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THE ORGANIZATION OF ETHICS AND THE ETHICS OF ORGANIZATIONS: THE CASE FOR

EXPANDED ORGANIZATIONAL ETHICS AUDITS

Michael Metzger, Dan R. Dalton, John W. Hill

Abstract: The United States Sentencing Commission's guidelines for the sentencing of organizations found guilty of violating federal laws re* cently became effective. Dramatically increased penalties are possi- ble under these gudelines, but so too is a substantial reduction in the penalties imposed on organizations that have an effective program in place to prevent and detect violations. This provides corporations with a tremendous new incentive in inaugurate organizational ethics audits both to avoid violations in the first instance and to reduce the penalty imposed in the event that a violation occurs. We argue, how- ever, that there have always been very good reasons for organizations to conduct such audits, which emphasize the identification of the or- ganizational factors that create incentives for unethical behavior. Cor- porate ethics programs initiated without reference to such factors cannot reasonably be expected to be effective in improving a company's internal ethical environment.

Introduction

ACCORDING to recent surveys, 90% of Fortune 500 firms and abouthalf of all companies have some form of corporate ethics code.^ An- other recent survey indicates that managers see corporate codes as the most effective way to encourage ethical corporate behavior.^ But the accuracy of such managerial perceptions is called into question by the findings of other researchers.

Corporate controllers and managerial accountants surveyed in a recent study, for example, indicated that they perceived no positive behavioral changes attributable to the adoption of a corporate code.^ Perhaps even more disturbing, these same respondents indicated that the pressure to achieve specific income and ROI targets was actually greater in companies that had adopted codes than in those with no code.* Additional confirmation of the limited impact of corporate codes can be found in a recent empirical study which found no statistically significant correlation between corporate codes and corporate regulatory violations.^

Dispiriting as these findings may be, however, they do not necessarily suggest anything wrong with corporate codes per se. Instead, the failure of extant corporate codes to produce the desired results^ may instead be

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attributable to imperfect drafting and inadequate implementation. For exam- ple, a recent survey of 700 companies indicated that only 28% provided actual ethics training for their employees.^ Companies without ethics imple- mentation programs are at best guilty of stunning naivete, and at worst, corporate negligence.

Yet, in our judgment, even those companies with implementation pro- grams have failed to take the steps necessary to enable their ethics code to achieve its maximum possible effectiveness. Such firms have ignored the basic fact "that behavioral change is almost always linked to structural organizational change."^ Ethics implementation programs that do nothing "to relieve the organizational pressures to be unethical"^ seek to "encourage ethical behavior in the midst of [a] corporate organization that continues to discourage it."'°

Thus, as we will discuss in some detail later in this article, there have always been excellent reasons why corporations seeking to promote ethical employee behavior should perform organizational ethics audits designed to identify intraorganizational practices, procedures, and pressures that en- courage unethical behavior." Corporations that were unaware of those rea- sons or that found them unconvincing now have a powerful new incentive to inaugurate an organizational ethics audit program. The United States Sentencing Commission's guidelines for the sentencing of organizations found guilty of violating federal laws became effective on November 1, 1991.'^ Under the new guidelines, dramatically increased penalties (as high as $290 million) are possible for some types of violations. The defendant organization's "culpability score" now plays a major role in the penalty determination process. So, for example, an organizational history of similar offenses or the active involvement of high-level corporate personnel in the instant offense will increase the ultimate penalty imposed. As a result, U.S. companies have never before had greater incentives to do everything they can to avoid illegal behavior. An organizational ethics audit emphasizing the "organizational" could play an effective, if not an essential, part in minimiz- ing a company's liability exposure.

Of course, even the most effective organizational ethics audit will not totally eliminate the risk of illegal behavior. However, the very fact that a company has such an audit program can reduce it's liability exposure under the new guidelines, which provide that "an effective program to prevent and detect violations of the law" can serve to reduce a company's culpability score and fine.'^ In a similar vein, recently announced Justice Department guidelines state that companies regularly conducting environmental compli- ance audits and reporting discovered violations promptly qualify for "pros- ecution leniency."'^

Faced with such powerful incentives, corporate America should now be more receptive to the idea of a thorough organizational ethics audit program. In the following sections we delineate the components of such a program, commencing with a discussion of corporate ethics codes.

EXPANDED ORGANIZATIONAL ETHICS AUDITS 29

Corporate Codes

Proponents of corporate ethics codes assert that such codes can serve many useful purposes. The fact that a company has a code may enhance its public image and, in the event of organizational wrongdoing, add to the credibility of a corporate assertion that the wrong at issue was the product of the malfeasance of an individual employee or small group of employees, rather than a reflection of company policy.^^ Codes can provide guidance to employees who do want to do the "right thing,"'^ bolstering individuals' ability to resist superiors' unethical requests,'^ and legitmating the discus- sion of overtly moral issues within the organization.'^

Many corporate codes, however, may do little more that serve as a pretext for public posturing, as they provide little meaningful guidance for manag- ers. Such codes have been described by critics as "bland lists of platitudes"'^ made up of "public relations boilerplate"20 and "motherhood and apple pie" pronouncements.^' Lack of substance, however, is only one problem with extant corporate ethics codes.

The substance of many corporate codes has been criticized as "legalis- t i c , " " and one study found that 91% of the codes examined grounded the code on the company's legal responsibilities.^^ There are several reasons why it is unwise to suggest that a company's ethical obligations emanate from and are coextensive with its legal obligations.

Employees admonished to behave ethically because their failure to do so may visit negative legal consequences on their employer are unlikely to see such an admonition as very compelling in situations where the perceived odds that their wrongdoing will be detected are slim. Codes that primarily emphasize preservation of the employer's reputation are vulnerable to a similar criticism: employees engaging in questionable practices that can harm a company's reputation rarely do so if they believe that they are likely to be caught.^* One need not deny the essential truth behind such a con- sequentialist view of corporate ethics (unethical behavior can indeed lead to undesirable legal penalties and/or damage to corporate image) to see the danger in the hidden message such codes unwittingly contain: if the sole purpose of the code is to avoid unpleasant consequences it need not be followed when the risk of such consequences is slight or nonexistent.

