2.Analyze three features and benefits of internal self-regulation business ethics. Do you agree with the challenges of and issues of self-regulation? Why or why not?

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O P E N I N G CA S E

Two Leaders’ Ethical Styles

Warren Buffet, Berkshire Hathaway Found er and chief executive offi cer (CEO) of Berkshire Hathaway, War- ren Buffett has taken unpre ce dented steps in recent years to ensure that his messages about investing, ethics, and philanthropy reach an audience that will survive him. He didn’t invent the light bulb, but he’s had lots of bright ideas. He didn’t devise the mass- production assem- bly line, but his companies have sold masses of goods. And Warren Buffett didn’t originate the concept of money, but he has more of it than most— he has been listed as the second most wealthy business person

Ethical Insight 6.3

Chapter Summary

Questions

Exercises

Real- Time Ethical Dilemmas

Cases 17. Kaiser Permanente: A Crisis of

Communication, Values, and Systems Failure

18. Social Networking and Social Responsibility

Notes

6.1 Leadership and Stakeholder Management

Ethical Insight 6.1

Ethical Insight 6.2

6.2 Or gan i za tion al Culture, Compliance, and Stakeholder Management

6.3 Leading and Managing Strategy and Structure

6.4 Leading Internal Stakeholder Values in the Or ga ni za tion

6.5 Corporate Self- Regulation and Ethics Programs: Challenges and Issues

6 T H E C O R P O R AT I O N A N D

I N T E R N A L S TA K E H O L D E R S Values- Based Moral Leadership,

Culture, Strategy, and Self- Regulation

Co py ri gh t © 2 01 4. B er re tt -K oe hl er P ub li sh er s. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s pe rm it te d un de r

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6 The Corporation and Internal Stakeholders 349

by Forbes for several years. So what will be the Omaha investor’s leg- acy? Or, rather, his legacies? Observers say the 83-year-old’s ideas and philosophy of business and life will last far beyond his own. “Some- body from this group will learn something that will affect their lives,” Buffett told a group of graduate students during a 2005 visit to Omaha.

“Buffett’s emphasis on working with ethical people is already infl u- encing business leaders and business schools, a change that could last far into the future,” said Bruce Avolio, director of the University of Nebraska- Lincoln’s Leadership Institute. “He buys the culture when he invests in an or ga ni za tion,” Avolio said, “valuing a business’s human con- dition as much as its fi nancial condition. That’s shifting people’s thinking, and it has a huge impact. It’s a model that’s replicable— treating people fairly. Integrity underlies not only Warren Buffett’s investments but also his philosophy of life.” Keith Darcy, head of the 1,400- member Ethics and Compliance Offi cers Association in Waltham, Massachusetts, said Buf- fett has played a hand in “a fl ight to integrity” by investors, executives, employees, suppliers, and customers, who want to be involved with com- panies that do business correctly. “It’s essential to him to be working with people he trusts,” Darcy said. “Without that level of trust, it’s not worth doing business. Certainly he has been an exemplar for understanding that when you make investments, character and reputation are every- thing.” In meetings with students, Darcy said, Buffett “speaks from his heart. He certainly is a mythological fi gure, except he’s not a myth, he’s real— a man of enormous success who always has believed in investing in companies with inherent value, but in par tic u lar the people in those businesses.” Darcy believes Buffett will be a role model far into the future. Buffett himself has stated: “I want employees to ask themselves whether they are willing to have any contemplated act appear on the front page of their local paper the next day, to be read by their spouses, children, and friends. . . . If they follow this test, they need not fear my other mes- sage to them: Lose money for the fi rm, and I will be understanding; lose a shred of reputation for the fi rm, and I will be ruthless.”1

Ratan Tata, Former Chairman of the Indian Corporation Tata Group Ratan Tata retired on his 75th birthday after leading the Indian corpo- rate conglomerate, the Tata Group. He assumed leadership from his uncle in 1991. The so- called House of Tata owns over 100 companies in 80 countries, including the Taj Group of luxury hotels and the exclu- sive Tata Nano car. The group’s holdings exceed those of Wal- mart or ExxonMobil. The Tata Group was the fi rst Indian company to obtain $100 billion in revenues, half of which is from abroad. Ratan Tata helped acquire signifi cant Eu ro pe an enterprises, including Jaguar Land Rover and Corus, the Anglo- Dutch steelmaker. Under his leadership, this group is now “perceived to represent Indian capitalism at its best,

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350 Business Ethics

enjoying the goodwill of millions of customers, the loyalty of more than 400,000 employees and the investments of 3.8 million shareholders, while also reinvesting a substantial part of its profi ts into philanthropic work overseen by a set of trusts.”2 His ethical beliefs are embodied in the company’s policies, as stated in the company’s Article and Rules for Sustaining CSR, Clause No. 10:

A Tata Company shall be committed to be a good corporate citizen not only in compliance with all relevant laws and regulations but also by actively assisting in the improvement of the quality of life of the people in the communities in which it operates with the objective of making them self- reliant. Such social responsibility would comprise, to initiate and support community initiatives in the fi eld of community health and family welfare, water management, vocational training, edu- cation and literacy and encourage application of modern scientifi c and managerial techniques and expertise. This will be reviewed periodi- cally in consonance with national and regional priorities. The com- pany would also not treat these activities as optional ones but would strive to incorporate them as integral part of its business plan. The company would also encourage volunteering amongst its employees and help them to work in the communities. Tata companies are en- couraged to develop social accounting systems and to carry out social audit of their operations.3

6.1 Leadership and Stakeholder Management

Leadership is the ability to infl uence followers to achieve common goals through shared purposes.4 Leaders, with the help of followers, are responsible for enacting an or ga ni za tion’s vision, mission, and strategies, and for achiev- ing goals in socially responsible ways.5 Leaders also help defi ne the culture and model the values of organizations that are essential for setting and mod- eling the legal and ethical tone and boundaries. Warren Buff ett, found er and CEO of Berkshire Hathaway and Rajan Tata, former chairman of the Tata Group, are two exemplary leaders among many others, who embody the ethi- cal leadership values, characteristics, and actions this chapter addresses.

The CEO or president, who sometimes is also the chair of the board of di- rectors, is the highest- ranking leader in a company. However, in both for- and not- for- profi t organizations, the CEO reports to and is advised by the board of directors, which also serves leadership and governance roles. Leadership is not only limited to a few individuals or teams at the top of organizations. Indi- viduals throughout an or ga ni za tion exert leadership responsibilities and infl u- ence in their roles and relationships to direct and guide their organizations.

Leadership also requires active involvement with and alignment of internal and external stakeholder relationships. Business relationships involve transac- tions and decisions that require ethical choices and, many times, moral courage. Building new strategic partnerships, transformational restructuring and lay-

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6 The Corporation and Internal Stakeholders 351

off s, consumer lawsuits, environmental crises, bold new “green” initiatives, and turning around corporate cultures damaged by the eff ects of harmful products are examples of situations that require leadership business and ethical decisions. Leaders are responsible for the economic success of their enterprises and for the rights of those served inside and outside their boundaries. Re- search on leadership demonstrates that moral values, courage, and credibility are essential leadership capabilities.6 James Collins’ fi ve- year research project on “good to great” companies found that leaders who moved from “good to great” showed what he called “Level 5” leadership. These leaders “channel their ego needs away from themselves and into the larger goal of building a great company. It’s not that Level 5 leaders have no ego or self- interest. In- deed, they are incredibly ambitious—but their ambition is fi rst and foremost for the institution, not themselves” (emphasis added).7 Collins also concluded that Level 5 leaders build “enduring greatness through a paradoxical blend of personal humility and professional will.”8

This chapter focuses on the challenges that values- based leaders face while managing internal stakeholders, strategy, and culture in organizations. From a stakeholder management approach, an or ga ni za tion’s leaders are re- sponsible for initiating and sustaining an ethical, principled, and collabora- tive orientation toward those served by the fi rm.9 Leaders model and enforce the values they wish their companies to embody with stakeholders.10 One of an or ga ni za tion’s most prized assets is its reputation, as noted earlier in the text. Reputations are built through productive and conscientious relation- ships with stockholders and stakeholders.11

A stakeholder, values- based leadership approach determines whether or not the or ga ni za tion and culture:

• Are integrated or fragmented. • Tolerate or build relationships. • Isolate the or ga ni za tion or create mutual benefi ts and opportunities. • Develop and sustain short- term or long- term goals and relationships. • Encourage idiosyncratic dependent implementation based on division,

function, business structure, and personal interest and style or encourage coherent approaches, driven by enterprise, visions, missions, values, and strategies.12

Eff ective leaders guide the ethical and strategic integration and alignment of the internal or ga ni za tion with the external environment. As the following sections show, competent leaders demonstrate diff erent competencies in guiding and responding to their stakeholders and stockholders.

Defi ning Purpose, Mission, and Values

Leading an or ga ni za tion begins by identifying and enacting purpose and ethical values that are central to internal alignment, external market eff ec- tiveness, and responsibility toward stakeholders. As Figure 6.1 shows, key

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352 Business Ethics

questions executives must answer before identifying a strategy and leading their fi rm are centered on defi ning the or ga ni za tion’s vision, mission, and val- ues: What business are we in? What is our product or ser vice? Who are our customers? What are our core competencies?

A values- based leadership approach is exemplifi ed by Chester Barnard, who wrote in 1939 that eff ective leaders and managers “inspire cooperative personal decisions by creating faith in common understanding, faith in the probability of success, faith in the ultimate satisfaction of personal motives, and faith in the integrity of common purpose.”13 In the classic book Built to Last,14 authors James Collins and Jerry Porras state, “Purpose is the set of funda- mental reasons for a company’s existence beyond just making money. Visionary companies get at purpose by asking questions similar to those posed by David Packard [cofound er of Hewlett- Packard]: ‘I want to discuss why a company exists in the fi rst place. . . . Why are we here? I think many people assume, wrongly, that a company exists simply to make money. While this is an im- portant result of a company’s existence, we have to go deeper and fi nd the real reasons for our being.’ ”

JetBlue’s found er and former CEO, David Neeleman, said:

For our company’s core values, we came up with fi ve words: safety, caring, fun, integrity, and passion. We guide our company by them. But from my experience— and I’ve had a lot of life experiences that were deep religious

What business are we in?

Who is our customer?

What are our core competencies?

What is our product or service?

Vision

Mission

Values

(Who are we? Who will we become?)

(What is our strategic purpose for operating?)

(What do we stand for and believe in? What standards

can be used to evaluate and judge us?)

Figure 6.1

Strategic Alignment Questions

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6 The Corporation and Internal Stakeholders 353

experiences— I feel that everyone is equal in the way they should be treated and the way they should be respected. I think that I try to conduct myself in that way. I treat everyone the same: I don’t give anyone more deference be- cause of their position or their status. Then I just try to create trust with our crewmembers. I know if they trust me, if they know I’m trying to do the best things I think are in their long- term interest, then they’ll be happier and they’ll feel like this is a better place to work. The top fi ve tips for landing a job at JetBlue include 1. Do your homework! Study JetBlue’s history and their current happenings and their fi ve core values, 2. Know your story: Be prepared for the interview by reviewing your own challenging situations and how you handled them, 3. Show your passion: People at JetBlue are very passionate about the company and what they do. Showing passion for the company and role you are applying for is important, 4. Be open and honest, and 5. Be yourself! “We are a fun company, and we just want you to be you!”15

Ethical companies may also include a “social mission” in their formal mission and values statements. A social mission is a commitment by the or ga- ni za tion to give back to their community and external stakeholders who make the or ga ni za tion’s existence possible. Ben and Jerry’s (now a division of the Anglo- Dutch Unilever conglomerate), Lands’ End, Southwest Airlines, and many other companies commit to serving their communities through diff er- ent types of stewardship outreach, facility sharing (e.g., day care and tutoring programs), and other service- related activities.

A starting point for identifying a leader’s values is a foundational vision and mission statement of the company. Levi Strauss & Co.’s, shown in Fig- ure 6.2, exemplifi es an inspirational vision with ethical values.

The classical visionary, “built- to- last” companies “are premier institutions— the crown jewels— in their industries— several are still ‘lasting’ today— widely admired by their peers, and have a long track record of mak- ing a signifi cant impact on the world around them . . . a visionary company is an organization— an institution . . . visionary companies prosper over long pe- riods of time, through multiple product life cycles and multiple generations of active leaders.”16 Such companies include 3M, American Express, Boeing, Citicorp, Ford, General Electric, Hewlett- Packard, IBM, Johnson & Johnson, Marriott, Merck, Motorola, Nordstrom, Philip Morris, Procter and Gamble, Sony, Wal- Mart, and Disney. These visionary companies, Collins and Porras discovered, succeeded over their rivals by developing and following a “core ideology” that consisted of core values plus purpose. Core values are “the or- ga ni za tion’s essential and enduring tenets— a small set of general guiding principles; not to be confused with specifi c cultural or operational practices; not to be compromised for fi nancial gain or short- term expediency.” Pur- pose is “the or ga ni za tion’s fundamental reasons for existence beyond just making money— a perpetual guiding star on the horizon; not to be confused with specifi c goods or business strategies.”17 Excerpts of core ideologies from some of the classic visionary companies are instructive and are summarized here:18

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Figure 6.2

Levi Strauss & Co. Values and Vision Statement

VALUES

Our values are fundamental to our success. They are the foundation of our company, defi ne who we are and set us apart from the competition. They underlie our vision of the future, our business strategies and our decisions, actions and behaviors. We live by them. They endure.

Four core values are at the heart of Levi Strauss & Co.: Empathy, Originality, Integrity and Courage. These four values are linked. As we look at our history, we see a story of how our core values work together and are the source of our success.

Empathy—Walking in Other People’s Shoes

Empathy begins with listening . . . paying close attention to the world around us . . . under- standing, appreciating and meeting the needs of those we serve, including consumers, retail customers, shareholders and each other as employees.

Levi Strauss and Jacob Davis listened. Jacob was the tailor who, in the 1870s, fi rst fash- ioned heavy cotton cloth, thread and metal rivets into sturdy “waist overalls” for miners seek- ing durable work pants. Levi in turn met Jacob’s needs for patenting and mass production of the product, enthusiastically embracing the idea and bringing it to life. The rest is history: The two created what would become the most pop u lar clothing in the world— blue jeans.

Our history is fi lled with relevant examples of paying attention to the world around us. We listened. We innovated. We responded.

• As early as 1926 in the United States, the company advertised in Spanish, Portuguese and Chinese, reaching out to specifi c groups of often- neglected consumers.

• In the 1930s, consumers complained that the metal rivets on the back pockets of our jeans tended to scratch furniture, saddles and car seats. So we redesigned the way the pockets were sewn, placing the rivets underneath the fabric.

• In 1982, a group of company employees asked se nior management for help in increasing awareness of a new and deadly disease affecting their lives. We quickly became a busi- ness leader in promoting AIDS awareness and education.

We believe in empathetic marketing, which means that we walk in our consumers’ shoes. In the company’s early years, that meant making durable clothes for workers in the American West. Now, it means responding to the casual clothing needs of a broad range of consumers around the world. Understanding and appreciating needs— consumer insight— is central to our commercial success.

Being empathetic also means that we are inclusive. Levi Strauss’ sturdy work pants are sold worldwide in more than 80 countries. Their popularity is based on their egalitarian appeal and originality. They transcend cultural boundaries. Levi’s® jeans— the pants without pretense— are not just for any one part of society. Everyone wears them.

Inclusiveness underlies our consumer marketing beliefs and way of doing business. We bring our Levi’s® and Dockers® brands to consumers of all ages and lifestyles around the world. We refl ect the diverse world we serve through the range and relevancy of our prod- ucts and the way we market them.

Likewise, our company workforce mirrors the marketplace in its diversity, helping us to understand and address differing consumer needs. We value ethnic, cultural and lifestyle diversity. And we depend and draw upon the varying backgrounds, knowledge, points of view and talents of each other.

As colleagues, we also are committed to helping one another succeed. We are sensitive to each other’s goals and interests, and we strive to ensure our mutual success through exceptional leadership, career development and supportive workplace practices.

Empathy also means engagement and compassion. Giving back to the people we serve and the communities we operate in is a big part of who we are. Levi Strauss was both a

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355

merchant and a philanthropist— a civic- minded leader who believed deeply in community ser vice. His way lives on. The company’s long- standing traditions of philanthropy, community involvement and employee volunteerism continue today and contribute to our commercial success.

Originality—Being Authentic and Innovative

Levi Strauss started it and forever earned a place in history. Today, the Levi’s® brand is an authentic American icon, known the world over.

Rooted in the rugged American West, Levi’s® jeans embody freedom and individuality. They are young at heart. Strong and adaptable, they have been worn by generations of in- dividuals who have made them their own. They are a symbol of frontier in de pen dence, demo cratic idealism, social change and fun. Levi’s® jeans are both a work pant and a fash- ion statement— at once ordinary and extraordinary. Collectively, these attributes and values make the Levi’s® brand unlike any other.

Innovation is the hallmark of our history. It started with Levi’s® jeans, but that pioneering spirit permeates all aspects of our business- innovation in product and marketing, workplace practices and corporate citizenship. Creating trends. Setting new standards. Continuously improving through change. For example:

• We were the fi rst U.S. apparel company to use radio and tele vi sion to market our products. • With the introduction of the Dockers® brand in 1986, we created an entirely new cate-

gory of casual clothing in the United States, bridging the gap between suits and jeans. A year later, Dockers® khakis had become the fastest growing apparel brand in history. Throughout the 1990s, we were instrumental in changing what offi ce workers wear on the job.

• Our Eu ro pe an Levi’s® brand team reinvented classic fi ve- pocket jeans in 1999. Inspired by the shape and movement of the human body, Levi’s® Engineered Jeans™ were the fi rst ergonomically designed jeans.

Now, more than ever, constant and meaningful innovation is critical to our commercial success. The worldwide business environment is fi ercely competitive. Global trade, instan- taneous communications and the ease of market entry are among the forces putting greater pressure on product and brand differentiation. To be successful, it is imperative that we change, competing in new and different ways that are relevant to the shifting times.

As the “makers and keepers” of Levi Strauss’ legacy, we must look at the world with fresh eyes and use the power of ideas to improve everything we do across all dimensions of our business, from modest improvements to total reinventions. We must create product news that comes from the core qualities of our brands— comfort, style, value and the freedom of self- expression—attributes that consumers love and prefer.

Integrity—Doing the Right Thing

Ethical conduct and social responsibility characterize our way of doing business. We are honest and trustworthy. We do what we say we are going to do.

Integrity includes a willingness to do the right thing for our employees, brands, the com- pany and society as a whole, even when personal, professional and social risks or economic pressures confront us. This principle of responsible commercial success is embedded in the company’s experience. It continues to anchor our beliefs and behaviors today, and is one of the reasons consumers trust our brands. Our shareholders expect us to manage the company this way. It strengthens brand equity and drives sustained, profi table growth and superior return on investment. In fact, our experience has shown that our “profi ts through principles” approach to business is a point of competitive advantage.

Figure 6.2 —continued

(continued)

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356

This values- based way of working results in innovation:

• Our commitment to equal employment opportunity and diversity predates the U.S. Civil Rights movement and federally mandated desegregation by two de cades. We opened integrated factories in California in the 1940s. In the 1950s, we combined our need for more production and our desire to open manufacturing plants in the American South into an opportunity to make change: We led our industry by sending a strong message that we would not locate new plants in Southern towns that imposed segregation. Our approach changed attitudes and helped to open the way for integration in other companies and in- dustries.

• In 1991, we were the fi rst multinational company to develop a comprehensive code of conduct to ensure that individuals making our products anywhere in the world would do so in safe and healthy working conditions and be treated with dignity and respect. Our Terms of Engagement are good for the people working on our behalf and good for the long- term reputation of our brands.

Trust is the most important value of a brand. Consumers feel more comfortable with brands they can trust. Increasingly, they are holding corporations accountable, not only for their prod- ucts but also for how they are made and marketed. Our brands are honest, dependable and trusted, a direct result of how we run our business.

Integrity is woven deeply into the fabric of our company. We have long believed that “Quality Never Goes Out of Style.” Our products are guaranteed to perform. We make them that way. But quality goes beyond products: We put quality in everything we do.

