Management 2

Five questions for addressing ethical dilemmas

Gerard L. Rossy

W e are currently suffering, on a global scale, the consequences of a series of

unethical decisions and poor judgments by both organizations and individuals on

Wall Street and across the world’s financial markets. Though the current ‘‘Great

Recession’’ precipitated by these behaviors has few precedents, with the possible

exception of the Great Depression, it was not that long ago that we were equally shocked by

the ethical lapses of individuals at all levels of firms such as Enron, Tyco and Arthur

Anderson, to name just a few. Unfortunately, history shows that such ethical failures should

have been expected. Such events have been common throughout history and have been at

the root of some of the greatest business failures of the last 25 years.[1] Leaders who learn to

recognize and prevent potential ethical lapses sooner and more effectively than their rivals

are better positioned to avoid costly repercussions – including calamitous stock price

drops, lawsuits and serious damage to the reputations of their organizations and their

management teams.

The nature of ethical dilemmas

While some of the key actors in each of the business tragedies cited above were clearly

acting with malicious intent, many of the culprits were initially treated as innovative members

of society. For example, Enron was once lauded in the business press as a pioneering

company. Even the creators of exotic financial derivatives were initially seen as trendsetters.

To spread the blame to government, for almost a decade, deregulation was a political

crusade of some congressional factions.

Unethical acts vs. ethical mistakes. As ethicist Marianne Jennings points out, ‘‘Ethical

collapse happens when organizations are not able to see that bright line between right and

wrong.’’[2] An unethical act has immoral intent. It is done with the full knowledge that it is

fundamentally wrong legally, morally, or contravenes the prevailing societal or organizational

culture. These unethical acts usually violate clear corporate codes of ethics as well as laws

and regulations. They are actions or decisions that are clearly wrong and everybody is aware

that they are – including the perpetrator. In fact, in most cases, this perception of dishonesty

is obvious to all involved without the need to specify a violation of any code or regulation. As

songwriter Leonard Cohen expresses it,

Everybody knows that the dice are loaded

Everybody rolls with their fingers crossed.[3]

By contrast, an ethical ‘‘mistake’’ is a decision or action that is unintentionally unethical and

that the individual or group later regrets and wishes they could somehow undo. The three

key factors that differentiate unethical actions from ethical mistakes are:

1. Intentionality – were your intentions good or bad? Did you know what you were doing was

wrong? Did you try to hide or disguise your motives?

DOI 10.1108/10878571111176619 VOL. 39 NO. 6 2011, pp. 35-42, Q Emerald Group Publishing Limited, ISSN 1087-8572 j STRATEGY & LEADERSHIP j PAGE 35

Gerard L. Rossy, professor

of management at

California State University,

Northridge, consults with

private and public sector

companies on strategic

management, leadership

and ethics (gerard.rossy@

csun.edu).

2. Remorse – do you regret what you did because you recognize you were behaving

unethically? Or do you only regret being caught and exposed?

3. Accountability – are you willing to admit your mistakes, accept responsibility for what

you’ve done, and be accountable for any unethical actions? Are you prepared to make

amends and do your best to reverse, or at least mitigate, the negative effects of your

actions?

Applications rather than theories

Ethics can be defined as: The art and discipline of applying principles and frameworks to

analyze and resolve complex moral dilemmas. This definition obscures two fundamental

problems inherent in its implementation. First, clear and simple principles are usually difficult

to operationalize in messy situations. Second, complex and specific codes, policies, and

procedures are often lengthy, difficult to remember, problematic to implement and frequently

communicate conflicting requirements. An example of a less-than-successful code is

Enron’s Code of Ethics that, in spite of its 64 pages of specific details and an inspiring

foreword by its CEO, Ken Lay, failed to prevent one of history’s worst examples of systemic

corporate ethical failure.[4] While over 85 percent of organizations have developed and

distributed organizational codes of conduct, there is no evidence that they significantly

affect ethical behavior.[5]

