Week 3 Disscusion 2

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REGULATION

Managing for Organizational Integrity by Lynn S. Paine

From the March–April 1994 Issue

M any managers think of ethics as a question of personal scruples,a confidential matter between individuals and their consciences.These executives are quick to describe any wrongdoing as an isolated incident, the work of a rogue employee. The thought that the

company could bear any responsibility for an individual’s misdeeds never

enters their minds. Ethics, after all, has nothing to do with management.

In fact, ethics has everything to do with management. Rarely do the character

flaws of a lone actor fully explain corporate misconduct. More typically,

unethical business practice involves the tacit, if not explicit, cooperation of

others and reflects the values, attitudes, beliefs, language, and behavioral

patterns that define an organization’s operating culture. Ethics, then, is as

much an organizational as a personal issue. Managers who fail to provide

proper leadership and to institute systems that facilitate ethical conduct share

responsibility with those who conceive, execute, and knowingly benefit from

corporate misdeeds.

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Managers must acknowledge their role in shaping organizational ethics and

seize this opportunity to create a climate that can strengthen the relationships

and reputations on which their companies’ success depends. Executives who

ignore ethics run the risk of personal and corporate liability in today’s

increasingly tough legal environment. In addition, they deprive their

organizations of the benefits available under new federal guidelines for

sentencing organizations convicted of wrongdoing. These sentencing

guidelines recognize for the first time the organizational and managerial roots

of unlawful conduct and base fines partly on the extent to which companies

have taken steps to prevent that misconduct.

Prompted by the prospect of leniency, many companies are rushing to

implement compliance-based ethics programs. Designed by corporate

counsel, the goal of these programs is to prevent, detect, and punish legal

violations. But organizational ethics means more than avoiding illegal

practice; and providing employees with a rule book will do little to address

the problems underlying unlawful conduct. To foster a climate that

encourages exemplary behavior, corporations need a comprehensive

approach that goes beyond the often punitive legal compliance stance.

An integrity-based approach to ethics management combines a concern for

the law with an emphasis on managerial responsibility for ethical behavior.

Though integrity strategies may vary in design and scope, all strive to define

companies’ guiding values, aspirations, and patterns of thought and conduct.

When integrated into the day-to-day operations of an organization, such

strategies can help prevent damaging ethical lapses while tapping into

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powerful human impulses for moral thought and action. Then an ethical

framework becomes no longer a burdensome constraint within which

companies must operate, but the governing ethos of an organization.

How Organizations Shape Individuals’ Behavior The once familiar picture of ethics as individualistic, unchanging, and

impervious to organizational influences has not stood up to scrutiny in recent

years. Sears Auto Centers’ and Beech-Nut Nutrition Corporation’s

experiences illustrate the role organizations play in shaping individuals’

behavior—and how even sound moral fiber can fray when stretched too thin.

In 1992, Sears, Roebuck & Company was inundated with complaints about its

automotive service business. Consumers and attorneys general in more than

40 states had accused the company of misleading customers and selling them

unnecessary parts and services, from brake jobs to front-end alignments. It

would be a mistake, however, to see this situation exclusively in terms of any

one individual’s moral failings. Nor did management set out to defraud Sears

customers. Instead, a number of organizational factors contributed to the

problematic sales practices.

In the face of declining revenues, shrinking market share, and an increasingly

competitive market for undercar services, Sears management attempted to

spur the performance of its auto centers by introducing new goals and

incentives for employees. The company increased minimum work quotas and

introduced productivity incentives for mechanics. The automotive service

advisers were given product-specific sales quotas—sell so many springs,

shock absorbers, alignments, or brake jobs per shift—and paid a commission

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based on sales. According to advisers, failure to meet quotas could lead to a

transfer or a reduction in work hours. Some employees spoke of the

“pressure, pressure, pressure” to bring in sales.

Under this new set of organizational pressures and incentives, with few

options for meeting their sales goals legitimately, some employees’ judgment

understandably suffered. Management’s failure to clarify the line between

unnecessary service and legitimate preventive maintenance, coupled with

consumer ignorance, left employees to chart their own courses through a vast

gray area, subject to a wide range of interpretations. Without active

management support for ethical practice and mechanisms to detect and check

questionable sales methods and poor work, it is not surprising that some

employees may have reacted to contextual forces by resorting to

exaggeration, carelessness, or even misrepresentation.