In addition, whatever the theoretical merits may be of the arguments in the perennial debate over the extent of business's moral duties beyond compli- ance with existing legal rules,^^ as a practical matter companies that treat existing legal rules as the only constraint on their behavior risk disaster. The law is dynamic rather than static, and the Johns-Manville case amply illus- trates the punishing liability that may flow from actions that were legal when taken.2**

Admonishing employees to "do the right thing" for it's own sake can- not, however, redeem an ethics code if it fails to address fundamental issues or if its focus is too narrow. Extant studies of the content of corporate codes indicate that items focused on employees' ethical obliga-

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tions to the firm tend to predominate, to the exclusion of items addressing the firm's moral duties to its external constituencies.^^ One can comfort- ably acknowledge employers' legitimate and compelling interest in ques- tions such as employee theft and employee conflict of interest^^ while still maintaining that companies adopting ethics codes for no purpose other than the reduction of their legal liability exposure would be well advised to broaden their codes' focus to embrace their duties to their broader constituencies.

But codes that do no more than contain a laundry list of ethical norms, none of which is assigned any relative priority, are also unlikely to be very effective.^' "[P]riorities are the true values of a firm,"^'' and in the absence of a definitive statement of the firm's priorities in its code, middle and operating level managers can be expected favor economic goals in any conflict between such goals and announced ethical norms.^' "Ambiguity about priorities" has been identified as a major source of corporate devi- ance,^^ a finding supporting the assertion that '*[i]f legal and moral con- straints are to be obeyed, they must be accorded higher priority than conventional economic goals, and this must be stated repeatedly and

Even a code that avoids all of the pitfalls mentioned above cannot reason- ably be expected to be self-executing, though many companies that have adopted ethics codes have apparently harbored such expectations given their failure to take any serious steps to implement their codes.̂ "^ All too often, new employees are merely asked to read and sign off on the corporate code upon accepting employment'^ and existing employees are required to sign annual compliance letters certifying that they understand, and have com- plied with, the

Implementation

Draining

Education is a "key method for institutionalizing ethics awareness."^^ Communication of the company's rules to affected employees is obviously an essential component of an effective compliance program,^* but an effec- tive training program should go beyond such communication to include sessions designed to sensitize employees to the ethical dimensions of busi- ness behavior and to give them practice applying the code to realistic prob- lems that they are likely to confront. Corporate ethics training should also emphasize the proper way for supervisors to respond to subordinates' ethi- cal concerns. Properly conducted ethics training programs can go a long way toward bringing morality "out of the corporate closet"" and making the discussion of moral issues "a familiar, comfortable part of the manager's job."^° Sadly, many corporate ethics training programs are unlikely to achieve these goals. One recent survey of Fortune 500 companies, for exam- ple, disclosed the fact that over 50% of those companies with training pro- grams devoted less than five hours to ethics.^'

EXPANDED ORGANIZATIONAL ETHICS AUDITS 31

Channels of Communication

A candid and ethical organizational culture is one where information flows freely,^^ and effective internal monitoring is impossible without open channels of communication.^^ Reducing the intraorganizational barriers to the open discussion of moral issues is a first step toward the creation of of a candid culture, but there are other important steps companies must take if they are to have the best chance of minimizing both the instances and effects of unethical behavior by their employees. Although one recent survey indi- cated that only 17% of the companies surveyed had an internal hotline or other provision for anonymous employee reporting of ethical concerns,'^* there is widespread agreement that such a device is essential to an effective corporate ethics program.^' Whistleblowers are "one of the least expensive and most efficient sources of feedback about mistakes the firm may be making," so they should be listened to even if they are wrong.*® Further- more, the costs of public whistleblowing are so dramatic that any device which allows top management to learn of a problem and respond to it before a dissident employee goes public with it can be invaluable.*^

But structural changes such as hotlines and/or corporate ombudsmen will not assure honesty in intracorporate communication*^ unless managerial practice is conducive to frankness. Are the bearers of bad news killed?*' Do upper level managers commonly adopt an "I don't want to know" attitude, sending subordinates the message that they don't really care how results are obtained so long as they are obtained?^" If so, there is no mystery behind the observed tendency for bad news not to reach the top of the organization.^^ The Pinto^^ and the Corvair^^ cases furnish sad, but by no means isolated, examples of situations where managerial practice stifled internal dissent to the ultimate detriment of the organization.

Inspection

Another device which can both prevent the occurrence of undesirable behavior and enhance the chances of its discovery is an effective program of employee monitoring. One study of middle managers cited employee monitoring as a key element in the cultivation of ethical corporate behav- ior.̂ * Saul Gellerman has suggested increasing the frequency of audits and spot checks, scheduling audits irregularly, conducting some surprise audits, and following quickly on the heels of some audits with others.^^

Punishment of Offenders

However evidence of a code violation is uncovered, the way in which those who violate the code are treated is of essential importance to the success of the code. Put simply, punishment of transgressions should be prompt, public,^^ serious,^^ and certain.^* If those who violate ethical norms are not punished severely, "the word spreads that the boss is not really interested in ethics."^' Top management plays the fundamental*" role in establishing the ethical "tone" of a company,**' and that what top manage-

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ment does,^^ rather than what it says,^^ is the ultimate determinant of the message sent to subordinates. One commentator correctly observes that:

Values are what you say you believe. Ethics are how you actually behave.^ Thus, for example, when Continental Illinois merely reprimanded a success- ful loan officer who had borrowed money from a client from whom he had also purchased loans, it "sent a clear message to other managers about what top management really thought was important."^^

Ethics Audits

Although a properly drafted code, adequate training, open charmels of communication, frequent inspections, and firm treatment of transgressors are all essential elements of a corporate ethics implementation strategy, more is needed if a company is serious about doing everything possible to ensure ethical employee behavior.^^ A number of organizations apparently understand this, and recently it has become increasingly fashionable for organizations to conduct ethics audits.^'' These audits may involve written instruments designed to find out how employees perceive their ethical envi- ronment,^* audit committee interviews with company auditors to gain their insights concerning the company's ethical environment,^' or employee in- terviews designed to ferret out ethics abuses^^ or test the adequacy of exist- ing policies or procedures."