Using moral intuition

While ethical codes of conduct may be hard to define and even harder to operationalize,

most people throughout the world have a well developed ability for distinguishing right from

wrong. Recent evidence from a study of children by Jonathan Haidth, a moral psychologist

at the University of Virginia, postulates the existence of two sources of what he calls moral

foundations.[6] The first, which he calls moral intuition, is the more ancient and is based on

emotion-laden moral beliefs that evolved in human beings even before the development of

language. The second, moral judgment, is our conscious rationalization for what we have

already concluded or decided based on our moral intuition. On a practical level, when we

confront ethical issues, our moral intuition gives us an immediate emotional response that

tells us whether something is right or wrong. Our moral judgment then attempts to analyze,

understand, rationalize and articulate this for ourselves and for others. In his final column,

after 12 years writing under the banner of ‘‘The Ethicist’’ in the New York Times Magazine,

Randy Cohen put it this way: ‘‘[. . .] I came to see that what readers often sought was not a

ruling on what to do – they seemed to know – but an argument for why to do it.’’[7] It is the

second step, one that often requires more time and effort to complete and communicate,

that if not done thoughtfully, can result in ethical mistakes.

When the moral questions are simple, the correct ethical response is usually equally

straightforward and obvious: Stealing and cheating are wrong; don’t do either. When they

are not so simple, determining the proper response may be more difficult. Rushworth Kidder,

founder of the Institute for Global Ethics, points out the importance of being prepared to

identify and deal effectively with difficult ethical issues:

‘‘ What is needed is a capacity to recognize the nature of moral challenges and respond with a well-tuned conscience, a lively perception of the difference between right and wrong and an ability to choose the right and live by it. What is needed is ethical fitness. ’’

PAGE 36jSTRATEGY & LEADERSHIPj VOL. 39 NO. 6 2011

What is needed is a capacity to recognize the nature of moral challenges and respond with a

well-tuned conscience, a lively perception of the difference between right and wrong and an

ability to choose the right and live by it. What is needed is ethical fitness.[8]

Although one can never be completely prepared for every possible moral or ethical issue,

there are five questions that can help reveal the fundamental issues underlying an ethical

quandary.

The five questions

The ethical landscape faced by most individuals in positions of authority and responsibility is

complex and replete with dilemmas. But if we are clear on the central issue that underlies an

ethical dilemma, the answer – that is, the right thing to do – is usually obvious. You don’t

need to be a sophisticated ethicist to know that stealing company funds is illegal or that

falsifying financial records is a breach of fiduciary responsibility. In these clear-cut situations,

the issue is self-restraint or impulse control. For example, ‘‘I won’t cook the books to increase

my compensation.’’

In contrast, the nature of ethical dilemmas is that the ‘‘right thing to do’’ is not immediately or

even eventually clear. These dilemmas are problems because their resolution is neither

simple nor easy and they must be confronted under time pressures as well as conflicting

financial and political demands. Often the ‘‘right answer’’ comes with a price tag. Moreover,

in many instances, the crucial factors underlying the dilemma are not immediately obvious.

So, how can individuals better resolve these dilemmas and reduce their chance of making a

mistake that they will later regret? As in many areas of life, we often fail in ethics, not because

we don’t know the right answer, but rather fail to ask the right questions. To tackle ethical

dilemmas and avoid making ethical mistakes, executives, managers, and professionals can

use the following five questions, which, while they will not guarantee making the right

decision, can help prevent making the wrong one. They are:

1. What’s in it for me?

2. What decision or action would lead to the greatest good for the greatest number?

3. What rules, policies and social norms – written or unwritten – apply in this situation?

4. What are my obligations to others?

5. What will be the long-term impact for myself and important stakeholders?

These five questions have the advantage of being simple, clear and easy to remember. And

although they are not the only questions that could be asked about an ethical dilemma,

together they address the majority of ethical issues faced by individuals in their

organizational and personal lives.

