Business Ethics Tathagat Varma Session 4/12: 7-‐Aug-‐09
Painful Personal Encounters • Ken Shelton, editor and publisher of Execuve Excellence magazine, the world’s leading execuIve advisory newsleLer, and Personal Excellence magazine – One reason unethical behavior is so common is because it can be very rewarding in the short-‐term. The near-‐term costs of honest behavior are well documented, making the ethical choice very tough, especially when the long-‐term payoﬀ or advantage seems remote at best. – Part of the maturaIon process is to pass through close encounters with unethical people, judging for ourselves who is who and what is what, and then associaIng with the people and organizaIons we’re most comfortable with. – But aSer an encounter or two, we ought to spot a trend, have the eyes to see certain signs, certain things coming, before we experience them
Painful… • When one area or aspect of our lives or organizaIons is more or less legiImate, all other areas then borrow credibility from the Bank of Strength (our strong points). So, we may be highly ethical in one area, highly unethical in another. And when our unethical acts are exposed, our loved ones are typically “stunned” or “shocked”, and quick to come to our defense because they know us to be legiImate and lovable in other roles. And yes, we may be based on a solid foundaIon in a profession only because it imposed a certain discipline on us, meaning we must abide by certain rules and regulaIons, checks and balances within the system. But once outside that system or specialty, we may register counterfeit to a high degree.
Painful… • Unethical behavior is most oSen about subtleIes, gray areas, whisper, shadows, nuances, and noise. And because of duality in people, diﬀerences can be hard to detect. We are all composites, not 100% counterfeit or authenIc. We are both originals and copies – nurtured from seed and made from scratch in some areas, and inﬂuenced by imitaIon, comparison, or compeIIon in others.
The Cost of Being Ethical • Norman AugusIne, President & CEO of Lockheed MarIn – Every great leader puts ethics ﬁrst. In business, it means pufng ethics before proﬁts, before sales, even before staying in business – I personally believe hardly anyone comes to work in the morning – or shows up at school or goes out on the ball ﬁeld – with the idea of doing something unethical. I believe most people want to be honest and ethical. But if people set out to do the ‘right thing’, why do so many end up doing something unethical? The answer is that being ethical oSen – perhaps even usually – entails a short-‐term cost – Well, no one ever said being ethical is easy! Being ethical means that we oSen must subsItute short-‐term gains for a greater, long-‐term reward
The Cost… – The truly diﬃcult ethical choices in life involve day-‐to-‐day decisions, where the immediate cost is very evident and the long-‐term “payoﬀ” or advantage seems remote. – I believe what needs to be said to our friends, our employees, and our colleagues is that by paying the price of being ethical today, we are actually invesIng for the longer good. We all know that nothing worth achieving is easily aLained. We must not reject ethical behavior because it is hard in the short run, but embrace it for the fact that it yields dividends over the long run. – The great French Marshal Lyautey once asked his gardener to plan a certain type of tree. The gardener protested that the tree was slow-‐growing and would not reach maturity for a hundred years. The Marshal replied, “ In that case, there is no Ime to lose; plant it this aSernoon!”
Ethics in Sports -‐ Baseball • In 1959, Ted Williams was 40 years old and closing out his career with the Boston Red Sox. He was suﬀering from pinched nerve in his neck that reason. For the ﬁrst Ime in his career, he baLed under .300, hifng just .254 with 10 home runs. He was the highest salaried player in sposts, making $150,000 a year. The following winter, the Red Sox sent him the same contract he had during his disappoinIng season. • When we got the proposal, Williams sent it back with a note saying that he would not sign it unIl they gave him the full pay cut allowed. “I was always treated fairly by the Red Sox when it came to contracts”, Williams said. “Now they were oﬀering me a contract I didn’t deserve. And I only wanted what I deserved”. The upshot was that Williams cut his own salary by 25%.
Ethics in Sports -‐ Golf • Golfers someImes joke about the player who cheated to regularly that when he once had a “hole in one”, he wrote down “zero” in his scorecard. • A more admirable approach to ethical behavior on the links was exhibited once during the Kemper Open. The great professional golfer Tom Kite wanted his playing partner, Grant Waite, that Waite was about to commit a rules infracIon that would cost him two strokes. Waite corrected his behavior, avoided the two-‐stroke penalty, and went on to win the tournament, eking out a one-‐stroke victory – over Tom Kite! Not only did Kite lost the victory trophy, he also lost $94,000 in prize money as a result of coming in second. But he gained a great deal of respect that is far more lasIng.
