It’s a CEO’s worst nightmare: He or she opens the newspaper or switches on the television and watches helplessly as the media dissect and devour the company under his or her control over flimsy ethics and illegal activities. Over the years, a steady stream of scandalous news reports have chronicled the questionable actions of companies like Sears, General Dynamics, Archer-Daniels-Midland Co., NYNEX and, most recently, Columbia/HCA Healthcare Corp. Even after the bad press and legal challenges fade, the results can be devastating. Such a scenario can cost a company tens of millions of dollars in legal fees and lost sales; it can demoralize a workforce and sap productivity. In the end, it can take years for a company to pull out of the tailspin.
Yet, despite more than two decades of intense media scrutiny, public pressure, academic research and corporate ethics programs designed to teach values and integrity, the business world seems unable to curb unethical behavior or improve its own image. Razor-thin profit margins, cutthroat competition, high-pressure sales and bloated workweeks are pushing workers harder than ever before. Combine all this with continued downsizing and a general breakdown of traditional attitudes about trust and loyalty, and it’s not difficult to understand why ethical transgressions are so common. As Michael Hoffman, executive director of the Center for Business Ethics at Bentley College in Waltham, Massachusetts, puts it: “Virtually all companies want to do the right thing, but evidence of unethical behavior keeps piling up.”
The evidence is everywhere. A 1994 Gallup Poll found that among members of the general public, only the government ranks lower than corporations in perceived trustworthiness. A 1996 New Orleans-based Tulane University study, about the effects of personal values and corporate codes of conduct on fraudulent financial reporting, found that two of every five controllers and nearly half of all top executives were willing to commit fraud in role-playing exercises. In fact, 87 percent made at least one fraudulent decision in the course of simulated work situations.
Glance inside the corporation and things are just as disturbing. An April 1997 study by the American Society of Chartered Life Underwriters & Chartered Financial Consultants and the Ethics Officers Association, based in Bryn Mawr, Pennsylvania, found that 56 percent of all workers feel some pressure to act unethically or illegally. The study, titled “Sources and Consequences of Workplace Pressures: Increasing the Risk of Unethical and Illegal Business Practices,” revealed that a head-turning 48 percent of workers admitted they had engaged in one or more unethical and/or illegal actions during the last year. Among the most common transgressions: cutting corners on quality, covering up incidents, abusing or lying about sick days, deceiving customers, lying to a supervisor or underling, and taking credit for a colleague’s ideas.
And the problem seems to be getting worse. The same study found that more than 60 percent of workers feel more pressure than five years ago and 40 percent feel greater pressure than only a year ago. Exacerbating the problem is an unclear definition of ethics, especially as companies go global. A gift in one country might be viewed as a bribe in another, for example, just as taking credit for a colleague’s idea might be considered business as usual at one company but shunned at another. “Ethics is a broad and often murky area,” says Laura Pincus Hartman, director of the Institute for Business and Professional Ethics at DePaul University in Chicago. Adds Carl Skooglund, vice president of ethics at Dallas-based Texas Instruments Corp. (TI): “The workplace is full of ethical confusion, dilemmas and issues.”
What in the world is going on? Why, despite the growing attention to ethics—including university teachings and media attention—is the problem so persistent? It’s certainly not for a lack of action. The Ethics Resource Center, a Washington, D.C.-based organization that helped launch many early corporate ethics programs in the 1980s, found the number of firms with ethics training programs has increased from 7 percent to 40 percent since 1994, when it last conducted a survey. Companies with ethics codes have swelled from 13 percent to 73 percent during the same period. In addition, a growing number of companies are establishing ombudsman positions, confidential hot lines and an array of other mechanisms to catch potential problems before they ever occur.
Obviously, good intentions alone aren’t solving the problem. Says Hoffman: “There’s no question that ethics is an important part of an organization’s identity. Unfortunately, there’s often a disconnect between a company’s objectives and what happens in the real world. The people who set the organizational goals aren’t the ones thinking about ethics and how situations actually play out.”
Today, an ethics strategy must encompass more than hot lines, guidelines and finely tuned human resources policies. A workforce not properly grounded in ethics and a corporate culture not guided by HR managers steeped in making proper decisions is an ethics disaster waiting to happen. Says Michael Deck, a principal at KPMG Ethics and Integrity Services in Toronto: “Decisions are made by individuals. Actions are taken by individuals. Companies are nothing without individual human beings, and that’s where the problems start or end.”