Shortly after the allegations against Sears became public, CEO Edward

Brennan acknowledged management’s responsibility for putting in place

compensation and goal-setting systems that “created an environment in

which mistakes did occur.” Although the company denied any intent to

deceive consumers, senior executives eliminated commissions for service

advisers and discontinued sales quotas for specific parts. They also instituted

At Sears Auto Centers, management’s failure to clarify the line between unnecessary service and legitimate preventive maintenance cost the company an estimated $60 million.

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a system of unannounced shopping audits and made plans to expand the

internal monitoring of service. In settling the pending lawsuits, Sears offered

coupons to customers who had bought certain auto services between 1990

and 1992. The total cost of the settlement, including potential customer

refunds, was an estimated $60 million.

Contextual forces can also influence the behavior of top management, as a

former CEO of Beech-Nut Nutrition Corporation discovered. In the early

1980s, only two years after joining the company, the CEO found evidence

suggesting that the apple juice concentrate, supplied by the company’s

vendors for use in Beech-Nut’s “100% pure” apple juice, contained nothing

more than sugar water and chemicals. The CEO could have destroyed the

bogus inventory and withdrawn the juice from grocers’ shelves, but he was

under extraordinary pressure to turn the ailing company around. Eliminating

the inventory would have killed any hope of turning even the meager

$700,000 profit promised to Beech-Nut’s then parent, Nestlé.

A number of people in the corporation, it turned out, had doubted the purity

of the juice for several years before the CEO arrived. But the 25% price

advantage offered by the supplier of the bogus concentrate allowed the

operations head to meet cost-control goals. Furthermore, the company lacked

an effective quality control system, and a conclusive lab test for juice purity

did not yet exist. When a member of the research department voiced

concerns about the juice to operating management, he was accused of not

being a team player and of acting like “Chicken Little.” His judgment, his

supervisor wrote in an annual performance review, was “colored by naïveté

and impractical ideals.” No one else seemed to have considered the

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company’s obligations to its customers or to have thought about the potential

harm of disclosure. No one considered the fact that the sale of adulterated or

misbranded juice is a legal offense, putting the company and its top

management at risk of criminal liability.

An FDA investigation taught Beech-Nut the hard way. In 1987, the company

pleaded guilty to selling adulterated and misbranded juice. Two years and two

criminal trials later, the CEO pleaded guilty to ten counts of mislabeling. The

total cost to the company—including fines, legal expenses, and lost sales—was

an estimated $25 million.

Such errors of judgment rarely reflect an organizational culture and

management philosophy that sets out to harm or deceive. More often, they

reveal a culture that is insensitive or indifferent to ethical considerations or

one that lacks effective organizational systems. By the same token, exemplary

conduct usually reflects an organizational culture and philosophy that is

infused with a sense of responsibility.

For example, Johnson & Johnson’s handling of the Tylenol crisis is sometimes

attributed to the singular personality of then-CEO James Burke. However, the

decision to do a nationwide recall of Tylenol capsules in order to avoid further

loss of life from product tampering was in reality not one decision but

thousands of decisions made by individuals at all levels of the organization.

The “Tylenol decision,” then, is best understood not as an isolated incident,

the achievement of a lone individual, but as the reflection of an organization’s

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culture. Without a shared set of values and guiding principles deeply

ingrained throughout the organization, it is doubtful that Johnson &

Johnson’s response would have been as rapid, cohesive, and ethically sound.

Many people resist acknowledging the influence of organizational factors on

individual behavior—especially on misconduct—for fear of diluting people’s

sense of personal moral responsibility. But this fear is based on a false

dichotomy between holding individual transgressors accountable and holding

“the system” accountable. Acknowledging the importance of organizational

context need not imply exculpating individual wrongdoers. To understand all

is not to forgive all.

The Limits of a Legal Compliance Program The consequences of an ethical lapse can be serious and far-reaching.