Ethics in Business -‐ Sears • A century ago, Richard Sears – founder of Sears Roebuck and Company – started the modern mail order industry, supplying a burgeoning naIon with innovaIve products and building a business that gave employment to hundreds of thousands of people. • In his zeal to sell merchandize, Sears occasionally would get carried away with catalogue descripIons, praising products far beyond the literal truth. This in turn led to returned merchandise and reduced proﬁts. • But Sears learned his lesson. In later years, he was fond of saying, “Honesty is the best policy. I know because I’ve tried it both ways.”
Deterring Dubious Business Behavior • Alfred Marcus, Carlson School of Management, University of Minnesota – Enlightened self-‐interest may not be suﬃcient guarantee that ethical behavior will take place; a stronger ethical stance, once which is not Ied to pure self-‐interest, may be needed – The only dependable deterrent to dubious behavior is moral duty, an awareness of the consequences in one’s acIons and an aLenIon to right conduct. The meaning here is that managers should treat people in the organizaIon and those outside of it with respect, as ends and not as means, as Kant as stated it, and as automonous creatures not subject to the managerial coercion. These standards should apply regardless of the short-‐ or long-‐term shareholder impact. – Stockholders should not necessarily be the sole determinant of “goodness” of a parIcular policy. The the raIonal pursuit of self-‐ interest always comes before moral duty, then humanity is the great loser.
A Price for Principle • David Neldert, Director of Auxiliary Services at Anderson University, Anderson, Indiana – The price of principle may never cost us personal loss. But principle may, at Imes, demand every cent we have invested. The lives of Nelson Mandela, of Abraham Lincoln and of the great social reformer Mahatma Gandhi let us know that imprisonment – and even death – may be the price of principle. Charles Swindoll writes about costs in his best-‐selling book, Strengthening Your Grip. Swindoll reminds us that the ﬁght for principle – for truth, integrity and jusIce – can’t be fought by “weary, ill-‐trained, noncommiLed, half-‐hearted troops”. The war of principle will be won in the long run by those who are willing to pay the price for principle, even if the cost if life itself.
Reinforcing Ethics in Recession • David Perry, Consultant with the Ethics Journal – Recessionary pressures manifect themselves in many areas: cornet-‐cufng in producIon; “creaIve” accounIng’ no-‐holds-‐barred markeIng and sales pracIces’ and high-‐pressure purchasing techniques, and in the conduct of layoﬀs and RIFs. RIFs generate employee grievances and resentment. Who to lay oﬀ is probably the most agonizing decision a manager can face but a RIF is a strong test of whether ethics has truly become imbedded in the corporate culture. – If employees see that the RIF leaves unscathed an “old boy network” in management, if they see their reIrement beneﬁt cut, or f they see that ethics “whistleblowers” are among the ﬁrst to be let go, employees will be unlikely to take seriously any future company statements on business ethics.
A QuesIon of Ethics • Barbara Strandell, Consultant – There is an implicit social contract that management of our large publicly held corporaIons have with shareholders, customers, and employees. Many corporate mission statement make those social contracts explicit….The social contract with employees is being broken. This, this “great asset” is currently experiencing record levels of work-‐related stress. – To understand why this contract has gone awry, merely look under the saIn sheets of the corporate culture: management negligence creates a conInuous deterioraIon of morale, pride and loyalty. Layoﬀs, acquisiIons and divesItures obviously have a serious impact on the “survivors”. But the real disease is the on-‐going management pracIces that alienate and suﬀocate people on a daily basis.
A QuesIon… • Many employees are unhappy with their work, but unable to bail out; so they hang in there, with resentment toward the company, working at about half of their potenIal pace. They oSen “act out” by abusing the system the way they feel when they have been abused; ulImately, they burn out, making worklife even more miserable for those around them. The net result is a less producIve workforce.
Ethical Leadership • Willard Butcher, reIred Chairman of Chase ManhaLan CorporaIon – Forty years ago, I received some simple advise that has stayed with me from a family friend named Marion Folsom, the architect of our naIon’s social security system and then a top execuIve of the Eastman Kodak Company. – “Bill”, Mr. Folsom said, “you are going to ﬁnd that 95% of all decisions you’ll ever make in your career could be made as well by any reasonably intelligent high school sophomore. But they’ll pay you for the other 5%.” – And it’s those 5% that will be the most diﬃcult – the subjecIve 51-‐49 decisions that will call into play your own long-‐term vision, your corporate ideals, the discipline and constancy of your character. If in making these decisions, you rely on clear ethical principles, a ﬁrm commitment toward ethical behavior, and an inﬂexible standard of what’s right and wrong, then your track record will be very good.