Such audits, while laudable, are nonetheless inadequate because they fail to identify the organizational causes of unethical behavior. To do that, audits are needed that more explicitly focus more on the organizational dimension. What is the "institutional logic" of the organization?'^

Organizational Ethics Audits

To discover their "institutional logic," companies must engage in a prob- ing, objective self-examination. For a corporate ethics policy to succeed, "individuals must be motivated to do the right thing."'' What does the existing incentive system motivate employees to do? As Steven Kerr ob- served in his classic article:

Most organisms seek information concerning what activities are rewarded, and then seek to do (or at least pretend to do) those things, often to the exclusion of activities not rewarded.'^

An organization's reward system is the key to understanding its culture and "an unequivocal statement ofthe corporation's values and beliefs."'^ Which plant manager is rewarded, the one with the highest accident rate or the one with the best environmental compliance record?'^

Two things are at issue here. Does the current incentive system reward ethical behavior? Worse yet, do existing systems positively encourage un- ethical behavior? A recent survey of large corporations found that although many of the respondents had adopted an ethics code of some sort, "almost no company had ... implemented a reward system for reinforcing the

EXPANDED ORGANIZATIONAL ETHICS AUDITS 33

achievement of ethical goals."'' This despite another well publicized survey of managers which found that 62% of the respondents agreed that "the equalization of managerial rewards and punishments for social performance with those for financial performance" would have a positive impact on corporate behavior.'^ The experience at least one company that has tried to positively reward ethical behavior would appear to confirm such managerial perceptions. In response to its conviction in the Kepone case. Allied Chem- ical changed its compensation system so that one-third of management bo- nuses derived from "environmental compliance, safety, antitrust, civil rights and other non-fiscal goals," an action which produced 75% reduction in workplace injuries.''

More important than rewarding ethical behavior, however, is the identifi- cation of organizational incentives for unethical behavior. Bizarre as it may seem at first glance, "numerous examples exist of reward systems that are fouled up in that behaviors which are rewarded are those which the rewarder is trying to discourage, while the behavior that he desires is not being rewarded at all."*" Managerial control systems that emphasize "the short- term and the obvious"*' can create perverse incentives that produce long- range problems. As Steven Kerr observed:

[M]any organizational reward systems pay off for short-run sales and earn- ings only. Under such circumstances it is perfectly rational for officials to sacrifice long-term growth and profit (by selling off equipment and prop- erty, or by stifling research and development) for short-term advantages.*^

Thus, the G.M. plant manager whose plant produced the worst quality cars is alleged to have received some of the highest bonuses because company policy empahsized cost-cutting and his plant had low costs."^

Likewise, plant managers whose compensation and promotion prospects depend in substantial part on short-term ROA measures are virtually com- pelled to produce "good" numbers by underinvesting in training, mainte- nance, and capital equipment, particularly when producing such numbers can produce a promotion that will allow them to escape the plant before the consequences of under-investment become obvious.*^ Similarly, division managers evaluated on ROI can manipulate the ROI calculation in a number of ways that are inimical to the firm's interests. If, for example, absorption costing measures are used in the evaluation, such a manager may be tempted to produce excess inventory so that fixed overhead may be spread over more units of product, yielding a higher income figure.*^

All too often companies shoot themselves in the foot by thoughtlessly adopting practices that virtually demand that their employees pursue courses of conduct which are not in the company's ultimate interests. Many organizations become victims of deceptive reporting schemes by their em- ployees because they gave their employees "strong incentives" to engage in such schemes.** Mortgage bankers whose compensation plans are based in part on the amounts they lend can easily become "borrower-advocates" because they have "a strong financial incentive to approve, rather than deny.

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many loan applications."^'' That such incentives create loan portfolios of poor quality should hardly come as much of a surprise. Even so, the institutions that adopted them probably were surprised by the results they produced.

The effects of such perverse incentives are exacerbated in companies that lack any negative feedback mechanisms aimed at searching out and punish- ing those who engage in self-maximizing behavior at the expense of the organization.^^ As Saul Gellerman has observed: "[M]any managers have been promoted on the basis of 'great' results obtained in just those ways, leaving unfortunate successors to inherit the inevitable whirlwind."®' This is possible because "the problems that such people create are not always traced back to them."̂ ** Robert Jackall argues that the lack of such tracking systems implicitly encourages scapegoating because it allows people to outrun their mistakes,^' making such organizations "systems of organized irresponsibility."'2 It is of critical importance, therefore, that companies not just look at results, but that they insist on finding out how "good" results were obtained.^^ It is also imperative that companies examine the structure of their promotion systems to be certain that "[c]utting corners catches up with you," making short-term behavior counterproductive for managers who might otherwise be tempted to engage in it.̂ *

Without such incentive, feedback, and promotion systems, for example, the possibility that their corporate employer may have to pay out warranty claims or product liability judgments in the future may simply not be an important part of the reality of plant managers who must meet monthly production quotas.^^Likewise, unless mortgage banking managers create financial disincentives against questionable lending practices, charging back losses from fraud against commissions earned, branch offices, and profit centers, they can expect a substantial number of questionable loans.^^

Nor can employees who respond to such perverse incentives be seen as particularly blameworthy, given the "double whammy" effect of poorly de- signed measures of performance and non-existent negative feedback mech- anisms: they not only encourage employees to further their own interests at the expense of their employer by rewarding those who do; they also penalize employees who do put the employer's interest first with lower bonuses and diminished chances of promotion. Even well intentioned employees can be forgiven for asking themselves how much they owe a company that puts them in such a position. Any company that expects a corporate ethics code to countervail the corrupting effects of such warped institutional logic is ignoring human nature '̂̂ and living in a dream from which a rude awakening can be expected.'*

