the management issues involved in the case. For example, think about

the case in terms of multiple ethical selves, norms, reward systems, diffusion of

responsibility, obedience to authority. What factors contributed the most to the

alleged unethical conduct on the part of service advisors and mechanics?

3. How would you evaluate Sears’ response to the allegations and the changes the

company made? Has Sears resolved its problem? Why or why not?

4. What do you think is the impact of the scandal on Sears’ reputation for quality

and service?

5. Respond to Brennan’s comment, ‘‘We have to have some way to measure per-

formance.’’ What can management do to prevent employees from overselling?

Propose a management plan (including a compensation system) that allows man-

agement to measure performance and encourages auto center employees to

behave ethically. Be specific.

6. Should anyone be disciplined? If so, who, and when? What should the discipline

be?

7. Think more generally about Sears management’s response to the firm’s financial

problems. How else could they have increased auto center sales without provid-

ing incentives to employees to sell specific products?

SHORT CASE

You’ve recently been promoted into the position of marketing manager in the com-

munications division of your company. Your new job involves managing a staff and

creating the publications and marketing materials for insurance sales professionals in

three regions.

288 SECTION III MANAGING ETHICS IN THE ORGANIZATION

NOTES

1. B. Toffler, Tough Choices (New York: Wiley & Sons, 1986).

2. R. A. Barrett, Culture and Conduct: An Excursion in Anthropology (Belmont, CA: Wadsworth,

1986).

3. E. Thomas and A. Murr, ‘‘The Gambler Who Blew It All,’’ Newsweek, 4 February 2002, 18–24.

4. Ibid.

5. J. Nichols, ‘‘Enron: What Dick Cheney Knew,’’ The Nation, 15 April 2002, 14–16, at www.thenation.

com/doc/20020415/nichols.

6. A. Sloan, ‘‘Lay’s a Victim? Not a Chance,’’ Newsweek, 19 July 2004, 50.

7. R. Lederer, ‘‘Take the Money Enron,’’ Across the Board, November–December 2003, 9.

8. A. B. Gesalman, ‘‘Cliff Was Climbing the Walls,’’ Newsweek, 4 February 2002, 24.

9. D. B. Levine, ‘‘The Inside Story of an Inside Trader,’’ Fortune, 21 May 1990, 80–89.

10. E. E. Umphress, A. Barsky, and K. See, ‘‘Be Careful What You Wish For: Goal Setting, Procedural

Justice, and Ethical Behavior at Work,’’ Paper presented at the Academy of Management meeting,

Honolulu, Hawaii, 2005.

11. D. Knight, C. C. Durham, and E. A. Locke, ‘‘The Relationship of Team Goals, Incentives, and Efficacy

to Strategic Risk, Tactical Implementation, and Performance,’’ Academy of Management Journal 44

(2001): 326–38; M. W. Schweitzer, L. Ordo~nez, and B. Douma, ‘‘Goal Setting as a Motivator of

Unethical Behavior,’’ Academy of Management Journal 47 (2004): 422–32.

12. E. Umphress, K. See, A. Barsky, C. Gogus, L. Ren, and A. Coleman, ‘‘Be Careful What You Wish

For: Goals Influencing Ethical Behavior in Organizations,’’ Symposium presented at the 65th annual

conference of the Academy of Management, Honolulu, Hawaii, 2005.

You have met the directors of the three regional sales forces before, and now you

ask each one for a meeting to discuss in depth how your team can best meet their

needs. Two of the sales directors were very cordial, and each explained what the

technical demands of their areas are and how your department can best meet their

needs.

However, during your meeting with Bill—the sales director of the third region

and one of your firm’s biggest moneymakers—he lays down the law. He says that his

area is the largest of the three regions, and it produces significantly more revenue for

your company than the other two regions combined. ‘‘You and your people need to

know that when I say, ‘Jump,’’’ he says, ‘‘they need to ask, ‘How high?’’’

In return, he says, he’ll recommend you and your people for every award the

company has to offer. In addition, he says he’ll personally give you a monetary

bonus, based on your team’s performance, at the end of the year. Although you have

never heard of a manager giving someone a bonus out of his own pocket, you suspect

that your company would frown on such a practice.

Case Questions

1. What are the ethical issues in this case?

2. What are some reasons the decision maker in this case might be inclined to go

along? Not go along?

3. If you were the decision maker, how would you handle the situation?

4. Would you report the conversation to your manager? Why or why not?

CHAPTER 7 MANAGING FOR ETHICAL CONDUCT 289

13. D. Eden, ‘‘Self-fulfilling Prophecy as a Management Tool: Harnessing Pygmalion,’’ Academy of

Management Review 9 (1984): 64–73.

14. A. Bandura, Social Foundations of Thought and Action: A Social-Cognitive Theory (Englewood

Cliffs, NJ: Prentice-Hall, 1986).

15. E. Goodman, ‘‘Nobody Deemed Accountable for Tailhook,’’ (State College, PA) Centre Daily Times,

15 February 1994, 6A.

16. D. C. Waller, ‘‘Tailhook’s Lightning Rod,’’ Newsweek, 28 February 1994, 31.

17. A. Marshall, ‘‘Knowing What’s Ahead Can Prevent Looking Back with Regret,’’ Hotel and Motel

Management, 6 March 2000, 10.

18. G. L. Vistica, ‘‘Anchors Aweigh,’’ Newsweek, 5 February 1996, 69–71.

19. D. De Vise, ‘‘Defense Department Surveys Academy Sex Assaults; 1 Woman in 7 Reports Being

Attacked,’’ Washington Post, 19 March 2005, A01.

20. Levine, ‘‘The Inside Story of an Inside Trader.’’

21. G. Ball, L. K. Trevi~no, and H. P. Sims Jr., ‘‘Just and Unjust Punishment Incidents,’’ Academy of

Management Journal 37 (1994): 299–322.

22. L. K. Trevi~no and G. A. Ball, ‘‘The Social Implications of Punishing Unethical Behavior: Observers’

Cognitive and Affective Reactions,’’ Journal of Management 18 (1992): 751–68.

23. B. McLean and P. Elkind, The Smartest Guys in the Room (New York: Portfolio, 2003), 21–24.

24. Thomas J. Watson Jr., Father, Son & Co.: My Life at IBM and Beyond (New York: Bantam, 1990).

25. G. Morgenson, ‘‘The Enforcers of Wall St.? Then Again, Maybe Not,’’ New York Times, 20 June

2002, C1–C2.

26. L. K. Trevi~no and B. Victor, ‘‘Peer Reporting of Unethical Behavior: A Social Context Perspective,’’

Academy of Management Journal 353 (1992): 38–64.

27. P. G. Zimbardo, ‘‘The Human Choice: Individuation, Reason, and Order versus Deindividuation,

Impulse, and Chaos,’’ In Nebraska Symposium on Motivation, eds. W. J. Arnold and D. Levine

(Lincoln: University of Nebraska Press, 1969), 237–307.

28. C. Haney, C. Banks, and P. Zimbardo, ‘‘Interpersonal Dynamics in a Simulated Prison,’’ Interna-

tional Journal of Criminology and Penology 1 (1973): 69–97.

29. P. Zimbardo, ‘‘Pathology of Imprisonment,’’ in Readings in Social Psychology: Contemporary

Perspectives (2nd ed.), ed. D. Krebs (New York: Harper & Row, 1982).

30. J. Barry, M. Hosenball, and B. Dehghanpisheh, ‘‘Abu Ghraib and Beyond,’’ Newsweek, 17 May 2004,

32–38; D. Jehl and E. Schmitt, ‘‘Dogs and Other Harsh Tactics Linked to Military Intelligence,’’

New York Times, 22 May 2004, A1; S. Sontag, ‘‘Regarding the Torture of Others,’’ New York Times

Magazine, 23 May 2004, 24–41; P. V. Zelbauer and J. Dao, ‘‘Guard Left Troubled Life for Duty in

Iraq,’’ New York Times, 14 May 2004, A11.

31. D. Katz and R. Kahn, The Social Psychology of Organizations, 2nd ed. (New York: Wiley & Sons,

1978).

32. F. N. Brady and J. M. Logsdon, ‘‘Zimbardo’s ‘Stanford prison experiment’ and the Relevance of

Social Psychology for Teaching Business Ethics,’’ Journal of Business Ethics 7 (1988): 703–10;

P. Brodeur, Outrageous Misconduct: The Asbestos Industry on Trial (New York: Pantheon, 1985).

33. S. Grover, ‘‘Why Professionals Lie: The Impact of Professional Role Conflict on Reporting

Accuracy,’’ Organizational Behavior and Human Decision Processes 55 (1993): 251–72.

34. M. P. Miceli and J. P. Near, ‘‘The Relationships among Beliefs, Organizational Position, and Whistle-

Blowing Status: A Discriminant Analysis,’’ Academy of Management Journal 27 (1984): 687–705.

35. Trevi~no and Victor, ‘‘Peer Reporting of Unethical Behavior.’’

36. H. C. Kelman and V. L. Hamilton, Crimes of Obedience (New Haven, CT: Yale University Press, 1989).

37. S. Milgram, Obedience to Authority: An Experimental View (New York: Harper & Row, 1974).

38. Kelman and Hamilton, Crimes of Obedience.

39. J. M. Burger, ‘‘Replicating Milgram: Would People Still Obey Today?’’ American Psychologist 64,

no. 1 (2009): 1–11.

40. J. A. Waters, ‘‘Catch 20.5: Corporate Morality as an Organizational Phenomenon,’’ Organizational

Dynamics (Spring 1978): 319.

290 SECTION III MANAGING ETHICS IN THE ORGANIZATION

41. Kelman and Hamilton, Crimes of Obedience.

42. S. H. Schwartz, ‘‘Words, Deeds, and the Perception of Consequences and Responsibility in Action

Situations,’’ Journal of Personality and Social Psychology 10 (1968): 232–42; S. H. Schwartz,

‘‘Awareness of Consequences and the Influence of Moral Norms on Interpersonal Behavior,’’

Sociometry 31 (1968): 355–69.