Organizations can quickly become entangled in an all-consuming web of legal

proceedings. The risk of litigation and liability has increased in the past

decade as lawmakers have legislated new civil and criminal offenses, stepped

up penalties, and improved support for law enforcement. Equally—if not

more—important is the damage an ethical lapse can do to an organization’s

reputation and relationships. Both Sears and Beech-Nut, for instance,

struggled to regain consumer trust and market share long after legal

proceedings had ended.

Acknowledging the importance of organizational context in ethics does not imply forgiving individual wrongdoers.

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Corporate Fines Under the Federal Sentencing Guidelines What size fine is a corporation likely to pay if convicted of a crime? It depends on a number of factors, some of which are beyond a CEO’s control, such as the existence of a prior record of similar misconduct. But it also depends on more controllable factors. The most important of these are reporting and accepting responsibility for the crime, cooperating with authorities, and having an effective program in place to prevent and detect unlawful behavior.

As more managers have become alerted to the importance of organizational

ethics, many have asked their lawyers to develop corporate ethics programs

to detect and prevent violations of the law. The 1991 Federal Sentencing

Guidelines offer a compelling rationale. Sanctions such as fines and probation

for organizations convicted of wrongdoing can vary dramatically depending

both on the degree of management cooperation in reporting and investigating

corporate misdeeds and on whether or not the company has implemented a

legal compliance program. (See the insert “Corporate Fines Under the Federal

Sentencing Guidelines.”)

Such programs tend to emphasize the

prevention of unlawful conduct,

primarily by increasing surveillance

and control and by imposing penalties

for wrongdoers. While plans vary, the

basic framework is outlined in the

sentencing guidelines. Managers must

establish compliance standards and

procedures; designate high-level

personnel to oversee compliance;

avoid delegating discretionary

authority to those likely to act

unlawfully; effectively communicate

the company’s standards and

procedures through training or

publications; take reasonable steps to

achieve compliance through audits,

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The following example, based on a case studied by the United States Sentencing Commission, shows how the 1991 Federal Sentencing Guidelines have affected overall fine levels and how managers’ actions influence organizational fines.

Acme Corporation was charged and convicted of mail fraud. The company systematically charged customers who damaged rented automobiles more than the actual cost of repairs. Acme also billed some customers for the cost of repairs to vehicles for which they were not responsible. Prior to the criminal adjudication, Acme paid $13.7 million in restitution to the customers who had been overcharged.

Deciding before the enactment of the sentencing guidelines, the judge in the criminal case imposed a fine of $6.85 million, roughly half the pecuniary loss suffered by Acme’s customers. Under the sentencing guidelines, however, the results could have been dramatically different. Acme could have been fined anywhere from 5% to 200% the loss suffered by customers, depending on whether or not it had an effective program to prevent and detect violations of

monitoring processes, and a system

for employees to report criminal

misconduct without fear of

retribution; consistently enforce

standards through appropriate

disciplinary measures; respond

appropriately when offenses are

detected; and, finally, take reasonable

steps to prevent the occurrence of

similar offenses in the future.

There is no question of the necessity of

a sound, well-articulated strategy for

legal compliance in an organization.

After all, employees can be frustrated

and frightened by the complexity of

today’s legal environment. And even

managers who claim to use the law as

a guide to ethical behavior often lack

more than a rudimentary

understanding of complex legal issues.

Managers would be mistaken,

however, to regard legal compliance as

an adequate means for addressing the

full range of ethical issues that arise

every day. “If it’s legal, it’s ethical,” is

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law and on whether or not it reported the crime, cooperated with authorities, and accepted responsibility for the unlawful conduct. If a high ranking official at Acme were found to have been involved, the maximum fine could have been as large as $54,800,000 or four times the loss to Acme customers. The following chart shows a possible range of fines for each situation:

What Fine Can Acme Expect? Based on Case No.: 88-266, United States Sentencing Commission, Supplementary Report on Sentencing Guidelines for Organizations.

a frequently heard slogan. But conduct

that is lawful may be highly

problematic from an ethical point of

view. Consider the sale in some

countries of hazardous products

without appropriate warnings or the

purchase of goods from suppliers who

operate inhumane sweat-shops in

developing countries. Companies

engaged in international business

often discover that conduct that

infringes on recognized standards of

human rights and decency is legally

permissible in some jurisdictions.