Conclusion

Corporate ethics codes have been justly criticized for reflecting "a naive belief that existing and largely unstated oversight and surveillance proce- dures, coupled with stern statements about the importance of ethical con- duct, are sufficient to ensure that a firm's ethical standards will be

EXPANDED ORGANIZATIONAL ETHICS AUDITS 35

followed."" To assure the creation of an ethical internal environment, com- panies must conduct a rigorous and thorough examination of existing sys- tems and incentives to determine what behaviors are currently being rewarded and to ascertain employee perceptions about the current state of the prevailing intemal ethical climate. Due to the sensitive nature of the inquiry and the expected difficulty with getting candid employee responses, such an organizational ethics audit is most likely to be effective when con- ducted by outsiders.""*

The process envisioned here plainly goes far beyond the standard ethics "audit," but we believe that the rewards of attempting it will be proportion- ate to the effort expended. Such an extensive audit could be viewed as "a corporate wellness tool;" a way for the corporation to understand itself better.'"' For a host of reasons too numerous to detail here (but, we suspect, ail too familiar to our readers) people at the top of an organization may know very little about the reality confronting their subordinates.'°^

From a purely profit-maximizing perspective, it should be obvious that a well-executed organizational audit of the type described here could yield significant returns in the form of greater organizational goal alignment,'"^ improved employee morale,'°* greatly improved information flows,'°^ and reduced exposure to the kind of incidents that damage companies' reputa- tions and expose them to dramatic legal liability.'°^ In these senses, at least, it seems to us that good ethics is, indeed, good business. We are familiar with the numerous studies which have found no demonstrable relationship between corporate social responsibility and firm performance.'"' We ques- tion whether the measures of corporate social responsibility used these stud- ies truly capture much socially responsible behavior,'"* and we note that many in the private sector appear to disagree with researchers on this point.'"9

We think that an effective organizational ethics audit program can go a long way toward preventing the kind of "catastrophes" that can undeniably have a negative impact on the bottom line. We agree that it is at best disin- genuous to suggest that doing the ethical thing will always be the profitable thing.''° Nonetheless, because the focus of organizational ethics audits as we envision them is on the prevention of firm action unintended by top management rather than upon situations where firms cotisciously choose to maximize the bottom line at the expense of their ethical obligations, we see substantial harmony between organizational ethics audits and business organizations' legitimate efforts to maximize their profits.

Notes

'Murphy, P.: 1988, 'Implementing Business Ethics', Journal of Business Ethics 7, pp. 907-15, p. 904. Another survey found that only 56% of the companies sampled had codes, with a positive correlation between company size and the adoption of a code. See Sweeney,

36 BUSINESS ETHICS QUARTERLY

R.B., and H.L. Siers: 1990, 'Survey: Ethics in Corporate America', Management Accounting (June), pp. 34-40, p. 34.

^Toiiche Ross: 1988, Ethics in American Business (Touche Ross & Co., New York). Other commentators, however, have noted the existence of "a gap between what mangers hope to accomplish with corporate codes and what is actually accomplished." Robin, D., M. Galloutakis, F. David, and T. Moritz: 1989, 'A Different Look at Codes of Ethics', Business Horizons 32 (Jan.-Feb.), pp. 66-73, p. 71. This petception is echoed in Lane, M.R.: 1991, 'Improving American Business Ethics in Three Steps', The CPA Journal (Feb.), pp. 30-34, p. 30.

^Rich, A.J., C.S. Smith, and RH. Mihaiek: 1990, 'Are Corporate Codes of Conduct Effective?', Management Accounting (Sept.), pp. 34-35, p. 35.

^Ibid. the authors tentatively attribute this phenomenon to the greater size of the companies adopting codes. Other possible explanations also suggest themselves. For example, compa- nies with such heightened internal pressures may adopt codes in an attempt to counteract the tendency of such pressures to produce undesirable employee behavior. For those unencum- bered by an exposure to managerial accounting, ROI (retum of investment) is a measure by which top corporate management attempts to gauge which intraotganizational investment centets are most profitably using the funds which have been entrusted to them. It is calculated by multiplying a center's margin (its net operating income divided by its sales) and its turnover (its sales divided by its operating assets). See Garrison, Ray H.: 1979, Managerial Accounting (Business Publications, Inc., Dallas, Texas), pp. 389-90.

^Mathews, M.C.: 1987, 'Codes of Ethics: Oi;ganizational Behavior and Misbehavior', Research in Corporate Social Performance and Policy 9, pp. 107-30, p. 119. In this study, firm size and industry were found to be far more significant variables than the presence or absence of a corporate code.

^We acknowledge the possibility that, in some cases, corporate codes have had the desired effect. In other words, some companies may have adopted ethics codes purely for public relations purposes. Few things are more unlikely than a code adopted for such purposes having a positive impact on corporate behavior. Our discussion, however, presupposes the existence of a bona fide desire for an effective ethics program.

''Kaplan, J.: 1991, 'Now is the time to review corporate compliance programs', Ethikos 5(1), pp. 8-9, p. 11. Another study found that only 15% of firms had ethics modules in their training programs, while about 30% discussed ethical concerns in management or policy sessions. Murphy, op. cit., p. 909.

^Cressey, D.R., and C.A. Moore: 1983, 'Managerial Values and Corporate Codes of Ethics', California Management Review 25(4), pp. 53-77, p. 73.

id., p. 74.

audits are not to be confused with the various forms of "social" audits designed to measure an organization's social performance. For an extensive discussion of the various forms of such audits, see Belkaoui, A.: 1984, Socio-Economic Accounting (Quorum Books, Westport, Conn.), pp. 262-94. For a seminal work in the area, see Bauer, R.A., & Fenn, D.H.: 1972, The Corporate Social Audit (Russell Sage Foundation, New York).