43. J. M. Darley and B. Latane, ‘‘Bystanders’ Intervention in Emergencies: Diffusion of Responsibility,’’

Journal of Personality and Social Psychology 8 (1968): 373–83.

44. I. Janis, Groupthink, 2nd ed. (Boston: Houghton Mifflin, 1982).

45. M. S. Peck, M. D., People of the Lie: The Hope for Healing Human Evil (New York: Simon &

Schuster, 1983).

46. Ibid.

47. W. Kilham and L. Mann, ‘‘Level of Destructive Obedience as a Function of Transmitter and Execu-

tant Roles in the Milgram Obedience Paradigm,’’ Journal of Personality and Social Psychology 29

(1974): 696–702.

48. Kelman and Hamilton, Crimes of Obedience.

49. Milgram. Obedience to Authority.

50. M. Stout, The Sociopath Next Door (New York: Broadway Books, 2005), 64–66.

51. M. A. Santoro, Sears Auto Centers (Boston: Harvard Business School, 1993).

52. Ibid.; K. Kelly, ‘‘How Did Sears Blow This Gasket?’’ Business Week, 29 June 1992, 38.

53. Santoro, Sears Auto Centers.

54. Kelly, ‘‘How Did Sears Blow This Gasket?’’

55. D. Gellene, ‘‘New State Probe of Sears Could Lead to Suit,’’ Los Angeles Times, 12 June 1992,

part D: 1.

56. Hearing before Subcommittee on Consumer of the Senate Committee on Commerce, Science, and

Transportation, 102nd Congress, 2nd Sess., July 21, 1992 (Sen. Hearing 102972), 83.

57. Santoro, Sears Auto Centers.

58. J. Flynn, ‘‘Did Sears Take Other Customers for a Ride?’’ Business Week, 3 August 1992, 24–25.

CHAPTER 7 MANAGING FOR ETHICAL CONDUCT 291

C H A P T E R8

ETHICAL PROBLEMS OF

MANAGERS

INTRODUCTION

Good managers do four things really well: hire good people, define clear expectations

(including ethical expectations), recognize excellence and praise it, and finally, show

their people that they care. 1 We’re going to focus on those managerial ‘‘basics’’ in

this chapter, since managers are responsible for the entire range of human resources

activities such as hiring, firing, disciplining, and evaluating performance. Conse-

quently, some of the ethical responsibilities of managers and employees are different

and require special thought and preparation. Also, since managers are responsible for

employee supervision, the courts can hold them accountable for the activities and

behavior of the people who report to them. Finally, because managers are role models

for the workers in their department, it’s critical that managers be able to discuss the

ethical implications of decision making and provide advice to employees who find

themselves in an ethical quandary. These facts of corporate life have frustrated many

managers. ‘‘How can I possibly manage the ethics or morality of the people I man-

age? Is it even possible to manage ethics? Where are the special pitfalls for me as a

manager?’’ In this chapter, we examine what responsibilities managers have and how

you as a manager can encourage employee engagement and influence your direct

reports to make ethical decisions. We also explore how organizational culture influ-

ences manager decisions and how managers can help reinforce the ethical culture of

their organization.

Managers and Employee Engagement

An extremely important element in any corporate endeavor—whether it’s an ethics

program, productivity effort, employee engagement initiative, or anything else—is

the quality of an organization’s managers. To employees, managers are the company,

and if managers are not able to manage the basics well, it will be extremely difficult

to inspire people to meet business goals or live organizational values.

As more companies study how people work and what makes employees most

productive, a clearer picture is emerging of exactly what motivates employees and

encourages ethical behavior at the same time. We believe that those seemingly

292

unconnected activities—encouraging employee engagement and ethical behavior—

are actually intertwined. Research indicates that perhaps the best way to encourage

ethical behavior is to create an organizational culture that is built to enhance

employee engagement and that uses as its linchpin the quality of managers.

What do we mean by ‘‘employee engagement?’’ In short, it is discretionary ef-

fort, or how committed employees are to their work. Are they willing to provide

excellent customer service? Are they willing to work overtime if needed to meet a

deadline? Are they willing to go the extra mile in providing solutions? We can divide

employees into three groups along an engagement continuum. For our purposes, let’s

just call them actively engaged, not engaged, and actively disengaged. Here’s how

we might describe the characteristics of each of the three groups:

Actively Engaged 3————— Not Engaged 3————— Actively Disengaged

! Passionate and

enthusiastic

! Feel profoundly

connected to the

company

! Drive innovation

! Move the company

forward

! Eagerly go the

‘‘extra mile’’

! ‘‘Checked out’’

! Sleepwalking

! Put time—but not

passion or energy—

into their work

! May or may not go the

extra mile

! ‘‘It’s not my job.’’

! Negative drag on the culture

! Little or no company loyalty

! Undermine what engaged

coworkers accomplish

! May well sabotage company

initiatives and employee

goodwill

It’s hard to overstate the importance of increasing an organization’s levels of

employee engagement. Gallup, one of the first companies to put employee engagement

research on the map, claims that actively disengaged employees cost world economies

billions of dollars each year. 2 On the positive side, however, actively engaged employ-

ees help an organization through such benefits as lower turnover and absenteeism,

higher customer loyalty, higher profits per employee, and fewer accidents. 3

Although the connection between employee engagement and productivity is

easy to see, the connection between engagement and ethical behavior may be less

obvious. Take just a moment and think about the characteristics that describe each

group along the engagement continuum. Which group do you suppose is most likely

to engage in unethical behavior? Which group is more likely to misuse corporate

resources? Which group is more likely to serve as role models for ethical behavior?

Which group is more likely to include mavericks who have their own (not a corpo-

rate) agenda? Which group is more likely to raise an issue about suspected wrong-

doing? Which group might tend to go to a regulator or newspaper reporter or some

other external source if they perceive wrongdoing?

We think it’s evident that improving levels of employee engagement can also

improve an organization’s ethical culture (see Chapter 5). But how does a company

begin to do that? First, it needs to focus on the four drivers of engagement; second, it

needs to identify and develop great managers. According to James Shaffer, an expert

CHAPTER 8 ETHICAL PROBLEMS OF MANAGERS 293

in communication and employee engagement, the four drivers of engagement are

as follows:

1. Line of sight. Employees understand the company’s strategic direction, how

the company makes money, and how their individual efforts play a role in

that revenue-generating enterprise. Note: Business goals and ethical values

are important elements in an organization’s strategic direction.

2. Involvement. Employees are involved in the enterprise; they actively parti-

cipate, and their ideas are heard. Note: This kind of employee involvement

encourages the two-way communication that is critical for ethical issues to

be identified and resolved.

3. Information sharing. People get the information they need to be effective,

when they need it, and information goes in all directions—up, down, and

across the organization as needed. Note: Cultures that encourage informa-

tion sharing are more likely to be open organizations that identify and

resolve ethical issues rather than sweeping them under the rug.

4. Rewards and recognition. Business goals and values are clearly spelled out,

and employees know what they need to do and how they need to behave to

get rewarded. Note: It is critical for companies to pay close attention to the

incentives that goals and values will provide for ethical (or unethical)

behavior. 4

While there are a number of employee engagement models, we think this one

makes a lot of sense and that the four drivers of employee engagement are critical

building blocks of an ethical culture.

In addition to focusing on the four drivers of engagement, organizations need to

recognize on a fundamental level the critical role that managers play in increasing

engagement and building an ethical culture. According to Towers Watson, the inter-

national human resources consulting firm, the following key senior manager behav-

iors influence employee engagement (and we believe these behaviors, when modeled

and endorsed by senior managers, trickle down to lower-level managers and supervi-

sors and can greatly influence employees’ ethical behavior).

& Senior management is sincerely interested in employee well-being.

& Senior management communicates openly and honestly.

& Senior management is visible and accessible.

& Senior management effectively communicates the reasons for key business

decisions.

& Senior management’s actions are consistent with stated values. 5

Think about these manager behaviors. Which do you think play a direct or an indirect

role in building an ethical culture? Which might build engagement but not influence

ethical culture? Which do both?

294 SECTION III MANAGING ETHICS IN THE ORGANIZATION

MANAGING THE ‘‘BASICS’’

A manager’s most important responsibility is to bring good people into the organiza-

tion and then manage in a way that makes those good people want to stay. The new

people may be permanent employees, or they may be part-time employees, tempo-

rary workers, or consultants. Effective managers need to be proficient at hiring the

best people who fit the organizational culture, evaluating their performance, recog-

nizing and praising excellence, and disciplining or even terminating poor performers.

Hiring and Work Assignments

HIRING CASE

You’re planning to hire a new sales manager, and the most promising candi-

date is really homely. You are concerned about how your customers—and

even his colleagues—would react to him. The specific job he’s applying for

requires extensive customer contact, and his appearance is frankly discon-

certing. On the other hand, his credentials are excellent, and he’s certainly

qualified for the job.

Federal law prohibits discrimination based on race, religion, sex, color, ethnic

background, and age, and it protects those who are pregnant or disabled.

In this case of a homely candidate, the solution is ambiguous. He is certainly

qualified for the job, and unattractive looks are not included in protectionist handi-

capped legislation, so the law isn’t helpful. But the larger issues are what qualities

should determine whether or not an individual should be hired, and is it ethical to

consider a prospective employee’s attractiveness?

All protectionist legislation points to the answer, as does the concept of fairness.

Hiring, promotions, and terminations should be based on qualifications, period. How-

ever, it’s one thing to ignore someone because of your own prejudice and quite

another to hesitate to put someone in a situation where he or she might suffer

discrimination from an external audience, such as your customers, that’s out of your

control. It’s difficult to say whether you’re doing someone a favor by setting him or

her up for possible failure in an environment that’s hostile.