Why ‘Good’ Managers make Bad Ethical Choices? • Saul Gellerman • Four commonly held raIonalizaIons that can lead to misconduct: – A belief that the acIvity is within reasonable ethical and legal limits – that is, that is not “really” illegal or immoral – A belief that the acIvity is in the individual’s or the corporaIon’s best interests – that the individual would somehow be expected to undertake the acIvity – A belief that the acIvity is “safe” because it will never be found out or publicized; the classic crime-‐and-‐ punishment issue of discovery – A belief that because the acIvity helps the company the company will condone it and even protect the person who engages in it
Why ‘Good’… • Top execuIves seldom ask their subordinates to do things that both of them know are against the law or imprudent. But company leaders someImes leave things unsaid or give the impression that there are things don’t want to know about. In other words, they can seem, whether deliberately or otherwise, to be distancing themselves from their subordinates’ tacIcal decisions in order to keep their own hands clean if things go awry. OSen they lure ambiIous lower level managers by implying that rich rewards await those who can produce certain results – and that the methods for achieving them will not be examined too closely.
Why ‘Good’… • How can managers avoid crossing a line that is seldom precise? Unfortunately, most know that they have overstepped it only when they have gone too far. They have no reliable guidelines about what will be overlooked or tolerated or what will be condemned or aLacked. When managers must operate in murky borderlands, their most reliable guideline is an old principle: when in doubt, don’t.
Why ‘Good’… • …there is a diﬀerence between taking a worthwhile economic risk and risking an illegal act to make more money • Contrary to popular mythology, managers are not paid to take risks; they are paid to know which risks are worth taking. Also, maximizing proﬁts is a company’s second priority, not its ﬁrst. The ﬁrst is ensuring its survival. • AmbiIous managers look for ways to aLract favorable aLenIon, something to disInguish them from other people. So they try to outperform their peers. Some may see that it is not diﬃcult to look remarkably good in the short run by avoiding things they pay oﬀ only in the long run.
Why ‘Good’… • The sad truth is that many managers have been promoted on the basis of “great” results obtained in just those ways, leaving unfortunate successors to inherit the inevitable whirlwind. • The most eﬀecIve deterrent is not to increase the severity for those caught but to heighten the perceived probability of being caught in the ﬁrst place
Why ‘Good’… • Top management has a responsibility to exert a moral force within the company. Senior execuIves are responsible for drawing the line between loyalty to the company and acIon against the laws and values of the society in which the company must operate. Further, because that line can be obscured in the heat of the moment, the line has to be drawn well short of where reasonable men and women could begin to suspect that their rights had been violated. • ExecuIves have a right to expect loyalty from employees against compeItors and detractors, but not loyalty against the law, or against common morality, or against society itself.
Examining Ethics of a Business decision • Ethics without the Sermon – Laura Nash • 12 quesIons • Have you deﬁned the problem accurately ? – A truly moral decision is an informed decision. A decision that is based on blind or convenient ignorance is hardly defensible. – Importance of ‘factual neutrality’ – Extensive fact gathering may also help defuse the emoIonalism of an issue
Q2 • How would you deﬁne the problem if you stood on the other side of the fence ? – The purpose of arIculaIng the other side, who needs are understandably less proximate than operaIonal consideraIons, is to allow some mechanism whereby calculaIons of self-‐interest (or even of a project’s ulImate general beneﬁcence) can be interrupted by a compelling empathy for those who might suﬀer immediate injury or mere annoyance as a result of corporaIon’s decision. – Such empathy is a necessary prerequisite for shouldering voluntarily some responsibility for the social consequences of corporate operaIons, and it may be the only soluIon to today’s overly liIgious and anarchic world. – There is a power in self-‐examinaIon: with an exploraIon of the likely consequences of a proposal, taken from the viewpoint of those who do not immediately beneﬁt, comes a discomfort or an embarrassment that rises in proporIon to the degree of the likely injury and its arIculaIon.
Q3 • How did this situaIon occur in the ﬁrst place? – As important as deciding the ethics of the situaIon was the inquiry into its history. Indeed, the history gave a clue to solving the dilemma – Very few execuIves are outright scoundrels. Rather, violaIons of corporate and social values usually occur inadvertently because no one recognizes that a problem exists unIl it becomes a crisis. This tendency toward iniIal trivializaIon seems to be the biggest ethical problem in business today.