'^U.S. Sentencing Commission: 1991, 'Sentencing Guidelines for Organizational Defendants', Federal Register 56(95), pp. 22786-22797. For discussions ofthe new guide- lines and their importance to business, see Kaplan, op. cit., p. 8; Singer, A.W.: 1991, 'Ethics programs could save companies millions under new sentencing guidelines', Ethikos 4(4), pp. 1-4; Wallance, G.: 1991, 'Guidelines on Corporate Crime Emphasize Prevention Programs', National Law Journal (July 1) pp. 22-23.

EXPANDED ORGANIZATIONAL ETHICS AUDITS 37

There is some evidence, however, that many companies are ignorant of the existence and the import of the guidelines. See Hayes, A: 1991, 'Corporate Sentencing Guidelines Thgger Limited Initial Response', Wall Street Journal (Nov. 1), pp. B l , B7.

'^Even where federal offenses are not at issue and the guidelines are not applicable, the existence of such a program is likely to have a significant impact on judges' and jurors' attitudes toward a defendant corporation. At least one scholar has suggested that the impo- sition of corporate liability should be contingent upon the existence or non-existence of a "corporate ethos" which encouraged corporate misconduct. See Bucy, P.H.: 1991, 'Corporate Ethos: A Standard for Imposing Corporate Criminal Liability', Minnesota Law Review, 75, pp. 109S-1184. An effective organizational ethics audit program presumably would go a iong way toward disproving the existence of such an ethos.

^*Moses, J., and W. Lambert: 1991, 'Companies Given Spur to Uncover Own Environ- mental Wrongdoing", The Wall Street Journal, Sept. 25, p. B2.

^*Pitt, H.L., and K.A. Groskaufmanis: 1990, 'Why a Corporate Code may not Protect You', Across the Board (May), pp. 22-25, p. 24.

'^An employee troubled by an existing or contemplated corporate practice can say: "Hey, it's not just me saying this. Our own code prohibits this kind of thing." For a survey in which the majority of respondents thought that a code would help subordinates refuse improper requests from their superiors, see Brenner, S.N., and E.A. Molander: 1977, 'Is the Ethics of Business Changing?', Harvard Business Review 55 (Jan.-Feb.), pp. 57-71.

^̂ On the general reluctance of managers to raise explicitly moral concerns, see Bird, F.B., and J.A. Waters: 1989, 'The Moral Muteness of Managers', Business Ethics 32, pp. 73-88; Jackall, R.: 1988, Moral Mazes (Oxford Press, New York, NY) pp. 104-05.

^^Bavaria, S.: 1991, 'Corporate Ethics Should Start in the Boatdroom,' Business Horizons 34(Jan.-Feb.), pp. 9-13,p. 9.

'̂'Laczmiak, GR., and P. Murphy: 1991, 'Fostering Ethical Marketing Decisions', of Business Ethics 10(4), pp. 259-71, p. 268.

Gallourakis, David, and Moritz, op. cit., p. 66. s, op. cit., p. 115. Neither of these outcomes is too surprising when one considers

the fact that corporate counsel is the official most likely to be involved in drafting the code. •Chronikos': 1991, Ethikos 5(1), p. 10.

^^Interestingly enough, one study found a higher incidence of legal violations in compa- nies with codes emphasizing corporate reputation. See Mathews, op. cit., pp. 123-24.

^̂ We do not intend to tread here on the well trampled ground of this debate. The literature on the issue is extensive and a meaningful discussion of it is beyond the scope of this article. While most readers are quite familiar with the debate, a nice summary of the arguments can be found in Goldman, A.: 1980, TTie Moral Foundations of Professional Ethics (Rowman and Littlefield, Totowa, NJ), pp. 230-64.

^̂ In 1982, Johns-Manville filed for reorganization under Chapter 11 of the Federal Bankruptcy Act due to thousands of lawsuits Tiled by former employees or their next-of-kin. The suits sought to recova for death or injuries allegedly attributable to exposure to asbestos while working for the company. The exposures in question were not prohibited by any existing fedetal or state law. For a discussion of the Johns-Manville case in particular and of the dynamic nature of the law in general, see Silverstein, D.: 1987, 'Managing Corporate Social Responsibility in a Changing Legal Environment', American Business Law Journal 25(3), pp. 524-66.

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^'Bavaria, op. cit., p. 9; Cressey and Moore, op. cit., p. 58; Mathews, op. cit., p. 115; Robin, Gallourakis, David, and Moritz, op. cit., p. 72.

^^For a source acknowledging the internal focus of most corporate codes but arguing that "the large number of possible conflicts against the corporation seem to justify discussion of them," see Benson, G.C.S.: 1989, 'Codes of Ethics', Journal of Business Ethics 8(5), pp. 305-19, p. 312.

29see Weller, S.: 1988, "The Effectiveness of Corporate Codes of Ethics', Journal of Business Ethics 7(5), pp. 389-95; p. 393; 'Making Ethics a Part of a Company's "Mythol- ogy"': 1991, Ethikos 4(4), pp. 12-13, p. 13.

'•^osmer, L.T.: 1987, The Ethics of Management (Irwin, Homewood, Illinois), p. 154. Hosmer believes that codes are doomed to be ineffective because "it is not possible to state the norms and beliefs of an organization relative to the various constituent groups... clearly and explicitly, without offending at least one of those groups." Ibid.

^^Ibid., p. 169. ^^See Szwajkowski, E.: 1983, 'Organizational Illegality: Theoretical Integration and

Illustrative Application', Academy of Management Review 10(3), pp. 558-567, p. 563. Szwajkowski observes that although ethics and profit are both typically formalized as corporate priorities, directives concerning profit are more numerous and carry more implied authority.

'^Waters, J.A., and F. Bird: 1987, 'The Moral Dimension of Organizational Culture', Journal of Business 7(1), pp. 15-22, p. 21.