Prejudice is difficult to overcome. As we’ve noted in earlier chapters, everyone

has biases. Some people don’t like very tall people, or very short people, or fat ones,

or skinny ones, or old ones, or young ones. Others have biases against brown eyes, or

blue eyes, or eyes with wrinkles, or big noses, or aquiline noses, or balding heads, or

hair that looks too long. Some people favor individuals from certain schools or from

particular parts of the country. What if someone interviews for a job and, as in this

case, he is just plain unattractive; or she’s deaf; or he had cancer three years ago; or

she speaks English with an accent? Do those qualities have anything to do with an

ability to do the job or with talent? What kind of response would the Golden Rule

prescribe? Kant’s categorical imperative? How about Rawls’s veil of ignorance?

CHAPTER 8 ETHICAL PROBLEMS OF MANAGERS 295

Some employers have a ‘‘corporate profile’’ in mind when they hire, especially

when they’re trying to fill positions with ‘‘extensive public contact.’’ Some large

Fortune 100 companies are well known for their penchant for hiring certain types of

employees. They look for healthy young people with regular features, moderate

height, a medium build, and no discernible accent. Do employers with a conscious or

subconscious ‘‘corporate profile’’ think that the public or their customers are somehow

homogeneous? If history had used a corporate profile as a yardstick, Abraham

Lincoln, Benjamin Franklin, Marian Anderson, Albert Einstein, Sammy Davis Jr., and

Franklin Roosevelt may have been relegated to positions with ‘‘no public contact.’’

Talent and ability come in a variety of packages. When managers use anything

other than those two factors to evaluate qualifications for hiring, promotions, or work

assignments, they shortchange not only the individual but also their employer and their

customers (who surely come in a variety of packages). They also help perpetuate

stereotypes, instead of trying to build a workforce that reflects real life. One way to

hire is to deeply understand your own organizational culture and to hire based on how

well a candidate will ‘‘fit’’ into the existing culture. Both the organization and the

employee are likely to be more satisfied when a good fit is achieved. For example,

think about a family-oriented organization, like Starbucks, that tries to demonstrate

great care for its employees. What would happen if a manager hired an edgy, highly

competitive person who doesn’t care about relationships? How would that type of

person fare in a touchy-feely company? It would be far smarter for a manager to

look for candidates who demonstrate the same qualities that the company values,

because those are the people who will succeed in the company culture. On the other

hand, companies that stick too closely to a corporate profile can risk being accused

of discrimination (as happened to Abercrombie & Fitch when the ‘‘look’’ the com-

pany was attempting to achieve seemed to exclude qualified individuals from certain

minority groups). Or, they risk becoming too homogeneous and therefore resistant to

needed change. So managers must strike a delicate balance. They need to hire peo-

ple who fit the current culture, but also they need to be open to people who fit, but

may be different. To be successful, organizations need to nurture strong cultures that

have enough differences to encourage innovation and balance and that counter the

tendency to hire to a ‘‘profile.’’

Performance Evaluation

You were recently promoted to manager of a department with five profession-

als and two clerical staff. One of the professionals, Joe, is a nice guy; but he

simply hasn’t been able to match the performance of the others in the depart-

ment. When he tells you he has been interviewing for another job in a differ-

ent part of your company, you pull his personnel file and see that your

predecessor had rated Joe’s performance as ‘‘good to excellent.’’ You frankly

disagree. Joe has asked you for a recommendation. Based on the written

appraisals, you could give him a good one—but your personal observation is

at odds with the written evaluations. Joe’s prospective manager—your peer in

another department—asks for your opinion. What do you say?

296 SECTION III MANAGING ETHICS IN THE ORGANIZATION

When we talk about performance evaluation, we’re really talking about two things.

First, there’s a written assessment of an employee’s performance. Most large compa-

nies have a formal performance management system, with forms to standardize the

process, and a mandate to complete a written evaluation on every employee (usually

once each year). These written appraisals usually have some influence on any salary

adjustments, and they usually become part of the employee’s permanent personnel

file. Second, there’s the informal process of performance evaluation that ideally is an

ongoing process throughout the year. When a manager gives continuous feedback—

when objectives are stated and then performance against those objectives is meas-

ured—employees generally aren’t surprised by the annual written performance

appraisal.

Why is continuous evaluation important? First, rewards and recognition are one

of the four drivers of employee engagement. Excellent managers recognize and

reward excellence as well as manage and improve the performance of workers who

are at a lower rung on the performance ladder. A training manager in New York City

tells a story about the importance of accurately and continuously appraising perform-

ance. ‘‘Imagine you’re bowling,’’ he says. ‘‘A bed sheet is stretched across the lane

and you can’t see what you’re doing. Your manager is the only person who can tell

you how you’re doing. What would happen if your manager told you how you were

doing only occasionally or once a year? How would your performance be affected if

he or she told you about your performance only when you got gutter balls? What

would happen if he or she commented just when you did well?’’ It’s only when your

manager gives you consistent feedback—reflecting the complete range of your

behavior—that you can improve your performance.

As we noted in Chapter 5, performance management systems do more than

almost anything else to signal what the organization cares about (including whether

ethics-related behaviors really matter) and to bake desired behaviors into the organi-

zational culture. If managers don’t do a good job at coaching employees and influ-

encing their performance, this valuable tool to drive culture and performance is

undermined. And if managers don’t communicate clearly that ethics-related perform-

ance matters, employees will focus on what does.

The practical problem with performance evaluation is that most managers hate to

do it. They especially hate to deliver negative feedback. It’s certainly easier to recog-

nize an employee’s achievements than his or her shortcomings. In any case, many

managers are so busy that they fail to recognize either. Pointing out an employee’s

deficient performance is extremely difficult for most managers. It’s such a thorny

issue that in a survey of 4,000 Fortune 500 executives, five out of seven executives

said that they would rather lie to employees about performance than confront them

about performance problems. 6 We even know of managers who have attempted to

conduct performance appraisals via e-mail in order to avoid their discomfort. But

performance evaluation is one of the most important activities managers do, and it

should be conducted regularly and in person. Most employees can and will accept

honest feedback if it is delivered in a clear, honest, and sensitive manner and if

expectations were clear in the first place. It is especially important to provide the

CHAPTER 8 ETHICAL PROBLEMS OF MANAGERS 297

employee with the specifics of any problem behavior, explicit goals for improvement

including a timeline, and follow-up.

In the last example, you as the manager think Joe has been inaccurately (and per-

haps even dishonestly) evaluated in the past. Since most employers require a rating of

‘‘good’’ or ‘‘satisfactory’’ before an employee can transfer to another job, you will

probably feel pressure to supply such a recommendation so Joe can qualify for the

transfer. This is a common problem. Many organizations have employees like Joe,

who are less than stellar performers but who are never confronted with their poor per-

formance and given guidance to improve. In Joe’s company, no manager has been

brave enough to bite the bullet and either try to get Joe to improve his performance or

initiate the termination process. It’s easier to pass Joe along to someone else—to turn

him into a Ping-Pong ball, bouncing from department to department, never really

improving his performance because no one will confront him with the truth. (In some

organizations, passing poor performers around the organization is called ‘‘turkey farm-

ing.’’) Because his previous written appraisals have been less than honest, prospective

managers get buffaloed into thinking Joe’s performance is adequate. It’s a vicious

cycle and a real disservice to the employee, his or her coworkers, and the organization.

Coworkers who are doing a good job will perceive the system to be unfair if someone

like Joe is getting a rating similar to theirs for his inferior work. They may even find

themselves picking up the slack for Joe. Perhaps the party most disadvantaged by this

kind of problem is the organization and its culture. Joe’s manager has sent the message

that ‘‘not very good’’ or ‘‘just OK’’ is good enough. It’s a dishonest message that

erodes organizational efforts regarding quality, integrity, and ethics.

One good way to ensure continuous performance evaluation is to establish a for-

mal system with the employees who report to you—whether or not your company

requires it—and certainly use it more than once each year. Meet regularly with every

employee and jointly agree to job objectives and how to measure success for each

objective. Make sure that your department goals are directly linked to corporate goals

and that the individual goals of the people who report to you are directly linked to

your department goals. Also ensure that ethics-related performance expectations

are included in goals and evaluation discussions. For example, have you talked

about your expectations for respectful interactions with coworkers, trusting relation-

ships with customers, fair treatment of subordinates, honesty and integrity in all busi-

ness dealings?

Remember the importance of driving employee engagement: establish a clear

line of sight between the goals of individuals and the organization and between the

results of the organization and the individual. Then meet weekly or monthly with

each employee and discuss how the employee is meeting his or her objectives. When

objectives and measurement standards are established in advance and progress is

tracked, it’s much easier for employees to perform. They know what the target looks

like, how to get there, and how they’ll know when they’ve met it. They will under-

stand and internalize what it means to create value. An ongoing process eliminates

the need to blast a nonperformer once a year and can greatly reduce misunderstand-

ing, resentment, and charges of discrimination or bias.

298 SECTION III MANAGING ETHICS IN THE ORGANIZATION

Probably the best way to handle the situation with Joe is to meet with him and be

completely honest. ‘‘I can’t write you the kind of letter you want for the following

reasons. [Spell out the performance problems.] We can either wait until you get your

performance on track, or I can write you a letter that reflects my honest evaluation of

your work at this time. It’s your decision.’’ This approach will obviously be much

easier if you’ve been providing Joe with honest appraisal of his performance all along.

Discipline

Most managers view disciplining employees as something to be postponed for as

long as possible. Many people in a work environment simply ignore a worker’s short-

comings and hope the situation will improve. Discipline, however, is important not

only to ensure worker productivity but also to set the standard that certain behaviors

are expected from all employees, and to meet the requirements of the U.S. Sentenc-

ing Guidelines. As we discussed in Chapter 6, the Sentencing Guidelines specify that

all employees in an organization must receive consistent discipline for similar infrac-

tions. For example, in the case of employee theft, a secretary and a senior vice presi-

dent must be treated in the same way. The guidelines are violated if people in

different job classifications are treated differently—if one receives a slap on the wrist

and the other is suspended or fired.

