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How Business Ethics Failed CorporateAmerica (and what we must do next)

What is ethics in business?Ethics refers to a prescribed or accepted code of conduct. Ethical issues are a set of moral valuesthat need to be addressed while carrying out business. Businesses operate in a society that isstructured around moral values. Therefore, when conducting its operations, a business has certainresponsibilities which are to provide the society with quality goods and services that willimprove the people's living standards.

These are times that test our courage. Our headlines are filled daily with revelations of corporatecorruption, blind greed and staggering billion dollar losses in stock evaluations that have affectedfinancial markets around the world. These are times that test our character.

A 2000 study by the Ethics Resource Center showed that when times are the toughest, integritymatters the most. Companies in transition from mergers, acquisitions or restructuring are most atrisk for unlawful or unethical behavior.

A look back at business ethics

The Harvard Business School was the first to offer a class on "social factors in businessenterprise" in 1915, but the modern business ethics movement grew out of widespread distrust ofgovernment after the Watergate scandal. Distrust spread with organizations with Ford Pinto's

infamous exploding gas tanks, illegal payments overseas by government contractors.

In 1976, when Dr. Michael Hoffman, founder of Bentley College's Center for Business Ethicsfirst applied for to the National Endowment for the Humanities for a grant to fund the center, hewas rejected - the agency had never heard of business ethics. When the Wall Street Journal firstwrote about CBE center, they called business ethics an oxymoron.

In the following decade, the need for CBE became clear. The roaring 1980s were brought to anabrupt close by discovery of Wall Street insider trading and U.S. department of defense scandalssurrounding $600 hammers and $800 toilet seats. Under the business-friendly climate of theReagan-Bush era, business had an opportunity to police itself.

In 1991, the Federal Sentencing Guidelines for Organizations (FSGO) outlined corporateguidelines for an effective ethics program. By successfully following the guidelines, companiesaccused of criminal conduct can reduce federal fines by up to 95%.

The FSGO outlined a minimum framework that includes, among other components: clearstandards, ethics training for employees, a reporting system to report misconduct anonymouslyand establishing a track record of disciplining violators.

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For the first time, executives were held responsible for the misconduct of subordinates. But iforganizations could show they made a serious, pro-active effort to prevent white-collar crime, itwould mitigate a judgment against the company and lessen their liability.

Large organizations responded by creating ethics officer positions, installing ethics hotlines and

crafting codes of conduct.

Eleven years after its inception, the carrot and stick combination of FSGO and director liabilityseemed to have worked. A 2000 study by the Society of Financial Service Professionals foundthat almost 90% of respondents reported that their companies have a written code of ethics andconduct.

Almost a dozen years later, employees are not entering organizations firmly grounded in theirvalues. A 2000 KPMG study showed that 76 % of employees have observed unlawful orunethical conduct on the job.

The white hot economy of the late 1990s put profits ahead of people, putting those same peopleunder tremendous pressure to do things they normally would not do to meet quarterly targets.Any miss in earnings per share, by even a penny, resulted in Wall Street's swift, surepunishment. Now, stories of accounting fraud and white collar crime have become prevalent.Fortune Magazine found that "In 1999 and 2000 the SEC demanded 96 restatements of earningsor other financial statements - more than the past 9 years combined."

Companies spend years and millions of advertising dollars building brand image and loyalty.Years of solid performance and profits can be wiped out overnight with one TV expose. Whenpeople make mistakes of judgment, the cost to companies is staggering. Litigation, plungingshare prices, and loss of market share directly affect the bottom line.

There are unmeasured costs to damaged brand image and organizational good will. And there arehuman costs to morale and productivity - employees who lose heart as their company is draggedthrough the headlines.

Up to this point, business ethics has been largely a legal issue because of the mandatorysentencing guidelines established in 1991 by the U.S. Sentencing Commission. Company codesof conduct are often written in "legalese" by the legal or internal audit department. Drafted onlyto protect the organization from potential vulnerability; they poorly cover everything fromdiscrimination to sexual harassment, from overseas bribery to insider trading.

Frequently, these codes of conduct are drafted without commitment from senior management orthe involvement of those doing the work. This approach misses the opportunity to strengthen thecompany culture and reputation.

While corporate codes of ethics provide an important and necessary framework for conduct,doing the right thing always comes down to the individual. The responsibility for organizationalintegrity must start with the organization's framework and end with individual accountability.

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Federal legislation and organizational ethics statements act as the white lines on either side of theroad, giving us freedom to drive fast within the boundaries. As all of the recent fraud andaccounting scandals have shown, it isn't a faceless organization doing wrong, it is individualswithin their organizations making mistakes in a misguided attempt to please their bosses andWall Street.

Today, many companies have learned that organizational integrity is more than following lawsand regulations. They are evolving from reactive, post-scandal compliance programs to pro-active, values-driven programs.

"Today there is pressure put on people to meet targets, pressuring them into things they normallywouldn't do," "It takes courage and moral character to stand up to pressure. It takes ordinarypeople with good habits of character."

Integrating professional and personal values is the solution

"Can ethics be taught?"

"Too many employees are not receiving any grounding in values from their home, their church,their school or their community service."

Corporate America has taken on the job of teaching values to its people, a sociological seachange that is as widespread as it is necessary.

Many would argue that values must be taught in the home; that developing character is theresponsibility of parents, pastors and teachers. The cynics would say it is too late to teach adultsright from wrong. It's true that employees come into your organization with their values largelyshaped, but companies can benefit by communicating their values and connecting them toleadership.

Above the mundane daily details of getting the job done, of meeting quarterly and annualperformance goals, there is a larger issue of leadership and character. How you lead at work andat home makes a difference; because it influences the people who work for you. It affects thekind of leaders they will become.

Leadership integrity must be firmly grounded in the company's values and integrated intoindividual employee values. Leaders must build a company culture based on its core values andsupported by a storehouse of stories, by telling your people what the organization stands for,what it is trying to achieve and what is in it for them.

Values-driven leadership is not a panacea or an easy answer to today's challenges. But bygrounding your leadership in your beliefs as you make decisions about people and strategy, yourvalues will become bedrock in a storm of uncertainly and change.