Courage—Standing Up for What We Believe

It takes courage to be great. Courage is the willingness to challenge hierarchy, accepted practices and conventional wisdom. Courage includes truth telling and acting resolutely on our beliefs. It means standing by our convictions. For example:

• It took courage to transform the company in the late 1940s. That was when we made the tough decision to shift from dry goods wholesaling, which represented the majority of our business at the time, and to focus instead on making and selling jeans, jean jackets, shirts and Western wear. It was a foresighted—though risky— decision that enabled us to develop and prosper.

• In the 1980s, we took a similar, bold step to expand our U.S. channels of distribution to include two national retail chains, Sears and JCPenney. We wanted to provide consum- ers with greater access to our products. The move resulted in lost business in the short term because of a backlash from some important retail customers, but it set the stage for substantial growth.

• We also demonstrated courage in our workplace practices. In 1992, Levi Strauss & Co. became the fi rst Fortune 500 company to extend full medical benefi ts to domestic part- ners of employees. Although controversial at the time, this action foreshadowed the widespread ac cep tance of this benefi t and positioned us as a progressive employer with prospective talent.

With courage and dedication, we act on our insights and beliefs, addressing the needs of those we serve in relevant and signifi cant ways. We do this with an unwavering commit- ment to excellence. We hold ourselves accountable for attaining the high per for mance standards and results that are inherent in our goals. We learn from our mistakes. We change. This is how we build our brands and business. This is how we determine our own destiny and achieve our vision of the future.

The story of Levi Strauss & Co. and our brands is fi lled with examples of the key role our values have played in meeting consumer needs. Likewise, our brands embody many of the core values that our consumers live by. This is why our brands have stood the test of time.

Figure 6.2 —continued

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6 The Corporation and Internal Stakeholders 357

• Disney: “To bring happiness to millions and to celebrate, nurture, and promulgate wholesome American values.”

• Wal- Mart: “We exist to provide value to our customers— to make their lives better via lower prices and greater selection; all else is secondary. . . . Be in partnership with employees.”

• Sony: “Respecting and encouraging each individual’s ability and creativity.”

• Motorola: “To honorably serve the community by providing products and ser vices of superior quality at a fair price.”

Built- to- last companies “more thoroughly indoctrinate employees into a core ideology than their comparison companies [i.e., those companies in Col- lins and Porras’s study that did not last], creating cultures so strong that they are almost cult- like around the ideology.”19 Visionary companies also select and support se nior management on the basis of whether they fi t with the core ideology. These best- in- class companies also attain more consistent goals, strategy, and or gan i za tion al structure alignment with their core ideology than do comparison companies in Collins and Porras’s study.20

Ethical Insight 6.1

Your Moral Leadership Profi le

Using actual situations in which you served in a leadership role, score the following statements with regard to how each statement characterizes your leadership style:

1 = Very little, 2 = Somewhat, 3 = Moderately, 4 = A lot, 5 = Most of the time

1. I act ethically even if my peers disagree with me. 1 2 3 4 5 2. I generally speak out for what I believe is right regardless of pressure

from others. 1 2 3 4 5

Generations of people have worn our products as a symbol of freedom and self- expression in the face of adversity, challenge and social change. They forged a new territory called the American West. They fought in wars for peace. They instigated counterculture revolutions. They tore down the Berlin Wall. Reverent, irreverent— they all took a stand.

Indeed, it is this special relationship between our values, our consumers and our brands that is the basis of our success and drives our core purpose. It is the foundation of who we are and what we want to become:

Vision People love our clothes and trust our company. We will market the most appealing and widely worn casual clothing in the world. We will clothe the world.

Source: Levi Strauss & Co. Used by permission of Levi Strauss & Co. Reprinted by permission of Levi Strauss & Co.

Figure 6.2 —continued

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358 Business Ethics

3. I tell others when I sense there are wrongdoing or hurtful activities about to happen. 1 2 3 4 5

4. I maintain composure when people try to pressure me into saying or doing unjust things. 1 2 3 4 5

5. I do not back down when I know that others are violating just rules and procedures. 1 2 3 4 5

6. I don’t go along with the crowd or majority just to get their approval when I know they are wrong and/or acting unethically. 1 2 3 4 5

7. My decisions are generally ethical and based on principles, not on random acts of instant gratifi cation or whim. 1 2 3 4 5

8. I say and do the right thing even if I lose the favor of some friends. 1 2 3 4 5

9. I generally act from my beliefs and ethical principles fi rst, regardless of the approval of my friends. 1 2 3 4 5

10. I go with what’s right for a project even though my friends and colleagues may turn against me. 1 2 3 4 5

Your Scores and Interpretation Add up your scores. Total of 10 statements = ____. If you received 40 or higher, you are considered a courageous leader. A score of 20 or below indi- cates you avoid confl ict and diffi cult situations that challenge your moral leadership. Examine the items in which you scored highest and lowest. Do these scores and items refl ect your moral courage in tough situations gener- ally? Why or why not? What do you need to do to improve or change your moral courage? How do your scores compare to other students?

Leadership Stakeholder Competencies

Core competencies of responsible leaders include the ability to:

1. Defi ne and lead the social, ethical, and competitive mission of organizations. This includes community- based, social, and environmental stewardship goals that promote being a global corporate citizen.21

2. Build and sustain accountable relationships with stakeholders.22

3. Dialogue and negotiate with stakeholders, respecting their interests and needs beyond economic and utilitarian dimensions.23

4. Demonstrate collaboration and trust in shared decision making and strategy sessions.

5. Show awareness and concern for employees and other stakeholders in the policies and practices of the company.

Eff ective ethical leaders develop a collaborative approach to setting direc- tion, leading top- level teams, and building relationships with partners and

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6 The Corporation and Internal Stakeholders 359

customers. For example, at Johnson & Johnson, one of the seven principles of leadership development states: “People are an asset of the corporation; lead- ership development is a collaborative, corporation- wide pro cess.”24 The company lives its leadership principles through its Executive Development Program. Figure 6.3 shows Johnson & Johnson’s Credo. The now classic “Beliefs of BorgWarner” corporation credo is shown in Figure 6.4 as another example of values companies should aspire to follow.

Or gan i za tion al leaders are also ultimately responsible for the economic viability and profi tability of a company. From a values- based, stakeholder management perspective, leaders must also oversee and implement the fol- lowing in their organizations:

Figure 6.3

Johnson & Johnson Credo

We believe our fi rst responsibility is to the doctors, nurses, and patients; to mothers and fathers; and all others who use our product and ser vices. In meeting their needs, every- thing we do must be of high quality.

We must constantly strive to reduce our costs in order to maintain reasonable prices. Customers’ orders must be ser viced promptly and accurately. Our suppliers and distributors must have an opportunity to make a fair profi t. We are responsible to our employees, the men and women who work with us throughout

the world. Everyone must be considered as an individual. We must respect their dignity and recog-

nize their merit. They must have a sense of security in their jobs. Compensation must be fair and adequate, and working conditions clean, orderly, and safe. We must be mindful of ways to help our employees fulfi ll their family responsibilities. Employees must feel free to make suggestions and complaints. There must be equal opportunity for employment, development, and advancement for

those qualifi ed. We must provide competent management, and their actions must be just and ethical. We are responsible to the communities in which we work and to the world community

as well. We must be good citizens— support good works and charities and bear our fair share of

taxes. We must encourage civic improvements and better health and education. We must maintain in good order the property we are privileged to use, protecting the

environment and natural resources. Our fi nal responsibility is to our stockholders. Business must make a sound profi t. We must experiment with new ideas. Research must be carried on, innovative programs developed, and mistakes paid for. New equipment must be purchased, new facilities provided, and new products

launched. Reserves must be created to provide for adverse times. When we operate according to these principles, the stockholders should realize a fair

return.

Source: Johnson & Johnson. Reprinted by permission of Johnson & Johnson.

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• Set the vision, mission, and direction. • Create and sustain a legal and ethical culture throughout the organization. • Articulate and guide the strategy and direction of the or ga ni za tion. • Ensure the competitive and ethical alignment of or gan i za tion al systems. • Reward ethical conduct.25

Herb Kelleher cofounded Southwest Airlines in 1966 on a personal $10,000 investment. He retired June 19, 2001, with a $200 million stake in the com- pany. Kelleher’s principles of management are straightforward and simple:26

• Employees come fi rst, customers second. • The team is important, not the individual. • Hire for attitude, train for skills. • Think like a small company. • Eschew or gan i za tion al hierarchy. • Keep it simple.

Kelleher owned and operated Southwest Airlines on these principles. When asked how the company would survive once he stepped down, Kelle- her responded, “The real answer is we have a very strong culture and it has a life of its own that is able to surmount a great deal. If we should, by happen- stance, have someone succeed me who is not interested in the culture, I don’t think they would last a long time. The place would just rise up.”27 Kelleher’s message is printed in white letters on the black elevator glass in the lobby of Southwest’s corporate headquarters: “The people of Southwest Airlines are the creators of what we have become— and what we will be. Our people trans- formed an idea into a legend. That legend will continue to grow only so long as it is nourished— by our people’s indomitable spirit, boundless energy, im- mense goodwill, and burning desire to excel. Our thanks— and our love— to the people of Southwest Airlines for creating a marvelous family and a won- drous airline.”28

Leaders who dare to be diff erent stretch goals while maintaining a moral, values- based approach:

• Seek to revolutionize every strategy and pro cess for optimal results while maintaining the or ga ni za tion’s integrity.29

• Empower everyone to perform beyond stated standards, while maintaining balance of life and personal values.

• Understand and serve customers as they would themselves. • Create and reward a culture obsessed with fairness and goodwill toward

everyone. • Act with compassion and forgiveness in every decision toward every

person and group. • Do unto their stockholders and stakeholders as they would have them do

to their company. • Treat the environment as their home.

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Figure 6.4

The Beliefs of BorgWarner: To Reach beyond the Minimal

Any business is a member of a social system, entitled to the rights and bound by the re- sponsibilities of that membership. Its freedom to pursue economic goals is constrained by law and channeled by the forces of a free market. But these demands are minimal, requiring only that a business provide wanted goods and ser vices, compete fairly, and cause no ob- vious harm. For some companies, that is enough. It is not enough for BorgWarner. We impose upon ourselves an obligation to reach beyond the minimal. We do so convinced that by making a larger contribution to the society that sustains us, we best assure not only its future vitality, but our own.

This is what we believe.

We Believe in the Dignity of the Individual

However large and complex a business may be, its work is still done by dealing with people. Each person involved is a unique human being, with pride, needs, values, and innate per- sonal worth. For BorgWarner to succeed, we must operate in a climate of openness and trust, in which each of us freely grants others the same respect, cooperation, and decency we seek for ourselves.

We Believe in Our Responsibility to the Common Good

Because BorgWarner is both an economic and social force, our responsibilities to the public are large. The spur of competition and the sanctions of the law give strong guidance to our behavior, but alone do not inspire our best. For that we must heed the voice of our natural concern for others. Our challenge is to supply goods and ser vices that are of supe- rior value to those who use them; to create jobs that provide meaning for those who do them; to honor and enhance human life; and to offer our talents and our wealth to help im- prove the world we share.

We Believe in the Endless Quest for Excellence

Though we may be better today than we were yesterday, we are not as good as we must become. BorgWarner chooses to be a leader— in serving our customers, advancing our technologies, and rewarding all who invest in us their time, money, and trust. None of us can settle for doing less than our best, and we can never stop trying to surpass what al- ready has been achieved.

We Believe in Continuous Renewal

A corporation endures and prospers only by moving forward. The past has given us the pres- ent to build on. But to follow our visions to the future, we must see the difference between traditions that give us continuity and strength and conventions that no longer serve us— and have the courage to act on that knowledge. Most can adapt after change has occurred; we must be among the few who anticipate change, shape it to our purpose, and act as its agents.

We Believe in the Commonwealth of BorgWarner and Its People

BorgWarner is both a federation of businesses and a community of people. Our goal is to preserve the freedom each of us needs to fi nd personal satisfaction, while building the strength that comes from unity. True unity is more than a melding of self- interests; it results when values and ideals also are shared. Some of ours are spelled out in these statements of belief. Others include faith in our po liti cal, economic, and spiritual heritage; pride in our work and our company; the knowledge that loyalty must fl ow in many directions; and a conviction that power is strongest when shared. We look to the unifying force of these be- liefs as a source of energy to brighten the future of our company and all who depend on it.

Source: BorgWarner Corp. Reprinted by permission of the BorgWarner Corporation.

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Example of Companies Using Stakeholder Relationship Management

A recent study of exemplary companies that have gone beyond traditional business models coined the term “fi rms of endearment” (FoE), which is explained in Case 9 in Chapter 4. Leaders of these fi rms practice “stake- holder relationship management.”30 An FoE is “a company that endears itself to stakeholders by bringing the interests of all stakeholder groups into strate- gic alignment. No stakeholder group benefi ts at the expense of any other stakeholder group, and each prospers as the others do.”31 The authors’ (Siso- dia, Sheth, and Wolfe) two- year research project started with mea sures of “humanistic performance— meeting the needs of stakeholders other than shareholders— and worked forward.” The authors “asked for nominations from thousands of people all over the world, including business professionals, marketing professionals, MBA students, and about 1,000 consumers.”32 The companies selected underwent further screening using quantitative and quali- tative per for mance of each fi rm for each stakeholder (societal communities, partners, investors, customers, and employees). The companies studied are not exhaustive, and the authors note that none of the fi rms are perfect. It was found that “the public FoEs returned 1,026% for investors over the 10 years ending June 30, 2006, compared to 122% for the S&P 500 . . . an 8– 1 ratio!”33 The companies in the “fi nal cut” include:

Amazon Honda Southwest BMW IDEO Starbucks CarMax IKEA Timberland Caterpillar JetBlue Toyota Commerce Bank Johnson & Johnson Trader Joe’s The Container Store Jordan’s Furniture UPS Costco LL Bean Wegmans eBay New Balance Whole Foods Google Patagonia Harley- Davidson REI

Some of the defi ning characteristics of FoEs include:

• Competitive advantage through a business model in which all stakeholders add and benefi t from gains in value created from a deeper set of resources.

• Possess a humanistic soul. “From the depths of this soul, the will to render uncommon ser vice to all stakeholders fl ows. These companies are imbued with the joy of service— to the community, to society, to the environment, to customers, to colleagues.”34

• Leaders who “facilitate, encourage, reward, recognize, and celebrate their employees for being of ser vice to their communities and the world at large, for no reason other than that it is the right thing to do.”35

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6 The Corporation and Internal Stakeholders 363

Honda, for example, “marries suppliers for life”; the company supports suppliers in improving quality, ser vice, and profi ts. IKEA abides by all laws, no matter how strict, in every country where it operates. Costco’s cofound er and CEO Jim Sinegal embodies the stakeholder management approach. His salary for the fi scal year 2011 was $350,000, with a bonus of $198,400; Cost- co’s revenues in its most recent fi scal year rose 14% to $88.92 billion. (The av- erage CEO compensation of a Forbes 500 company in 2010 was $9 million.36) Costco’s low employee turnover and liberal benefi ts have created loyalty in an industry that is standard- setting. Southwest Airlines has an elected “Culture Committee” consisting of 96 employees in charge of sustaining the company’s humanistic culture. JetBlue’s found er, David Neeleman, quickly responded to the post- 2007 Valentine’s Day crisis when passengers were kept on board planes that had been grounded due to weather conditions. Neeleman instituted “employee cross- training so that all 900 of the corporate employees in JetBlue’s Forest Hills offi ce could assist at nearby JFK during any future operational crisis.”37 Neeleman also initiated action on a customer’s “Bill of Rights” document. All the FoE companies and their leaders exhibited these types of stakeholder relationship management actions, attributes, and policies.

Ethical Insight 6.2

Global CEO Survey: Leaders CEOs Most Admire

Pricewater houseCoopers’ (PWC) annual survey asked CEOs in 60 countries “to share an example of someone from literature or history who exhibited good leadership, and what the CEOs admired about them.” PWC was interested in the types of leaders CEOs named and reasons for naming them. The top 10 people named by CEOs across seven regions and over 60 countries were:

1. Winston Churchill 2. Steve Jobs 3. Mahatma Gandhi 4. Nelson Mandela 5. Jack Welch 6. Abraham Lincoln 7. Margaret Thatcher 8. Ronald Reagan 9. John F. Kennedy 10. Bill Clinton/Napoleon Bonaparte

There was an unusually high degree of agreement on leaders admired across diff erent geographies and cultures. CEOs identifi ed Winston Churchill in 30 countries across six regions. Steve Jobs was identifi ed by CEOs in 37 countries and six regions. PWC also discovered that CEOs named by emerging- market countries tended to identify role models in regions other than their own, even though they gave tribute to local heroes. North

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American and Western Eu ro pe an CEOs were more alike in their choices and chose most admired leaders nearer home. PWC noted this fi nding in- dicated that these CEOs might “refl ect their markets’ dominant economic standing in recent history—but could also be an obstacle to their ability to adapt to diff erent cultural traits that are gaining (or regaining) prominence as the global economy rebalances.” Fifteen female leaders were identifi ed, and Margaret Thatcher was the only one in the top 10 who received several mentions. Next most identifi ed were Angela Merkel, Ayn Rand, Mother Teresa, and Queen Elizabeth I. The authors found that “Female CEOs were more than four times more likely to select female leaders than male CEOs: 17% of women CEOs chose women leaders, with 78% choosing male lead- ers. 4% of male CEOs, meanwhile, named female leaders and 95% named male leaders.” Leaders who had “a strong vision” were most identifi ed. Other characteristics included “motivational, caring, innovative, per sis tent and ethical qualities.” Respondents seemed to choose leaders who were driven “by the prevailing mood of the time, which could explain why so many CEOs chose leaders who were per sis tent in the face of adversity—as well as transformational leaders and leaders who did the ‘right thing.’ ”

Questions 1. Who are your most admired leaders? 2. What traits do/did they have? 3. How would you describe and characterize their ethics? 4. How alike and/or different are your choices from your (evolving) leadership

style? Explain.

Source: Pricewater houseCoopers. (2013). Global CEO survey: Leaders CEOs most admire. PWC.com. http:// www .pwc .com /gx /en /ceo -survey /2013 /key -fi ndings /admired -leaders -lead ership -attributes .jhtml, accessed January 8, 2014.

Spiritual Values, Practices, and Moral Courage in Leading

John Kotter of Harvard University has said that “What we call courage is a strong emotional commitment— and the keyword is emotional— to some ideas. Those ideas could be called a vision for where we’re trying to drive the enterprise. They could be called values for what we think is important in life. They could be called principles of what is right and wrong. When people don’t just have an intellectual sense that these are logically good, but are deeply committed to them, they’re developing courage. When you run up against barriers that keep you from those ideals, the stronger your commitment, the more likely you are to take action consistent with those ideals. Even if it’s against your short- term best interests. . . . The bigger the context, the greater the barriers, the more the snake pits . . . the more there will be times for cou- rageous acts.”38

Moral courage comes from the heart and soul as well as the head. When leaders face extreme dilemmas, where not only their own but their or ga ni za-

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6 The Corporation and Internal Stakeholders 365

tion’s reputation or existence is at stake based on the course of action that must be taken (or not taken), they come to know the meaning of this type of courage. An emerging body of literature describes leadership from just such a spiritual perspective.39 Spirituality, broadly defi ned, is the search for “ulti- mate meaning and purpose in one’s life.”40 This dimension of leadership is inherently linked to ethics, in that leaders act as stewards and servants who do “the right thing” for their followers, communities, and society.41 Spiritual values and practices are also the sources of moral courage, which is the ability to act with wisdom of the soul against fear, greed, conformity, and pressures that work against the common good. Spiritual values originate from a deeper wisdom of having a sense of purpose and “knowing yourself.” Some religious traditions, including Christianity, link this deeper knowing to a person’s “call- ing” that is discovered and nurtured from their relationship with community and the source of their spiritual guidance. The following characteristics illus- trate leadership from a spiritual perspective:42

• Understand and practice refl ective “being” as well as “doing”; genuine spirituality must be the willingness to enter into the pro cess of dialogue with oneself and with others, and to try to stay with it over a period of time. “Being is the only reality with integrity; obeying one’s conscience brings one into communion with this ‘integrity of Being.’ ”43

• Use discernment, prayer, and patience in strategic decision making. Decisions are analyzed within the context of communities.