In the case of Steven, the salesman who is always late, you as a manager could

be tempted to view disciplining his lateness as nitpicking. He’s a star after all, right?

However, it’s unrealistic and unfair to expect promptness from all of your other

employees and not from Steven.

As we noted in Chapter 7, research has given us clues about the most effective

ways to discipline employees. First, the discipline must be constructive and done in a

professional manner. For example, although you might be tempted to scream at

Steven and call him a jerk, that’s not going to change his behavior. It’s much more

effective to meet with him, explain the consequences of his lateness, and focus the

discussion on his behavior, not on him personally.

Second, the discipline should be done privately. Employees should never be crit-

icized in front of other employees. It’s just as embarrassing as being criticized in

Steven is a salesman who reports to you, the regional director of sales for an

office supply company. He has a great track record and has consistently sur-

passed his sales targets, but he has one terrible flaw: He’s not on time for any-

thing. He’s late both for meetings with you and for lunches with clients, and

the problem extends to his paperwork. His expense reports, sales reports—

everything is handed in a week late. As his manager, you’ve counseled him

about his tardiness, and he has improved. Now instead of being 15 minutes

late for a meeting, he’s only 5 minutes late. And instead of submitting his

expenses a week late, they’re only two days late. His lateness seems minor in

view of his achievements, but it’s driving you and his coworkers crazy.

CHAPTER 8 ETHICAL PROBLEMS OF MANAGERS 299

public by your parent or your spouse, and it encourages nothing but hard feelings.

Those discussions should always be held behind closed doors.

Third, employees should have input into the process and be encouraged to

explain their side of the story. The entire idea of ‘‘team’’ management revolves

around individuals being encouraged to share their view of a situation. The real prob-

lem may not be with the particular employee you want to discipline. Steven, for

example, may be late with reports because people are late in submitting data to him.

To solve problems at the simplest point, it’s wise to ask for an employee’s

explanation.

Finally, discipline should be appropriately harsh and consistent with what other

employees have received for similar offenses. This aspect of discipline is perhaps the

most important in ensuring good performance in the future. 7

For example, a highly respected financial professional (let’s call her Beth) was

fired from her position at a large financial services company for providing an

inaccurate calculation in a report to senior management. The director of human

resources had given Beth an almost impossible assignment: use a new formula to

calculate the company’s pension obligations to all current employees. The assign-

ment was given at 6:00 p.m. on a Tuesday, and the report needed to be written, typed,

and copied for a senior management meeting the next morning at 9:00 a.m. Beth and

her secretary stayed at the office all night long, doing calculations, writing the report,

and finally preparing it for the meeting the next morning. When one of the senior

managers discovered an error in one of the complex calculations, Beth was summar-

ily fired by the human resources director. It sent a huge message not only to Beth, but

to the entire human resources department. Other mistakes had been made—even by

the director—and if those errors had been punished, it had been with a reprimand,

certainly not a firing. And, of course, the impossible deadline constituted an extenuat-

ing circumstance in everyone’s opinion except the director. The effects of

unreasonable discipline are far reaching, and that’s why discipline needs to be

appropriate to the offense and consistent with what others have received. In the case

of Steven, the tardy salesman, unless you’re willing to be consistent and accept tardi-

ness in all other employees, his behavior needs to be addressed. Just don’t follow the

example of the human resources director—she had been placed in the role as part of

her company’s grooming process of high-potential executives. If she had succeeded,

she surely would have moved on to bigger and better things. However, the executive

team viewed her behavior with Beth and others as erratic and ill advised. She left

human resources after a few years and ended up in a senior marketing role some-

where in one of the company’s subsidiaries—not in the enterprise-wide role she had

been on track for before the debacle.

How companies manage ‘‘star’’ employees is one of the most telling character-

istics of their ethical cultures. If an organization treats stars in a way that is consistent

with their organizational values, the culture of the organization will be strengthened.

On the other hand, if an organization states one thing in its values statement and

permits star behavior to deviate from the organization’s stated values, the entire cul-

ture can be undermined. For example, if a star employee is allowed to be abusive to

300 SECTION III MANAGING ETHICS IN THE ORGANIZATION

coworkers in an organization that has stated that people management and respect are

core values, those values will be suspect. Employees will instead look to the very

visible star and perceive that his or her attributes are the ones that are really valued

by the organization (regardless of what appears on its values statement). Perhaps the

biggest cultural question is who gets to be considered a star in the first place. Does

only quantitative performance matter, or does performance based upon ethical values

also figure in (as we recommend)? In a strong ethical culture, a star would be some-

one who not only performs well in terms of the bottom line but also achieves that

bottom-line performance in a way that is consistent with other values such as respect

for people and integrity.

Terminations

You’re a manager in a large commercial bank. You discover that Patricia, a

loan officer who reports to you, has forged an approval signature on a cus-

tomer loan that requires signatures from two loan officers. When you con-

front Pat with the forgery, she apologizes profusely and says that her

husband has been very ill. The day she forged the signature, he was going

into surgery and she just didn’t have time to find another loan officer to sign

the authorization for the loan. Pat has been with your bank for 15 years and

has a spotless record.

Terminations come in many varieties, none of them pleasant. There are termina-

tions for cause—meaning that an individual has committed an offense that can

result in instant dismissal. ‘‘Cause’’ can represent different things to different

companies, but generally theft, assault, cheating on expense reports, forgery,

fraud, and gross insubordination (including lying about a business matter) are

considered as cause in most organizations. Many companies define cause in their

employee handbooks.

In the case above, Patricia will most likely be fired for cause. In banking, few

things are as sacred as a signature, and a professional with 15 years of banking expe-

rience would certainly be expected to know this. Forgery of any kind cannot be toler-

ated in a financial institution. It’s a sad case, and any manager would feel compassion

for Patricia. However, some offenses are unpardonable in a financial institution, and

this is probably one of them.

There are also terminations for poor performance. This type of firing is most

often based on written documentation such as performance appraisals and attendance

records. Many employers have a formal system of warnings that will occur before

someone is actually terminated for poor performance. A verbal warning is usually

the first step in the process, followed by a written warning and then termination. The

process can differ from company to company.

Then there are downsizings or layoffs. Layoffs can result from many kinds

of reorganizations, such as mergers, acquisitions, and relocations, or they can be

the result of economic reasons or changes in business strategy. A layoff can

CHAPTER 8 ETHICAL PROBLEMS OF MANAGERS 301

result from a decision to trim staff in one department or from a decision to

reduce head count across the company. Whatever the reason, layoffs are painful

not only for the person losing his or her job but also for the coworkers who’ll

be left behind. Coworkers tend to display several reactions: they exhibit low

morale; they become less productive; they distrust management; and they

become extremely cautious. 8

In addition, layoff survivors are generally very concerned about the fairness of

the layoff. They need to feel that the downsizing was necessary for legitimate busi-

ness reasons; that it was conducted in a way that was consistent with the corporate

culture; that layoff victims received ample notice; and that the victims were treated

with dignity and respect. If management provided ‘‘a clear and adequate explanation

of the reasons for the layoffs,’’ survivors are more likely to view the layoffs as being

fair. 9 Once again, if a company espouses respect and concern for employees in its

values statements or executive speeches and then lays off employees in a particularly

brutal way, it undermines employee confidence in the organization. Layoffs and other

terminations speak volumes about what a culture truly values. Smart companies

make sure that their actions are aligned with their values. These are just a few reasons

that layoffs have to be handled well.

Whatever the reason for a termination, you can take certain steps as a manager to

make it easier for the employee being terminated and for yourself. 10

Again, the main

goals are to be fair, to deliver the news in a way that is aligned with your organiza-

tion’s values, and to allow the employee to maintain personal dignity.

1. Do your homework before you meet with the employee. Prepare a brief

explanation of why this termination is necessary, and have ready an explan-

ation of the severance package being offered to this employee, including fi-

nancial and benefits arrangements. It’s also helpful to check the calendar and

consult with your company’s public relations department to ensure you’re

not firing someone on his birthday or on the day she receives recognition

from an industry group or professional association.

2. If at all possible, you should arrange to have an outplacement counselor or

human resources professional on hand to meet with the employee after you

have spoken to him or her. Most outplacement counselors advise managers

to give the bad news to terminated employees early in the day and early in

the week, if possible. This gives the employee time to meet with a counselor

if necessary. (Obviously, this advice doesn’t apply to employees who are

fired for cause.)

3. It’s generally a good idea to terminate someone on neutral ground—in a

conference room, for example, rather than in your office. In that way, you

can leave if the situation becomes confrontational. If possible, try to assess

what the employee’s reaction might be. If you’re about to fire a violent per-

son for cause (like assaulting a coworker), you might want to have security

nearby when you deliver the news.

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4. Speak privately with each individual and deliver the news face-to-face, not

by e-mail, telephone, or in a meeting or other kind of public forum. When

you deliver the news, be objective, don’t be abusive in any way, be com-

passionate, do it quickly (if possible), and never, never get personal.

5. Finally, keep all information about the termination private. Never discuss

the reasons for a firing with anyone who doesn’t have a need to know. The

exception to this advice is when numerous layoffs occur. Survivors—

coworkers who are left behind—will require some explanation of why lay-

offs were needed. In this case, you will want to speak about the business

reasons that made the layoff necessary. Never explain why particular

individuals were involved and others weren’t. (For more information on

downsizing, see Chapter 10.)

Terminations for cause don’t go unnoticed, and the employee grapevine will as-

suredly carry the news of a termination around your organization. That’s a good thing

because it’s important for employees to understand that bad acts get punished. How-

ever, it’s generally improper to publicly explain why an individual has been pun-

ished; the primary objective is to protect the dignity and privacy of the person who

has been punished.

Why Are These Ethical Problems?

Hiring, performance evaluation, discipline, and terminations can be ethical issues

because they all involve honesty, fairness, and the dignity of the individual. Rice and

Dreilinger 11

say that the desire for justice is a ‘‘fundamental human characteristic.