Q4 • To whom and what do you give your loyalIes as a person and as a member of the corporaIon? – Every execuIve faces conﬂicts of loyalty. The most familiar occasions pit private conscience and sense of duty against corporate policy, but equally frequent are the situaIons (tacit or explicit) in an operaIon or a decision that runs counter to company policy. To whom or what is the greater loyalty to ons’e corporaIon? Superior? Family? Society? Self? Race? Sex? – The good news about conﬂicts of loyalty is that their idenIﬁcaIon is a workable way of smoking out the ethics of a situaIon and of the absolute values inherent in it. – The bad news about is that there are few automaIc answers for placing prioriIes on them
Q4… – The US securiIes industry, for example, is one of the most rigorous industries in America in its requirements of honesty and disclosure. Yet in the end, all its systemaIc precauIons prove inadequate unless the people involved also have a sense of strong sense of integrity that puts loyalty to these principles above personal gain. – How does one probe into one’s own loyalIes and their implicaIons? A useful method is simply to play various roles out loud, to call on one’s loyalty to family and community by asking, “What will I say when my child asks me why I did that?”. If the answer is “that’s the way the world works”, then your loyalIes are clear and moral passivity inevitable. But if the quesIon presents real problems, you have begun a demodulaIon of signals from your conscience that can only enhance corporate responsibility.
Q5, Q6 • What is your intenIon in making this decision? • How does this intenIon compare with the likely results? – Sociologist Max Weber called [this an] “ethics of aftude” and contrasted it with an “ethics of absolute ends”. An Ethics of aftude sets a standard to ensure a certain acIon. – The goodness of intent pales somewhat before results that perpetrate great injury or simply do liLle good. Common sense demands that the “responsible” corporaIon try to align the two more closely, to idenIfy the probable consequences and also the limitaIons of knowledge that might lead to more harm than good. Two things to remember in comparing intenIon and results are that knowledge of the future is always inadequate and that overconﬁdence oSen preceded a disastrous mistake.
Q7 • Whom could your decision or acIon injure? – In an integrated society where business and government share certain values, possible injury is an even more important consideraIon than potenIal beneﬁt.
Q8 • Can you engage the aﬀected parIes in a discussion of the problem before you make your decision? – If the calculus of injury is one way of responding to limitaIons of knowledge about the probable results of a parIcular decision, the parIcipaIon of aﬀected parIes is one of the best ways of informing that consideraIon. – The issue of parIcipaIon aﬀects everyone. And yet it is a principle oSen forgoLen because of the pressure of Ime or the inconvenience of calling people together and facing predictably hosIle quesIons.
Q9 • Are you conﬁdent that your posiIon will be as valid over a long period of Ime as it seems now? – Doing what you can get away with today may not be a secure moral standard, but short-‐term discomfort for a long-‐term sainthood may require irraIonal courage or a raIonal reasoning system or, more likely, both
Q10 • Could you disclose without qualm your decision or acIon to your boss, your CEO, the board of directors, your family, or society as a whole? – A corporaIon may maintain the there’s really no problem, but a survey of how many “trivial” acIons it is reluctant to disclose might be interesIng. Disclosure is a way of sounding those submarine depths of conscience and of searching out loyalIes. It is also a way of keeping corporate character coherent. – Disclosure does not, however, automaIcally bring universal sympathy
Q11 • What is the symbolic potenIal of your acIon if understood? If misunderstood? – The Greek root of our word “symbol” means both signal and contract. A business decision – whether it is the use of an expense account or a corporate decision – has a symbolic value in signaling what is acceptable behavior within the corporate culture and in making a tacit contract with employees and the community about the rules of the same. How the symbol is actually perceived (or misperceived) is as important as how you intend it to be perceived.
Q12 • Under what condiIons would you allow excepIons to your stand? – If we accept the idea that every business decision has an important symbolic value and a contractual nature, then the need for constancy is obvious. At the same Ime, it is also important to ask under what condiIons the rules of the same may be changed. – What conﬂicIng principles, circumstances, or Ime constraints would provide a morally acceptable basis for making an excepIon to one’s normal insItuIonal ethos? – QuesIons of consistency – if you would do X, would you also do Y? – are yet another way of eliciIng the ethics of the company and of oneself, and can be a ﬁnal test of strength, idealism, or pracIcality of those values.
References • hLp://web.tepper.cmu.edu/ethics/aa/ arthurandersen.htm for mini-‐case studies • Integrity at Work, Ken Shelton, 2000 edion • Harvard Business Review on Corporate Ethics, 2003 edion
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