• See the leadership role as a calling that reveals its presence by the enjoyment and sense of renewed energy in the practice and results yielded.

• Seek to connect with people and connect people to people with meaning and in meaningful ways.

• Create communities, environments, and safe havens for empowerment, mobilization, development, spiritual growth, and nourishment.

• Lead with refl ection, choice, passion, reason, compassion, humility, vulnerability, and prayer, as well as courage, boldness, and vision.

Spiritually based values and practices of leaders have been shown to posi- tively aff ect their stakeholder relationships as well as per for mance: “The spir- itual values of integrity, honesty, and humility, and the spiritual practices of treating others with respect and fairness, expressing caring and concern, lis- tening responsively, appreciating others, and taking time for personal refl ec- tion have all been linked to quantifi able positive eff ects for organizations and individuals. They cause leaders to be judged as more eff ective by both their peers and their subordinates, and they lead to enhanced per for mance. They have been proven to be associated with increased worker satisfaction and motivation, greater productivity, greater sustainability, and enhanced corpo- ration reputation, which in turn have all been linked to increases in the bot- tom line of profi ts.”44

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366 Business Ethics

Jim Collins’s Level 5 leadership, or servant leadership, focuses on ethical behavior through good stewardship. Leaders that act as stewards both em- power followers in their decision making and help them gain control over their work. Servant leadership is selfl ess and involves working alongside fol- lowers to achieve shared goals and improve collective welfare. The focus is not on the individual, but on the whole. A key component of ethical leader- ship is the treatment of followers with respect, empowering them to grow both personally and professionally. Servant leaders lead with respect and em- powerment.

Leading with stewardship assumes an authority without domination. These leaders sincerely care for their followers’ well- being and achievement of personal and professional goals. This kind of eff ective stewardship results in a team- oriented, cooperative environment. Organizations led by steward- ship are often characterized by decentralized decision- making structures. Authority is not centered in a single individual, group, department, or admin- istrative body, distributing power among all stakeholders. James Goodnight, CEO of SAS Institute; Ed Bastian, president of Delta Airlines; Herb Kelle- her, former CEO and cofound er of Southwest; Aaron Feuerstein, found er of Malden Mills Industries, Inc.; Tom Chappell of Tom’s of Maine; Jeff rey Swartz of the Timberland Company; David Steward of World Wide Tech- nology, Inc.; and Krishan Kalra of BioGenex Laboratories, Inc. are some leaders— past and present— who have relied on their spiritual beliefs in their professional lives to create and promote strategies and policies involving em- ployees, customers, suppliers, vendors, their communities, and other stake- holders. JetBlue’s found er David Neeleman also admitted that his Mormon background and “missionary” responsibilities as a youth infl uenced his con- tinuing values and practices toward his employees and stakeholders.

The servant leadership approach implemented by the leaders listed above, among many others, was formulated by Robert K. Greenleaf. Greenleaf saw a strong correlation between leadership and ser vice, stating that “the essential quality that separates servant- leaders from others is that they live by their con- science—the inward moral sense of what is right and wrong. That one quality is the diff erence between leadership that works and leadership – like servant leadership—that endures.” Stewardship demands that leaders devote them- selves to a greater cause, rather than personal accolades. This approach to leadership is characterized by the following attributes:

1. Placing ser vice before self- interest: Recognition or fi nancial rewards are not the primary concern of servant leaders.

2. Listening to others: Servant leaders do not impose their will on others, but listen to the concerns and ideas of all stakeholders. This strengthens relationships, provides an understanding of group dynamics and needs, and allows for more eff ective allocation of resources.

3. Inspiring followers through trust: Servant leaders value trust and are truthful, due to their strong moral convictions.

4. Working toward feasible goals: Problem solving is most often a team eff ort, and servant leaders work toward solving the most pressing issues.

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6 The Corporation and Internal Stakeholders 367

5. Helping others whenever possible: Servant leaders go out of their way to help those around them; often these above and beyond tasks are not an explicit part of their job description.

Stewardship and servant leadership are targeted at empowering followers to become champions. They often evoke strong loyalty and cooperation in and out of the workplace. The ethical style of these leaders is one of univer- salism, altruism, and pragmatism. They demonstrate Kouzes and Posner’s fi ve dimensions of transformational leadership: ethically modeling the way; inspiring a shared vision; challenging the pro cess; enabling others to act; and encouraging the heart in ways that exceed transactional, transformational, and charismatic leaders.45 DeGraaf, Tilley and Neal discuss servant leader- ship as follows: “The main assumption is that true leadership should call us to serve a higher purpose, something beyond ourselves. One of the most impor- tant aspects of leadership is helping organizations and staff identify their higher purpose. The best test of the Servant- Leadership philosophy is whether or not customers and staff grow as persons! Do customers become healthier, wiser, free, more autonomous, more likely themselves to become ‘servants’? And, what is the eff ect on the least privileged in society? Will they benefi t? Or, at least, not be further deprived? To achieve this higher purpose of public organizations, you, as a leader, must be passionate about your desire to im- prove your community and yourself !” As stakeholders increasingly value social responsibility and broaden its application to business practices, ethical leadership will remain relevant and become an even more signifi cant matter.46A study by Mitroff and Denton interviewed 215 executive offi cers and manag- ers.47 A surprising fi nding was that the leaders desired a way to express their spiritual selves while at work, rather than to “park it at the offi ce door.” Lead- ers and organizations enable the expression of spirituality in diff erent ways: from the religious fi rm, where religious teachings are openly articulated, mod- eled, and included in business practices, to the values- based company (like Ben & Jerry’s), where secular values (awareness, consciousness, dignity, honesty, openness, and trust) are guides in the fi rm. In these types of fi rms, the Golden Rule is the major business principle and “the whole person comes to work” and “causes no embarrassment by expressing ‘deeply felt emotions’ such as love and grieving.”48

Failure of Ethical Leadership

Corporate leaders can and do fail when their decisions lack moral courage. The examples and cases in this text regarding U.S. corporate scandals clearly demonstrate that corruption started at the top. There are also classic sce- narios of leaders who violated their legal and ethical responsibilities to stock- holders and stakeholders. Mickey Monus, former CEO of the Phar- Mor company (a failed discount retail drugstore chain that attempted to take on Wal- Mart), was sentenced to 20 years in prison and fi ned $1 million on December 12, 1995, when he was “convicted on all counts of a 109- count indictment that charged him with conspiracy to commit mail fraud, wire

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368 Business Ethics

fraud, bank fraud, and transportation of funds obtained by theft or fraud.” Monus was hailed as a community hero in Youngstown, Ohio, when he led Phar- Mor to historical growth. But his charismatic, entrepreneurial person- ality and leadership had a dark side— greed, deceit, and theft. His infl uence also led his young fi nance management team into massive theft, fraud, and cover- up.49

There was also “Chainsaw Al” Dunlap, former CEO of Sunbeam, who was fi red following a Securities and Exchange Commission investigation of accounting fraud under his watch. Dunlap was known for his ability to achieve profi ts. To meet Sunbeam’s profi t projections and appease Wall Street analysts, Dunlap devised a method of selling Sunbeam spare parts (used to fi x broken blenders and grills) for $11 million to a company that ware housed the parts. That company valued the parts at $2 million. Dunlap and company pres- sured the ware house fi rm to sign a contract to buy the parts at $11 million, booking $8 million in profi t. (The parts were never sold.) He was instrumental in laying off large numbers of employees and cutting back or gan i za tion al operations to achieve profi tability.50 Dunlap described his other approaches to doing business in his book Mean Business: How I Save Bad Companies and Make Good Companies Great.51

Seven symptoms of the failure of ethical leadership provide a practical lens to examine a leader’s shortsightedness:52

1. Ethical blindness: They do not perceive ethical issues due to inattention or inability.

2. Ethical muteness: They do not have or use ethical language or principles. They “talk the talk” but do not “walk the talk” on values.

3. Ethical incoherence: They are not able to see inconsistencies among values they say they follow; e.g., they say they value responsibility, but reward per for mance based only on numbers.

4. Ethical paralysis: They are unable to act on their values from lack of knowledge or fear of the consequences of their actions.

5. Ethical hypocrisy: They are not committed to their espoused values. They delegate things they are unwilling to or cannot do themselves.

6. Ethical schizo phre nia: They do not have a set of coherent values; they act one way at work and another way at home.

7. Ethical complacency: They believe they can do no wrong because of who they are. They believe they are immune to being unethical.

Ethical Dimensions of Leadership Styles

Every leadership style has an ethical dimension. The following spectrum of styles is illustrated here because it refl ects some of the ethical principles dis- cussed in Chapter 2. An or gan i za tion al leader’s (as well as your own) moral decision- making style can also be evaluated using the continuum shown in Figure 6.5.53

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6 The Corporation and Internal Stakeholders 369

The manipulator leadership style is based on a Machiavellian principle that views leadership amorally. That is, the end result justifi es the means taken to reach it. Power is the driving force behind a manipulator’s motives. This is an egotistically and essentially eco nom ical ly motivated moral leadership style. Leaders who lack trust and interest in relationship building and are oriented toward the short term may also be manipulators. Although the motives un- derlying this style may be amoral, the consequences could prove immoral. Have you ever worked under someone who used this style?

The bureaucratic administrator is a rule- based moral leadership style. Based on the theories of German sociologist Max Weber, the bureaucratic admin- istrator acts on the rational principles embodied in an ideal or gan i za tion al bureaucracy, that is, fi xed rules that explain the purpose and functions of the or ga ni za tion, a hierarchy that shows the chain- of- command, well- defi ned job descriptions, professional managers who communicate and enforce the rules, and technically qualifi ed employees who are promoted by expertise and rewarded by rank and tenure.54 The driving force behind this style is ef- fi ciency (“doing things right,” functioning in the least wasteful manner) more than eff ectiveness (producing the intended result or aim, “doing the right things”). Although this leadership style has an admirable aim of basing deci- sions only on objective, rational criteria, the moral problem with it lies in the “sin of omission.” That is, a leader may follow all the rules exactly but hurt someone unintentionally by not attending to legitimate human needs be- cause the option to do so was not included in the rules.

For example, a military captain may follow remote orders of a general by sending a regiment into a battle zone that he knows will lead to disaster based on available “on the ground” conditions. Nevertheless, rather than risk disobeying orders and the formal consequences, he proceeds. Another cap- tain who has a diff erent moral leadership style may choose to risk disobeying orders to save the troops. Rules for overly bureaucratic leaders can become ends in themselves.

Rules cannot address all problems and needs in what we know are im- perfect and po liti cal organizations. The well- intentioned bureaucratic ad- ministrator may try to act amorally, but his or her eff orts could result in immoral and irresponsible consequences. Do you recognize this moral lead- ership style? Have you ever worked for someone who used it?

The professional manager aims at eff ectiveness and “doing things right.” This style is grounded in Peter Drucker’s view of managers as professionals

LESS ETHICAL

Manipulator (end-justifies- means ethic)

Bureaucratic administrator (rule ethic)

Professional manager (social-contract ethic)

Transforming leader (personal ethic)

MORE ETHICAL

Figure 6.5

Moral Leadership Styles

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370 Business Ethics

who have the expertise and tools for accomplishing work eff ectively through others.55 Based on a social contract, this management style relies— like the previous two styles— on amorality for getting work done. For example, professional career managers use rational objectives and their training to ac- complish the or ga ni za tion’s work. The or ga ni za tion’s corporate culture and the social contract— implicit and explicit agreements— made between man- agers and or gan i za tion al executives set the ground rules that govern the manager’s behavior. However, social contracts are not always ethical.

An ethical problem with this leadership style lies in the real possibility that the collective corporate culture and the dominant governing group may think and act amorally or immorally. Groupthink (consensus- dominated deci- sion making, based on uncritical, biased thinking) may occur.56 The collective may lead itself astray. Professional managers, by training, are still prone to unethical behavior. Do you recognize managers or leaders who act amorally or immorally as “professionals”?

Finally, the transforming leadership style, based on James Burns’s theory,57 is grounded on a personal ethic. The transformational leader bases his or her eff ectiveness on relationships with followers. Also, this style focuses on the charisma, energy, and excitement the leader brings to relationships. The trans- formational leader is involved in the growth and self- actualization of others and views others according to their potential. This type of leader identifi es and elevates the values of others. He or she empowers, coaches, and helps pro- mote other leaders. This leadership style is moral because “it raises the level of human conduct and aspirations of both leaders and led, and thus has a transforming eff ect on both.”58

William Hitt moved the continuum of moral leadership one step beyond the transformational leader to what he termed an “encompassing approach to leadership,” or “the eff ective leader– manager.”59 The encompassing leader learns from the shortcomings of each of the four leadership styles on the con- tinuum and uses all of their strengths. For example, manipulative leadership does value the eff ective use of power. However, this style’s deceptive and dysfunctional use of power should be avoided. The bureaucratic administra- tor values the eff ective use of rules; however, these should not become ends rather than means. The professional manager values results; however, human concerns should be valued more highly than physical and fi scal results. The transformational leader values human empowerment; however, even this characteristic is not the complete job of management.

Socially and morally responsible leaders should observe their obligations to all stakeholders, including their own conscience, and observe in their deal- ings the ethical principles of rights, justice, and duty— in addition to utilitar- ian logic. Richard Branson, found er and chairman of the Virgin Group, is another example of a pop u lar global leader who practices ethical stakeholder management. A partial list of infl uential actions in 2007 include his Virgin Airlines “blowing the whistle on an illegal airline cargo price collusion and Virgin ponying up a $25 million prize for whomever can develop a commer- cially viable design to cut down on green house gasses” (Virgin Earth).60

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Branson noted in a CNN interview, “I would say . . . most important is how good you are with dealing with people, you know, whether you’re a good motivator of people. And I think that, no question, that ethics should play a big part, I think, for a company. If you deal well with people and fairly with people, then people will want to continue to deal with you and come back for more.” He continued on a related topic about business ethics: “If we’d wanted to fl y to a par tic u lar country in this world— and I’m not to talk about America— you know, as a country we desperately wanted to fl y to, we’d wanted to fl y years ago, and we were willing to slip some money under the table, it would have cost next to nothing to get a license to fl y to it. We felt that was wrong. And we just wouldn’t do something like that. And, therefore, it took us 10 years before we legitimately got the license. And so I think it’s very important that you sleep well at night and that you run your company in an ethical way.”61

How Should CEOs as Leaders Be Evaluated and Rewarded?

CEO Pay: Excessive or Earned? Fair and just compensation systems for executives and professionals are nec- essary for creating long- term corporate value, and for encouraging active participation in the legal, ethical, and business eff ectiveness of fi rms. Pay and compensation are not the only ways or gan i za tion al leaders, CEOs in par tic- u lar, are compensated. There are also intrinsic as well as extrinsic rewards that motivate leaders, especially those who follow the servant and steward- ship models. However, many CEOs of large, publicly traded fi rms are selected and evaluated based on their level of pay and compensation. It is important to reiterate that most CEOs, especially in small, medium, and even large fi rms, earn their salaries and benefi ts from the value they create for their companies. And although many have increased the revenue and market value of their fi rms many times over, there are, however, a large number of CEOs whose pay and compensation drastically exceeds their fi rm’s per for mance.

Executive compensation is largely a demonstration of accountability. In- creasing scrutiny and pressure has been placed on the topic of CEO compen- sation following global economic diffi culties and corporate scandals. The Wall Street Journal/HayGroup 2010 CEO Compensation Study noted that pay levels were substantially higher in 2010 than in 2009. “While pay levels showed increases that were in line with company per for mance improvements, the structure of pay saw meaningful changes, as more companies increased their emphasis on performance- oriented long- term incentive programs, and continued to eliminate some of the ‘extras’ like executive perquisites.” Con- sider these facts: CEOs made more money in 2010 than in 2011, as the bull market swelled the value of prior stock- based compensation. Executive pay rose a median 3.6% to $10.1 million in 2012, according to that year’s Wall Street Journal/Hay Group study, which examined CEO pay from the 300 larg- est U.S. public companies by revenue that fi led their defi nitive proxy state- ments between May 1, 2012, and April 30, 2013.62,63

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Several issues are at stake here. First, after the corporate scandals, many investors and the public are more skeptical of CEO pay and per for mance. Second, many CEOs who have been with the same company most of their careers are looking toward retirement and do not need bonuses or perks that they could well aff ord on their own. Third, the salary increases, stock options, and perks are off ered even when the company’s per for mance is suboptimal and layoff s are occurring. Fourth, the CEO’s pay can be 20, 30, or 50 times higher than the salaries of some fi rst- line managers and supervisors. How- ever, a diff erence of more than a factor of seven is considered sizable for an average CEO position. Finally, although CEOs certainly bear greater respon- sibility, risk, and blame for a company’s successes and failures, one question remains: Why are CEO salaries and perks not linked more to per for mance? Activist shareholders are beginning to address this question and issue. For example, in 2007, shareholders howled when they discovered that Robert Nardelli’s contract as chief of the Home Depot enabled him to command a severance package totaling $210 million when he was ousted. The Home Depot board did not make the same mistake when it wrote the contract for Frank Blake, Nardelli’s successor. “Frank Blake’s package is so tied to per for- mance that it is almost the mirror image of Nardelli’s,” said Minow of the Corporate Library. “Home Depot went from the worst pay package imagin- able to one that is close to exemplary.”64

CEO Evaluations The board of directors of a company is technically responsible for disciplin- ing and rewarding the CEO. This is refl ected in the increasing number of board evaluations of the CEO— 86% of public company boards perform an annual CEO evaluation, according to a 2009 National Association of Cor- porate Directors study. “For both nonprofi t and investor- owned organiza- tions, appointing the CEO, establishing his or her per for mance expectations, and assessing the CEO’s per for mance in relation to those expectations are among a governing board’s most fundamental and important duties.”65 Evi- dence shows that “CEO appraisals require a special commitment from the CEO and from the board members” in order for the pro cess to work well and the results to be meaningful. “A CFO magazine survey of 2,000 employees in several large public companies found that only 39% believe their per for mance reviews are eff ective.”66 However, in many instances, it is the CEO who is also president of the company and chairperson of the board.

Two forces infl uence the popularity of boards of directors evaluating CEOs. The fi rst is the increased recognition of the critical roles CEOs play and the increased compensation levels received for those roles. The second infl uential force is pressure from the investment community, which dates back to the beginning of shareholder awareness in the 1980s, when corporate acqui- sitions and restructuring activities were questioned with regard to the eff ec- tiveness of CEOs and their boards, due diligence, and management practices. Still, not all CEOs are formally evaluated with their top- level team members and other employees. For publicly traded companies, such as those listed on the New York Stock Exchange, NASDAQ, and other trading companies, industry

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6 The Corporation and Internal Stakeholders 373

analysts constantly score and keep pressure on the per for mance of CEOs and chief fi nancial offi cers (CFOs)— by the numbers. Market per for mance is a ma- jor evaluator of these offi cers’ eff ectiveness. Annual reports and fi nancial audits available to stockholders are another form of assessing leaders.

CEOs are also evaluated by assessing gaps between their stated and en- acted strategies and by using customer and employee surveys. Assessments of the or ga ni za tion’s systems are also refl ections of the leader’s overall eff ec- tiveness in directing, aligning, and implementing strategy. Finally, leaders must balance and align stakeholder interests with the dominant mission and values of the company. Certainly not all CEOs are overpaid. Still, many critics argue that CEO pay and compensation in the larger, publicly traded companies are not in line with the per for mance of their fi rms, especially over the last de cade.

6.2 Or gan i za tion al Culture, Compliance, and Stakeholder Management

The most recent survey by the Ethics Resource Center (ERC) reported a reduction in the percentage of employees who witnessed misconduct to only 45%. Of those employees, 65% reported the wrongdoing. The survey notes a new and disturbing trend accompanying the low levels of misconduct and high levels of reporting— increasing whistle-blower retaliation, pressure to compromise ethical standards, and number of companies with weak ethical cultures. Forty- two percent of employees indicated that their company has a weak ethical culture, including the mea sures of ethical leadership, super- visor reinforcement of ethical behavior, and peer commitment. The survey notes that employees have now become less confi dent in their ability to handle situations dealing with ethics. New types of ethical violations are becoming prevalent— for example, environmental violations— but the larg- est increases in risk of misconduct occurred in the categories of sexual ha- rassment and substance abuse. Misuse of company time, abusive behavior, abuse of company resources, lying to employees, and violating company In- ternet use policies were the fi ve most frequently observed types of misconduct in 2011.