People want to believe that the world operates on the principles of fairness; they react

strongly when that belief is violated.’’ In fact, most calls to corporate ethics hotlines

(discussed more fully in Chapter 6) relate to precisely these types of human resources

issues.

Costs

Much federal legislation exists to protect the rights of individuals in situations that

involve hiring, performance evaluation, discipline, and terminations. There are myriad

legal remedies for employees who feel they have suffered discrimination (see discrimi-

nation costs in Chapter 4 for more details). In response to increased litigation, employ-

ment practice liability insurance is a hot product among corporations. This insurance

covers organizations that are sued by employees over charges such as harassment, dis-

crimination, or wrongful discharge. The insurance, which was virtually unheard of

10 years ago, has been purchased by many Fortune 500 companies. This is surely the

result of the huge increase in litigation and in settlements. The Equal Employment

Opportunity Commission received more than 93,000 workplace discrimination

complaints in 2009, and monetary relief for victims totaled more than $376 million. 12

Besides perhaps paying legal costs and fines, organizations that are charged with

discrimination can expect to pay a price in terms of employee morale and

CHAPTER 8 ETHICAL PROBLEMS OF MANAGERS 303

organizational reputation. Research evidence indicates that employees who perceive

that they have been unfairly treated are less satisfied, less likely to go the extra mile,

and more likely to steal from the organization. 13

But smart organizations look beyond monetary costs when it comes to training

managers to manage the ‘‘basics’’ of the employer-employee relationship. Savvy

companies understand that managing the basics is the aspect of organizational culture

that’s probably most visible to employees. Those day-to-day activities—hiring, fir-

ing, discipline, rewards, praise, and so on—are concrete signals to employees about

how an organization really values its workers. If an organization pays no attention to

those basics and does not identify and train managers to perform those basics well, it

will be an uphill struggle to inspire workers to produce excellent results and to con-

vince them that the culture values employees and their efforts.

MANAGING A DIVERSE WORKFORCE

Experts predict that the workforce is becoming more diverse and that the key to many

managers’ success will be how well they can persuade diverse groups to sing together

as a well-tuned chorus. Companies that best address the needs of a diverse population

will probably be in a better position to succeed than companies that ignore this new

reality. Managers must be able to deal with individuals of both sexes and all ages,

races, religions, and ethnic groups. Managers need to have this ability themselves,

and they need to encourage this ability in team members. Managers must become

‘‘conductors’’ who orchestrate team performance—sometimes teaching, sometimes

coaching, always communicating with employees and empowering them to learn and

make good decisions.

The second skill set required of the new manager involves positively influencing

the relationships among other team members and creating an ethical work environ-

ment that enhances individual productivity. Everyone we work with has a range of

issues that could affect the ability to perform well. Many people are responsible for

children, parents, or other relatives. Many workers have chronic illnesses or condi-

tions or allergies, and those workers who are lucky not to have a chronic condition

can suddenly become ill or injured. Other employees have chemical dependencies,

such as an addiction to drugs or alcohol. Managers must be able to accomplish tasks

and the mission of a department or team despite the often painful events and condi-

tions that can distract team members.

Since a bias-free person hasn’t been born yet, managers also must be able to coun-

sel team members in their relationships with one another. Because every team will

include a wide range of personalities, a manager frequently needs to be a referee who

mediates and resolves disputes, assigns tasks to the workers who can best accomplish

them, and ensures that fairness is built into the working relationships of team members.

The examples that follow are similar to those in Chapter 4 but are presented from

the perspective of the manager rather than the individual. And, as we said earlier in

this chapter, managers have a different level of responsibility.

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Diversity

One of your best customers is a very conservative organization—a real

‘‘white-shirt’’ company. Reporting to you is David, a very talented African

American who could benefit greatly from working with this customer

account—and the customer account would benefit greatly from David’s

expertise and creativity. The issue is that David dresses in vibrant colors and

wears a kufi, an African skullcap. Your company long ago recognized

David’s brilliance, and his dress within the company isn’t an issue. But you

know your customer would react to David’s attire with raised eyebrows.

A diverse workforce consists of individuals of both sexes and myriad races, ethnic

groups, religions, and sexual orientations. The role of a manager is to create an envi-

ronment that maximizes the contribution of each individual. Since the population of

the United States is remarkably diverse, it makes perfect sense to believe that prod-

ucts and services offered to this population should be developed, produced, and mar-

keted by a diverse workforce.

The danger of ignoring this diversity was illustrated during an interview with a

chemical company executive. One of the company’s products is wallpaper. Even

though the wallpaper was of a very high quality and priced competitively, sales were

down. This was even more of a mystery since home repairs and renovations, espe-

cially by do-it-yourself decorators, were at record numbers.

Baffled by the problem, several senior marketing managers conducted cus-

tomer surveys and found that the company’s wallpaper patterns were the prob-

lem. Consumers viewed the patterns and styles as being outdated and

old-fashioned. The managers then investigated the process the company used to

select patterns and styles. What kind of market research was performed before

selecting patterns for the next season?

They discovered that even though female consumers made more than 90 percent

of all wallpaper purchases, no women were on the team of chemical company

employees who selected patterns for production. Male employees were making all

style decisions. The marketing managers and other executives insisted that women

and other diverse voices be included on the selection committee. The results were

immediate. As soon as the new styles of wallpaper appeared in stores, sales increased

substantially.

In the example at the beginning of this section, David’s attire could be viewed as

problematic by some managers. In this case, and others like it, honesty is the best

policy. You may want to tell David frankly that you want him to work on this account

because his ability would benefit the customer. You may perhaps say that the cus-

tomer is conservative and that his attire may distract the customer from his ability.

Let David decide how he wants to dress when meeting with the customer.

You may also be frank with your customer: Tell him or her that David is extra-

ordinarily talented and is the best person to add value to your relationship. To lessen

the surprise of the initial meeting, mention in advance that David often wears ethnic

CHAPTER 8 ETHICAL PROBLEMS OF MANAGERS 305

garb. This approach lets David know how the client might interpret his clothing, but

it doesn’t force him into some narrow corporate box. It also prepares the client to deal

with diversity. The point is to balance your interpretation of what a customer might

appreciate with David’s individuality and diverse voice.

Dress codes tend to raise some people’s hackles. The intention of most dress

codes is not to restrict individuality, but to ensure a professional appearance in the

workplace. Ethnic garb shouldn’t really be an issue, as long as it’s modest. The aim

of most dress codes is to eliminate clothing that could be viewed as immodest or too

casual to a customer. Dress codes are also a very visible manifestation of your orga-

nization’s culture, and how employees are advised to dress should be aligned with

other elements of culture. For example, if a company is casual and egalitarian, in-

formal dress is part of that. Managers may encourage formal dress in certain situa-

tions (such as when employees meet with conservative clients), but the reason should

be explained. This issue is all about having words match actions.

Harassment

Your profession has been traditionally a male-dominated one, and Marcia is

the only woman in your department. Whenever Sam, your senior engineer,

holds staff meetings, he and the other males in the department compliment

Marcia profusely. They say things like, ‘‘It’s hard for us to concentrate with a

gorgeous woman like you in the room,’’ or ‘‘You’ve got to stop batting your

eyelashes at us or the temperature in this room will trigger the air condition-

ing.’’ They compliment her apparel, her figure, her legs, and her manner of

speaking. Although flattering, their remarks make her feel uncomfortable.

She has mentioned her discomfort to you on several occasions, and you’ve

told Sam and the others to cut it out. They just laughed and told you that

Marcia was too sensitive. You think that while Marcia was being sensitive,

she did have justification for being upset about her coworkers’ remarks. (For

a review of the legal definitions of sexual harassment, see Chapter 4.)

Do compliments constitute harassment? They do when they embarrass someone and

serve to undermine an individual’s professional standing in front of coworkers. If

Marcia is disturbed by the remarks of her coworkers, it’s your responsibility as her

manager to do something about it. In cases like these, it’s sometimes helpful to reverse

the situation. Imagine that your department was predominantly female and that the

women continually said to the lone male, ‘‘You’re just a hunk.’’ ‘‘We all get aroused

when you bat your eyelashes at us.’’ ‘‘That’s a great suit you’re wearing; those slacks

really show off your gorgeous thighs.’’ How ridiculous does that banter sound?

In this case, Marcia’s discomfort is the issue, and it’s irrelevant whether you or

others think she’s being a ‘‘little too sensitive.’’ She has already taken the appropriate

steps, first by telling her coworkers to stop and then by approaching you when they

didn’t. You should meet immediately with the members of your department, either

306 SECTION III MANAGING ETHICS IN THE ORGANIZATION

individually or as a group. To show the men how ridiculous their comments would

sound if women were saying such things to men, you could reverse the situation.

Explain to them that inappropriate compliments are not acceptable and that anyone

who behaves inappropriately in the future will be disciplined. Make it clear that every

member of the team has the right to feel comfortable on the team and to be treated

with respect. If you don’t act swiftly and firmly, and then back up future offenses

with disciplinary action, you may be inviting a lawsuit.

Here’s another kind of harassment:

One of your direct reports, Robert, belongs to an activist church. Although

you have no problems with anyone’s religious beliefs, Robert is so vocal

about his religion that it’s becoming a problem with other employees in your

department. He not only preaches to his fellow employees, but criticizes

the attire of some of his female coworkers and continually quotes religious

verse in staff meetings. You’ve received complaints about his behavior

from several employees. A few weeks ago, you suggested to Robert that he

tone down his preaching, and he reacted as if you were a heathen about to

persecute him for his beliefs. His behavior has since escalated.

It’s the manager’s job to maintain a balance between the rights of the individual and

the rights of the group—in this case, the attempt by one individual to impose his or

her opinions or behavior on other team members. The objectives are fairness and

respect for each individual.