Today’s business climate fosters unethical behavior.
Ethical conflicts are nothing new, of course. In the early 1900s, social pundits debated child labor laws and the idea of improving working conditions at the nation’s factories. That concern spurred a furious national debate on ethics and morality. A half-century later, politicians, government and the courts began scrutinizing sales methods and advertising, hiring practices and equal opportunity. Many of the laws people take for granted today were nothing more than ethical question marks only a few decades ago.
Along the way, the media, shareholders and public watchdog groups also began scrutinizing the activities of companies far more closely—how defense contractors handled government contracts, for example, and how stockbrokers promoted equities to customers. But just as this scrutiny was intensifying, the workplace evolved into a more complex and confusing place than at any point in history.
Ethics programs are a relatively new phenomenon.
Given today’s business climate, the rise of corporate ethics programs hasn’t happened by chance. Although some companies, such as Texas Instruments, began to lay down ethics guidelines in the early 1960s, the idea of training a workforce and offering an ombudsman or ethics officer to handle questions, problems and disputes is a relatively new phenomenon. In the early 1980s, only a half-dozen or so companies nationwide offered ethics training. Today, according to the Ethics Resource Center, 60 percent of all companies have ethics codes, and 95 percent of Fortune 50 firms teach ethics to employees.
At first glance, it might seem like a trend rooted in 1990s sensibility. After decades of a cynical public and the press’ scrutiny of the corporate and political landscape, it could be argued that corporations are finally seeing the light. But other factors also are driving change. The fallout from an Archer-Daniels-Midland price-fixing scandal or Sears’ automotive fiasco (in which mechanics charged customers for service and parts never received) can become a public relations and investor relations nightmare for a company. In fact, the Ethics Resource Center found that two-thirds of its clients asked for assistance in establishing a program only after enduring a front-page scandal.
And then there are the 1991 Federal Sentencing Guidelines. They allow a company with a bona fide ethics program to receive up to a 95 percent reduction in fines if officials are convicted of a felony such as insider trading or fraud. Some say the stampede to ethics programs is little more than window dressing designed to accommodate the Federal Sentencing Guidelines. Yet, regardless of the exact motivation or reason, the fact remains that many companies are developing ethics strategies, and some are shelling out as much as $1 million a year to ensure that problems don’t boil up. Indeed, a growing number of organizations are recognizing the long-term importance of building an ethical organization. “Trust is the foundation for any solid business relationship. You can’t form a close and candid relationship with suppliers, customers and the public if you don’t have a track record of integrity and ethics,” says TI’s Skooglund.
Ethics isn’t only good policy.
A track record established by actions, not merely policies, sets an organization on ethical ground. Retail giant Sears, Roebuck & Co. is an example of how culture can influence individual actions. In the early 1990s, the Chicago company came under intense fire for its automotive repair practices. After an investigation by officials in California, Florida and New Jersey, the attorneys general in 43 states charged the company with systematically overselling parts and services to 933,000 customers. Allegations of wrongdoing included making false and misleading statements, fraud, failure to state clearly what parts and labor were on repair invoices, and false advertising. By the time Sears agreed to accept responsibility and settle the matter for more than $40 million, the company was reeling from bad press and dismal public opinion.
Sears found itself under siege for a very basic reason, experts say. It had few safeguards against poor workmanship or unnecessary repairs, and it allowed employees to earn commissions on both selling parts and making repairs—a proven recipe for abuse. With tough sales quotas and a lack of customer-satisfaction checks, employees were rewarded for racking up sales whether parts and repairs were needed or not. It was only a matter of time before the situation spiraled inexorably downward, critics contend.
The way Hoffman sees it, ethics problems often spin a tight orbit around organizational objectives. “When a company sets unrealistic sales targets or implementation schedules, the pressure to meet goals gets pushed down through the organizational structure. All of a sudden, you wind up with people who begin to say, ‘I don’t want to mislead my customers, and I don’t want to cut corners. But if I don’t go along with things, I’m afraid I’ll lose my job or wind up falling far behind when it comes to income and promotions.’ That’s when employees begin to do things they wouldn’t ordinarily do.”