Legal clearance does not certify the

absence of ethical problems in the

United States either, as a 1991 case at

Salomon Brothers illustrates. Four

top-level executives failed to take

appropriate action when learning of

unlawful activities on the government

trading desk. Company lawyers found

no law obligating the executives to disclose the improprieties. Nevertheless,

the executives’ delay in disclosing and failure to reveal their prior knowledge

prompted a serious crisis of confidence among employees, creditors,

shareholders, and customers. The executives were forced to resign, having

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lost the moral authority to lead. Their ethical lapse compounded the trading

desk’s legal offenses, and the company ended up suffering losses—including

legal costs, increased funding costs, and lost business—estimated at nearly $1

billion.

A compliance approach to ethics also overemphasizes the threat of detection

and punishment in order to channel behavior in lawful directions. The

underlying model for this approach is deterrence theory, which envisions

people as rational maximizers of self-interest, responsive to the personal costs

and benefits of their choices, yet indifferent to the moral legitimacy of those

choices. But a recent study reported in Why People Obey the Law by Tom R.

Tyler shows that obedience to the law is strongly influenced by a belief in its

legitimacy and its moral correctness. People generally feel that they have a

strong obligation to obey the law. Education about the legal standards and a

supportive environment may be all that’s required to insure compliance.

Discipline is, of course, a necessary part of any ethical system. Justified

penalties for the infringement of legitimate norms are fair and appropriate.

Some people do need the threat of sanctions. However, an overemphasis on

potential sanctions can be superfluous and even counterproductive.

Employees may rebel against programs that stress penalties, particularly if

they are designed and imposed without employee involvement or if the

standards are vague or unrealistic. Management may talk of mutual trust

when unveiling a compliance plan, but employees often receive the message

as a warning from on high. Indeed, the more skeptical among them may view

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compliance programs as nothing more than liability insurance for senior

management. This is not an unreasonable conclusion, considering that

compliance programs rarely address the root causes of misconduct.

Even in the best cases, legal compliance is unlikely to unleash much moral

imagination or commitment. The law does not generally seek to inspire

human excellence or distinction. It is no guide for exemplary behavior—or

even good practice. Those managers who define ethics as legal compliance are

implicitly endorsing a code of moral mediocrity for their organizations. As

Richard Breeden, former chairman of the Securities and Exchange

Commission, noted, “It is not an adequate ethical standard to aspire to get

through the day without being indicted.”

Integrity as a Governing Ethic A strategy based on integrity holds organizations to a more robust standard.

While compliance is rooted in avoiding legal sanctions, organizational

integrity is based on the concept of self-governance in accordance with a set

of guiding principles. From the perspective of integrity, the task of ethics

management is to define and give life to an organization’s guiding values, to

create an environment that supports ethically sound behavior, and to instill a

sense of shared accountability among employees. The need to obey the law is

viewed as a positive aspect of organizational life, rather than an unwelcome

constraint imposed by external authorities.

Management may talk of mutual trust when unveiling a compliance plan, but employees often see a warning from on high.

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The Hallmarks of an Effective Integrity Strategy There is no one right integrity strategy. Factors such as management personality, company history, culture, lines of business, and industry regulations must be taken into account when shaping an appropriate set of values and designing an implementation

An integrity strategy is characterized by a conception of ethics as a driving

force of an enterprise. Ethical values shape the search for opportunities, the

design of organizational systems, and the decision-making process used by

individuals and groups. They provide a common frame of reference and serve

as a unifying force across different functions, lines of business, and employee

groups. Organizational ethics helps define what a company is and what it

stands for.

Many integrity initiatives have structural features common to compliance-

based initiatives: a code of conduct, training in relevant areas of law,

mechanisms for reporting and investigating potential misconduct, and audits

and controls to insure that laws and company standards are being met. In

addition, if suitably designed, an integrity-based initiative can establish a

foundation for seeking the legal benefits that are available under the

sentencing guidelines should criminal wrongdoing occur. (See the insert “The

Hallmarks of an Effective Integrity Strategy.”)