It appears that Robert has crossed the line from expressing diverse views to

harassment. Although it’s important to recognize the value of diverse backgrounds,

it’s just as important to have an environment where one individual can’t constantly

attempt to impose his beliefs on other team members. Robert has ignored your re-

quests and those of his coworkers, and he continues to preach. This kind of behavior

will no doubt disrupt the team’s performance and the relationships among team

members. In this case, it’s probably reasonable to begin documenting Robert’s per-

formance since you’ve already verbally warned him. His hostility and his refusal to

respect the opinions of his coworkers and his manager can be viewed as

insubordination. In organizations that have a due process approach to discipline, the

next step might be a written warning to curb his attempts to influence the religion of

his coworkers, or termination will result. Then, if Robert’s harassment of his

coworkers doesn’t stop, he could be fired.

Family and Personal Issues

One of your direct reports is Ellen, who just returned from maternity leave.

She now has two children; her infant is four months old, and her older child is

three years old. Ellen is not only a talented worker but also a wonderful

person.

CHAPTER 8 ETHICAL PROBLEMS OF MANAGERS 307

Before the birth of her second child, she had no problem handling the

workload and the demands on her time; she had a live-in nanny who could

care for her child regardless of when she returned home. Recently, however,

her live-in left, and Ellen is now sending her children to a day-care facility

with strict opening and closing times. Although Ellen is very productive

when she’s in the office, her schedule is no longer flexible—she must leave

the office no later than 5:00 p.m. This has caused a hardship for all of her

peers, who must complete team assignments whether or not she’s present.

Although you don’t want to cause problems for her, the situation doesn’t

seem fair to her coworkers.

Family and personal issues are those situations and conditions that, though not di-

rectly related to work, can affect someone’s ability to perform. People simply can’t

leave their personal and family problems at home. The difficulty in situations like

these is achieving a balance between maintaining a worker’s right to privacy and

ensuring fairness to coworkers. The yardstick is that if someone is performing well,

and his or her attendance is satisfactory, there’s probably no cause for action by the

manager, beyond offering assistance if the worker wants it.

In Ellen’s case, she has a temporary inability to match her coworkers’ schedules.

Sooner or later, every worker must deal with situations that place limitations on the

ability to maintain certain working hours. Similar situations could result from a vari-

ety of other causes, including illness, family responsibilities, home construction, and

commuting schedules. The issue here is fairness in attendance, not in performance or

productivity. The ideal solution may be to build more flexibility into the working

hours, not just for Ellen but for the entire team. The ideal solution would involve

confronting the problem head-on by asking the people in your area to collaborate and

find a solution. For example, you could make an attempt to hold all team meetings in

the middle of the day, when everyone can attend. Individual activities could be rele-

gated to the afternoon, so that it would not be essential for Ellen—or anyone else—to

stay late and work as a group. If your organization has flexible work hours, you could

talk to your manager about the possibility of your area incorporating flexible work

schedules that allow people to arrive and leave at varying times, but ensure that the

office and department are always covered. The objective is to make life easier for

individual employees and fair for the entire group, and as a result enhance the team’s

overall productivity.

Personal illnesses and chemical dependencies of employees present a different

set of issues. These situations can affect work schedules as well as an individual’s

ability to perform. Most corporations have explicit policies for managing employee

illness. Generally, employees are guaranteed a specific number of sick days and then

must go on some sort of disability program. If, however, an employee hasn’t received

a formal diagnosis and is simply taking sick days, acting erratically, or showing a

change in his or her performance, you might suspect a physical or mental illness.

Encourage the employee to see a doctor, and consult with the company medical

department (if you have one) if you continue to be concerned about an employee’s

308 SECTION III MANAGING ETHICS IN THE ORGANIZATION

health. It’s important to remember that illnesses of any kind—depression, cancer,

AIDS—are private and should be kept confidential. These conditions cause no danger

to coworkers, and many people who suffer from them can resume normal or modified

work schedules. Managers can help these employees by protecting their privacy and

by being fair and compassionate.

Drug or alcohol abuse is a different matter. Most corporations have policies that

prohibit any kind of drug or alcohol use on company premises, and many companies

have severe penalties for employees who are caught working under the influence of

alcohol or drugs. Both alcoholism and drug addiction are costly in terms of the abus-

er’s health, and they can both cause extreme danger in the workplace. A corporate

bond trader who’s high on cocaine can wreak havoc on himself, his employer, and

his customers. A pilot who’s drunk poses obvious risks to an airline and its passen-

gers. Would you like to ride with a railroad engineer who just smoked a few joints, or

have the sale of your home negotiated by a real estate broker who’s inebriated, or

have your child’s broken leg set by a doctor who’s high on amphetamines?

If you suspect that one of your employees is abusing drugs on or off the job, keep

track of any changes in behavior and performance, in writing. (Even if an employee

uses drugs or alcohol only off company premises, the residual effects of the substance

may affect job performance.) This is an important step because some medications

smell like alcohol on the breath, so it’s important to be sure that you’re dealing with

abuse and not a medical condition. Once you’re fairly certain that abuse is the problem,

contact your human resources department. Substance abuse is considered an illness

(and generally not an offense that will get the employee fired—at least in many large

corporations), and the employee usually will be counseled by human resources. If

abuse is present, most large employers offer substance abuse programs for employees

and will probably insist that your employee participate in such a program. In most large

companies, employees are given one or two chances to get clean. If the problem recurs,

substance abusers can be terminated. The important issue here is to get fast help for the

employee—for the sake of the employee, the company, and your customers.

Why Are These Ethical Problems?

These are all ethical issues because they concern fairness and respect for the individ-

ual. A large percentage of the ethical issues that arise in business are related to human

resources, and they can usually be addressed by local managers who act quickly,

fairly, and compassionately.

Costs

The personal, professional, and corporate costs of discrimination and sexual harass-

ment are described earlier in this chapter and in Chapter 4. The costs for mishandling

most issues connected to diversity are not clear-cut, and they’re often difficult to

quantify.

To glimpse how costly the publicity associated with such cases can be, we have

to look no further than the now infamous Texaco case, which is described in detail at

CHAPTER 8 ETHICAL PROBLEMS OF MANAGERS 309

the end of Chapter 5. Texaco executives were heard on tape complaining about

Hanukkah and Kwanzaa interfering with the celebration of Christmas, and recount-

ing the destruction of documents connected to a pending discrimination case. 14 In the

wake of a firestorm of bad publicity, Texaco was forced to settle the case for $176

million. Obviously, the costs to Texaco—both financially and in damaged reputa-

tion—were significant. Yet those costs are just the tip of a giant iceberg. If we could

combine all of the fairness issues—performance evaluation systems, harassment,

subtle and not-so-subtle discrimination, and how managers handle family, substance,

and illness issues—and figure out how much it costs businesses when employees are

treated unfairly, the result would probably be astronomical, and not just in terms of

financial costs and damaged reputations. How many people leave a job because of

unresolved problems with a coworker? How many people choose not to go the extra

mile because the organization doesn’t treat its employees fairly? How many of the

best performers choose to work for a company that allows them flexible hours to care

for a child or an aging parent? How many people are depressed and frustrated be-

cause they’re picking up the slack for a coworker who’s a chronic alcoholic? The toll

in human suffering, morale, loyalty, productivity, and lost opportunity is inestimable.

THE MANAGER AS A LENS

Managers perform a crucial role in organizations because they interpret company

policy, execute corporate directives, fulfill all of the people management needs in

their particular area of responsibility, cascade senior management messages down

the chain of command, and communicate employee feedback up the chain. More

than almost anything else, managers communicate the culture of the organization up

close and on the ground to everyone who reports to them. Managers are probably the

most important ingredient in an organization’s success, and they are frequently the

most overlooked. But make no mistake—managers are the lens through which

employees view the company as well as the filter through which senior executives

view employees. As we noted earlier in this chapter, managers are the critical ingre-

dient in growing employee engagement: to many employees, managers are the com-

pany. Managers can be the inspiration for someone to stay with an organization or the

impetus for someone to leave. As a result, managers have more influence and need

more senior management attention, more training, and more communication skills

than any other employee group.

The Buck Stops with Managers

If we could take a peek at the innermost thoughts of managers, we might very well

encounter this sentiment: ‘‘I hope we do good work and get recognized for it. But most

of all, I hope there’s nothing going on that I don’t know about that could hit the fan.’’

As a manager, you’ll soon discover that your employees can bring you glory as

well as get you into big trouble. But the good news is that you can make investments

over time to help ensure that nothing hits the fan; or if it does, that you find out about

310 SECTION III MANAGING ETHICS IN THE ORGANIZATION

it before it mushrooms out of control. As a manager, you can design your own little

insurance policy to help protect you and your organization from employees who

might cause problems.

You can begin to protect yourself by understanding and internalizing the idea

that the people who report to you are looking to you for guidance and approval. That

means that you need to actively manage ethics. Your employees want to know what

your rules are, so you need to think carefully about your standards and consciously

try to communicate and enforce them. Most important, you need to understand that

you are a role model and your employees will follow your example. (Read more

about the importance of ethical leadership in Chapter 5.)

Boris Yavitz, former dean of Columbia University’s Graduate School of Busi-

ness and a member of several large corporate boards, had sage advice for managers.

First, communicate your expectations and standards publicly and privately. Employ-

ees are more likely to respond to a direct verbal challenge from you—‘‘Are we doing

it right?’’—than they are to an expectation that’s expressed only in a policy manual.

Second, managers should prove their commitment through personal example. They

need to ‘‘walk the talk,’’ or no one will take their expectations seriously. Finally,

since employees are naturally inclined to protect managers from bad news, managers

need to explicitly tell employees that they don’t want that kind of protection. ‘‘Tell

me everything.’’ The best policy is to communicate loudly and clearly that you don’t

want protection. Of course, that also means that you can’t shoot the messenger who

brings you bad news, or it will be the last time you ever hear from a messenger.