^^Several commentators have noted a tendency for companies to devote too little attention to implementation issues. See, for example Murphy, op. cit, p. 907; Pascale, R.: 1985, 'The Paradox of "Corporate Culture": Reconciling Ourselves to Socialization' California Man- agement Review 27(2), pp, 26-41, p. 28; Singer. A.W.: 1991, 'Ethics, "quality" and the Persian Gulf War', Ethikos 4(6), pp. 1-3, 16, p. 3.

y, op. cit., p. 911. sources commending compliance letters as a component of a corporate ethics

program, see Bucy, op. cit., p. 24. ^'''Digital Rewards Ethical Employees who "Buck the System"': 1991, Ethikos 5(1), pp.

5-7, 16, p. 7. and Groskaufmanis, op. cit., p. 24.

and Bird, op. cit., p. 18.

40/iiV/., p. 22. ^^Kohls, J., C. Chapman, and C. Mathieu: 1989, 'Ethics Training Programs in the Fortune

500', Business and Professional Ethics Journal 8(2), pp. 55-72, p. 69. ^^Murphy, op. cit., p. 910. When we speak of free information flows we are speaking of

matters of degree, given the well known problems associated with assuring accurate infor- mation flows to top decisionmakers in any large organization. Anthony Downs, for example, has compellingly described the tendency of bureaucrats to distort the information reaching their superiors. See Downs, A.: 1967, Inside Bureaucracy (Little, Brown & Co., Boston, MA), p. 77. Kenneth Boulding similarly observed:

"[AJlmost all organizational structures tend to produce false images in the decisionma- ker, and . . . the larger and more authoritarian the organization, the better the chance that its top decisionmakers will be operating in purely imaginary worlds."

Boulding, K.: 1966, 'The Economics of Knowledge and the Knowledge of Economies', American Economic Review 56(2), pp. 1-13, at 8.

EXPANDED ORGANIZATIONAL ETHICS AUDITS 39

y, op. c/r.,p. 1136.

''̂ Kaplan, op. cit., p. 11. ^^See, for example, Cooke, R.A.: 1991, 'Danger Signs of Unethical Behavior: How to

Determine If Your Firm Is at Ethical Risk', Jour/to/ of Business Ethics 10(4), pp. 249-53; Pitt and Groskaufmanis, op. cit., p. 394; * A "Hotline" for Management Accountants': 1991, Ethikos 4(6), pp. 9, 12-13; 'Pitney Bowes' Ombudsman: Venting Ethical Conflicts': 1991, Ethikos 4(5), pp. 5-8.

'*^ear, J.P.: 1989, 'Whistle-Blowing: Encourage It!*, Business Horizons 32 (Jan.-Feb.), pp, 2-6, p. 5.

^^One 1976 study found that "honesty in communication" was the biggest challenge faced by managers. This included communication with clients, government, and top management. See Brenner and Molander, op. cit., p. 59. For the indicators of lack of candor in an organization, see Serpa, R.: 1985, 'Creating a Candid Corporate Culture', Journal of Business Ethics 4(5), pp. 425-30, p. 427.

^^Robert Jackal! has discussed top managers' "well-known aversion to bad news and the resulting tendency to kill the messenger who bears the news." Jackall, R.: 1988, Moral Mazes (Oxford Press, New York, NY) p. 21. This tendency, according to Jackall, derives from the fact that "[b]ad news either requires action, always open to pejorative interpretations, or it upsets pre-established plans of action, scattering ducks already set in a row." Ibid., p. 118.

^ n one survey, 50% of the respondents felt that their superiors did not want to know how results are obtained as long as the desired outcome was achieved. Brenner and Molander, op. cit., p. 62. The "I don't want to be told" attitude has been identified as a significant contributor to corporate lawbreaking. See Clinard, M., and P. Yeager: 1980, Corporate Crime (Free Press, New York, NY), p. 45. Saul Gelletman has also identified it as a major source of unethical behavior. Gellerman, S.: 1986, "Why "Good" Managers Make Bad Ethical Choices', Harvard Business Review, (July/Aug.), pp. 85-90, p. 88.

e, C : 1975, Where the Law Ends (Harper & Row, New York, NY), p. 45. lacocca. Ford's president during the development of the Pinto allegedly was fond

of saying: "Safety doesn't sell." Not surprisingly, no one told him when it was discovered that there were i^oblems with the car's gas tank. Pinto's designers were operating under lacocca-dictated "limits of 2,000"—the car couldn't weigh more than 2,000 lbs or cost more than $2,000—consequently, they rejected safety devices that would have added either weight or cost. See Dowie, M.: 1977, 'How Ford Put Two Million Firetraps on Wheels', Business & Society Review 23, pp. 46-55.

The engineers and managers who were concerned about the Corvair's design allegedly were in effect told to "stop these objections. Get on the team, or you can find someplace else Jo work." See Wright, J.P., 1980, On a Clear Day You Can See General Motors (Avon Books, New York, NY), at p. 66.

**Bucy, op. cit., p. 1136. ^^Gellerman, op. cit., p. 90. ^^Saul Gellerman asserts that: A trespass detected should not be dealt with discreetly. Managers should announce the

misconduct and how the individuals involved were punished. Gellerman, op. cit., p. 90.

^Unethical actions must have "serious, perceived, and negative consequences" if a company's ethics program is to succeed. Singer, A.W,: 1991, 'The Dark Side of Leadership',

40 BUSINESS ETHICS QUARTERLY

Ethikos S(l), pp. 1-4,3 [quoting ethicist Michael Josephson]. Two other commentatots agree, observing that:

the bottom line is that the company must send a simple message: Violation of the code leads to penalties, including dismissal.

Pitt and Groskauftnanis, op. cit., p. 25.

^^The mote serious the penalties for violation of the code and the greater the threat that those sanctions will be imposed, the more efiiective the code is likely to be. Weller, op. cit., p. 393.