A major factor in these new trends is the infl uence and use of social media at the workplace. Several drivers are critical in reducing ethics risk: a well- implemented ethics program and a strong ethical culture. If U.S. businesses viewed ethics as building reputational capital— protecting corporate brand and preventing misconduct— ethics risk in the U.S. would be substantially reduced.67 The survey reported that ethics risk is reduced when there are lower levels of misconduct, greater awareness of wrongdoing, and a reduc- tion in retaliation of reporting.68 Interestingly, the same survey found that only 29% of U.S. companies actually have strong ethical cultures. On a less than positive note, the survey concluded that these results were “borne out by a wave of major corporate scandals that wiped out whole companies and cost thousands of employees their jobs. Given this history, there is reason to

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be concerned that the current weakness of ethics cultures could foreshadow a new surge in misconduct.”69

What is or gan i za tion al culture and why is it so important to supporting ethical activities and curtailing unethical actions? According to the ERC, four elements that shape ethical culture are: (1) ethical leadership, (2) supervisor re- inforcement, (3) peer commitment to ethics, and (4) embedded ethical values. Studies on culture generally show that coupled with leadership, or gan i za tion al culture is central to a fi rm’s overall eff ectiveness and operating effi ciency. As Figure 6.6 illustrates, culture is also the “glue” that holds the other or gan i za- tion al dimensions (strategy, structure, people, systems) together. Strong or- gan i za tion al cultures are possible only with strong leaders who model, build, and help sustain legal and ethical cultures through well- defi ned and compre- hensively implemented ethics and compliance programs.

Or gan i za tion al Culture Defi ned

A corporation’s culture is the shared values and meanings its members hold in common, which are articulated and practiced by an or ga ni za tion’s leaders. Purpose, embodied in corporate culture, defi nes organizations.

Corporate culture is transmitted through: (1) the values and leadership styles that the leaders espouse and practice, (2) the heroes and heroines that the company rewards and holds up as models, (3) the rites and symbols that organizations value, and (4) the way that or gan i za tion al executives and mem- bers communicate among themselves and with their stakeholders.

Heroes and heroines in corporations set the moral tone and direction by their present and past examples. They are the role models; they defi ne what is successful and attainable; they symbolize the company to outsiders and

Figure 6.6

Contingency Alignment Model

Inputs Transformation Outputs

Customer PartnershipCustomer Requirements Customer Satisfaction

Leadership Environment History Resources

Organizational Level Competition Market share Product and service quality Responsibility (environment and community)

Groups Level Synergy Performance

Performance

Effectiveness Satisfaction

Satisfaction

Individual Level

Development and growth

Vision and Strategy

People Structure

Culture

Technology

Nature of Work

Measurement Systems

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6 The Corporation and Internal Stakeholders 375

insiders; and they preserve the valued qualities of the fi rm, set standards of excellence, and motivate people. Enduring corporate and or gan i za tion al cul- tural heroes include Warren Buff et at Berkshire Hathaway, Herb Kelleher at Southwest Airlines, Sam Walton at Wal- Mart, Ben Cohen and Jerry Green- fi eld at Ben & Jerry’s, Mary Kay at Mary Kay, David Packard at Hewlett- Packard, and Bill Gates at Microsoft. Who are the heroes and heroines in your or ga ni za tion? By what qualities and characteristics are they remembered? Are they moral, immoral, or amoral leaders?

Rituals in companies help defi ne corporate culture and its moral nature. Zappos, a retail shoe and clothing company, has an interesting, quirky and creative culture that stresses and balances family with innovation values. Their employees are close- knit and emphasize caring as well as productivity; they are also involved in community ser vice. The company’s values include: “Deliver WOW Through Ser vice, Embrace and Drive Change, Create Fun and A Little Weirdness, Be Adventurous, Creative, and Open- Minded, Pur- sue Growth and Learning, Build Open and Honest Relationships With Com- munication, Build a Positive Team and Family Spirit, Do More With Less, Be Passionate and Determined, Be Humble.”70

Corporately sanctioned rituals that bring people together, foster open- ness, and promote communication can lower stress and encourage moral be- havior. Social gatherings, picnics, recognition ceremonies, and other company outings where corporate leaders are present and values, stories, problems, accomplishments, and aspirations are shared, can lead to cultures that value people and the company’s aims. Does ethics matter for an or ga ni za tion’s sur- vival and market eff ectiveness? The “good management hypothesis” suggests that there is a positive relationship between a corporation’s per for mance and how it treats its stakeholders. Studies confi rm this hypothesis.71

Observing Or gan i za tion al Culture Or gan i za tion al cultures are both visible and invisible, formal and informal. They can be studied by observation, by listening to and interacting with peo- ple in the culture, and in the following ways:

• Studying the physical setting. • Reading what the company says about its own culture. • Observing and testing how the company greets strangers. • Watching how people spend time. • Understanding career path progressions. • Noting the length of tenure in jobs, especially for middle managers. • Observing anecdotes and stories.

How ethically is your or gan i za tion al or company culture using these methods?

Traits and Values of Strong Corporate Cultures Strong corporate cultures (1) have a widely shared philosophy, (2) value the importance of people, (3) have heroes (presidents and products) that sym- bolize the success of the company, and (4) celebrate rituals, which provide

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376 Business Ethics

opportunities for caring and sharing, for developing a spirit of “oneness” and “we- ness.”72 From a stakeholder management view, or gan i za tion al systems are aligned along the purpose, ethical values, and mission of the company. Also, individuals and teams in ethical cultures demonstrate a tolerance and respect for individual diff erences, compassion, ability to forgive and accept, and freedom and courage to do the right thing in questionable situations. The authors of the ERC survey referred to above state that “by every mea- sure, strong ethics programs and strong ethics cultures produce substantially better outcomes— less pressure, less misconduct, higher reporting, and less retaliation— than in weaker ethical environments.”73 Moreover, the same sur- vey concluded that 30% of employees observe misconduct in strong cultural environments as opposed to 89% in weaker cultures. Twenty- nine percent of employees working in companies with strong ethical cultures who reported misconduct experienced retaliation as a result, compared to the 46% who experienced retaliation in weak cultural environments.74 As discussed be- low, fear and retaliation prevent reporting of illegal and unethical acts by employees.

Corporate values statements serve as the economic, po liti cal, social, and ethical compasses for employees, stakeholders, and systems. Two classic bench- mark values statements are those of Johnson & Johnson (Figure 6.3) and Borg- Warner (Figure 6.4). Seattle- based Boeing Corporation’s values were fi rst articulated by its former CEO William Allen. These values still serve as an outstanding example at the individual level. They are:75

• Be considerate of my associates’ views. • Don’t talk too much . . . let others talk. • Don’t be afraid to admit that you don’t know. • Don’t get immersed in detail. • Make contacts with other people in industry. • Try to improve feeling around Seattle toward the company. • Make a sincere eff ort to understand labor’s viewpoint. • Be defi nite, don’t vacillate. • Act—get things done— move forward.

High- Ethics Companies

What would a highly eff ective values- based or gan i za tion al culture look like? Mark Pastin studied 25 “high- ethics, high- profi t” fi rms, which at the time included Motorola, 3M, Cadbury Schweppes, Arco, Hilby Wilson, Northern Chemical, and Apple. Although the list of high- ethics fi rms— like “built- to- last” fi rms— may change, the four principles that Pastin used to describe such fi rms serve as a benchmark for understanding ethically eff ective organizations:

1. High- ethics fi rms are at ease interacting with diverse internal and external stakeholder groups. The ground rules of these fi rms make the good of these stakeholder groups part of the fi rm’s own good.

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6 The Corporation and Internal Stakeholders 377

2. High- ethics fi rms are obsessed with fairness. Their ground rules emphasize that the other person’s interests count as much as their own.

3. In high- ethics fi rms, responsibility is individual rather than collective; individuals assume responsibility for the fi rm’s actions. The ground rules mandate that individuals are responsible for themselves.

4. The high- ethics fi rm sees its activities as having a purpose, a way of operating that members of the fi rm value. And purpose ties the fi rm to its environment.76

Many of the FoEs (fi rms of endearment) discussed at the beginning of this chapter demonstrate these principles, for example Amazon, Costco, New Bal- ance, IKEA, eBay, LL Bean, Wegmans, Google, Patagonia, Harley- Davidson, and REI, to name a few.

Weak Cultures

What about companies that are not ethical? Companies that reinforce secrecy, hidden agendas, and physical settings that isolate executives from managers and employees, and emphasize status over human concern, often are cultures in trouble. Troubled corporate and or gan i za tion al cultures can breed and encourage unethical activities, as illustrated by Enron, WorldCom, Adelphia, Arthur Andersen, and so many other fi rms that have been involved in corporate scandals. Figure 6.7 shows results of the ERC’s 2012 survey with regard to the observing and reporting of misconduct in strong and weak cultures.

Organizations that also overstress hypercompetition, profi t at any cost, and singular economic or introverted self- interest over stakeholder obliga- tions, and that have no moral direction, often have cultures in trouble. Signs of cultures in trouble, or weak cultures, include the following:77

Figure 6.7

Ethical Conduct in Strong and Weak Cultures

The Ethics Resource Center states that ethics is a component of culture. The group mea- sured culture through three dimensions:

1. Ethical leadership / tone at the top. 2. Supervisor reinforcement of ethical behavior. 3. Peer commitment / supporting one another in doing right.

In weaker cultures misconduct is more prevalent:

• Strong cultures: 29% of employees observed misconduct the previous 12 months. • Weak cultures: 90% of employees observed misconduct the previous 12 months. • Strong- leaning cultures: Reported misconduct was 46%. • Weak- leaning cultures: Reported misconduct was 67%.

Source: Ethical Resource Center (ERC). (2012). 2011 National business ethics survey, 20. Ethics.org. http:// www .ethics .org /nbes /fi les /FinalNBES -web .pdf, accessed January 10, 2010.

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378 Business Ethics

• An inward focus. • A short- term focus. • Morale and motivational problems. • Emotional outbursts. • Fragmentation and inconsistency (in dress, speech, physical settings, or

work habits). • Clashes among subcultures. • Ingrown subcultures. • Dominance of subculture values over shared company values. • No clear values or beliefs about how to succeed in business. • Many beliefs, with no priorities about which are important. • Diff erent beliefs throughout the company. • Destructive or disruptive cultural heroes, rather than builders of common

understanding about what is important. • Disor ga nized or disruptive daily rituals.

In an earlier survey the ERC found that “severe” ethical risks for businesses with weak cultures included “1. Lying to employees, 2. Abusive behavior, 3. Discrimination, 4. Lying to stakeholders, 5. Misreporting hours worked, 6. Safety violations, 7. Putting own interests ahead of the or ga ni za tion, 8. Improper hiring practices, 9. Sexual harassment, 10. Stealing/Provision of low quality goods and ser vices, 11. Environmental violations, 12. Internet abuse, 13. Misuse of confi dential or ga ni za tion information, and 14. Altera- tion of fi nancial rec ords.”78

One of the worst corporate cultures in recent history was Enron’s. Malcolm S. Salter, Harvard Business School professor, described Enron’s culture the following way:

Enron is a case about how a team of executives, led by Ken Lay, created an ex- treme performance- oriented culture that both institutionalized and tolerated deviant behavior. It’s a story about a group of executives who created a world that they could not understand and therefore could not control. It’s a story about the delinquent society— and I use that phrase intentionally— that grew up around the company, and here I’m referring to the collusion of Enron’s various advisors and fi nancial intermediaries. And most importantly, Enron is a story about how fraud is often preceded by gross incompetence: where the primary source of that incompetence is inexperience, naiveté, an ends- justify- the- means attitude toward life, and so on. And most importantly, an inability to face reality when painful problems arise.79

A values- based stakeholder management approach would assess an or ga- ni za tion’s values with these questions: Do the leaders and culture embody “high- ethic” or “in trouble” characteristics in their values, actions, and poli- cies? Are the values written down? Do others know the values? Do the values refl ect a concern for and obligation toward the or ga ni za tion’s stakeholders? Do the values refl ect a utilitarian, just, dutiful, or egotistical ethic? Are the

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values taken at “face value” only, or are they practiced and implemented by employees? Do the values and communication patterns promote moral, im- moral, or amoral behavior?

6.3 Leading and Managing Strategy and Structure

If culture is the glue that holds organizations together, strategy maps the di- rection. The moral dimensions of strategy are also based on ethics. People are motivated to implement strategies that they believe in, are able to enact, and that produce results. Strategy and the strategy development pro cess are the domain of or gan i za tion al leaders. Gary Hamel, a contemporary strategy guru, calls for a “revolution” in leading the strategy innovation pro cess. He states that “you need a set of values that will set you apart from the courtiers and wan- nabes.” Those values include “honesty, compassion, humility, pragmatism, and fearlessness.”80 The strategy- making pro cess also involves stakeholder man- agement. A corporation’s strategy is propelled and supported by its people, stakeholders, culture, and moral contributions to its communities, custom- ers, and society. Strategic thinking has evolved from a mechanistic pro cess to a more holistic pro cess, which emphasizes innovation, generation of value for stakeholders and stockholders, involvement and learning with stakehold- ers, and building customer partnerships and relationships.81 This section and the next discuss the relationships between corporate strategy, structure, cul- ture, systems, and moral responsibility. How do strategy and structure infl u- ence the moral behavior of employees?

Corporate leaders are responsible for orchestrating the development and execution of strategy. An or ga ni za tion’s strategy infl uences legality, morality, innovation, and competitiveness in the following ways:

1. Strategy sets the overall direction of business activities. Enterprise strategy, for example, can emphasize revenue and growth over customer satisfaction or product quality. It can drive technical concern over profes- sional development. Corporate strategy can also direct a fi rm’s activities to- ward social issues, employee rights, and other stakeholder obligations. It can include or exclude stakeholders and employees. It can innovate recklessly for the short term or in long- term ways that benefi t society as well as a few market niches.

2. Strategy refl ects what management values and prioritizes. It mirrors management’s ethics and morality. It is the message to the messengers. Strategy says: “We care and value your feedback, safety, and concerns,” or “We only want your money and participation in our profi ts.”

3. Strategy sets the tone of business transactions inside the or ga ni za tion. Reward and control systems refl ect the values of the larger strategic direction. An emphasis on profi t at the expense of employee development is usually re- fl ected as rigid and unrealistic incentive and revenue quota systems. Growth and expansion can be made a priority at the expense of talent development and contribution.

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Marianne Broadbent, a leading scholar in information technology, off ers the following insights about strategy:

When creating a strategy, I see a number of steps: the aspiration, the big busi- ness principles or maxims, then having a number of scenarios or options which are based on a set of strategic assumptions that you constantly, constantly pick to see if they are in sync. And then you use that information to shift and change. At a tactical level, that means rolling out products and ser vices in a very care- ful, risk- managed way so that you can sense and respond to the marketplace.

Strategy is very much about synchronizing the enterprise with its external environment as much as possible. Think about how increasingly intercon- nected economies, markets, technology and po liti cal situations are. September 11 is a great example of how quickly things can change and how interdepen- dent logistics, for example, is with strategy, with customer ser vice, with the politics of what’s going on at the moment. I look at strategy more as synchro- nization, and that which focuses much more on what we call the market inputs rather than the outputs.82

From a values- based stakeholder management approach, the strategy de- velopment and implementation pro cess should refl ect the vision and mission of the or ga ni za tion. As with the Levi Strauss’s values and vision statement in Figure 6.2, the strategy would be reviewed from these statements: “Integrity— Doing the Right Thing. Ethical conduct and social responsibility characterize our way of doing business. We are honest and trustworthy. We do what we say we are going to do. Integrity includes a willingness to do the right thing for our employees, brands, the company and society as a whole, even when personal, professional and social risks or economic pressures confront us. This principle of responsible commercial success is embedded in the company’s experience. It continues to anchor our beliefs and behaviors today and is one of the reasons consumers trust our brands. Our shareholders expect us to manage the com- pany this way. It strengthens brand equity and drives sustained, profi table growth and superior return on investment. In fact, our experience has shown that our ‘profi ts through principles’ approach to business is a point of com- petitive advantage.”

A fi rm should identify issues that aff ect its stakeholder obligations and relationships while developing strategies. From a social and moral perspective, managers should be concerned about fulfi lling their internal stakeholder ob- ligations through these strategies. Responsible corporations must be prepared to equitably and justly enable the workforce with new technical skills and integrate aging employees, dual- career families, and new immigrants. Flex- ible work times, health care programs, and fl exible management styles must be implemented to manage this changing workforce responsibly.

Or gan i za tion al Structure and Ethics

Structure is another or gan i za tion al dimension, shown in Figure 6.6, along with strategy and culture, that is part of an or ga ni za tion’s infrastructural makeup. Ask to see almost any or ga ni za tion’s structure and you will be

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6 The Corporation and Internal Stakeholders 381

handed a hierarchical set of boxes connected by lines. This so- called pyra- mid, or functional structure, is one of the oldest forms of depicting arrange- ments in companies.

Regardless of the specifi c type of structure, from an ethical, values- based stakeholder management perspective, key concerns and questions regarding any structure are:

• How centralized or decentralized are the authority, responsibility, communication, and information fl ow?

• How organic (less structured) or mechanistic (more structured) are the systems?

• How tall (more layers of bureaucracy) or fl at are the reporting systems? • How formal or informal are procedures, rules, and regulations? • How much autonomy, freedom, and discretion do internal stakeholders

and decision makers have? • How fl exible, adaptable, and responsive are systems and professionals to

responding to internal and external threats, opportunities, and potential crises?

Although there are no absolute guidelines regarding which structure is more immune to or leads to ethical problems, the following overview pro- vides some evidence about how structure relates to ethical behavior. Func- tionally centralized structures can encourage lack of communication, coordination, and increased confl ict because each area is typically separated by its own boundaries, managers, and systems. Infi ghting over bud gets, “turf,” and power increase the likelihood of unethical, and even illegal, activities. For example, post- September 11, 2001, reports show the overly centralized CIA and FBI communicated poorly with each other, with the White House, and with other systems of government.

On the other hand, highly supervised employees in bureaucratic fi rms may also act more ethically than employees in entrepreneurial, laissez- faire fi rms because employees tend to think through the risk of getting caught in fi rms with more supervised structures. A study conducted by Cullen, Victor, and Stephens reported that a subunit’s location in the or gan i za tion al struc- ture aff ects its ethical climate.83 At a savings and loan association and also at a manufacturing plant, the employees at the home offi ces reported less em- phasis on laws, codes, and rules than did the employees at the branch offi ces. Perhaps control by formal mechanisms becomes more necessary when direct supervision by top management is not feasible.

There is evidence that decentralized structures can encourage more unethi- cal behavior among employees than more supervised, controlled structures. Citicorp’s credit card pro cessing division illustrated the relationships among or gan i za tion al structure, competitive pressures, and immoral and illegal be- havior. The bank fi red the president and 11 se nior executives of that division because they fraudulently overstated revenue by $23 million for two years. The infl ating of revenue by division employees may have been related to the fact that employee bonuses were tied to unrealistic revenue targets. Citicorp

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382 Business Ethics

centralized its or gan i za tion al functions. In this case, the decentralized struc- ture left the bank susceptible to potential abuse by employees. On the other hand, some decentralized structures may enable individually responsible and ethical professionals to communicate their beliefs and report errors faster, up and down a more fl uid chain of command.

Pressures from upper- level managers who overemphasize unrealistic quar- terly revenue objectives and who give unclear policies and procedures to guide ethical decision making may also contribute to immoral behavior in more de- centralized structures. There is evidence to support the argument that middle- and lower- level managers, in par tic u lar, feel pressured to compromise their personal moral standards to meet corporate expectations.84 Managers in large fi rms may compromise their personal ethics to meet corporate expectations for several reasons, which include:

1. Decentralized structures with little or no coordination and central policy and procedures encourage a climate for immoral activities when pressures for profi t making increase.