KPMG’s Deck has seen plenty of companies that serve up a compelling message but fail to back it with any real actions. Winning the ethics battle isn’t only about how an organization punishes those who engage in unethical behavior, but how the company rewards both good and bad behavior. A company, for example, can provide ethics guidelines and detailed conduct codes; HR can offer superb training and establish an ethics hot line for questions and problems. “But it’s the reward system and the organizational behavior that let people know what the real story is. If a manager turns his or her head and looks the other way when it comes to a top salesman who cheats on an expense account or accepts inappropriate gifts, that sends a powerful message. The desired behavior must start from the top and work its way through the entire organization,” he says.
Such expectations require a CEO who serves as an example of an ethical leader. It means managers are honest and expect honesty from their employees. And, increasingly, it means establishing clear-cut policies, guidelines and rewards—and HR making sure employees fully understand the repercussions of an ethical transgression and that such behavior won’t be tolerated. Remarkably, when researchers Arthur Brief and Janet Dukerich studied executives as part of the Tulane University project, the most disturbing finding wasn’t that executives were willing to bend the rules, but that their personal beliefs about ethics did little to stop them from committing fraudulent acts. In other words, managers almost always knew right from wrong, but didn’t feel obliged to act on those beliefs.
Yes, an ethical environment is possible.
Companies that create an ethical culture frequently avoid sinking into the quicksand. At Texas Instruments, Lockheed Martin and United Technologies, for example, efforts are under way to transform policies into action. Texas Instruments has written and distributed a code of ethics since 1961. It introduced a formal ethics program 11 years ago, after executives at the company recognized that problems were popping up in industry—particularly among defense firms. At the time, about one-third of TI’s business came from defense contracts. “We realized we couldn’t go on autopilot without expecting problems. The simple fact is, there are too many difficult issues and situations for which people have to make judgment calls,” says Skooglund.
While TI’s code of ethics serves as the foundation for the program, it’s not the only tool the company uses. The company communicates with its 60,000 employees by sending a weekly, electronic newsletter over the corporate intranet, and at least one article about ethics is always included. In addition, Skooglund’s five-person staff field questions on everything from benefits conflicts to legal compliance. A toll-free feedback line handles 100 to 120 calls each month, and workers can maintain anonymity, if they so desire. And the company arms employees with a Quick Test that can help guide them through ethics issues.
TI also has worked hard to create an environment in which the ethics office and human resources personnel work closely with one another to resolve problems. If a question arises about sexual harassment or discrimination, for example, it’s up to HR to resolve it—and the ethics office will pass along any phone call or inquiry that pertains to those issues. If, on the other hand, an employee asks a human resources manager whether a gift from a client is appropriate, the manager will refer the matter over to the ethics department. HR also plays a role in briefing new hires about the ethics program and works with the ethics department and other company officials to refine policies and procedures.
At Lockheed Martin Corp. of Bethesda, Maryland, the emphasis is on ethics training for all 200,000 employees. Every year, workers receive one hour of training from their direct supervisor or manager. The company uses a top-down approach: the chairman trains his direct reports, they train their managers and so on. All instructors receive training from an ethics officer; there’s one at each of the company’s 70 business units. (Ethics officers come from finance, marketing, human resources and other departments. Each performs the duties on top of his or her regular job.) The end result? “We wind up with each immediate supervisor having an ongoing ethics dialog with his or her direct reports. That way, we’re not sending out a message that there’s only one person in the entire company who’s capable of handling these issues,” explains Carol R. Marshall, vice president of ethics and business conduct at Lockheed Martin.
The company takes ethics seriously. It too provides a toll-free line for answering questions and dealing with issues. In a typical year, more than 4,000 calls stream in. But the backbone of the program remains the training sessions, which include discussions, video instruction and role-playing. Recently, Lockheed Martin introduced a full-fledged board game, complete with Dilbert (TM) characters, that presents ethical dilemmas and evokes group discussion. “The freer the communication and the more open and honest the environment, the fewer the problems,” Marshall insists.
Although Lockheed Martin administers the ethics program separately from HR, like TI it depends heavily on human resources to provide support for the underlying structure. And it’s not difficult to understand why. Approximately 37 percent of all ethics inquiries involve HR issues, and that means ethics officers must consult with HR and use the department’s expertise to interpret regulations, resolve disputes and consult on ways to reduce future problems. In some cases, HR is able to resolve specific ethics problems on the spot, something the company encourages, and thus avoids the time and expense of a full-scale inquiry.