1. What’s in it for me?

Understanding and appreciating the impact of our self-interest. There is nothing morally

wrong with asking this question first. How will I and those I care about benefit and what will

‘‘ Leaders who learn to recognize and prevent potential ethical lapses sooner and more effectively than their rivals are better positioned to avoid costly repercussions – including calamitous stock price drops, lawsuits and serious damage to the reputations of their organizations and their management teams. ’’

VOL. 39 NO. 6 2011 jSTRATEGY & LEADERSHIPj PAGE 37

it cost me – in terms of money, time, work and reputation? Rather than suppressing these

thoughts and feelings, it is better to acknowledge them and understand how they might

influence our perceptions, priorities, and decisions and weigh how they might conflict with

other legitimate interests in the situation. One test of the appropriateness of your

self-interest is to ask, ‘‘How comfortable would you feel about sharing your real motivations

publicly?’’

2. What would lead to the greatest good for the greatest number?

Understanding and appreciating the legitimate interests of others. This question is based on

the philosophical argument that the correctness of an ethical decision should be measured

by its outcome. This ethic is sometimes referred to as utilitarianism[9] or the social benefit

function, where the preferred decision is the one that will return the highest net social benefit

to stakeholders. This criterion is especially appropriate for public policy, legislation and

government regulation but can also be equally appropriate for business organizations that

have multiple constituencies. The difficulty in applying this principle occurs when not every

group of stakeholders has the same values and priorities with regard to desired and

undesired outcomes. On an organizational level, desired outcomes often differ among

management, labor, customers, and shareholders. Applying utilitarianism in strategic

decision-making requires an understanding of stakeholder values and utilities and the

tradeoffs among them. Value conflicts can make this kind of outcome optimization difficult to

achieve.

With utilitarianism, therefore, we are forced to ask, ‘‘How do we define the greater good?’’ It is

not unusual for the answer to this question to conflict with the answer to the first question,

‘‘What’s in it for me?’’ Such conflicts can be helpful and the resultant dialectic can help

illuminate what is at stake for you personally and for others.

3. What laws, rules, or policies apply?

The importance of principle. The third question considers the rightness or wrongness of

an action from the perspective of how closely it conforms to some formal principle or set

of principles. Immanuel Kant, the major contributor to this point of view, believed that a

moral decision should be based on a single principle: Act as if the maxim of your action

were to become general law, binding on everyone.[10] He called this the Categorical

Imperative.

Patricia Werhane, currently Director of the Institute for Business and Professional Ethics at

DePaul University, provides a list of possible questions implied by a rule-based

perspective:

B Does the action set positive or negative precedents?

B Is the action acceptable to other reasonable persons?

B Is it applicable to other similar situations?

B Does it respect, or at least not denigrate, human dignity?[11]

This approach to ethical decision-making is accepted practice in many private

organizations. In Western society, one of the most basic canons of behavior, the Golden

Rule, is an example of the categorical imperative: Do unto others as you would have them do

unto you.

‘‘ Being ethical sometimes requires swimming against the tide and taking personal risks. ’’

PAGE 38jSTRATEGY & LEADERSHIPj VOL. 39 NO. 6 2011

In answering this third question, consider whether there are any conflicts among other laws

or principles that may apply.

4. What are my obligations to others in this situation?

The role of reciprocity and trust in the social fabric. In the view of Confucius, conflicts should

be resolved by amicable compromise, thereby allowing nature to follow its harmonious

course. For him, ethical behavior was grounded in the relationships of interdependence and

trust between individuals.[12] He stressed the duties of individuals in their relationships,

rather than their rights apart from others. To Confucius, each side is obligated to provide

what the other side needs to achieve its goals and fulfill itself. Any other kind of behavior is

insincere, exploitive, or contentious. The foundations of these relationships are trust and the

principle of reciprocity.[13]

Reciprocity is a universal norm.[14] It exists in all human cultures whether pre-industrial tribal

societies or advanced economies and it forms the basis for many of our day-to-day social

and business interactions.[15] How do we feel when someone we’ve previously helped

rejects us? Would we ever be willing to help them again? When a colleague whom you have

helped multiple times does not reciprocate, will you ever forget? The answer is: no.