2. Unrealistic short- term and bottom- line profi t quotas add pressure on employees to commit unethical actions.

3. Overemphasis on numbers- driven fi nancial incentives encourages shortcuts.

4. Amoral or gan i za tion al and work- unit cultures can create an environment that condones illegal and immoral actions.

Boundaryless and Networked Organizations

The decentralization of organizations has been accelerated by information technology and the reengineering of business pro cesses. Software applications and Web- enabled intranets and extranets allow the boundaries within organi- zations and between customers and companies to become more transparent and fl uid.85 Dell Computer has eliminated middle layers of its company, supply chain, and industry by enabling individual customers to design, order, and purchase— and even receive, in the case of software— their own custom- ized computer products online. These changes are not easy, nor are they iso- lated from the larger context of the or ga ni za tion. An or gan i za tion al expert noted that the main reason implementation of major technology changes fails is that “the technology was seen as the solution, without taking into account the complex dynamic of the or ga ni za tion and people. It doesn’t matter in which area, whether it’s knowledge management or B2B. You can’t forget that organizations are made of people and technology, and both people and technology will defi ne the success of an or ga ni za tion.”86

From both an ethics and effi ciency perspective, care should be taken by companies implementing digital networks, because one study has reported that digital networks generate both opportunities for and threats to worker autonomy.87 Major opportunities include increased communication capa- bilities, “informedness,” and “teleworking.” Threats to worker autonomy are electronic monitoring, dependence on third- party operators and managers,

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and task prestructuring, which can reduce individual responsibility and con- trol. These opportunities and problems depend, in part, on the type of or- gan i za tion al structure in place: how open and responsive it is or how closed and vulnerable it may be to unethical activities.

6.4 Leading Internal Stakeholder Values in the Or ga ni za tion

The other internal dimensions of organizations, illustrated in Figure 6.6, should also be aligned in order for the or ga ni za tion to succeed in meeting its goals and social responsibility obligations. In practice, aligning an or ga ni za- tion’s values and mission with its internal stakeholders, while treating external groups and organizations ethically, is diffi cult because of competing values of internal stakeholders. The following quote from Anderson illustrates the di- versity among stakeholder values:

An or ga ni za tion in almost all its phases is a refl ection of competing value choices. Own ers want a return on their investment. Employees want secure jobs and career development. Managers want growth and industry leadership. Government regulators want minimal pollution, safety, work opportunities for a wide variety of groups, and tax revenues. For top managers, this compe- tition comes to a head because they must unravel complex problems whose solutions benefi t some groups but have negative consequences for others. Fram- ing these decisions inevitably leads to some crucial dilemmas for managers, who must answer the broad question, “What is a convincing balance among competing value choices?”88

R. Edward Freeman and Daniel Gilbert Jr. argued that we must understand the multiple and competing values underlying stakeholders’ actions in order to understand the choices corporations make.89 Balancing internal stakeholder interests can be diffi cult because of the diversity of professional and functional backgrounds, training, goals, time horizons, and reward systems. These dif- ferences are further infl uenced by or gan i za tion al politics, the constraints and pressures of other internal systems, and changing roles and assignments. Fig- ure 6.8 is an example of an or ga ni za tion’s internal stakeholders and compet- ing professional value orientations.

Function orientations, such as marketing, research and development (R&D), production, information systems, and fi nance, have built- in competing values, especially when employees who are under pressure must design, de- liver, and ser vice complex products and ser vices for demanding customers. Marketing and sales professionals work with short- to medium- term time horizons and are rewarded on the basis of their results. Sales professionals, in par tic u lar, have a very short time horizon and depend on the success of indi- vidual and team selling abilities to satisfy, retain, and attract customers. R&D professionals generally have a longer time horizon and are rewarded for their innovations.

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384 Business Ethics

The contrast between marketing and sales professionals and R&D profes- sionals is shown in Figure 6.8, and you can see how value diff erences and role confl icts can occur within cross- functional teams. Competition and confl ict can lead to higher productivity and also to unethical decisions and practices, such as producing unsafe products or lying to customers to make a sale.

From a stakeholder management perspective, it is the role of an or ga ni za- tion’s leaders, with the support of each professional, to ensure that the inter- nal integrity and market eff ectiveness of a company is based on the types of relationships and values that embody trust, collaboration, and a “win– win” goal for stakeholders and stockholders. Amorally and unethically led and man- aged organizations with confl icting internal values can, and sometimes do, lead to illegal situations. Interpersonal communication skills, confl ict resolu- tion, and collaborative negotiation methods (as exemplifi ed in Chapter 3) are also needed to help integrate these functional area diff erences.

Value and innovation are created when the collaborative eff orts of an or- ga ni za tion’s systems create synergy. The or ga ni za tion’s vision, values, and mission, which are reinforced by the culture and example of the leaders, are the cornerstone for integrating structures and systems. Following this logic,

Figure 6.8

A Functional Profi le of Internal Or gan i za tion al Stakeholders: Professional Orientations

Professional Stakeholders

Orientations Marketing and

Sales

Research and Development

(R&D) Production Finance and Accounting

Information Systems

Background Liberal arts; social sciences; entrepreneurial; technical

Electrical engineering; technical

Mechanical engineering; operations

Finance; accounting; auditing; tax

Software “engineers”; data management; programming

Goals and “Stakes”

High product mix; revenue and market competitiveness; customer satisfaction

Market dominance; innovation; competitiveness

Product yield; Quality control

Low- cost capital; effi cient borrowing; accountability

Problem solving; or- gan i za tion al integration; systems functioning

Focus and Rewards

Product or service leadership; creative autonomy; bonuses; equity; career mobility

Next “killer” application; resources to innovate; prestige

Product Lifecycle stability; peace with R&D job security; bonuses

Low costs; high yields; data access; accuracy; cooperation; career advancement

Satisfi ed users; state- of- the- art technology; career advancement; new skill development

Time Horizon

Short to medium time frame

Medium to long time frame

Short to continuous time frame

Continuous time frame

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6 The Corporation and Internal Stakeholders 385

Kim and Mauborgne posed the following research question: “What type of or ga ni za tion best unlocks the ideas and creativity of its employees to achieve this end?”90 They discovered that “when putting value innovation strategies into action, structural conditions create only the potential for individuals to share their best ideas and knowledge. To actualize this potential, a company must cultivate a corporate culture conducive to willing collaboration.”91

These authors see “the positively reinforcing cycle of fair pro cess” as one which creates innovative outcomes for companies. They describe this pro cess as follows: For each success a group has in implementing a “general value in- novation strategy” based on fair pro cess, the result strengthens the group’s cohesiveness and their belief in the pro cess. This, in turn, sustains the col- laboration and creativity inherent to value innovation. The four components of that pro cess include:92

1. Engagement, explanation, expectation, clarity. 2. Idea sharing and voluntary cooperation. 3. Value innovation plans and rapid execution. 4. Or gan i za tion al confi dence in and respect for colleagues’ intellectual and

emotional worth.

6.5 Corporate Self- Regulation and Ethics Programs: Challenges and Issues

According to the ethicist Lynn Paine in a Harvard Business Review article, a values- based approach in ethics programs should be more eff ective than a strict, rules- based compliance approach, since a values approach is grounded and motivated in personal self- governance.93 Employees are more likely to be motivated to “do the right thing” than threatened if they violate laws and rules. A values- based stakeholder management approach assumes that corpo- rations (own ers and management) ought to intrinsically value the interests of all stakeholders.94 In practice, this is not always the case.95 Later studies suggest that both values- based and compliance ethics programs seem to work eff ec- tively together. Without values- based compliance, however, compliance and fear- based programs are less likely to succeed.96 Responsible self- regulation in companies can enhance entrepreneurship and reduce unnecessary costs of too much bureaucratic control (e.g., it is estimated that the 2002 Sarbanes- Oxley Act costs large public companies $16 million to implement). One study by the Open Compliance Ethics Group (OCEG) found that fi rms that had had an ethics program for 10 or more years did not have “reputational damage” dur- ing the last fi ve years. Ethics programs appear to have some intended eff ect.97 Complete your company’s “Ethical Weather Report” to identify your point of view regarding how ethical your company is.

Chapter 4 discussed in more detail ethics programs that include codes of ethical and legal conduct that are designed to help companies fi nancially and legally. As noted there, the Federal Sentencing Guidelines for Organizations (FSGO) were established in 1984 by Congress— which passed a crime bill

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386 Business Ethics

that instituted the U.S. Sentencing Commission. This commission, made up of federal judges, was empowered with sentencing those found in violation of the guidelines. In 1987, uniform guidelines were created for sentencing individuals in the federal courts. Some federal judges quit the bench in pro- test of the strictness of the guidelines and the sentences they were required to hand down. In 1991, the commission shifted the emphasis from individual wrongdoers to organizations that might be found guilty for the illegal ac- tions of their employees. The 1991 revised guidelines threaten fi nes of up to $290 million to companies found guilty of violating the federal guidelines. However, those fi nes can be substantially reduced if an or ga ni za tion imple- ments an “eff ective program to prevent and detect violations of law.” Com- panies that followed the requirements of the FSGO could fi nd relief from lawsuits that resulted from one or more criminally motivated professionals. However, without active, ethical leadership, there is less likely to be a strong culture, open communication, and support from other or gan i za tion al sys- tems to support ethics programs.

Ethical Insight 6.3

Ethical Climate of Your Or ga ni za tion

Step 1: Complete the following questionnaire using the or ga ni za tion em- ploying you now or in the recent past. Record the number beside each item from the scale that realistically refl ects your experience with and understand- ing of the or ga ni za tion.

0 = Completely False, 1 = Mostly False, 2 = Somewhat False, 3 = Somewhat True, 4 = Mostly True, 5 = Completely True

1. In this or ga ni za tion, people can, and often do, follow their own principles and belief systems.

2. Employees and professionals are expected to do what it takes to achieve the or ga ni za tion’s goals and interests.

3. Individuals and groups generally protect and advance each other’s interests.

4. Dutifully following the or ga ni za tion’s rules and decisions are strongly expected.

5. Everyone protects themselves over others’ interests in this or ga ni za tion.

6. The law, rules, and regulations are fi rst and foremost with authority here.

7. People are strictly expected to stay within the or ga ni za tion’s authoritative rules.

8. Effi ciency is oftentimes more important than eff ectiveness in this or ga ni za tion.

9. People are considerate to and for others in this or ga ni za tion.

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6 The Corporation and Internal Stakeholders 387

10. Professional ethical codes and principles are very important in this or ga ni za tion.

11. People in this or ga ni za tion are rewarded for promoting the interests of customers and stakeholders.

Step 2: Add your responses to 1, 3, 6, 9, 10, and 11. Write the sum after “Subtotal 1” below. Now reverse the scores on questions 2, 4, 5, 7, and 8 (5 = 0, 4 = 1, 3 = 2, 2 = 3, 1 = 4, 0 = 5). Add these reverse scores (i.e., number value) and write the sum after “Subtotal 2” below. Now add Subtotal 1 with Sub- total 2 for your overall score. The total score ranges between 0 and 55. The higher the score, the more the or ga ni za tion supports ethical behavior.

Subtotal 1 ______ + Subtotal 2 ______ = Overall Score ______

Step 3: Write a statement describing your or ga ni za tion’s ethics. Explain why the or ga ni za tion is as you describe it. How does/did the ethical climate aff ect you, your attitudes, energy, motivation, and ethical orientation?

Step 4: What would you say to the leaders and staff of this or ga ni za tion, if you could, regarding the culture, policies, procedures, and ethical environment? What recommendations would you off er to change the climate and culture of the or ga ni za tion?

Source: Reprinted from Cullen, J. B., Victor, B., and Stephens, C. (Autumn 1989). An ethical weather report: Assessing the or ga ni za tion’s ethical climate. Or gan i za tion al Dynamics, 18, 50– 62, with permission from Elsevier.

Organizations and Leaders as Moral Agents

Since corporations are charted as citizens of states and nations, they also share the same rights and obligations as citizens. Corporations are not, however, individuals; they are moral agents that must follow laws, rules, and regulations of their local and national settings. When corporations violate such laws, they are also subject to penalties and fi nes, and can even have their right to exist taken away, depending on judicial fi ndings in criminal acts (as was the case with Arthur Andersen). The role of leaders as moral agents has not been em- phasized enough as one of the key ingredients in building and sustaining eth- ics programs. Or gan i za tion al leaders who lack strong moral character and convictions, even if they are brilliant strategists and execute excellently, leave their fi rms vulnerable to illegal and unethical acts, as Enron clearly showed.

Ethics Codes

Ethics codes are value statements that defi ne an or ga ni za tion. Leaders’ values again play a signifi cant role in shaping the values of the organizations in which they serve. Six core values that researchers have found desirable in such codes include (1) trustworthiness, (2) respect, (3) responsibility, (4) fairness, (5) caring and (6) citizenship.98 Johnson & Johnson’s Credo (Figure 6.3) is

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388 Business Ethics

an outstanding example. Raytheon, Fidelity, Honda, and other fi rms in the FoE list in this chapter have ethics and codes of conduct that are noteworthy. Major purposes of ethics codes include:99

• To state corporate leaders’ dominant values and beliefs, which are the foundation of the corporate culture.

• To defi ne the moral identity of the company inside and outside the fi rm. • To set the moral tone of the work environment. • To provide a more stable, permanent set of guidelines for right and wrong

actions. • To control erratic and autocratic power or whims of employees. • To serve business interests (because unethical practices invite outside

government, law enforcement, and media intervention). • To provide an instructional and motivational basis for training employees

regarding ethical guidelines and for integrating ethics into operational policies, procedures, and problems.

• To constitute a legitimate source of support for professionals who face improper demands on their skills or well- being.

• To off er a basis for adjudicating disputes among professionals inside the fi rm and between those inside and outside the fi rm.

• To provide an added means of socializing professionals, not only in specialized knowledge, but also in beliefs and practices the company values or rejects.

Codes of Conduct

An or ga ni za tion’s code of conduct is only as credible as the CEO’s and leaders’ personal and professional codes of conduct. Leaders must “walk the walk” as well as “talk the talk.” “An or ga ni za tion’s code of conduct, alternatively re- ferred to as ‘code of ethics’ or ‘code of business standards,’ is the stated com- mitment of the behavioral expectations that an or ga ni za tion holds for its employees and agents. Such codes are now commonplace for most corporations and are increasingly shared not only with employees, but also with customers and the public at large. To be successful, a code must be believable by all stakeholders to which it applies. A corporation’s leaders must show commit- ment to communication and fairly enforcing codes of conduct for such docu- ments to be eff ective. However, how the code is written and what it contains are also important elements regarding whether it has the power to infl uence not only perceptions, but actions.”100

One survey of U.S. corporate ethics codes found that the most important topics were general statements about ethics and philosophy; confl icts of in- terest; compliance with applicable laws; po liti cal contributions; payments to government offi cials or po liti cal parties; inside information; gifts, favors, and entertainment; false entries in books and rec ords; and customer and supplier relations.101 Notable fi rms go further in detailing corporate obliga- tions. The examples of Johnson & Johnson and BorgWarner (Figures 6.3

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6 The Corporation and Internal Stakeholders 389

and 6.4) defi ne their obligations to various stakeholders. Other exemplary codes include those of General Electric, KMPG, Pricewater houseCoopers, Boeing, General Mills, GTE, Hewlett- Packard, McDonnell Douglas, Xe- rox, Norton, Chemical Bank, Champion International, Mattel, Hershey’s, Ford Motor Company, the Coca- Cola Company, American Express, UPS, and IKEA.

Examples of items in a code of conduct include the following list:102

• Financial Integrity & Assurance • Legal & Eff ective E-mail • Ethical Principles • Anti- Money Laundering • Intellectual Property • Confl icts of Interest • Information Security • Health & Safety • Workplace Violence • Harassment • Insider Trading • Record Keeping & • Illegal Business Practices Destruction • OSHA (Occupational Safety • Gifts & Gratuities and Health Administration) • Antitrust guidelines • Diversity

Companies looking to buy (acquirers) other companies (targets) perform preacquisition due diligence on the management, fi nance, technology, ser vices and products, legality, and ethics of the targets. That is, companies looking to purchase other companies need to perform analyses to discover if the targets are telling the truth about their products, fi nances, and legal rec ords. “Where does one start in uncovering the ethical vulnerability of a target?” The follow- ing basic questions are suggested as a starting point:103

1. Does the target have a written code of conduct or code of ethics? 2. Does the company provide ethics training or ethics awareness- building

programs for management and company employees? 3. Are avenues, such as an ethics offi ce or hotline, available for employees

to ask questions about ethical issues?

Problems with Ethics and Conduct Codes

The problems with corporate ethics codes in general are the following:104

1. Most codes are too vague to be meaningful; that is, the codes do not inform employees about how to prioritize confl icting interests of distributors, customers, and the company. What does being a “good citizen” really mean in practice?

2. Codes do not prioritize beliefs, values, and norms. Should profi t always supersede concern for customers or employees?

3. Codes are not enforced in fi rms. 4. Not all employees are informed of codes. 5. Codes do not relate to employee’s actual work and ethical “gray” areas.

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390 Business Ethics

6. Top- level leaders in organizations usually do not show interest or involvement in the programs.

7. Codes do not inspire or motivate employees to follow law, rules, and procedures.

8. Codes that are used internationally have sections that are irrelevant or incomplete to other country personnel’s experiences and specifi c areas of concern.

Ethics codes are a necessary but insuffi cient means of assisting or infl u- encing professionals with managing moral conduct in companies. One study showed that companies that had corporate ethics codes had “less wrongdoing and higher levels of employee commitment.”105 However, the authors explain that “formal ethical codes are one component of a milieu that encourages and supports high standards of ethical behavior; that is, these organizations have formal and informal mechanisms to ensure that ethical conduct becomes ‘a way of life.’ ” Also, employee behavior was not as infl uenced by the ethics codes because the codes “are not part of the or gan i za tion al environment.” Part of the message here may also be that implementing several or gan i za tion- ally supported and integrated values- based stakeholder management and eth- ics programs has a better chance of meeting intended goals than does reliance on brochures and printed documents.

Ombuds and Peer- Review Programs

Ombuds and peer review programs are additional methods that corporations use to manage the legal and moral aspects of potentially problematic activi- ties in the workplace. The ombuds approach provides employees with a means of having their grievances heard, reviewed, and resolved. Originating in Swe- den, this concept was fi rst tried at Xerox in 1972 and later at General Electric and Boeing. Ombuds individuals are third parties inside the corporation to whom employees can take their grievances. At Xerox, employees are encour- aged to solve their problems through the chain of command before seeking out the ombudsperson. However, if that pro cess fails, the employee can go to the ombudsperson, who acts as an intermediary. The ombuds individuals, with the employee’s approval, can go to the employee’s manager to discuss the grievance. The ombudsperson can continue through the chain of command, all the way to the president of the corporation, if the problem has not been satisfactorily resolved for the employee. Ombudspersons have no power them- selves to solve disputes or override managers’ decisions. Complaints usually center on salary disputes, job per for mance appraisals, layoff s, benefi ts, and job mobility. At General Electric, ombudspersons report that they handle 150 cases every year.

The International Ombudsman Program recently stated on its web site, “The legislative and corporate governance environment has changed in recent years. It is more critical than ever for companies to have a complete system for identifying and resolving ethics problems. Such a system works best if it combines formal channels such as hotlines and compliance policies with the

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6 The Corporation and Internal Stakeholders 391

informal channel of an ombuds offi ce, which remains in de pen dent of the company’s management structure.”106

An example of an eff ective ombuds program is that of the International Franchise Association (IFA). Its board of directors adopted a comprehensive self- regulation program that has a clearly and strongly stated ethics code; an investor awareness and education program; a franchise education compliance and training program; a code enforcement mechanism; and an ombudsper- son program, which is described as follows: “The ombudsperson program is designed to enable franchisors and franchisees to identify disputes early and to assist them in taking preventative mea sures . . . facilitating dispute reso- lution . . . recommending non- legal methods and approaches to resolving disputes, encouraging [both parties] to work together to resolve disputes, providing confi dentiality throughout the pro cess, and providing objective and unbiased advice and guidance to all the participants.”107

A problem with the ombuds approach is that managers may feel their authority is threatened. Employees who seek out ombudspersons also might worry about their managers retaliating against them from fear or spite. Con- fi dentiality also has to be observed on the part of ombudspersons. The om- budsperson is as eff ective as the support of the program by stakeholders allows him or her to be. An ombudsperson’s success is mea sured by the trust, confi - dence, and confi dentiality he or she can create and sustain with the stakehold- ers. Finally, the ombudsperson’s eff ectiveness depends on the ac cep tance by managers and employees of the solutions adopted to resolve problems. Om- buds programs, for example, have been successful at IBM, Xerox, General Electric, the U.S. Department of Education, Boeing, The World Bank, and several major U.S. newspaper organizations.