But an integrity strategy is broader,

deeper, and more demanding than a

legal compliance initiative. Broader in

that it seeks to enable responsible

conduct. Deeper in that it cuts to the

ethos and operating systems of the

organization and its members, their

guiding values and patterns of thought

and action. And more demanding in

that it requires an active effort to

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program. Still, several features are common to efforts that have achieved some success:

The guiding values and commitments make sense and are clearly communicated. They reflect important organizational obligations and widely shared aspirations that appeal to the organization’s members. Employees at all levels take them seriously, feel comfortable discussing them, and have a concrete understanding of their practical importance. This does not signal the absence of ambiguity and conflict but a willingness to seek solutions compatible with the framework of values.

Company leaders are personally committed, credible, and willing to take action on the values they espouse. They are not mere mouthpieces. They are willing to scrutinize their own decisions. Consistency on the part of leadership is key. Waffling on values will lead

define the responsibilities and

aspirations that constitute an

organization’s ethical compass. Above

all, organizational ethics is seen as the

work of management. Corporate

counsel may play a role in the design

and implementation of integrity

strategies, but managers at all levels

and across all functions are involved in

the process. (See the chart, “Strategies

for Ethics Management.”)

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to employee cynicism and a rejection of the program. At the same time, managers must assume responsibility for making tough calls when ethical obligations conflict.

The espoused values are integrated into the normal channels of management decision making and are reflected in the organization’s critical activities: the development of plans, the setting of goals, the search for opportunities, the allocation of resources, the gathering and communication of information, the measurement of performance, and the promotion and advancement of personnel.

The company’s systems and structures support and reinforce its values. Information systems, for example, are designed to provide timely and accurate information. Reporting relationships are structured

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to build in checks and balances to promote objective judgment. Performance appraisal is sensitive to means as well as ends.

Managers throughout the company have the decision- making skills, knowledge, and competencies needed to make ethically sound decisions on a day-to-day basis. Ethical thinking and awareness must be part of every managers’ mental equipment. Ethics education is usually part of the process.

Success in creating a climate for responsible and ethically sound behavior requires continuing effort and a considerable investment of time and resources. A glossy code of conduct, a high-ranking ethics officer, a training program, an annual ethics audit—these trappings of an ethics program do not necessarily add up to a responsible, law-abiding organization whose espoused values match its actions. A formal ethics program can serve as a

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catalyst and a support system, but organizational integrity depends on the integration of the company’s values into its driving systems.

Strategies for Ethics Management

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During the past decade, a number of companies have undertaken integrity

initiatives. They vary according to the ethical values focused on and the

implementation approaches used. Some companies focus on the core values

of integrity that reflect basic social obligations, such as respect for the rights

of others, honesty, fair dealing, and obedience to the law. Other companies

emphasize aspirations—values that are ethically desirable but not necessarily

morally obligatory—such as good service to customers, a commitment to

diversity, and involvement in the community.

When it comes to implementation, some companies begin with behavior.

Following Aristotle’s view that one becomes courageous by acting as a

courageous person, such companies develop codes of conduct specifying

appropriate behavior, along with a system of incentives, audits, and controls.

Other companies focus less on specific actions and more on developing

attitudes, decision-making processes, and ways of thinking that reflect their

values. The assumption is that personal commitment and appropriate

decision processes will lead to right action.

Martin Marietta, NovaCare, and Wetherill Associates have implemented and

lived with quite different integrity strategies. In each case, management has

found that the initiative has made important and often unexpected

contributions to competitiveness, work environment, and key relationships

on which the company depends.

Martin Marietta: Emphasizing Core Values

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Martin Marietta Corporation, the U.S. aerospace and defense contractor,

opted for an integrity-based ethics program in 1985. At the time, the defense

industry was under attack for fraud and mismanagement, and Martin

Marietta was under investigation for improper travel billings. Managers knew

they needed a better form of self-governance but were skeptical that an ethics

program could influence behavior. “Back then people asked, ‘Do you really

need an ethics program to be ethical?’” recalls current President Thomas

Young. “Ethics was something personal. Either you had it, or you didn’t.”