BEGIN WITH CLEAR STANDARDS All organizations have standards, and many

organizations even have written standards. Written standards—usually in the form of

a mission statement or guiding principles—can be a double-edged sword. It’s great if

an organization has written standards that actually guide how it does business. It’s a

huge problem if those written standards are just window dressing, and the real stan-

dards have nothing to do with the ones that are printed up and hanging on the wall.

The disconnect between written standards and reality (referred to as cultural mis-

alignment in Chapter 5) destroys credibility, and a company can’t be effective over

the long term without credibility.

The same is true for managers. Any employee can tell you what the rules are for

working for a particular manager. ‘‘You must tell the truth here or you’ll be fired,’’

might be a rule, or ‘‘Don’t rock the boat,’’ or ‘‘Don’t tell me how you do it, just do

it.’’ The very best way for managers to gain credibility among employees (as well as

their respect) is to set clear standards, live by those standards, very deliberately com-

municate them, and insist that everyone adhere to them.

The truth is that employees are always trying to figure out if managers mean

what they say and if they support the values that the company has communicated so

well. Think about this case: The manager of a food processing plant consistently talks

about the importance of quality. ‘‘The consumer should always come first,’’ he says.

Then one day, a shipment of food is delivered for processing. The factory equipment

is ready to go, the employees have been waiting for this huge delivery—and the food

CHAPTER 8 ETHICAL PROBLEMS OF MANAGERS 311

is just on the wrong side of spoiled. ‘‘It’s good enough,’’ the manager says. ‘‘The

processing will kill any contaminants and the consumer will never know the differ-

ence because this will be flash-frozen after the processing. We’ll lose a lot of money

if we don’t process something now.’’ What message has he just sent to his employ-

ees? Suppose that a month later, an employee finds a few rodent droppings in a food

processing unit. It’ll cost a lot of money to stop the machinery and clean it, plus the

food already in the hopper would have to be destroyed. What do you think the

employee would do? Would he or she believe that the consumer comes first? Or

would the employee decide that it’s okay to cut a corner to save money?

It’s important to understand that, as a manager, you are setting standards and com-

municating organizational culture all the time. In fact, failing to deliberately set ethical

standards is a standard in itself, since your employees may very well interpret it as

meaning you have no standards. In this era of teams and empowered employees, man-

agers need to be very deliberate in spelling out what they stand for and ‘‘how things are

going to be done around here.’’ Those ethical standards have to be demonstrated by the

manager and enforced, or people won’t believe them. It’s what ‘‘walking the talk’’

really means. Plus, employees figure out what really matters to an organization by

observing manager behavior. This is how culture gets baked into an organization (and

once employee perceptions are baked in, they are very difficult to change).

DESIGN A PLAN TO CONTINUALLY COMMUNICATE YOUR STANDARDS Good

communication skills are at the very heart of effective ethics management. Without

them, it’s virtually impossible to encourage ethical behavior. Regardless of where

you are in the management hierarchy, if you haven’t made effective communication

your top priority, you had better get ready for some big surprises. Here’s a Big Truth:

If you don’t communicate with your employees, they won’t communicate with you.

You won’t know what’s going on; you’ll be out of the loop; you’ll be ignorant; you’ll

be inviting ethical transgressions. And in business, ignorance is definitely not bliss.

Communicating with one group of employees is not enough, because you’ll

know what’s going on only with them. You’ll see information about other employee

groups only through the filter of that one group. That’s why ‘‘management by walk-

ing around’’ always gets such high marks from management experts. Managers can

be knowledgeable only when they regularly interact with and listen to many different

people on many different levels. (You may think this is simplistic, but think about

how many top executives think they are communicating when they do it just with the

executives who report to them.)

Consider this example. A young, newly named CEO decided to create an execu-

tive floor and bring all of his most senior people together to improve communication

within the group and make it easy to work together. It happens all the time in compa-

nies around the world. Is it a good idea? Maybe not, since he effectively isolated not

only himself but also the rest of the executive team. He also created an atmosphere of

elitism within the organization.

You can improve the communication within your department by holding regular

staff meetings where you discuss the company mission, business results, and the way

312 SECTION III MANAGING ETHICS IN THE ORGANIZATION

you want things done. Talk about what you stand for and what you want your depart-

ment to stand for. Use ethical language—for example, when employees are designing

a new program or product, ask them in a staff meeting if they have considered every-

one who could be affected by their plans. Ask them if they think they’re doing the

right thing. Framing business decisions in ethical terms goes a long way toward

increasing moral awareness, communicating your standards, and emphasizing the

importance of ethical behavior. It also helps reinforce ethical culture.

Once you have deliberately articulated and communicated your standards

both privately to individuals and publicly in front of your team, you need to

think about how approachable you are. You need to think long and hard about

how you react when people raise issues or ask questions or deliver criticism. If

you kill the messenger or react with hostility if someone asks a question, or if

you seem too busy to clarify directions, you are asking for trouble. Your people

may well consider you unapproachable, and managers who aren’t approachable

lay the groundwork for being blindsided. The first time they hear about a prob-

lem may not be from an employee, but from a lawyer, a newspaper reporter, or

a regulator. So, if you are a manager, work hard at being approachable. Drop in

on people who work in your area and shoot the breeze. Ask them what they’re

doing in and out of the office. Take your people out to lunch, and stay interested

in what they are thinking and feeling. Get to know one another. Build a relation-

ship. Learn to trust one another. Those relationships will be invaluable when

problems occur, as they surely will.

Managers Are Role Models

A number of years ago, then famous professional basketball player Charles Barkley

made sports headlines when he proclaimed, ‘‘I’m not paid to be a role model.’’ 15

A

colleague on the courts, Karl Malone, responded in an issue of Sports Illustrated,

‘‘Charles, you can deny being a role model all you want, but I don’t think it’s your

decision to make. We don’t choose to be role models; we’re chosen. Our only choice

is whether to be a good role model or a bad one.’’ Like Barkley, some managers may

not want to be role models. But Barkley and managers are indeed role models—not

because they want to be, but because of the positions they hold. Being a manager and

a good role model means more than just doing the right thing; it means helping your

employees do the right thing. A manager who is a good role model inspires employ-

ees, helps them define gray areas, and respects their concerns.

Managers can provide guidance to employees who encounter ethical dilemmas

by encouraging them to gather all of the facts and then evaluate the situation using

some of the advice detailed in Chapter 2. And after that, managers need to go further.

What happens if one of your employees raises an issue with you, and you don’t see

where there’s a problem? The employee goes away, satisfied for the moment with

your response that nothing’s wrong. But soon she is back because she still doesn’t

feel right about the situation. What do you do now? Probably the most responsible

thing you can do at that point is to offer to pursue it with her to make sure there is no

CHAPTER 8 ETHICAL PROBLEMS OF MANAGERS 313

problem. This sends a huge message to the employee and to her colleagues. First,

you’re saying that you’re glad she brought this to your attention. Second, you’re tak-

ing her seriously even if you don’t particularly agree with her. Third, you’re saying

that you trust her instincts and that she should, too. Fourth, you’re declaring that

ethics are important to you and to your organization—so important that you’re will-

ing to pursue this issue, even though you don’t agree, in an effort to make her feel

more comfortable. These are all critical messages to send to employees. (You also

may find that she is right in her suspicions.)

The most important thing for managers to remember about their job as role

model is that what they do is infinitely more important than what they say. They can

preach ethics all they want; but unless they live that message, their people won’t. As

a manager, all eyes are upon you and what you’re doing. Your actions will speak

much louder than your words, and if there is a disconnect between the two, you will

have no credibility—and employees may even question the credibility of your

organization.

MANAGING UP AND ACROSS

Gone are the days when a person could advance in an organization by impressing

only the next level of management. The new team structures mandate that workers

treat everyone well. An example of how some corporations are institutionalizing this

approach is an increasingly popular method of performance appraisal that some com-

panies call 360-degree feedback. This means that when reviewing an employee’s per-

formance, a manager asks for input from the employee’s coworkers and subordinates.

Feedback of this sort, which comes from all directions, is probably a much more

effective barometer of performance than old methods that measure only how well

people manage up. Of course, it means that workers need to carefully consider all of

their work relationships: up, down, and across. It’s also an indicator of what astute

workers have always known: since you never know who you might end up reporting

to, or who is going to be crucial to your success in the future, it’s critical to effec-

tively manage all of your work relationships.

In team situations, managers can still profoundly affect your future. They sign

off on or approve performance appraisals, pay raises, transfers, and generally are a

primary influence on your career mobility and trajectory. It can be difficult to over-

come a poor relationship with a manager unless you have solid relationships with

individuals on or above your manager’s level. That’s why it’s important for you to

cultivate your manager’s respect.

Although it may appear that your peers don’t have as direct an impact on your

career as your manager does, they nevertheless can significantly affect your future

success. Since you generally ‘‘get as good as you give,’’ if you don’t cooperate with

your peers, they’ll probably refuse to cooperate with you—perhaps even sabotage

you behind the scenes—and that lack of cooperation could cripple you. In addition,

peers can be promoted to management positions; this outcome can be truly

unfortunate if you haven’t developed good relationships with them.

314 SECTION III MANAGING ETHICS IN THE ORGANIZATION

Honesty Is Rule One

Michael is a lawyer who reports to Paula, the corporate counsel for a chemical

company. During one particularly busy period, Paula asks Michael to prepare a

summary of all pending lawsuits and other legal activity for the company’s

senior management. Michael has several court appearances and depositions

cluttering his schedule, so he assigns the report to one of his paralegals, who

completes the report in several days. Since he’s so busy, Michael simply sub-

mits the report to Paula without reviewing it. When Paula asks him what he

thinks of the report, he assures her that it’s fine. The next day, Paula asks Mi-

chael into her office and says that she has found a major omission in the report.

Michael has no choice but to admit that he didn’t have time to review it.

Probably nothing trips up more people than the temptation to lie or stretch the truth.

And probably nothing will trip up your career faster than a lie or an exaggeration. In

business, your reputation is everything, and lying or exaggerating can quickly under-

mine it.