Peer review programs have been used by more than 100 large companies to enable employees to express and solve grievances, thus relieving stress that could lead to immoral activities. Employees initially use the chain of com- mand whenever a problem exists. If the supervisors or executives do not re- solve the problem, the employee can request a peer review panel to help fi nd a solution. Two randomly selected workers in the same job classifi cation are chosen for the panel along with an executive from another work unit. The selection must be reviewed in reference to company policy. Peer review programs work when top management supports such due pro cess proce- dures and when these mechanisms are perceived as long- term, permanent programs.

Peer review programs have received positive reviews and have had good results, particularly in the health care and accounting industries. More than 50% of the U.S. state boards of accountancy require certifi ed public accoun- tants to participate in a peer review program to obtain a license to practice.108 Congress has mandated the use of the Medicare Peer Review Or ga ni za tion since 1982.109 In En gland, peer review accreditation programs have evolved as external voluntary mechanisms that also provide or gan i za tion al develop- ment of health care providers.110 Ombudsperson and peer review programs serve as pop u lar mechanisms not only for solving disputes among stakehold- ers, but also for integrating the interests of diverse stakeholders.

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392 Business Ethics

We conclude this chapter by presenting a “Readiness Checklist” organi- zations can use to determine whether or not their executives and profession- als use a values- based stakeholder management approach to create and sustain integrity in the or ga ni za tion. If not, they may review their vision, mission, values statements as well as their ethics and codes of conduct. You may con- sider applying the checklist to your or ga ni za tion or institution.

Is the Or ga ni za tion Ready to Implement a Values- Based Stakeholder Approach? A Readiness Checklist

A values- based stakeholder readiness checklist can inform and educate (even interest and mobilize) top- level leaders to evaluate the ethics of their business practices and relationships. The following readiness checklist is an example that can be modifi ed and used as a preliminary questionnaire for this purpose:

1. Do the top leaders believe that key stakeholder and stockholder relationship building is important to the company’s fi nancial and bottom- line success?

2. What percentage of the CEO’s activities is spent in building new and sustaining existing relationships with key stakeholders?

3. Can employees identify the or ga ni za tion’s key stakeholders? 4. What percentage of employee activities is spent in building productive

stakeholder relationships? 5. Do the or ga ni za tion’s vision, mission, and value statements identify

stakeholder collaboration and ser vice? If so, do leaders and employees “walk the talk” of these statements?

6. Does the corporate culture value and support participation and open and shared decision making and collaboration across structures and functions?

7. Does the corporate culture treat its employees fairly, openly, and with trust and respect? Are policies employee- friendly? Are training programs on diversity, ethics, and professional development available and used by employees?

8. Is there collaboration and open communication across the or ga ni za tion? Are openness, collaboration, and innovation rewarded?

9. Is there a defi ned pro cess for employees to report complaints and illegal or unethical company practices without risking their jobs or facing retribution?

10. Does the strategy of the company encourage or discourage stakeholder respect and fair treatment? Is the strategy oriented toward the long or short term?

11. Does the structure of the company facilitate or hinder information sharing and shared problem solving?

12. Are the systems aligned along a common purpose or are they separate and isolated?

13. Do se nior managers and employees know what customers want, and does the or ga ni za tion meet customer needs and expectations?

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6 The Corporation and Internal Stakeholders 393

If answers to these questions are mostly affi rmative, the internal or ga ni- za tion most likely refl ects ethical leadership, culture, and practices. If responses are mostly negative, legal and ethical problems may be imminent.

Chapter Summary

Corporate and or gan i za tion al leaders set the vision, mission, and values of their enterprises. Leaders also help defi ne the culture of companies that determine their fi rms’ ethical and legal boundaries and contributions. A stakeholder management, values- based approach is central to or ga niz ing and aligning internal systems to respond to all stakeholders. There are still many lessons to be found in the classic “built- to- last” and “good to great” companies, whose fundamental purposes and core values were the foundation for competitive long- term achievement. More recently, highly successful com- panies referred to as “fi rms of endearment” exemplify even more of a values- based, stakeholder approach in dealing with customers, employees, suppliers, vendors, and society. This chapter off ered numerous examples and evidence of eff ective values and stakeholder management approaches leaders use in the marketplace.

Leaders defi ne and model the moral character of organizations. Leaders guide the identifi cation of a vision, mission, and values and then serve as ethical role models in their stakeholder and business relationships. Figure 6.1 illustrates a strategic alignment model that leaders can use to guide their strategy development pro cess. James Collins’s “Level 5” leader profi le was used as an example of successful leaders. A values- based stakeholder man- agement approach was summarized and argued that organizations can be eco nom ical ly successful by being socially responsible and ethical with their stakeholders.

Leadership in organizations can be defi ned from a values- based approach: Leaders defi ne and model the social and ethical as well as the competitive mission of companies. They build and sustain relationships with stakeholders while demonstrating collaboration and trust. Stakeholder management is the basis for strategic alliances. Former president of Southwest Airlines Herb Kelle- her, Aaron Feuerstein of Malden Mills, and Jeff rey Swartz of the Timberland Company are a few examples of successful competitive industry leaders who lead ethically and spiritually.

Failure of ethical leadership is evidenced by seven symptoms: ethical blindness, muteness, incoherence, paralysis, hypocrisy, schizo phre nia, and com- placency. Mickey Monus, former CEO of the Phar- Mor company, failed to lead ethically and was sentenced to 20 years in prison for mail fraud, wire fraud, bank fraud, and theft. “Chainsaw Al” Dunlap, former CEO of Sunbeam, was fi red after the SEC found fraudulent activities during his tenure.

The reasonableness of CEO pay and per for mance was discussed. Not all CEOs are overpaid, but there is a signifi cant number of highly visible CEOs whose high compensation appears unrelated to their fi rm’s per for mance. This remains a concern of activist shareholders.

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394 Business Ethics

Figure 6.6 summarizes an alignment contingency model for understand- ing the “big picture” of leaders’ tasks in defi ning and implementing eff ective and ethical strategies, cultures, and structures. Strategies, cultures, struc- tures, and systems are aligned along a vision, mission, and core values. This approach is compatible with the “fi rms of endearment,” “built- to- last,” and “good to great” studies of successful organizations. Customers as key stake- holders are central to an or ga ni za tion’s alignment since they are essential to a fi rm’s success.

Strategy must be aligned with markets, values, culture, leadership style, and structure to be eff ective. Strategy serves both a revolutionary role (to be innovatively competitive) and a more classical role at four levels: enterprise, corporate, business, and function. Strategies infl uence ethics by the expecta- tions, pressures, motivation, and rewards they create. Overly aggressive strate- gies, which may also be unrealistic, can create implementation pressures that lead to unethical activities.

Culture, structure, and other systems are internal dimensions that enable leaders and professionals to implement strategy. “High- ethics” com- pany cultures can serve as a benchmark for other organizations’ cultures. Such cultures are grounded in well- defi ned purposes that drive operations. These cultures are also modeled by leaders who are devoted to fairness, interaction with all stakeholders, concern for stakeholder interests, and indi- vidual responsibility.

Or gan i za tion al structures that are overly centralized or decentralized may foster ethical problems. Although there is not “one best way” to structure a company, there are advantages and disadvantages to each type of structure. For example, centralized functional structures discourage open communica- tion and sharing and must be integrated. Decentralized structures, such as net- works and project teams with little or no coordination, may create a climate for unethical activities, such as fraud, theft, and unfair pressure of customers and alliance partners. Having leaders who rely on mission- driven ethical values that are communicated, refl ected in the culture, and enforced throughout a fi rm is a necessary part of structural alignment.

Figure 6.8 illustrates the challenge of balancing internal or gan i za tion al and professional stakeholders’ values. Professional stakeholders in marketing, R&D, sales, fi nance, and production often function within four boundaries: rewards, time horizons, training backgrounds, and resource constraints. A critical task of or gan i za tion al leaders is to guide internal professionals and focus them on the mission and values of the company.

An overview of self- regulated ethics programs was presented. Ethics pro- grams, codes, ombudspersons, peer reviews, and ethics offi cers programs are ways in which corporations can attempt to regulate themselves. Johnson & Johnson’s “Credo” (Figure 6.3) is an example of an outstanding ethics code.

A “Readiness Checklist” for assessing a values- based, stakeholder readi- ness perspective was off ered that enables fi rms to address the extent to which they use a values- based stakeholder approach in their business practices.

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6 The Corporation and Internal Stakeholders 395

Questions

1. Describe the most ethical leader for whom you have worked. Now describe the least ethical leader. Which leader did you learn valuable lessons from and enjoy working with the most? The least? Why? What role did ethics play in your answers? Explain.

2. Describe an experience you have had (or an experience where you ob- served a leader) that required moral courage to either make a tough deci- sion or refrain from making a decision that could have had harmful consequences. After describing the experience, answer these questions: (a) What was “moral” about the decision that had to be made? (b) What differentiated this situation and decision from other decisions that were seri- ous but that did not require “moral courage”? Explain.

3. Do you believe leaders in large Fortune 500 companies follow and model their stated visions, missions, and values in everyday business dealings? Ex- plain. Identify a Fortune 500 company and CEO in the news that demon- strates ethical behavior. Is there any evidence that his or her company’s per for mance is related to ethical leadership behavior? Explain.

4. Do companies have to operate ethically to be fi nancially successful? Ex- plain.

5. Identify some characteristics of a values- based stakeholder approach to leading and running a company. Do you agree or disagree with these char- acteristics? Explain.

6. Which of the 13 values- based readiness checklist steps would you expect are least practiced in most companies? Which steps on the list do you be- lieve the or ga ni za tion for which you work(ed) practiced least? Why?

7. Do you believe most CEOs in U.S. companies are overpaid and under- perform? Explain. What pay or per for mance criteria do you believe should be used for top- level offi cers in publicly traded companies?

8. Offer one difference a values- based, ethical stakeholder approach could make in the formulation and implementation of an or ga ni za tion’s strategy. Explain.

9. Suggest three differences a values- based, ethical stakeholder perspective could make in forming and building a new or gan i za tion al culture. Explain.

10. What clues would you look for in identifying ethical and unethical activities by evaluating an or ga ni za tion’s structure? Explain.

11. If you were to evaluate the alignment of an or ga ni za tion’s strategy, structure, and culture from a values- based stakeholder approach, suggest three crite- ria you would use and some questions you would ask.

12. Which is most effective for or gan i za tion al stakeholders: internal self- regulation or government regulation? Defend your points.

13. Explain the strengths and weaknesses of or gan i za tion al (a) ethics codes, (b) ombuds and peer review programs, and (c) ethics departments.

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Exercises

1. Assume you are an ombudsperson or an ethics offi cer for a large or ga ni za- tion. What problems do you believe you would experience? Why? What con- tributions do you think you could make in this role? Why?

2. Describe the type of training you would need and list specifi c competencies that would help you in the role of ombuds or ethics offi cer.

3. Draft a brief values statement (or list some major values) of the ideal com- pany for which you would like to work. Compare your list with other students’ lists. What similarities and differences did you fi nd? Compare your list to the examples in this chapter. What are the similarities or differences?

4. Briefl y describe the leader of an or ga ni za tion in which you work or have worked. Evaluate the moral, amoral, or immoral characteristics of the leader. Refer to the “ethics of leadership styles” and the “seven symptoms of the failure— or success— of leadership” in the chapter.

5. Return to question 4. Suggest specifi c ways that your leader could improve his or her leadership competency and ethical style.

6. Briefl y describe the culture of an or ga ni za tion in which you work or have worked. Explain how the culture affected a specifi c business practice. How ethical or unethical were the effects of the culture on that business practice? Explain.

7. Return to question 6. Suggest a few ways in which that or ga ni za tion’s culture could be strengthened or changed. Offer a suggestion for the way the strat- egy formulation or implementation could be changed. Offer a way in which one of the practices or management methods of the system could be changed for improvement.

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Real- Time Ethical Dilemma

Values and Leadership at Z Insurance Corp. “What Would You Do?” I graduated from the University of New En gland on a beautiful day in May. Graduating cum laude, with a job in my back pocket, I thought that my future was as bright as the sun was that day. However, un- like that beautiful day, blue skies did not lie ahead for me professionally.

During the spring of my se nior year, I was busy interviewing for full- time positions after graduation. At one par tic u lar campus career fair, I came across the Z Insurance Corp. booth. As a business student, I had a keen in- terest in fi nancial ser vices. I believed and still believe that it is a noble pro- fession, which helps to give hardworking people the power to be fi nancially stable, save money for retirement, or put their children through college. Because of these interests, I was very curious to see what Z Corp. had to off er in the realm of fi nancial ser vices.

Looking back (with 20/20 hindsight), I believe that I was duped from the beginning. I’ll tell you why in the following two actual scenarios.

Scenario One: “How I Learned to Lie to the El der ly” My grandmother is one of the most caring and wonderful people I know. Recently, my grandfather passed away and left my grandmother with a con- siderable amount of money, and little fi nancial experience to manage it. She guarded the money very carefully, since it was earned by her best friend and loving husband. Back to Z Corp.

The new “recruits” at Z Corp. have a two- week- long orientation before they can begin their work. During the fi rst couple of days of this orientation, we watched fi lms that illustrated how we would be helping se nior citizens protect their life savings. These fi lms had positive messages about America’s se nior citizens, including how to communicate with them in a respectful man- ner, cherish their money as if it was ours, and take each question they had with the utmost care. Although I was still a bit shocked by the fact that I was now an insurance salesperson, I was excited by the prospect of making a diff erence in the lives of America’s se nior citizens. I was picturing folks, similar to my grandmother, who would trust us to help them protect their life’s hard- earned money.

These utopian ideals were soon transformed into harsh realities. Daily, I became increasingly aware of the games that this company was playing with us and the people that we were to “help.” On one par tic u lar day, we were dis- cussing how we were going to “entice” our customers on the phones so that they would listen to our message about long- term care insurance. Again, we didn’t know that we were going to be involved in “cold calling,” which was yet another surprise to us. During this meeting, we were given our “communica- tion,” which was to be followed very closely, not deviating from any of the scripts. While I was reading over the “communication,” something struck me as peculiar. The following is a rough sample of our “communication”:

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Z Corp. Rep: “Hello, my name is Lea Stern from Z Corp. I am a fi nancial adviser. I am calling in regard to literature that you received in the mail from us. Do you recall receiving this information?” (Usually the response was “No, I don’t remember seeing anything from Z Corp.”)

Z Corp. Rep: (chuckling) “Oh, I am sure you may not have. We all receive so much in the mail these days that you may have thrown it away or may have not read it yet.”

After I read this script, I asked the sales manager whether or not these folks actually received something from Z Corp. regarding long- term care insur- ance. What he said in response to my question still rings clear in my head. So clear, in fact, that I am going to quote it: “These folks are old and confused. Most likely they received something in the mail about ‘fi nancial planning.’ We are banking on the fact that they will not remember or realize who it was from and will take our word that it was from us.”

“Old and confused” is how the sales manager described my loving grand- mother. Because of the values that I grew up with and still hold, I could not imagine taking advantage of hardworking se niors in such a twisted, immoral way. With this one statement, I decided that I did not respect my manager or Z Corp. My attitude changed immediately. I knew from that moment that I would fi nd it very hard to work for Z Corp. and almost impossible to work for that manager.

Scenario Two: “Reading the Fine Print” I have been blessed with a wonderful family who surrounded me with caring people who would never try to take advantage of me. Maybe I am trusting and a bit naive, but I’m not stupid! With the experience I described previ- ously at Z Corp., I learned that this trust could be a double- edged sword. I lived 21 years not realizing how twisted company policies and practices could be; it took only one week at Z Corp. for me to wake up to “corporate realities”— at least in an insurance- sales setting.

At the career fair at the University of New En gland, I had a wonderful conversation with a sales manager at Z Corp. We discussed the virtues of be- ing a fi nancial adviser, such as recommending appropriate mutual funds based on fi nancial needs, careful investments, and the merits of having Series 6 and 7 licenses. I enjoyed the fact that Z Corp. seemed to be a company that helped folks invest in diversifi ed ways. Never once were insurance sales, cold calling, or no pay for four months mentioned; not during the fi rst, second, or fi nal interview. Only when I signed on and was in training did I fi nd out the truth about this shifty company.

During each of the lunches on that fi rst week of our orientation, the “re- cruits” discussed what we called the “footnote.” We used this term because we felt there was always another footnote regarding pay, customer contact, or offi ce supplies. I felt as if I were employed at a diff erent company, with a com- pletely diff erent position than the one for which I originally interviewed. Some of this may have been my fault. For example, I never asked what the values of this company were or what its mission was. However, important points such

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as job function and company mission, as well as reimbursement, should be communicated truthfully. I felt as if the people at Z Corp. did not communi- cate eff ectively with us at all. A communication channel was not established between the managers and me at Z Corp. Without proper communication, I was taken advantage of and didn’t feel comfortable being in the follower role. I didn’t know what the company stood for, and most importantly I didn’t know what I stood for!

Questions 1. What are your general reactions to the two scenarios? 2. Would you react similarly or differently than the writer? Explain. 3. Do you believe the writer is naive and that these scenarios represent the “real

world” from which she has been sheltered? Or, do you think this company is a single “rotten apple” among the more honest companies in this industry and the writer should react as she did? Explain.

4. Are there any illegal or unethical tactics that the company sales manager/rep is using? Explain.

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Real- Time Ethical Dilemma

Whose Values? Whose Decision? Jim Howard is a sales manager at a software company that produces a search interface for databases with indexed information. The company is an estab- lished vendor and has a good reputation in the market for its high- quality products, fast and personal customer support, and strong loyalty to its custom- ers. Part of the values statement of the company includes, “We will treat our customers with respect and dignity.”

In his fi rst year with the company, Jim noticed that the sales force was having diffi culty acquiring new customers and retaining existing ones. The problem was complex: a shrinking market with continuously increasing buying power, increasing competition, and the emergence of free alterna- tives from the Internet. These problems started to signifi cantly aff ect the company’s revenue. The company’s reaction was to drastically decrease the cost of its products, bundle databases into packages, and start to alter product introductions by including several value- added ser vices that were new to the market.

Jim’s boss suggested that Jim take over the responsibility for the yearly renewals of customer subscriptions from the company’s secretary, which pre- viously had been regarded as an easy clerical procedure. When he started to check the old accounts and follow up with renewals, he faced a problem that he thought would never have occurred: unfair treatment of old customers in comparison to new customers in terms of the product pricing. Existing cus- tomers were off ered renewal at triple the price of the same package off ered to new customers.

When he asked his boss whether he should inform the old customers that the price had changed and whether the old customers could now benefi t from the lowered price, the answer was, “Why don’t we try to get this price? If the customer refuses to pay it, then we’ll negotiate.” An additional diffi culty was that, in the last few months, information had been disseminated to all cus- tomers that made the company’s new pricing strategy visible to customers. Jim shared the fact with his boss that this information was already available to customers and pointed out the contradiction. His boss remained insistent, to the point of shouting, that Jim follow his previous instructions with the sales force.

Jim felt he was betraying the company, the customer, his sales force, and his own professional values. He didn’t want to lose his job, and he didn’t want to lose any more customer accounts.

Questions 1. If you were Jim, what would you do in this situation? 2. What are the issues here? For whom? 3. Who stands to be hurt the most from following the advice of Jim’s boss?

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4. What would a values- based stakeholder management approach suggest that you do, if you were Jim? Lay out an action plan and be ready to role- play your suggested approach.

5. Compare your answer to question 1 to your approach in question 4. Any differences? If so, could you still follow what you said in question 4?