The corporate general counsel played a pivotal role in promoting the

program, and legal compliance was a critical objective. But it was conceived

of and implemented from the start as a company-wide management initiative

aimed at creating and maintaining a “do-it-right” climate. In its original

conception, the program emphasized core values, such as honesty and fair

play. Over time, it expanded to encompass quality and environmental

responsibility as well.

Today the initiative consists of a code of conduct, an ethics training program,

and procedures for reporting and investigating ethical concerns within the

company. It also includes a system for disclosing violations of federal

procurement law to the government. A corporate ethics office manages the

program, and ethics representatives are stationed at major facilities. An ethics

steering committee, made up of Martin Marietta’s president, senior

executives, and two rotating members selected from field operations,

oversees the ethics office. The audit and ethics committee of the board of

directors oversees the steering committee.

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The ethics office is responsible for responding to questions and concerns from

the company’s employees. Its network of representatives serves as a sounding

board, a source of guidance, and a channel for raising a range of issues, from

allegations of wrongdoing to complaints about poor management, unfair

supervision, and company policies and practices. Martin Marietta’s ethics

network, which accepts anonymous complaints, logged over 9,000 calls in

1991, when the company had about 60,000 employees. In 1992, it

investigated 684 cases. The ethics office also works closely with the human

resources, legal, audit, communications, and security functions to respond to

employee concerns.

Shortly after establishing the program, the company began its first round of

ethics training for the entire workforce, starting with the CEO and senior

executives. Now in its third round, training for senior executives focuses on

decision making, the challenges of balancing multiple responsibilities, and

compliance with laws and regulations critical to the company. The incentive

compensation plan for executives makes responsibility for promoting ethical

conduct an explicit requirement for reward eligibility and requires that

business and personal goals be achieved in accordance with the company’s

policy on ethics. Ethical conduct and support for the ethics program are also

criteria in regular performance reviews.

Martin Marietta’s ethics training program teaches senior executives how to balance responsibilities.

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Today top-level managers say the ethics program has helped the company

avoid serious problems and become more responsive to its more than 90,000

employees. The ethics network, which tracks the number and types of cases

and complaints, has served as an early warning system for poor management,

quality and safety defects, racial and gender discrimination, environmental

concerns, inaccurate and false records, and personnel grievances regarding

salaries, promotions, and layoffs. By providing an alternative channel for

raising such concerns, Martin Marietta is able to take corrective action more

quickly and with a lot less pain. In many cases, potentially embarrassing

problems have been identified and dealt with before becoming a management

crisis, a lawsuit, or a criminal investigation. Among employees who brought

complaints in 1993, 75% were satisfied with the results.

Company executives are also convinced that the program has helped reduce

the incidence of misconduct. When allegations of misconduct do surface, the

company says it deals with them more openly. On several occasions, for

instance, Martin Marietta has voluntarily disclosed and made restitution to

the government for misconduct involving potential violations of federal

procurement laws. In addition, when an employee alleged that the company

had retaliated against him for voicing safety concerns about his plant on CBS

news, top management commissioned an investigation by an outside law

firm. Although failing to support the allegations, the investigation found that

employees at the plant feared retaliation when raising health, safety, or

environmental complaints. The company redoubled its efforts to identify and

discipline those employees taking retaliatory action and stressed the

desirability of an open work environment in its ethics training and company

communications.

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Although the ethics program helps Martin Marietta avoid certain types of

litigation, it has occasionally led to other kinds of legal action. In a few cases,

employees dismissed for violating the code of ethics sued Martin Marietta,

arguing that the company had violated its own code by imposing unfair and

excessive discipline.

Still, the company believes that its attention to ethics has been worth it. The

ethics program has led to better relationships with the government, as well as

to new business opportunities. Along with prices and technology, Martin

Marietta’s record of integrity, quality, and reliability of estimates plays a role

in the awarding of defense contracts, which account for some 75% of the

company’s revenues. Executives believe that the reputation they’ve earned

through their ethics program has helped them build trust with government

auditors, as well. By opening up communications, the company has reduced

the time spent on redundant audits.

The program has also helped change employees’ perceptions and priorities.

Some managers compare their new ways of thinking about ethics to the way

they understand quality. They consider more carefully how situations will be

perceived by others, the possible long-term consequences of short-term

thinking, and the need for continuous improvement. CEO Norman Augustine

notes, “Ten years ago, people would have said that there were no ethical

issues in business. Today employees think their number-one objective is to be

thought of as decent people doing quality work.”