^ '̂The Dark Side of Leadership', op. cit., p. 2. [quoting Harvard Professor John Kotter]. ^^^eller argues that in decentralized organizations middle managers are a more effective

source of authority for promoting the corporate code than upper management. Weller, op. cit., p. 391. This is unobjectionable, so far as it goes, but it gives too little credit to the role of top management in establishing the imperatives under which such middle managers must operate. For example, John Coffee has aigued that organizationally undesirable behavior is sometimes produced when central managers press divisional managers for ''quick solutions to intractable problems." Coffee, J.: 1981, 'No Soul to Damn: No Body to Kick.: An Unscandalized Inquiry into the Problem of Corporate Punishment' Michigan Law Review 79, pp. 386-459, p. 398. Ultimately, the zeal with which middle managers will enforce the corporate code depends in large part on the way in which their performance is measured.

See, for example, DeMott, D.A.: 1977, 'Reweaving the Corporate Veil: Management Structure and the Control of Corporate Information', Law and Contemporary Problems 41(3) pp. 182-221, p. 217; Hambrick, D.C, and P.A. Mason: 1984, 'Upper Echelons: The Organi- zation as a Reflection of Its Top Managers', Academy of Management Review 9(2), pp. 193-206; Murphy, op. cit., p. 910.

*̂ Ŝee, for example, 'Chocolate Aside, Hershey Keeps a Close Eye on Gifts': 1991, Ethikos 4(6), pp. 4-6, p. 6; 'Ethics, "Quality" and the Persian Gulf War', op cit, p. 3; Singer, A.W.: 1990, 'Do Business Ethics Deteriorate in a Downturn?', Ethikos 4(3), pp. 1-3, 16, p. 3.

"̂ In one survey, executives ranked "formal organization policy" as the least important factor in influencing unethical behavior in organizations while the actual conduct of superiors and peers were seen as the most important factors. See Serpa, op. cit., p. 427.

^Reynolds, L.: 1991, 'The Ethics Audit', Business Ethics 5(4), pp. 20-2, p. 20. ^^Gellerman, op. cit., p. 88.

°°We are far from the first to recognize this fact. For example, see the following observa- tion from Mary Ellen Oliverio:

Writing a code of ethics, establishing procedures for communicating the code to all employees, and setting aside time in the schedule of internal auditors to check com- pliance may give the aura of introducing a high level of ethical behavior. However, even though such actions are necessary, they are not sufficient to assure success. There must be a constant, thorough, pervasive style of attention and assessment to ethical concerns if there is to be a difference in behavior throughout the entity.

Oliverio, M.E.: 1989, 'The Implementation of a Code of Ethics: The Early Efforts of One Entrepreneur', Jour/ia/ of Business Ethics 8(5), pp. 367-74, p. 373.

'̂̂ Nixon, J., C. Wiley, and J. West: 1991, 'Beyond Survival: Ethics for Industrial Managers', Industrial Management (May-June), pp. 15-18, p. 15.

See generally Reynolds, op. cit.,; 'Making Ethics Part of a Company's "Mythology"', op. cit.

EXPANDED ORGANIZATIONAL ETHICS AUDITS 41

, S.F.: 1990, 'Auditors, Directors, and Management" Promoting Accountability', Intemal Auditing (Winter), pp. 3-9, p. 7.

'°See Muiphy, op. ciL p. 909. " S e e , Impert, J.E.: 1991, 'How Boeing Moved Beyond the Prohibition List Toward

Inspiring "Right Behavior'", Ethikos 5(2), pp. 1-9, 11, p. 9. '^The term is Robert Jackall's. He defines it as:

[T]he complicated, experientially constructed,. . . , set of rules, premiums, and sanc- tions that men and women in a particular context create and re-create in such a way that their behavior and accompanying perspectives are to some extent regularized and predictable.

In short, "the way a particular social world works." Jackall, op. cit, p. 112. The institu- tional logic of their corporation is of critical importance to managers because their "fates depend on how well they accomplish defined goals in accordance with the institutional logic of their situation." Ibid.

'^Murphy, op. cit, p. 911. ''̂ Kerr, S.: 1975, On the Folly of Rewarding A, While Hoping for B', Academy of

Management Journal 18, pp. 769-83, p. 769.

'^Kerr, J., and J.W. Slocum, Jr.: 1987, 'Managing Corporate Culture Through Reward Systems', Academy of Management Executive l{2), pp. 99-108, p. 99.

'^The example is drawn from Bucy, op. cit, p. 1139.

"Brooks, L.J.: 1989, 'Corporate Ethical Performance: Trends, Forecaste and Outlooks', Joumal of Business Ethics 8(1), pp. 31-38, p. 34.

'^Brenner and Molander, op. cit, p. 1149.

"Bucy, op. cit, p. 1149.

^^Kerr, op. cit., p. 769 (original emphasis). Kerr gives the example of a manufacturing company where a survey revealed that behaviors which management labeled dysfunctional were seen by lower level employees as behaviors which were rewarded. Ibid., p. 778. See also Reynolds, op. cit., p. 22, for the case of a company which found that its aggressive pursuit of sales and service quotas caused employee behavior that undermined its customer service objectives.

r, op. cit., p. 12. r, op. cit., p. 775.

t, op. cit., pp. 251-52. a full discussion of plant-milking, see Jackall, op. cit, pp. 91-95. Saul Gellerman

has observed that:

[I]t is not difficult to look remarkably gook in the short run by avoiding the things that pay off only in the long run. For example, you can skimp on maintenance or training or customer service, and you can get away with it—for a while.

Gellerman, op. cit, p. 89. ROA (retum on assets) is a measure of operating perfonnance which seeks to determine how well assets have been employed. It is calculated by dividing the sum of a fum's net income and interest expense by its average total assets. Ganison, op. cit, p. 652.

°^This tendency is aggravated in cases where the division has excess capacity which the manager cannot control in the short-run. Such excess capacity has a negative impact on the manager*s ability to reach target ROI because it increases the amount of fixed overhead which must be covered.