Implicit in the fourth question is: In this situation, are any of my obligations in conflict, and if

so, what are my priorities?

5. What will be the long-term impact on me and important stakeholders?

Enlightened self-interest – taking the long-term perspective. This question assumes that an

individual’s self-interest and those of society are indistinguishable, that is, if each person

truly understands what that self-interest is. To some observers of society, such as the 19th

century French historian Alexis de Tocqueville, wrong decisions are due to intellectual error

and result from not understanding that one’s true self-interest lies in doing what is also right

for others.[16] From this perspective, ethical people understand that their own long-term

interests and those of society are one and the same. This approach is most obviously

reflected in the behavior of environmentalists and those who make personal sacrifices for

humanitarian causes. Even our mothers espouse this approach when they tell us as children:

‘‘Someday you will understand that I am telling you to do what is best for you in the long run.’’

The keys to using this question are to understand and apply our most important and

enduring values, take a long-term rather than an expedient perspective and reflect on the

implications and possible consequences of the decision (see Exhibit 1).

Exhibit 1 Ethical perspectives

Ethical Dilemma

Self-interest

Others

Principles

Recip- rocity

Long-term

VOL. 39 NO. 6 2011 jSTRATEGY & LEADERSHIPj PAGE 39

The five questions as a framework

Each of the five questions views an ethical issue from a different perspective. By asking all five

questions, we reduce the chance of overlooking a critical factor in our decision-making. Together,

the five questions ask all of the following about an ethical dilemma:

1. What are my self-interests in this situation and how might they influence me? Self-interests are a

natural part of human nature. They are neither necessarily good nor bad but should be

acknowledged so as to prevent you from doing something unethical.

2. What are the interests of others and the larger society and to what extent should I take them into

consideration? What would lead to the greatest good for the greatest number and to what extent

should that be my predominant criterion in this situation?

3. What principles and values, laws and regulations, policies and procedures, or socially

appropriate behaviors do I need to consider? Are the relevant principles or processes more

important than outcomes? Am I willing to apply those same principles to myself regardless of the

personal consequences?

4. In my job or role, my personal or professional relationships, or as a member of the larger society,

what are my obligations to others? How should the principle of reciprocity apply? Are my

obligations sufficiently important that I would be willing to sacrifice my self-interest, a

fundamental principle or the greater good?

5. What is in my long-term best interest and that of society in general, and how can I simultaneously

meet both those commitments? Where do my long-term interests and those of others intersect,

and is there a decision or action that might satisfy both?

The challenge, having asked these five questions and considered their implications, is to

understand and minimize any inherent conflicts among the values and obligations that they

underscore. This can be addressed by focusing on three criteria for resolving such value conflicts –

primacy, balance and acceptance. Primacy asks, ‘‘Which questions are most relevant to the values

that are important to you and your organization in this situation?’’ Balance encourages seeking the

best tradeoff if you must compromise among values. Acceptance asks, ‘‘How well will your decision

and its underlying rationale likely hold up under public scrutiny?’’

Applying the five questions: guidelines for leaders and strategic decision makers

B Ask all five questions before reaching a decision. Just because one of the questions may seem to

provide an adequate justification for your decision or action doesn’t mean that other perspectives

may not be equally helpful or even lead to a different conclusion. Be willing to challenge

assumptions, both yours and those of others; wrong assumptions can render the best decisions

worthless.

B Always remember the central role of values in determining the implications of the issues raised.

When conflicts emerge, refer back to your core values or those of your organization to resolve

fundamental issues or priorities. Be attentive to possible conflicts between your personal values

and your organization’s culture; you may find that at times they conflict or are even incompatible.