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Cases

Case 17

Kaiser Permanente: A Crisis of Communication, Values, and Systems Failure

In 2009, the customers of Kaiser Permanente (KP), a California- based health care or ga ni za tion that runs both managed- care hospitals and a medical plan (HMO), rated the company highest in the J.D. Power and Associates National Health Insurance Plan Study (SM) in four regions: California, Colorado, Northwest and Virginia– Maryland. In all four regions, the company ranked 40– 50 points higher than the average score, mea sur ing coverage, benefi ts, choice of provider, and administrative effi ciency.

One factor, not directly included in the survey but cited as value added to the company, was the company’s easy- to- use web interface that allowed users to schedule appointments, check and update medical histories, view and pay in- voices, fi ll prescriptions, and otherwise access hospital and insurance rec ords from home. The goal of information technology (IT) at KP was to connect all members of the network— patients, physicians, specialists, hospital and plan ad- ministrators, and other medical staff— while, at the same time, maintaining a customer- oriented focus. The customer satisfaction associated with the Web in- terface, called “myHealthManager,” was extremely hard- won, however. In fact, KP’s IT- related track record was erratic, at best. The company’s IT goal and its inability to attain it would become part of an incon ve nient company crisis.

A Company Crisis Dear Colleague, Three weeks ago, George Halvorson, our CEO, wrote to tell us that Health Plan and Hospitals are facing signifi cant fi nancial challenges. What Mr. Halvorson did not mention was the magnitude of the fi nancial losses we could see: our internal projections show that we could lose as much as $7 billion dollars in total over the next two fi scal years. Losses of even a fraction of that total will be a threatening blow to our or ga ni za tion and what we stand for, and will signifi - cantly compromise our ability to care for our members. — Excerpt from an e-mail from Justen Deal, project supervisor at KP, sent

on November 3, 2006.

On Monday, November 6, 2006, approximately 50,000 employees at KP discov- ered an e-mail from Justen Deal, a project supervisor working in the company’s project education and training department. The e-mail was passionate but re- searched, thoughtful and committed to the company’s core mission. The e-mail stated that KP’s new electronic medical rec ords (EMR) system, HealthConnect, was a failure; that it was unable to scale up to an or ga ni za tion the size of KP, that it was going to cost the company billions of dollars and might even jeopardize patient information and erode customer loyalty and trust.

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The e-mail accused several top company executives, including Chief Infor- mation Offi cer (CIO) J. Clifford Dodd and CEO George Halvorson, of having a personal interest in HealthConnect’s developing company, Epic Systems, as the vendor of choice and accused them of circumventing normal vendor procedures to ensure the selection of their product despite an internal engineering analysis that questioned the system’s acceptability and scalability to a health care or ga ni- za tion of its size and complexity. Justen Deal later stated that Halvorson was the main supporter of the Epic Systems choice and was canceling other internal CIS (Computer Information Systems) efforts at the time research into vendor possi- bilities was just beginning.

Despite the IT department’s frantic attempt to remove the e-mail from the system over the weekend (the employee had sent the message late in the day on the prior Friday), the e-mail remained in inboxes throughout the company. To make matters even worse, those employees who received the e-mail on Monday morning almost immediately forwarded it to their coworkers, who then forwarded it to their coworkers. The number of people who had read the e-mail quickly grew from the original 50,000 to all 180,000 employees at KP (both those at the hos- pitals and those at the health plan). The e-mail was also leaked externally, setting off a stream of negative publicity and media attention. CEO Halvorson sent a company- wide e-mail on the same day dismissing the author’s claims, but the damage had already been done.

The or ga ni za tion felt the effects of the e-mail almost immediately. Justen Deal, the author of the e-mail, was placed on paid administrative leave, his computers were seized, and the company initiated an investigation to determine if his e-mail violated company policy and could provide the basis for termination of employ- ment. Deal would ultimately be fi red, though the company would cite reasons other than his e-mail. On the Tuesday following the e-mail’s dissemination, the company’s quarterly report was published. J. Clifford Dodd resigned as CIO and was replaced by an interim CIO, Bruce Turkstra, who was the vice president and program director for KP HealthConnect at the time. In attempts to manage dam- age control, several staff members gave interviews attesting to the system’s reli- ability. KP also paid Google to place an ad for the company at the top of any search conducted for Justen Deal’s name. Computerworld magazine published a 722- page report on the weaknesses of the system, and a California health care watch- dog group began to monitor the company.

The Whistle- Blower Justen Deal was a 25- year- old project supervisor in the company’s project edu- cation and training department. His department was involved in the testing of the new system and had access to reports related to HealthConnect and an under- standing of its functionality. According to one report, the $1.5 million cost was noticed as incongruous almost immediately. He believed that the project had stalled as a result of its lack of scalability to an or ga ni za tion of KP’s size and that the project had been chosen not because of its potential value to the or ga ni za- tion, but because of management preference.

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The e-mail itself was the result of many months of research. Prior to penning and distributing it, Deal spent several months trying to bring HealthConnect’s possible fallacies to the attention of internal management. While he admitted that Epic was a good vendor with a great product, Deal did not see the vendor as a good fi t to the or ga ni za tion. Furthermore, the system was suffering from regular outages due to data load. Deal informed an internal investigator of his concerns, but his concerns were dismissed. He then sent a letter to the company’s chief compliance offi cer and all board members detailing his concerns and received a response that an investigation had been conducted and no indication of dishon- est executive conduct or issues with project scalability had been found.

Deal had a history of activism. As a teenager, he testifi ed in front of West Virginia’s legislature in favor of gay rights. He studied journalism in college, but did not complete his degree. After leaving school, he worked for the West Virginia Symphony, a gay- rights group in West Virginia, a travel agency in Ottawa, and then KP.

Kaiser Permanente: A Brief Overview KP is a nonprofi t healthcare network based in Oakland, California. The or ga ni za- tion consists of three functional units: Kaiser Foundation Hospitals, Permanente Medical Groups, and the Kaiser Foundation Health Plan, but considers itself to be a single or ga ni za tion. This view is supported by management. KP is run by CEO George Halvorson and a board of directors. Each hospital in the network is run by a managing physician or executive director.

KP is a managed- care or ga ni za tion (MCO), which means that members pay a fi xed membership rate and then receive the right to ser vices at any of KP’s hos- pitals and clinics. “The essential difference between MCOs and more traditional types of medical care is connected with the distribution of fi nancial risk among the purchaser of the health plan, the provider of the care and the insurer.” The health plan primarily serves that membership, which numbers approximately 8.3 million.

The or ga ni za tion’s mission statement is as follows: “At Kaiser Permanente, our mission is to provide affordable, high- quality health care ser vices and im- prove the total health of our members we serve.” KP is considered the largest MCO in the United States, serving Northern and Southern California, Colorado, Georgia, Hawaii, Ohio, and the Mid- Atlantic and Northwest regions. It also has a subsidiary company, KP International, formed to provide managed- care consult- ing ser vices to companies and governments overseas, focusing on Asia, Australia, United Kingdom, and Eastern Eu rope.

KP’s vision statement expresses the following values: operating as a team, valuing the contributions of its employees, exhibiting compassion and investment in the health and well- being of the membership, supplying superior health care value, partnering medicine and business, remaining fi rst choice for a career in health care, fostering innovation, providing leadership to healthcare community and supporting the external community.

One challenge of the or ga ni za tion is balancing exceptional medical care with cost management. As a membership- based or ga ni za tion, it does not re- ceive extra cash fl ow from specifi c medical procedures.

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6 The Corporation and Internal Stakeholders 405

KP HealthConnect The new HealthConnect system was, at the time, also in the testing and early rollout phase in a small number of hospitals in the Kaiser network. As of 2006, KP had not yet broadened its IT project scope to include a Web interface for its cus- tomers and was more concerned with internal data management. HealthConnect was designed as an internal tool to provide an information backbone for its 12,000 physicians, 30 medical centers, and 431 medical offi ces. The purpose of the network was to provide a centralized data management system to handle all medical rec ords in the hospitals and through the plan (which directly served KP patients) electronically. This would reduce paper, data redundancy, and potential for errors and mistakes. It also would enable all physicians and other medical personnel to access patient data regardless of location, time of day, or urgency of need. The system was intended to centralize data from all locations to provide a common system for employee decision making throughout the network.

At the time, several other data management systems were already in place at KP. One such system was the Medical Automated Rec ords System (MARS) used in KP- Ohio. This was a knowledge management tool that integrated “cli- ent/server technology, relational databases, intranet and extranet capabilities.” MARS could be seen as a smaller- scale version of the HealthConnect system. It used a variety of interfaces and technologies to connect all Kaiser medical staff within the state with the information pathways and data centers necessary to provide quality care, while doing so in a cost- effective manner. It also provided care pa ram e ters to give users support to medically assist patients in ways that were proven, successful, and cost- effective. Its design enabled for extensive report- generating capabilities, which positioned the system to accommodate the requirements of the Health Insurance Portability and Accountability Act.

In 2006, MARS had received some acclaim as being strategically benefi cial and innovative in the health care fi eld, including recognition in a paper presented at the 35th Annual Hawaii International Conference in System Sciences by Nilmini Wickramasinghe from the James J. Nance College of Business Adminis- tration at Cleveland State University. At the time that HealthConnect was imple- mented, however, all work on this and other homegrown systems in conjunction with IBM had been discontinued.

The Health Insurance Portability and Accountability Act of 1996 One of the primary motivating factors for health care- oriented data management in recent history is the aforementioned Health Insurance Portability and Account- ability Act (HIPAA) of 1996. This act provides a standard by which electronic medical data is handled, stored, and transferred. It affects which members in an or ga ni za tion are able to access, read, disseminate, and otherwise use the data. It also confers specifi c rights on health care consumers: the right to access to one’s own rec ords; the right to disclosure about an or ga ni za tion’s privacy practices; transparency in regards to who has accessed one’s rec ords; and a limited right to privacy and a procedure for fi ling a complaint. HIPAA contains provisions regard- ing proper transmission and storage of health- related rec ords and guidelines for

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training those who handle this information on a regular basis or have access to storage locations. Health care providers and health plans that transmit informa- tion electronically are both considered covered entities under this Act. When it was implemented in 1996, HIPAA set a series of staggered deadlines for various levels of compliance. The fi nal compliance deadline was April 21, 2005.

Medical information is only protected under HIPAA if it is connected to iden- tifying information. That is, a doctor discussing a patient’s condition in a general way is not covered, but if this information is in any way connected to identify- ing information (name, address, social security number), then it is covered under HIPAA. HIPAA’s jurisdiction extends only to companies based in or conducting operations in the United States. Should information be sent to a business entity outside of the United States, HIPAA is not enforceable.

In February 2009, the Health Information and Technology for Economic and Clinical Health (HITECH) Act was signed into law. This is a provision of the American Recovery and Reinvestment Act of 2009 and provides federal stimulus money to advance the design and development of a national health care infra- structure. It builds upon HIPAA to outline much stiffer penalties for noncompliance with HIPAA and lays out much more extensive requirements and enforcements related to enforcement of patient privacy.

Other Data Management Issues at KP HealthConnect was ultimately implemented on an organization- wide basis and is successfully used to the present time (with limited connectivity to the myHealth- Manager customer database). The fi asco detailed above was only one event along a continuum of negative public relations related to KP’s IT initiatives, how- ever. One of the most pressing concerns related to these initiatives is that of the privacy of its patient- members.

A major data privacy concern has existed for some time with regard to KP’s outsourcing initiatives. In 2003, it was disclosed that the or ga ni za tion was quietly outsourcing computer operations to India to reduce overhead costs. The com- puter operations included data storage, transcription and retrieval regarding pa- tient medical data, personal member information, and payroll information of KP employees and member physicians. The outsourcing plan called for remote ac- cess to KP’s systems by at least six Indian fi rms. Although outsourcing of com- puter operations was an increasingly common trend for the health care industry, this news caused a furor in the media because some of the data transferred was sensitive patient data, and once the rec ords went overseas they were no longer covered by HIPAA. Outsourcing fi rms do not qualify as third parties under HIPAA, and there have been many stories of employees of outsourcing fi rms who violated privacy guidelines through either negligence or intent— for example, in 2003 a medical transcriber in Pakistan threatened to post online patient rec ords if the University of California San Francisco did not pay her back wages. In April 2009, KP announced that it had struck a deal with IBM to outsource the management and storage of most of its data to IBM, eliminating approximately 700– 860 jobs and transferring its IT and data management out- of- house.

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6 The Corporation and Internal Stakeholders 407

One of the most signifi cant negative public relations events in recent his- tory occurred when KP employees violated patient privacy laws by accessing the medical rec ords of various celebrity patients without permission or reason. In March 2009, KP disclosed that 15 of its employees had illegally accessed the medical rec ords of Nadya Suleman, the woman who gave birth to octuplets in their hospital in Bellfl ower, California, on January 26, 2009; these employees were subsequently fi red. Two months later, the state reprimanded KP and fi ned the or ga ni za tion $250,000 for breach of privacy under the new HITECH law. “According to a report by California’s Department of Public Health, the hospital did not do enough to prevent the violations.” This fi ne followed a $200,000 fi ne in 2005 from the California Department of Managed Health for violation of both the Notifi cation of Risk to Personal Data Act and HIPAA after a software test of an initial version of myHealthManager accidentally made confi dential patient in- formation accessible on a public web site.

The IT/data management issues presented in this case are part of a contin- uum of ongoing threats and challenges to the integrity of the IT/data management systems and policies in place. Due to the interconnection of data management practices and policies with patient care practices and policies, challenges to the integrity of the data management system affect and refl ect directly on the rights, lives, and humanity of those served: patients and employees, executive decision makers, subsidiaries and business partners, and the communities in which the or ga ni za tion functions.

Conclusion KP’s data management- related crisis cycle highlights the inherent dichotomy be- tween its stated mission’s focus on patients and the autonomously functioning business goals that appear to operate based on a mind- set that is both pragmatic and individualistic. The dysfunction between the two sets of values appears to create an ethical vacuum within the or ga ni za tion, in which decisions are not made based on a core set of values or principles. Due to the lack of shared purpose and a code of ethics, the company appears to be unable to break out of the contin- ual cycle of crisis and clean- up involved in the disclosure of misbehavior or even illegality within the health care network and is unable to achieve a level of or gan i za- tion al self- awareness that would allow it to adopt a proactive ethical stance against internal wrongdoing and effectively conclude their crisis management cycle.

Questions for Discussion 1. Do you think a company- wide e-mail was the best way for Justen Deal to

express his concerns about the HealthConnect system? Why or why not? If not, how should he have handled the situation?

2. Are there any concerns about top company executives personally investing in company vendors? Explain. Imagine that you were the director of IT at Kaiser Permanente. What would you have done about the e-mail sent to employees? Do you think it was right for IT to remove the e-mail from the system? Why or why not?

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408 Business Ethics

3. What responsibility, if any, should Kaiser Permanente have taken over the actions of its third- party outsourcers with regard to the protection of private patient data? Explain your answer.

4. In your opinion, how well did Kaiser Permanente manage the crisis of Justen Deal’s HealthConnect e-mail? Using a crisis management framework from Chapter 3, evaluate the crisis in this case and offer suggestions for what should have happened and why.

Sources This case was developed from material contained in the following sources:

An exclusive interview with Justen Deal of Kaiser Permanente. (November 13, 2006). HIStalk. http:// histalk .blog -city .com /an _exclusive _interview _with _justen _deal _of _kaiser _permanente .htm, accessed February 5, 2010.

Bole, K. (June 14, 1996). Kaiser takes managed care abroad: new subsidiary to consult foreign fi rms, governments. San Francisco Business Times, 1(2).

Clark, C. (May 15, 2009). Kaiser Fined $250,000 for Disclosing Octo- Mom Medical Record. HealthLeadersMedia.com. http:// www .healthleadersmedia .com /content / TEC -233165 /Kaiser -Fined -250000 -for -Disclosing -OctoMom -Medical -Record . html, accessed February 5, 2014.

Close- Up Media. (May 1, 2009). Kaiser: 3 million people now using its personal health record. Wireless News.

Global Trade Watch. (2004). Offshoring and privacy protection. Public Citizen. http:// www .citizen .org /trade /offshoring /privacy, accessed February 4, 2010.

Gray, E. (December 1994). Preparing for the future at Kaiser Permanente: An interview with Frank E. Murray. Journal of Management Inquiry, 3, 307– 318.

Hayes, F. (November 13, 2006). It’s a bitter pill. Computerworld, 66. HITECH, major settlements, EHRS, and more. (January 1, 2010). Briefi ngs on

HIPAA, 1– 4. Kaiser Healthcare IT meltdown? (November 7, 2007). Health Care Renewal (blog).

http:// hcrenewal .blogspot .com /2006 /11 /kaiser -healthcare -it -meltdown .html, accessed January 30, 2010.

Kaiser outsourcing leads to job cuts. (April 1, 2009). AMedNews.com. http:// www .ama -assn .org /amednews /2009 /03 /bise0401 .htm, accessed February 2, 2010.

Kaiser Permanente. (n.d.). Choose Kaiser Permanente: Goals. Kaiser Permanente Summit High School Plan. FUSD.net. http:// www .fusd .net /summitvb /homepage . html, accessed February 7, 2010.

Kaiser Permanente. (2012). Our mission. KaiserPermanente.org. http:// mydoctor . kaiserpermanente .org /ncal /facilities /region /eastbay /area _master /about _us / missionstatement .jsp, accessed April 24, 2012.

Lawrence, S. (November 8, 2006). Kaiser EHR system is stalled, employee says. eWeek.com. http:// www .eweek .com /c /a /Health -Care -IT /Kaiser -EHR -System -Is -Stalled -Employee -Says /, accessed February 6, 2010.

Lazarus, D. (May 14, 2003). Kaiser exporting privacy. SFGate.com. http:// articles . sfgate .com /2003 -05 -14 /business /17491341 _1 _kaiser -employees -social -security -numbers -identity -theft, accessed February 4, 2010.

Power and Associates study. (April 16, 2009). Kaiser Permanente receives top marks in 2009 J.D. Healthcare IT News.

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Privacy Rights Clearing house. (January 2010). Fact sheet 8a: HIPAA basics. Privacy Rights Clearing house. http:// www .privacyrights .org /fs /fs8a -hipaa .htm, accessed February 4, 2010.

Robeznieks, A. (November 13, 2006). Tumult at Kaiser: Head of big IT project exists amid controversy. Modern Healthcare, 10.

Rosenthal, B. E. (August 2005). Huge Kaiser fi ne demonstrates why hospitals are outsourcing their data security. Outsourcing Center. http:// www .outsourcing -journal .com /aug2005 -healthcare .html, accessed January 30, 2010.

Rundle, R. (April 24, 2007). Critical case: How an e-mail rant jolted a big HMO. Wall Street Journal, A1.

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Sciences 2002, 10. Hawaii: Computer Society.

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Case 18

Social Networking and Social Responsibility

The Beginnings of Social Networking Early social- networking web sites started in the form of generalized online com- munities such as The WELL (1985), Theglobe .com (1994), Geocities (1994) and Tripod .com (1995). The goal of these online communities was bringing people together to interact in virtual “chat rooms” to share personal information and ideas, which served as the start of the “blogging” phenomenon. These sites included Classmates .com (1995), focusing on ties with former peers, and SixDegrees .com (1997), which focused on indirect ties. The sites had the capabilities of creating user profi les; sending messages to users stored on a “friends list”; and searching for other members with similar interests in their profi les. Although some of these features predated these web sites, this was the fi rst time such functions were available in one package.

Between 2002 and 2004, four social networking sites (SNSs) emerged as the most pop u lar form of these sites in the world: Friendster in 2002 (which Google tried to acquire in 2003), MySpace and LinkedIn a year later, and fi nally, Bebo. By 2005, MySpace had emerged as the largest such site and was report- edly getting more page views than Google. Facebook emerged in 2004 and grew exponentially. In 2005, Facebook opened to the non- U.S. college community and created externally developed applications that enabled graphing of a user’s own social network and the capability of linking social networks and networking.