Michael has basically lied to his manager. Even if he can weasel his way out of

the hot seat by saying he didn’t have time to thoroughly review the report, he has

created an indelible impression on Paula. She may question not only his future

reports but also his activities in general. Michael could have told Paula up front that

he didn’t have time to prepare a report. He could have suggested that one of the para-

legals prepare it. He could have asked for more time so that he could carefully review

it. Paula may not have been thrilled with his analysis of the situation, but she proba-

bly would have understood and helped him look for another solution. However, by

implying that he had completed and reviewed the report when in fact he hadn’t

looked at it, Michael has severely damaged his reputation with his manager. A work-

er’s responsibility includes identifying a problem and then proposing a solution. If

you provide a solution when you report a concern, you stand a good chance of having

your idea implemented. If you just report an issue with no solution, you’ll probably

have a solution imposed on you.

Managers and peers rely on the information they receive from the people who

report to them and who work with them. Obviously, that information must be truthful

and accurate, or someone else’s work will be skewed. Once someone has reason to

doubt your veracity, it may be impossible for you to recover. As one executive said,

‘‘Lying will end someone’s relationship with me, period.’’ The message: Be com-

pletely honest about all aspects of your work, including your ability, the information

you provide, and your ability to meet deadlines. Keep your promises.

Standards Go Both Ways

It began when Bruce asked Andy to lie to his wife about his whereabouts. ‘‘If

Marcia calls, tell her I’m in Phoenix on a business trip,’’ he told Andy. Of

course, he had also confided to Andy that in case of an office emergency, he

CHAPTER 8 ETHICAL PROBLEMS OF MANAGERS 315

could be reached at a local golf tournament or at a nearby hotel where he was

staying with another woman. Since Bruce was senior to Andy and was a pow-

erful contributor in the department, Andy went along with his request. When

Marcia called, Andy told the lie about Bruce being in Phoenix. Bruce asked

several more ‘‘favors’’ of Andy, and Andy complied. Then Bruce asked for a

big favor: he instructed Andy to inflate monthly sales figures for a report

going to senior management. When Andy objected, Bruce said, ‘‘Oh, come

on, Andy, we all know how high your standards are.’’

Just as it’s important for managers to set standards within their departments, it’s

equally important for workers to set ethical standards with their managers and peers

and stick to them. The best way to ensure that you’re not going to be asked to com-

promise your values is to clearly communicate what people can expect from you.

In Andy’s case, he made his first mistake by going along with Bruce’s lie to

his wife. Although it’s tempting to help out a colleague—especially one who’s pow-

erful and senior to you—you’re sliding down a slippery slope when it involves a

lie. The chances are excellent that Bruce would not have asked Andy to lie about

the monthly sales figures if he hadn’t already known that he could manipulate

Andy. If Andy had refused to lie for Bruce on that first occasion, Bruce would proba-

bly have vastly different expectations of him. When Bruce asked Andy to lie to

his wife, Andy could have replied, ‘‘Hey, Bruce, don’t drag me into that one! I’ll

tell her you’re not in the office, but I’m not going to outright lie to her.’’ Andy

could have said it in an unthreatening way and Bruce probably would have under-

stood. Bruce might even have been embarrassed. But once Andy got caught up

in Bruce’s conspiracy, Bruce felt he would probably go along with other untruths.

The message: Say it politely, but say it firmly and unequivocally. If a coworker or

manager asks you to betray your standards—even in the tiniest of ways—refuse to

compromise your standards, or you’ll end up being confronted with increasingly

thorny dilemmas.

CONCLUSION

Employees are strongly influenced by the conduct of management, and managers

build and reinforce organizational culture with everything they say and do. That’s

why it’s so critical that individual managers understand how they are viewed by

employees. It’s also critical that managers understand that if they set high standards,

foster good communications, and act as ethical role models, they will have the power

to create an environment that encourages employees to behave ethically. Good man-

agers also understand their pivotal role in influencing subordinates, building ethical

culture, growing employee engagement, and inspiring people to do their best work.

It’s equally important that workers appreciate the importance of managing their rela-

tionships with the manager and their peers and know how to alert the company’s

senior executives to wrongdoing in the safest way possible.

316 SECTION III MANAGING ETHICS IN THE ORGANIZATION

DISCUSSION QUESTIONS

1. Why is employee engagement important, and what is its relationship to ethics?

2. How does employee engagement relate to organizational culture? How do man-

agers contribute to the ethical culture?

3. In addition to identifying and training good managers, what else could an orga-

nization do to increase levels of employee engagement?

4. What specific action could a manager take to help move employees up the

employee engagement continuum—for example, from not engaged to actively

engaged?

5. Why should performance be measured as an ongoing process, and not just as a

once-a-year event?

6. Should high performers be allowed to work by rules that are different from

those that apply to other workers? Why or why not?

7. Imagine that you’re the manager of a facility where 200 layoffs are scheduled.

Design an action plan for how the layoffs would occur. How would you handle

both those being laid off and the survivors?

8. Are there ways in which managers can avoid harassment issues among employ-

ees who report to them? What would your strategy be?

9. Imagine that someone who reports to you is on a prescription medication that

makes his breath smell like alcohol. How would you handle this situation?

10. Imagine that one of your employees complained about being harassed by a

coworker. Also imagine that you suspect the motives of the person who is com-

plaining to you. How would you handle this situation? Is there a way you could

discern motivation, or does it matter? When would you involve your company’s

human resources department?

11. As a manager, how would you respond when a worker’s performance has de-

clined and you suspect a problem at home is the cause?

12. List some ways you can communicate your ethical standards to your employees

and to your peers.

SHORT CASES

EMPLOYMENT BASICS

You’ve recently been promoted to a supervisory position and are now responsible for

coordinating the work of four other employees. Two of these workers are more than

20 years older than you are, and both have been with the company much longer than

you have. Although you’ve tried to be supportive of them and have gone out of your

way to praise their work, whenever there is some kind of disagreement, they go to

your boss with the problem. You’ve asked them repeatedly to come to you with

CHAPTER 8 ETHICAL PROBLEMS OF MANAGERS 317

NOTES

1. M. Buckingham, The One Thing You Need to Know (New York: Free Press, 2005), 73–85.

2. A. Gopal, ‘‘Disengaged Employees Cost Singapore $4.9 Billion,’’ Gallup Management Journal

(October 9, 2003), www.gallup.com.

3. J. Shaffer, ‘‘Communicating for Business Results: How to Choose and Execute Communication

Projects That Dramatically Help the Company,’’ Journal of Employee Communication Management

(March–April, 2003), www.ragan.com.

4. Ibid.

5. Towers Perrin, ‘‘Global Workforce Report’’ (2008), www.towersperrin.com.

6. J. Halper, Quiet Desperation: The Truth about Successful Men (New York: Warner Books, 1988).

7. G. Ball, L. Treo, and H. P. Sims Jr., ‘‘Just and Unjust Punishment Incidents: Influence on Subordinate

Performance and Citizenship,’’ Academy of Management Journal 37 (1994): 299–332.

whatever issues they have; they just ignore you and complain to other workers about

reporting to someone your age. Design a strategy for dealing with these workers and

your manager.

MANAGING A DIVERSE WORKFORCE

After two years of sales calls and persuasion, a large, multinational petroleum com-

pany—Big Oil Ltd.—decides to sign with your employer, Secure Bank. Since Big

Oil is headquartered in Saudi Arabia and most of the meetings with the client have

been in the Middle East, Secure Bank’s senior executive in charge of oil and oil prod-

ucts companies, Julie, has not attended. Although the Secure Bank employees who

have met with the company have told the Big Oil executives that the lead on their

account will be a woman, the news must not have registered, perhaps because of

language difficulties. Today, the Big Oil reps are in Chicago to sign on the dotted

line and meet with Secure Bank’s senior managers; and of course, they’ve met with

Julie. A member of your sales team calls you to say that Big Oil’s senior team mem-

ber has told him he does not want Julie to work on their account, period. Because of

cultural issues, Big Oil execs are uncomfortable dealing with women from any coun-

try. As Julie’s manager, what do you do?

MANAGING UP AND ACROSS

As an operations professional, you need to be able to interact effectively with many

internal customers—from corporate managers to field representatives. One of your

peers is Jessica, who is a talented operations professional but who is downright rude

to her internal customers. Her attitude is so bad that people around your company ask

specifically to deal with you instead of Jessica. You’ve heard many tales about her

sarcasm and her unwillingness to deliver anything other than the absolute minimum

to other employees. You’ve thought about talking to Bruce, the manager to whom

both you and Jessica report, but you and everyone else knows that they’re dating. In

the meantime, your workload is increasing because of Jessica’s reputation. How do

you handle Jessica and Bruce?

318 SECTION III MANAGING ETHICS IN THE ORGANIZATION

8. D. Rice and C. Dreilinger, ‘‘After Downsizing,’’ Training and Development Journal (May 1991): 41–

44.

9. J. Brockner, ‘‘Managing the Effects of Layoffs on Survivors,’’ California Management Review,

Winter 1992: 928.

10. Kenneth Labich, ‘‘How to Fire People and Still Sleep at Night,’’ Fortune, 10 June 1996, 65–71.

11. Rice and Dreilinger, ‘‘After Downsizing.’’

12. Equal Employment Opportunity Commission website (2010), http://www.eeoc.gov/eeoc/newsroom/

release/1-6-10.cfm.

13. J. Greenberg, ‘‘Employee Theft as a Reaction to Underpayment Inequity: The Hidden Cost of Pay

Cuts,’’ Journal of Applied Psychology 75 (1990): 56–64.

14. J. Leo, ‘‘Jellybean: The Sequel,’’ U.S. News & World Report, 10 February 1997, 20.

15. D. Gelman, ‘‘I’m Not a Role Model,’’ Newsweek, 28 June 1993, 56.

CHAPTER 8 ETHICAL PROBLEMS OF MANAGERS 319