NovaCare: Building Shared Aspirations

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NovaCare Inc., one of the largest providers of rehabilitation services to

nursing homes and hospitals in the United States, has oriented its ethics effort

toward building a common core of shared aspirations. But in 1988, when the

company was called InSpeech, the only sentiment shared was mutual

mistrust.

Senior executives built the company from a series of aggressive acquisitions

over a brief period of time to take advantage of the expanding market for

therapeutic services. However, in 1988, the viability of the company was in

question. Turnover among its frontline employees—the clinicians and

therapists who care for patients in nursing homes and hospitals—escalated to

57% per year. The company’s inability to retain therapists caused customers

to defect and the stock price to languish in an extended slump.

After months of soul-searching, InSpeech executives realized that the

turnover rate was a symptom of a more basic problem: the lack of a common

set of values and aspirations. There was, as one executive put it, a “huge

disconnect” between the values of the therapists and clinicians and those of

the managers who ran the company. The therapists and clinicians evaluated

the company’s success in terms of its delivery of high-quality health care.

InSpeech management, led by executives with financial services and venture

capital backgrounds, measured the company’s worth exclusively in terms of

financial success. Management’s single-minded emphasis on increasing hours

of reimbursable care turned clinicians off. They took management’s

performance orientation for indifference to patient care and left the company

in droves.

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CEO John Foster recognized the need for a common frame of reference and a

common language to unify the diverse groups. So he brought in consultants

to conduct interviews and focus groups with the company’s health care

professionals, managers, and customers. Based on the results, an employee

task force drafted a proposed vision statement for the company, and another

250 employees suggested revisions. Then Foster and several senior managers

developed a succinct statement of the company’s guiding purpose and

fundamental beliefs that could be used as a framework for making decisions

and setting goals, policies, and practices.

Unlike a code of conduct, which articulates specific behavioral standards, the

statement of vision, purposes, and beliefs lays out in very simple terms the

company’s central purpose and core values. The purpose—meeting the

rehabilitation needs of patients through clinical leadership—is supported by

four key beliefs: respect for the individual, service to the customer, pursuit of

excellence, and commitment to personal integrity. Each value is discussed

with examples of how it is manifested in the day-to-day activities and policies

of the company, such as how to measure the quality of care.

To support the newly defined values, the company changed its name to

NovaCare and introduced a number of structural and operational changes.

Field managers and clinicians were given greater decision-making authority;

clinicians were provided with additional resources to assist in the delivery of

At NovaCare, clinicians took management’s performance orientation for indifference to patient care and left the company in droves.

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effective therapy; and a new management structure integrated the various

therapies offered by the company. The hiring of new corporate personnel

with health care backgrounds reinforced the company’s new clinical focus.

The introduction of the vision, purpose, and beliefs met with varied reactions

from employees, ranging from cool skepticism to open enthusiasm. One

employee remembered thinking the talk about values “much ado about

nothing.” Another recalled, “It was really wonderful. It gave us a goal that

everyone aspired to, no matter what their place in the company.” At first,

some were baffled about how the vision, purpose, and beliefs were to be used.

But, over time, managers became more adept at explaining and using them as

a guide. When a customer tried to hire away a valued employee, for example,

managers considered raiding the customer’s company for employees. After

reviewing the beliefs, the managers abandoned the idea.

NovaCare managers acknowledge and company surveys indicate that there is

plenty of room for improvement. While the values are used as a firm

reference point for decision making and evaluation in some areas of the

company, they are still viewed with reservation in others. Some managers do

not “walk the talk,” employees complain. And recently acquired companies

have yet to be fully integrated into the program. Nevertheless, many

NovaCare employees say the values initiative played a critical role in the

company’s 1990 turnaround.

At NovaCare, executives defined organizational values and introduced structural changes to support those values.