^^Merchanl, K.A.: 1987, Fraudulent and Questionable Financial Reporting: A Corporate

42 BUSINESS ETHICS QUARTERLY

Perspective (Financial Executives Research Foundation, Morristown, NJ 1987), p. 12. Mer- chant identifies the organizational factors that contribute to deceptive financial reporting as: emphasis on results; pressure to meet unrealistic performance targets; upper and lower cutoffs on bonus plans; nonexistent intemal control systems; environmental change which renders existing controls ineffective; and high divisional autonomy. Ibid. pp. 12-14.

8'Wolfe, C : 1991, 'An Inside Job', Mortgage Banking (May), pp. 45-53, p. 47.

^^Robert Jackall makes the following observation: Whenever structural inducements place premiums on immediate personal gains, espe- cially when mistakes are not penalized, there seems to be a sharp decline in the likelihood of men and women sacrificing their own interests for others, for their organizations, or least of all for the common weal.

Jackall, op. cit., p. 96 (emphasis added). ^'Gellerman, op. cit., p. 89. ^Ibid.

l, op. cit., pp. 87, 90.

id., p. 95 (the phrase belongs to C. Wright Mills).

Gellerman, op. cit., p. 89; Hosmer, op. cit., p. 169; 'How the Numbers are Obtained is as Important as Wwrthe Numbers Are': 1991, Ethikos 4(5), p. 16; Murphy, op. cit., p. 911.

^Pascale, op. cit., p. 31. Pascale argues that at highly socialized companies, "in-the- trenches" training and orchestrated promotion paths lead "all trainees [to] understand there is one step by step career path," which has the effect of reducing politics and short-term behavior because "[t]here is no quick way to jump ranks and reach the top." Ibid., p. 30. Firms that lack a strong culture, Pascale asserts, are forced to rely on formal controls, leading to an inordinate amount of energy being dissipated fighting the system. Ibid., p. 34.

Stone, op. cit., p. 44. e, op. cit., pp. 51-52.

^^Chester Bamard tellingly observed that "a person can and will accept a communication as authoritative only when . . . at the time of bis decision, he believes it to be compatible with his personal interests as a whole. Bamard, Chester I. 1964, The Functions of the Executive (Harvard University Press, Cambridge, MA), p. 165.

^̂ A recent article in the Wall Street Journal succinctly makes the point where governmen- tal regulation of business activity is concerned:

In a properly designed institutional and contractual setting, ethical conduct is conso- nant with, not contrary to, economic gain.

Furbush, Dean: 1991, 'Better Rules for More Ethical Finance', Wall Street Journal, Nov. 8,p.A14.

^Cressey and Moore, op. cit., p. 73. ^'^ven if outsiders are used, significant employee suspicion will probably need to be

overcome if candid responses are to be obtained. Techniques are available, howevra-, to elicit such responses without violating employee privacy or confidentiality. See Dalton, D., and Metzger, M.: 1992, 'Towards Candor, Cooperation, & Privacy in Applied Business Ethics Research: TTie Randomized Response Technique', Business Ethics Quarterly, 2 (2), pp. 207-221. Etespite what we have said about the desirability of outsiders as ethics auditors, some oi^nizations may prefer to rely on intemal auditors. We have addressed this possibility elsewhere. See Metzger, M., Hill, J., & Dalton, D. (1992), 'How Ethical is Your Company', Management Accounting (July), pp. 59-61.

EXPANDED ORGANIZATIONAL ETHICS AUDITS 43

s, op. cit., p. 22.

id., p. 20. ^̂ ^On the relationship between organizational ethics and quality, see 'Ethics, "quality"

and the Persian Gulf War', op. cit., pp. 2, 16. '^For the assertion that improving a company's ethical climate can yield dividends in the

form of improved employee satisfaction and morale, see Nixon, Wiley, and West, op. cit., p. 18.

A major part of a manager's job is processing information. When truthful information is flowing freely throughout the organization decisionmakers have the "greatest likelihood of formulating realistic objectives and strategies." Serpa, op. cit., p. 426.

"^It is surely not accidental that the defense industry, which has suffered greatly from ethics scandals, is a leader in corporate ethics programs. See 'Pitney Bowes' Ombudsman: Venting Ethical Conflicts', op. cit., p. 9.

''̂ ^See Aupperle, K.E., A.B. Carroll, and J.D. Hatfield: 1985, 'An Empirical Examination of the Relationship Between Corporate Social Responsibility and Profitability', Academy of Management Journal 28, pp. 446-63; Cochran, P.L., and R.A. Wood: 1984, 'Corporate Social Responsibility and Financial Performance', Academy of Management Journal 27, pp. 42-56; McGuire, J.B., A. Sundren, and T.Schneeweis: 1988, 'Corporate Social Responsibility and Firm Financial Performance', Academy of Management Journal 31, pp. 854-72. Also see O'Toole, J.: 1991, 'Doing Good by Doing Well: The Business Enterprise Trust Awards', California Management Review 33(3), pp. 9-24, p. 21, for the assertion that "[o]ne may either succeed or fail taking the high road, as one may either succeed or fail taking the low road."

^ °For an exhaustive overview of the state of research on corporate social performance, see Wood, D.J.: 1991, Academy of Management Review 16(4), pp. 691-718.

'̂'̂ See Harrington, S.J.: 1991, 'What Corporate America is Teaching About Ethics', Academy of Management Executive 5(1), pp. 21-30, pp. 21-22.

'^^avid Vogel has observed that:

Et is irresponsible to imply that acting responsibly is always costless, and it is unethical to base a case for ethics on economic self interest. If we want executives to act more ethically, we need to be more honest with each other. The market has many worthwhile features, but setting an appropriate price on virtue is not among them.

Vogei, D.; 1990, 'Ethics and ProfiU Don't Always go Hand and Hand", Ethics: Easier Said than Done 2(1), p. 63.