Hartford, Connecticut-based United Technologies Corp. (UTC) has taken a slightly different approach. Since 1986, the $23.5 billion manufacturing conglomerate has offered a corporate ombudsman who’s responsible for resolving problems and mediating conflicts when they arise. Employees can call toll-free and speak confidentially to a trained representative or submit a written question or statement via the company’s Dialog program. The information is forwarded to the appropriate investigative department for further action and the ombudsman ensures that the person making the report receives a written response. “We’re not agents for management,” says George Wratney, who heads the ombudsman program. In the past 11 years, United Technologies has received more than 43,000 Dialog inquiries and tens of thousands of phone calls. Many of the inquiries have led to direct changes in management and business practices.
Although UTC won’t launch an investigation without cause (“Employees must document and support their complaints, and we don’t sanction wild personal attacks,” says Wratney), the company does take allegations of wrongdoing seriously. It guarantees that employees who submit a complaint won’t find themselves the target of any kind of recrimination. And it backs that up by communicating with an employee only through a home phone number or address and providing other measures to ensure confidentiality. All this has fostered an environment in which only 11 percent of inquiries and complaints are anonymous, and only 3 percent of them involve questions about business practices.
In fact, questioning of business practices isn’t the norm at most companies—although it certainly pops up from time to time. More often, workers struggle with their own ethical questions in relation to work-related issues. Nynex Corp. has found that nearly 50 percent of the calls that stream into its toll-free phone line deal with such issues as disagreements about how an employee can use one’s benefits and what recourse a worker has if he or she doesn’t concur with a job evaluation and can’t resolve the issue with a manager. Hardly the stuff international scandals are made of, says Hartman. Nevertheless, “It’s the day-to-day personal ethical issues that can sink a company,” she says.
Promote an ethics culture in your company.
Of course, developing a corporate culture that fosters ethical behavior is an enormous task, as HR personnel at the above companies can attest to. The problem, experts agree, is that no single approach or cookie-cutter program works for every company. Many experts argue that ethics is relative and sometimes situational, and recognizing that fact goes a long way toward finding solutions. “There’s something to be said for zero tolerance and the message it sends out,” says Hartman. “But managers better think through all the rules and regulations very carefully because they can easily come back to bite the company. It’s possible to wind up with a company that searches bags and snoops on voicemail and e-mail messages. That can raise an entirely separate set of ethical issues revolving around privacy and trust. It also can affect the way workers view the company.”
Hoffman believes it’s important to view ethics in the proper cultural context—particularly for companies doing business in other countries. An unofficial fee to unload boats in one part of the world might be labeled extortion in another. “You have to determine where it’s appropriate and ethically OK for different cultures to embrace different principles. But you have to maintain your own framework of ethical values and not deviate from them,” he remarks.
Although it might seem that human resources plays a tangential role in the ethics debate, KPMG’s Deck says that simply isn’t so. HR can help design programs, advise on strategy and consult on investigations. HR can play an ongoing role in educating and training workers about ethics, he states. And it doesn’t end with a 45-minute lecture and video. “The underlying values of the company need to be visible—and communicated—during the selection process, employment interviews, orientation [sessions] and performance reviews. Only then can a company create a culture that emphasizes ethics.”
Whether the focus on creating ethical cultures will result in fundamental change in Corporate America remains to be seen. Many, like Deck and Hoffman, believe ethics programs will drive behavioral change and organizational improvement over time. Already, federal sentencing guidelines, Conference Board-sponsored symposiums, the creation of an ethics officers’ association and greater awareness of the problem indicate that ethics is getting the attention it deserves, they say. “There always will be room for improvement and progress,” says Hoffman. “But we have come a long way in terms of knowledge and we’ll likely gain more ground in the future.
“A successful ethics program doesn’t come about as a result of pounding workers over the head and telling them they have to be ethical or else,” Hoffman concludes. It comes from understanding that business ethics involves individual and institutional values and that the two are inexorably intertwined. It also comes from recognizing that problems in the corporate world are often systemic and not the result of a few bad apples in the corporate barrel. A company that finds a way to change the system so people can be influenced to act ethically and responsibly is far more likely to succeed.
Workforce, October 1997, Vol. 76, No. 10, pp. 44-53.