B Weigh short-term vs. long-term consequences. While expediency is often tempting, most of the

time the ethical decision is also the best long-term decision. Many ethical mistakes result from

deadlines and budget pressures.

B Be persistent and patient. Ethical issues are often complex and difficult. It can be tempting to find

a quick solution and move on to more concrete business problems. A quick but wrong solution

may exacerbate the problem; the right solution may take longer but is usually worth the wait.

B Trust your gut but be willing to seek the counsel of others. As this article discussed at the

beginning, most people know intuitively what is right and wrong. Even if you are not sure why, trust

your instincts. If you find yourself having trouble reconciling the objective facts with your feelings,

seek the counsel of someone whose values, experience and judgment you respect. The advice

may help you clarify and articulate the discrepancy.

B Be courageous. It is not unusual for the ethically right answer to be politically unpopular. Being

ethical sometimes requires swimming against the tide and taking personal risks.

B Remember the fifth question. ‘‘What will be the long-term impact on me and important

stakeholders?’’ In the end, this may be the most important question of all.

PAGE 40jSTRATEGY & LEADERSHIPj VOL. 39 NO. 6 2011

Notes

1. Anand, V., Ashforth, B. E. and Joshi, M. (2005), ‘‘Business as usual: the acceptance and

perpetuation of corruption in organizations,’’ The Academy of Management Executive, Volume 19,

Number 4, pp. 9-23.

2. Jennings, M.M. (2006), The Seven Signs of Ethical Collapse: How to Spot Moral Meltdowns in

Companies . . . Before It’s Too Late, St Martins Press, New York, NY.

Berkshire Hathaway and Lubrizol case

Berkshire Hathaway founder Warren Buffet called the purchases of Lubrizol stock by his former top

aide and heir apparent, David Sokol, ‘‘inexplicable and inexcusable.’’ Citigroup had recommended

the company to Sokol as a possible acquisition by Berkshire in December 2010. In early January

2011, Sokol bought nearly 100,000 shares of Lubrizol for his personal account. Soon after, he

recommended Lubrizol to Buffett as a possible takeover target for Berkshire. When the deal was

consummated in March 2011 Sokol’s shares rose dramatically and he may have made as much as

$3 million in profit on his equity position. Although he had told Buffett that he owned some Lubrizol

stock at the time he recommended the acquisition, he did not disclose that he had bought the

shares only a few weeks earlier and after Citigroup had proposed it as a possible Berkshire

acquisition.

At a shareholders meeting in March 2011, Buffet said that Sokol had violated Berkshire’s insider

trading rules and code of ethics when he bought shares of Lubrizol prior to recommending that

Berkshire buy it. Sokol resigned under pressure later that month but refused to concede that he had

done anything wrong; he believed that he had behaved ethically with regard to the Lubrizol

imbroglio. On April 27, 2011 Berkshire’s audit committee accused Sokol of violating company

standards and misleading Berkshire about his personal stake when he recommended the Lubrizol

acquisition to Buffett. In addition, the SEC is investigating the incident to determine whether a

criminal investigation is warranted.

Even if we give David Sokol the benefit of the doubt, his failure to recognize that he had done

anything wrong may be a good illustration of an ethical mistake. How might the five questions have

helped avoid such tragic consequences? His error was clearly in considering only two questions:

‘‘What’s in it for me?’’ and ‘‘What rules apply in this situation?’’ Let’s consider how he might have

thought through his situation using all five questions.

What’s in it for me? Clearly one thing that was in it for him was a significant increase in wealth; but he

also should have considered the possible damage to his reputation and his future with Berkshire

Hathaway.

What would lead to the greatest good for the greatest number? As the audit committee has alleged,

he engaged in ‘‘usurpation of corporate opportunity,’’ or wrongly capturing profit that rightfully

belonged to Berkshire stockholders. As a Berkshire executive the stockholders’ interests should

have been his priority, not his own enrichment.