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The values reorientation also helped the company deal with its most serious

problem: turnover among health care providers. In 1990, the turnover rate

stood at 32%, still above target but a significant improvement over the 1988

rate of 57%. By 1993, turnover had dropped to 27%. Moreover, recruiting new

clinicians became easier. Barely able to hire 25 new clinicians each month in

1988, the company added 776 in 1990 and 2,546 in 1993. Indeed, one

employee who left during the 1988 turmoil said that her decision to return in

1990 hinged on the company’s adoption of the vision, purpose, and beliefs.

Wetherill Associates: Defining Right Action Wetherill Associates, Inc.—a small, privately held supplier of electrical parts

to the automotive market—has neither a conventional code of conduct nor a

statement of values. Instead, WAI has a Quality Assurance Manual—a

combination of philosophy text, conduct guide, technical manual, and

company profile—that describes the company’s commitment to honesty and

its guiding principle of right action.

WAI doesn’t have a corporate ethics officer who reports to top management,

because at WAI, the company’s corporate ethics officer is top management.

Marie Bothe, WAI’s chief executive officer, sees her main function as keeping

the 350-employee company on the path of right action and looking for

opportunities to help the community. She delegates the “technical” aspects of

the business—marketing, finance, personnel, operations—to other members

of the organization.

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Right action, the basis for all of WAI’s decisions, is a well-developed approach

that challenges most conventional management thinking. The company

explicitly rejects the usual conceptual boundaries that separate morality and

self-interest. Instead, they define right behavior as logically, expediently, and

morally right. Managers teach employees to look at the needs of the

customers, suppliers, and the community—in addition to those of the

company and its employees—when making decisions.

WAI also has a unique approach to competition. One employee explains, “We

are not ‘in competition’ with anybody. We just do what we have to do to

serve the customer.” Indeed, when occasionally unable to fill orders, WAI

salespeople refer customers to competitors. Artificial incentives, such as sales

contests, are never used to spur individual performance. Nor are sales results

used in determining compensation. Instead, the focus is on teamwork and

customer service. Managers tell all new recruits that absolute honesty, mutual

courtesy, and respect are standard operating procedure.

Newcomers generally react positively to company philosophy, but not all are

prepared for such a radical departure from the practices they have known

elsewhere. Recalling her initial interview, one recruit described her response

to being told that lying was not allowed, “What do you mean? No lying? I’m a

buyer. I lie for a living!” Today she is persuaded that the policy makes sound

business sense. WAI is known for informing suppliers of overshipments as

well as undershipments and for scrupulous honesty in the sale of parts, even

when deception cannot be readily detected.

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Since its entry into the distribution business 13 years ago, WAI has seen its

revenues climb steadily from just under $1 million to nearly $98 million in

1993, and this in an industry with little growth. Once seen as an upstart beset

by naysayers and industry skeptics, WAI is now credited with entering and

professionalizing an industry in which kickbacks, bribes, and “gratuities”

were commonplace. Employees—equal numbers of men and women ranging

in age from 17 to 92—praise the work environment as both productive and

supportive.

WAI’s approach could be difficult to introduce in a larger, more traditional

organization. WAI is a small company founded by 34 people who shared a

belief in right action; its ethical values were naturally built into the

organization from the start. Those values are so deeply ingrained in the

company’s culture and operating systems that they have been largely self-

sustaining. Still, the company has developed its own training program and

takes special care to hire people willing to support right action. Ethics and job

skills are considered equally important in determining an individual’s

competence and suitability for employment. For WAI, the challenge will be to

sustain its vision as the company grows and taps into markets overseas.

At WAI, as at Martin Marietta and NovaCare, a management-led commitment

to ethical values has contributed to competitiveness, positive work-force

morale, as well as solid sustainable relationships with the company’s key

Creating an organization that encourages exemplary conduct may be the best way to prevent damaging misconduct.

11/7/19, 3:47 PM Page 28 of 30

constituencies. In the end, creating a climate that encourages exemplary

conduct may be the best way to discourage damaging misconduct. Only in

such an environment do rogues really act alone.

A version of this article appeared in the March–April 1994 issue of Harvard Business Review.

Lynn S. Paine is the John G. McLean Professor of Business Administration and Senior Associate Dean for International Development at

Harvard Business School. She is a coauthor of Capitalism at Risk: Rethinking

the Role of Business.

Related Topics: Business Law | Ethics | Social Responsibility

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