A Growing Global Trend Social networking continues to be one of the fastest- growing global trends. Ac- cording to Pew Research Center’s Internet and American Life Project, “the num- ber of those using social networking sites has nearly doubled since 2008 and the population of SNS users has gotten older.” Fifty- nine percent of Internet us- ers claim to use at least one SNS— 92% of SNS users use Facebook, 29% use MySpace, 18% use LinkedIn, and 13% use Twitter. Most people in the world today have either heard of or actively use Facebook, Twitter, MySpace, LinkedIn, or one of the many other SNSs available to the public. Common uses for social networking include: staying connected with fellow users, following world news and gossip, and sharing opinions and life experiences. SNSs, however, are being used for commercial purposes often unknown to the user.

Social Networking in the Corporate World Businesses gravitated toward social networking as an innovative marketing strategy around March 2005 when Yahoo launched Yahoo! 360°. Various SNSs have since sprung up catering to different languages and countries. It is estimated that there are now over 200 SNSs using these existing and emerging social- networking technologies. This number does not include the niche social networks made possible by ser vices such as Ning. Twitter, launched in 2006, has eclipsed

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many other social network ser vices, even though it lacks some features that were considered essential aspects of a SNS.

Social networking allows businesses to place their company information within an online network to build contacts and relationships with individuals that share the same interests and insights. It creates an outlet for interactive commu- nication using online communities. The tools available also allow businesses to reach millions of people in a short amount of time, usually with no cost attached.

Companies have found that SNSs such as Facebook and Twitter are great ways to build their brand image. According to Jody Nimetz, author of Marketing Jive, there are fi ve major uses for businesses and social media: 1) to create brand awareness; 2) as an online reputation management tool; 3) for recruiting; 4) to learn about new technologies and competitors; and 5) as a lead- generation tool to intercept potential prospects. These companies are able to drive traffi c to their own online sites, while encouraging their consumers and clients to have discus- sions on how to improve or change products or ser vices.

Companies and advertising fi rms use the sites to analyze consumer trends, opinions, and infl uence consumers to view their products favorably. Is this prac- tice of tracking user information without their knowledge ethical? Some compa- nies might state that they are simply trying to leverage social networking to create a creative work environment for their employees and offer a better product to consumers. IBM is a company that uses social networking in both ways. The ethical implications of social networking and consumers as infl uencers are much clearer when we take a closer look at how a company like IBM uses social net- working in its daily operations.

Social Networking at IBM International Business Machines, or IBM, is one of the most notable companies operating in the world today. According to their company profi le, IBM was founded in 1910 and currently employs over 440,885 full- time employees in 200 countries tasked with manufacturing and selling computer hardware and soft- ware, as well as infrastructure, hosting, and consulting ser vices in areas ranging from mainframe computers to nanotechnology. The company’s fi ve segments of operations include: Global Technology Ser vices, Global Business Ser vices, Software, Systems and Technology, and Global Financing. IBM, as a world leader in computers and computer software, has a unique method for understanding and applying new technologies for solving technical business problems and lever- aging new technologies in the technology sector. The use of social media and social networking is no different. Companies continue to fi nd ways to use social media sites like Facebook and Twitter to increase their bottom line. At IBM, social networking has already been implemented to generate new ideas, increase em- ployee morale, monitor consumer trends, and increase visibility and sales for the company.

Social networking at IBM is publicly advertised as a creative and innovative way to keep employees connected and keep the company in tune with consumer demands. The framework for internal social networking among IBM employees

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is an employee- edited directory known as “Blue Pages.” This directory is used over 6 million times a day by 400,000 IBM employees to access information on other employees and send them instant messages. Employees at IBM have con- trol over their profi les and can add photos, resumes, or other personal informa- tion to foster a sense of community with other IBM employees. The company points to the sharing of ideas or opinions on new technologies and developments as one of the main advantages of such a site.

IBM also offers an internal network space where employees can post blogs for other employees to read. Blog topics range from personal opinions on various technologies to updates on work that is being done by different groups within the company. The blogs offer a unique way for employees to communicate with each other and keep current on company events.

Wikis Another element of social networking within IBM is information- storing web sites called wikis. The leaders of the various software production teams at IBM man- age these wikis and allow team members to share memos and other information for the entire team to view. Each team member can share his or her progress with the other team members through these wikis, allowing team leaders to monitor the entire project without having to contact each team member directly. The major advantage of this outlet is that IBM employees may work from home or other loca- tions without having to travel to a single destination in order to complete a proj- ect. This is especially important for the 42% of IBM employees that regularly work from locations other than IBM facilities.

IBM has a policy in place that strictly forbids any employee from joining the company’s social- networking platforms anonymously. This ensures that every comment or post made by an IBM employee is transparent to other employees in the company. The onus is on the employees to police themselves and forward any inappropriate comments or posts to upper management.

While these social- networking tools attempt to connect employees, IBM has also leveraged social media to stay connected with customers. IBM developed a social media monitoring software known as the SPSS Modeler, which the com- pany uses to search for customer comments, sentiments, and opinions on vari- ous social- networking platforms like Twitter, Facebook, and online blogs. This tool can mine through large piles of data searching for specifi c text, industry terms, or developing technology that may be pertinent to IBM’s customers. IBM uses this information to stay up- to- date with the latest trends and consumer behaviors. If consumers have positive or negative opinions about IBM products, the com- pany can track the feedback and make changes accordingly.

IBM has also developed a software known as Cognos Consumer Insight, which can perform predictive analytics on the text and data that the SPSS Mod- eler can pull from Twitter, Facebook, etc. This technology takes the data collected by the SPSS Modeler from the SNSs, analyzes the consumer sentiment, and makes predictive analytical decisions based on the information it is viewing. In essence, the computer software is a form of artifi cial intelligence that performs

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the job of marketing analysts. IBM uses this software internally, but also sells it to other large companies and retailers, along with the ser vices necessary for these companies to learn how to analyze the data. Some companies already using this IBM technology are Rosetta Stone, Navy Federal Credit Union, and Money Mailer.

The ingenuity and resourcefulness displayed by IBM leveraging social media tools to enhance their business is a reminder that thinking creatively can benefi t even the largest companies. The use of social networking within the company helps to generate new ideas and develop a sense of camaraderie among the employees at minimal cost to IBM. Employees are allowed to develop a personal identity and share their stories and experiences through blogs and personal pro- fi les. For a company that thrives on creativity and new technology, social network- ing is the perfect way to share ideas and opinions without the limitations that come from simple e-mail correspondence.

Using Social Media for Consumer Data Collection The ethical implications of using social networking to monitor consumer de- mands are far more complex. Unlike using social networking internally to gener- ate discussion among employees bounded by rules and policies, external uses of SNSs allow IBM to monitor what consumers are saying without consumers knowing that they are being monitored. Although this is not an illegal practice because the information is publically posted on social media platforms, the ques- tion must be asked, is it ethical? IBM is openly developing and selling their soft- ware to other companies so that they, too, can track consumer sentiment through social networking and make key business decisions based on information that consumers are sharing on the Internet. The term used by IBM’s vice president for social business and collaboration solutions, Sandy Carter is “analytics.” Carter prefers to focus on the positive results that social networking has within the com- pany, but also admits that analytics has become a key component of “tracking sentiments, and fi nding out how the community is feeling about an issue.” She goes on to say that IBM uses “deep analytic capability to fi nd out what is being said. Then we look at affi nities.” IBM can track users tweeting about the com- pany, users that are the most infl uential tweeters, and so on. Tracking these types of postings allows the company to make decisions based on consumer feedback without the consumers ever knowing that they infl uenced the decision. Carter does not condemn the company’s decision to use social media to analyze con- sumer decisions, and justifi es the practice by making the argument that whether or not your company participates in social media or monitors consumer senti- ment, most brands are already openly discussed by consumers, so you might as well monitor what they are saying.

Legality of Social Networking As social networking grows rapidly, the debate over legal implications of using various social- networking tools continues. IBM is using social networking to sup- port internal innovation and form a closer bond among its various departments. At the same time, the company is attempting to defl ect the focus from its other

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uses of social networking that include developing and using software to track customer sentiments and infl uence consumer behaviors. From a legal standpoint, IBM is not violating any existing laws, but social networking is an area in which laws are constantly evolving. Most of the laws in existence today protect social- networking companies from lawsuits brought on because of information that users have posted on their pages. These types of lawsuits would be relevant to companies like Facebook and MySpace, where users share their opinions and ideas to a larger community. Although IBM encourages their employees to write blogs and share information on their personal profi les, any content that is dis- played by employees must adhere to the IBM code of conduct.

The major hurdle for IBM regarding their external data analytics practice revolves around the privacy issues that SNSs now face on a regular basis. Sites such as Tagged and Facebook have come under legal scrutiny for using members’ e-mail address books to solicit new members, or for broadcasting members’ trans- actions with affi liated web sites on their Facebook pages. The lawsuits these SNSs faced were based on the premise that the consumer or user has certain rights to privacy that these companies violated. If companies like Facebook are coming under fi re for breach of privacy, how does IBM get away with monitoring user information and using it to infl uence consumer decisions without their knowledge? Although no laws currently exist to prevent IBM from continuing this practice, changes are being made by the government and SNSs themselves to slowly limit intrusion into personal information. Companies that participate on SNSs have the same potential liabilities as any one of us has, including copyright infringement, trademark infringement, and defamation. Analyzing information that users openly disclose on their profi le pages to infl uence business decisions is not considered illegal because it is the users’ job to withhold any information that they do not want companies to see.

A person who has a Facebook page and openly shares opinions or personal information on that page is giving Facebook own ership of his/her photos and post- ings; and, accepts the fact that information is publically viewable. Monitoring prac- tices have come under scrutiny by individual users and consumer rights groups, but few lawsuits have challenged this type of data collection. Any lawsuits that have challenged it are usually directed at the SNSs themselves for failing to maintain certain levels of user privacy. Because social networking is a relatively new trend whose potential is not fully understood, the legislation governing this type of tech- nology is not yet up to pace with its rapid growth and expanding capabilities.

It is feasible that within the next 10 years, Sandy Carter and executives at other companies will not be able to rely on social media for consumer analytics. In 2010, the Federal Trade Commission (FTC) made it clear that federal regula- tion may be necessary to protect the private information of consumers if self- regulation fails. At the same time, the U.S. Judiciary Committee has passed the Personal Data Privacy and Security Act and the Data Breach Notifi cation Act, which broaden consumer privacy rights regarding information collected and dis- tributed by “commercial data brokers.” These data brokers are the types of com- panies to which IBM sells its analytic software.

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IBM uses social networking both internally and externally, and the ethical im- plications of those uses are signifi cant. The company openly promotes its usage of internal fi le sharing and blogging, but all employee actions are guided by IBM’s ethics codes and value statements. IBM’s use of analytics to monitor consumers is technically legal, but ethically questionable.

Ethical Implications IBM is one of many large fi rms that uses analytics in its day- to- day operations and continues to develop analytic software for other companies. The company also promotes the use of social- networking tools to share ideas and connect with dif- ferent groups operating in the company. A question still remains about whether or not this and other practices are ethical.

Ethical implications may be considered from two angles: the internal and external or gan i za tion al uses of social networking. A company’s use of social networking to pass along ideas and share personal information internally may be ethical and morally acceptable if no harm is done to any user or the company. Employee stakeholders interested in developing new ideas and increasing wages and benefi ts may help the company with their contributions using social media. Customers and customer advocacy groups may also be interested in purchasing a product that lives up to its stated advertised online purpose and that functions at or above the promised level. Those government, po liti cal groups, and competitors that are interested in ensuring that organizations operate in fair and legal ways would be observant of the ways social media methods are used with external groups, including consumers. Stockholders, suppliers, vendors, and companies also have a stake, not only in maximizing their profi ts through using social media, but also in acting socially responsible toward each other to ensure business growth, while protecting consumers and the environment.

Using social networking to share ideas and information with other employees or departments internally also aligns with the responsibilities and moral obligations a company has to its various stakeholders. Sharing new thoughts and ideas with others through social- networking software can potentially increase opportunities for successful innovation and product development. Additionally, as employees connect with each other at human and communal levels, morale and motivation to act ethically increase.

Darker Sides of Social Networking Using social networking to monitor consumers and analyze trends without their knowledge is a different matter, one that is ethically questionable. Legally, using data collected by consumers to analyze and infl uence certain business decisions is permitted, but the legislation protecting consumers is constantly changing and evolving with technology. As quickly as the legal system is working to catch up with technology, it could be a practice that is illegal in a matter of years.

Corporations have an ethical responsibility to inform consumers; not misrepre- sent or withhold information from consumers; not force or take undue advantage of consumers; and take “due care” to prevent any mishaps. Based on this framework,

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companies like IBM are acting unethically by using social networking to perform customer analytics. First and foremost, the very nature of collecting data from Facebook and MySpace without letting the customer know that they are doing so breaks the fi rst rule of informing the customer. If customers are aware that they are being monitored and permit companies to collect data from their accounts, then there may be no legal or ethical issues. An alleged argument about some data- collection methods used in analytics to collect unbiased information, is that this pro cess can occur without consumers’ awareness. Corporations also have a responsibility to not misrepresent or withhold information about a product or ser vice that would hinder a consumer’s free choice. By setting up corporate SNSs and then luring consumers to view the pages through daily deals, games, and prizes, the corporation would be withholding information from the consumer. A person without specifi c marketing knowledge might think that playing a game or leaving a comment on the Facebook page of a company is of little or no con- sequence. Meanwhile, the company is collecting and analyzing such activity while strategizing how to translate a product or brand into a consumer need and choice.

A major aim of ethical reasoning is to gain a clear focus on problems to facili- tate acting in morally responsible ways. In this case, the company that is know- ingly collecting information from consumers without their knowledge is morally responsible for the harmful effects of their actions when they knowingly and freely acted or caused the act to happen and knew that the act was morally wrong, or if they knowingly and freely failed to act or prevent a harmful act, and they knew it would be morally wrong for a person to do this. Companies like IBM that choose to monitor Facebook, Twitter, and MySpace for data may walk a thin line between providing consumers with desirable products and violating consumer rights. Government agencies such as the FTC work towards protecting consumers from certain acts by providing laws to promote consumer choice, and protecting con- sumer privacy. Specifi cally, the FTC has certain guidelines represented in the FTC Act that allows it to work towards preventing deceptive acts. In Section 5 of the act, the term “deceptive” is defi ned as a practice that is misleading to con- sumers, or one that affects consumers’ behavior or decisions about the product or ser vice.

Advancements in technology have certainly blurred the lines between what is right and wrong, ethical and unethical. A major issue with regard to the ethical implications surrounding the use of technology in the business world is that tech- nology seems to advance much more quickly than related legislation.

Questions for Discussion 1. What are the benefi ts and risks associated with a company’s use of social

networking? 2. Are there any signifi cant differences between a company’s use of social

networking technologies and an individual use? 3. As a social media user, are you concerned that your information is tracked for

“advertising” purposes? Why or why not?

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6 The Corporation and Internal Stakeholders 417

4. Compare IBM’s private social network Blue Pages with a public social- networking site like Twitter or Facebook. Do you think user information is any safer on Blue Pages? Why or why not?

5. What responsibilities do companies have regarding private company social- networking sites?

6. Do you think it’s right for companies to collect and analyze user data from social- networking sites in order to infl uence consumers? Why or why not?

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Notes

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3. Srivastava, A., Gayatri, N., Vipul, M., and Pandey, S. (2012). Corporate social re- sponsibility: A case study of TATA Group. Journal of Business and Management, 3(5), 17– 27.

4. Weiss, J. (2011). An introduction to leadership. San Diego, CA: Bridgepoint Education; Barnard, C. (1939). The functions of the executive, 259. Cambridge, MA: Harvard University Press; Selznick, P. (1983). Leadership in administration: A so cio log i cal interpretation. Berkeley: University of California Press; Rost, J. (1993). Leadership for the twenty- fi rst century. West- port, CT: Praeger.

5. Selznick, P. (1983). Leadership in administration. 6. Karakas, F., and Sarigollu, E. (2012). The role of leadership in creating virtuous and

compassionate organizations: Narratives of benevolent leadership in an Anatolian tiger. Journal of Business Ethics, 113(4), 663– 678; Kouzes, J., and Posner, B. (2003). Credibility: How leaders gain and lose it, why people demand it, rev. ed. San Francisco: Jossey- Bass; Finkel- stein, S. (2003). Why smart executives fail. New York: Portfolio; Zauderer, D. (September 22, 1992). Integrity: An essential executive quality. Business Forum, 12– 16.

7. Collins, J. (2001). Good to great, 21. New York: HarperCollins. 8. Ibid. It should be noted that the companies and leaders Collins studied achieved

their greatness over 15- year time periods that spanned the 1970s, 1980s, and some into the 1990s. Although many of the companies are not currently great, Collins’s best practices and principles continue to be widely read and used by corporations.

9. Waddock, S., and Smith, N. (2000). Relationships: The real challenge of corpo- rate global citizenship. Business and Society Review, 104(1), 47– 62; Clarkson, M. (1995). A stakeholder framework for analyzing and evaluating corporate social per for mance. Acad- emy of Management Review, 20, 91– 117; Liedtka, J. (1998). Constructing an ethic for business practice: Competing eff ectively and doing good. Business and Society, 37(3), 254– 280.

10. For more on this perspective, see Svendsen, A. (1998). The stakeholder strategy. San Francisco: Berrett- Koehler; and also Quinn, D., and Jones, T. (1995). An agent morality view of business policy. Academy of Management Review, 20(1), 22– 42.

11. Waddock, S., and Graves, S. (March– April 1997). Does it pay to be ethical? Business Ethics, 14; Waddock, S., and Graves, S. (1997). The corporate social performance– fi nancial per for mance link. Strategic Management Journal, 18(4), 303– 319; Waddock, S., and Graves, S. (1997). Quality of management and quality of stakeholder relations: Are they synony- mous? Business and Society Review, 36(3), 250– 279; Waddock, S., and Graves, S. (2000). Beyond built to last . . . stakeholder relations in built- to- last companies. Business and Soci- ety Review, 105(4), 393– 418.

12. Based on Svendsen, op. cit., tables 1 and 2. 13. Barnard, op. cit.

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6 The Corporation and Internal Stakeholders 419

14. Collins, J., and Porras, J. (1994). Built to last: successful habits of visionary companies, 78. New York: HarperCollins.

15. Ford, R. (2004). David Neeleman, CEO of JetBlue Airways, on people + strategy = growth. Academy of Management Executive, 18(2), 141; JetBlue. (May 8, 2013). A day in the life: Recruiting. JetBlue.com. http:// blog .jetblue .com /index .php /2013 /05 /08 /a -day -in -the -life -recruiting /, accessed January 7, 2014.

16. Collins and Porras, op. cit., 78. 17. Ibid. 18. Based on Svendsen, op. cit., 1– 2. 19. Based on ibid., 73. 20. Ibid., 70. 21. Based on ibid., 70. 22. Greenleaf, R. (1977). Servant leadership: A journey into the nature of legitimate power and

greatness. Mahwah, NJ: Paulist Press. 23. Svendsen, A., and Boutilier, R. Stakeholder 360: Mea sur ing the quality of stake-

holder relationships. Centre for Innovation in Management. http:// www .cim .sfu .ca /folders / research /6 -stakeholder -360 .pdf, accessed January 7, 2014.

24. Ibid. 25. Fulmer, R. (Winter 2001). Johnson & Johnson: Frameworks for leadership. Or gan-

i za tion al Dynamics, 29(3), 219. 26. Trevino, L., Hartman, L., and Brown, M. (Summer 2000). Moral person and moral

manager: How executives develop a reputation for ethical leadership. California Manage- ment Review, 42(4), 128– 142.

27. Brelis, M. (November 5, 2000). Herb’s way. Boston Globe, F1; O’Neill, M. (May 28, 2001). The chairman of the board looks back. Fortune, 63– 76.

28. Brelis, op. cit., F4. 29. Ibid. 30. Tichy, N., and McGill, A. (2003). The ethical challenge: How to lead with unyielding

integrity. San Francisco: Jossey- Bass. 31. Sisodia, R., Sheth, J., and Wolfe, D. (2007). Firms of endearment: How world- class

companies profi t from passion and purpose. Upper Saddle River, NJ: Wharton School Pub- lishing.

32. Ibid., 6. 33. Ibid., 13. 34. Ibid., 16. 35. Ibid. 36. Ibid., 19. 37. Hanna, J. (March 31, 2008). JetBlue’s Valentine’s Day Crisis. Harvard Business

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