What rules should apply in this situation? Obviously the company, through its audit committee, and

the SEC, seem to be claiming that he broke the rules, both those of Berkshire’s code of ethics and

possibly federal and state regulations regarding insider trading. At the very least he created the

perception of violating these rules.

What were Sokol’s obligations to others? As a Berkshire executive being mentored by Warren

Buffett, he owed his boss the absolute honesty and candor that is essential to maintain the trust

implied in that relationship.

How would I feel about this decision in the long term? Evidently Sokol failed to fully consider the

possible long-term consequences of his actions. As a result he lost his reputation for integrity,

forfeited his position and future at Berkshire Hathaway, risked incurring tens of millions of dollars in

legal fees defending his actions and faces possible criminal charges for insider trading.

Had Sokol taken the time to ask all of the questions, he would have realized that there were many

other factors, and possible consequences, to consider in this situation. What factors were most

critical to Berkshire and his own professed value of integrity? How might he find the right balance

among his different priorities? What decisions or actions would likely be most acceptable to

Buffett, his stakeholders and himself in the long run? Certainly it wouldn’t have been the decision

he chose.

VOL. 39 NO. 6 2011 jSTRATEGY & LEADERSHIPj PAGE 41

3. First recorded in 1988, Leonard Cohen’s lyrics state in a very clear (and poetic) way the pervasive

nature of unethical behavior in various parts of our society and points out that all too often

‘‘everybody knows.’’

Everybody knows that the dice are loaded

Everybody rolls with their fingers crossed

Everybody knows that the war is over

Everybody knows the good guys lost

Everybody knows the fight was fixed

The poor stay poor, the rich get rich

That’s how it goes

Everybody knows

4. The Smoking Gun Website, ‘‘Don’t laugh: Enron’s ethics code,’’ available at: www.thesmokinggun.

com/file/dont-laugh-enrons-ethics-code (accessed April 12,2011).

5. Cleek, M.A. and Leonard, S.L. (1998), ‘‘Can Corporate codes of ethics influence behavior?’’, Journal

of Business Ethics, Volume 17, Number 6, pp. 619-630.

6. Haidth, J. (2006), The Happiness Hypothesis: Finding Modern Truth in Ancient Wisdom, Basic

Books, New York, NY.

7. Cohen, R. (2011), ‘‘Goodbye,’’ New York Times Magazine, February 27, p. 14.

8. Kidder, R. (2003), How Good People Make Tough Decisions, HarperCollins, New York, NY.

9. Mill, J.S. (1906), Utilitarianism, University of Chicago Press, Chicago, IL.

10. Kant, I. (1785) translated by James W. Ellington (1993). Grounding for the Metaphysics of Morals,

3rd ed. Hackett, Indianapolis, IN.

11. Werhane, P.H. (1994), A Note on Five Traditional Theories of Moral Reasoning, University of Virginia

Darden School Foundation, Charlottesville, VA.

12. Ames, R.T. (2011), Confucian Role Ethics, Chinese University Press, Hong Kong.

13. Ostrom, E. and Walker J. (eds.), (2003), Trust and Reciprocity: Interdisciplinary Lessons from

Experimental Research (Russell Sage Foundation Series on Trust)

14. Becker, L.C. (1986), Reciprocity. Routledge, New York.

15. Mulej, M. and Kajzer, S. (1998), ‘‘Ethics of interdependence and the law of requisite holism,’’

In Rebernik, M. and Mulej, M. (eds.): Proceedings of STIQE, ISR, Maribor.

16. Tocqueville, A. (1840) Democracy in America (Lawrence, G., trans.; Mayer, J. P., ed.; Perennial

Classics, New York, NY (2000). In particular see Volume II, Chapter 8 also available at: http://xroads.

virginia.edu/,HYPER/DETOC/ch2_08.htm

Corresponding author

Gerard L. Rossy can be contacted at: [email protected]

PAGE 42jSTRATEGY & LEADERSHIPj VOL. 39 NO. 6 2011

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