Transcript Business Ethics - Australian Graduate School of Management

Business Ethics
The Managerial Approach to
Business Ethics
Roadmap
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What is the role of managers in
corporate ethics? Leadership and
example.
Corporate culture: raising the ethical
performance of a corporation by an inch.
Control systems: steering corporations
away from ethical failure.
Stakeholders: Merck and Enron as
examples.
The point
 ‘Rather
than ask “What was going on with
those people to make them act that way?”, we
ask, “What was going on in that organization
that made people act that way?”’ James Waters
 If we want individuals to be ethical, then we
must support them.
Jackall’s five rules of
corporate morality (survival)
(1)
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(4)
(5)
Don’t go around your boss;
even if your boss invites dissent, tell him or her
what he or she wants to hear;
if the boss wants something dropped, drop it;
anticipate the boss’s wishes - don’t force him
or her to act the boss;
do not report what the boss does not want
reported, cover it up and remain silent.
Raising ethical culture by an
inch
 Say
you are a new manager. As the
managing director walks out the door for
her annual holidays, she asks you to
deliver a strategy to raise the ethical
standards of the corporation by an inch by
the time she returns.
 What would you do?
TWO BASIC RULES
1. Identify (and state) your rules of operation
clearly. Make commitments and values
explicit.
2. Avoid organisational hypocrisy. Don’t
subvert formal requirements with informal
laxity (see Stonecipher case below).
Leadership at every level
 The
single biggest factor in sustaining
ethical conduct is example from superiors.
 The CEO sets the example and all other
managers should follow.
Institutional supports
Codes
Ethics training
Ethics officers
Committees
Newsletters
Leadership &
mentoring
Incentives and
disincentives
Hotlines
Ombudsman
Performance standards
Use examples

Reward good behaviour and never punish it,
even if brings problems - Sherron Watkins;
Cynthia Cooper.
 Recognise good conduct and use it in staff
training.
 Punish poor behaviour and never reward it, even
if it brings results - Enron.
 Use examples of ethical failure in training, but
balance them with examples of excellence.
CODES
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State fundamental values & establish a common floor
akin to the rule of law
Can combine general principles & prescriptions
Must be used frequently to be effective
Should be part of induction and development
Must cover whole organisation
Can be developed at top
Harry Stonecipher

Became CEO of Boeing to clean up corruption
and refurbish the corporation’s ethical image.
 Championed a strong code of ethics, which
among other things, forbade relationships
between subordinates and their managers.
 Had a brief affair with a vice-president who did
not report to him.
 This became known and he had to resign. His
judgment was questioned, he had embarrassed
Boeing by breaching his own code, and there is
always the shadow of litigation …
Auditors/Consultants
 Auditors
are supposed to attest to
accounts independently.
 The big firms ran lucrative consultancy
businesses and Andersens was a classic
example. It complied with pressures from
Enron, Sunbeam and others to provide
good audits.
 Its consultancy prospered until spun off
into Accenture.
Law and regulation

Lobby for a regulatory environment appropriate
to the times. A good company don’t have to be
ethical alone and lose competitive advantage
because it is ethical.
 Self-regulate and be firm about it. Codes are
only one form of this. Policies and procedures
complement ethical directives and exhortations.
Classic Symptoms Preceding
Collapse
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Overstatement of the value of assets, and
understatement of liabilities in financial reports.
Use of related party transactions to disguise the reality, e.g. to create a false
impression about earnings.
Delays in financial reporting.
Continuing financial losses and cash flow deficiencies
Weak management
Inadequate management succession planning
Looming debt payments & concealment of bad debts
Inadequate capital expenditure programs
Lack of adequate information systems
Shareholder disputes
In failing corporations
1. There is a "kill the messenger" ethos in the organisation - justifies distortion
and concealment of information.
2. There is a low degree of confidence in the accuracy of internal reports.
3. Despite claims to doing the right thing, in the last analysis, top management
does the most expedient thing.
4. Employees do not know of or refer to written ethics policies .
5. The operative value of the organisation is: if it's legal it's ethical.
6. Top management's stated concern for ethics is for public relations.
7. Managers while basically truthful are willing to deceive in order to
accomplish organizational or personal goals.
8. Managers do not believe there is an obligation to be candid where could
harm personal or organizational goals.
9. People who ignore ethics but produce bottom line results get promoted.
Criteria for legitimate
whistleblowing

You have good evidence of an immediate and
serious issue of public concern in your
organisation.
 You have tried reporting the matter to the proper
authorities without success.
 Your intervention is likely to make a difference.
 You believe the damage resulting from your
action will be proportionate to the resolution of
the issue.
Whistleblowing: a last resort
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Public exposure of a danger to public interest
Permitted when a serious issue is not addressed
within an organisation
Not internal
Involves a betrayal of kinds
Is a costly remedy
Motives of whistleblower not central
Difficult to legislate protection for
Sherron Watkins to Ken Lay
Dear Mr. Lay,
Has Enron become a risky place to work? For those of us who didn't get
rich over the last few years, can we afford to stay?
… I am incredibly nervous that we will implode in a wave of accounting
scandals. My eight years of Enron work history will be worth nothing on
my resume, the business world will consider the past successes as nothing
but an elaborate accounting hoax. Skilling is resigning now for "personal
reasons" but I would think he wasn't having fun, looked down the road and
knew this stuff was unfixable and would rather abandon ship now than
resign in shame in two years. … I firmly believe that the probability of
discovery significantly increased with Skilling's shocking departure. Too
many people are looking for a smoking gun.
Sherron Watkins
Enron heroine
Do you think that post-Enron America is a more
ethical place?
“Not really. We are building more Enrons, but we
don't want to admit it. I fall into Warren Buffett's
camp when he says that C.E.O. pay is the acid test.
When C.E.O. pay has been reduced, then I'll believe
that our business leaders have adopted a spirit of
corporate reform.”
A legal remedy:
the Sarbanes - Oxley Act

Sarbanes-Oxley (2002) passed in wake of Enron and
other collapses to strengthen corporate governance
and restore investor confidence and public trust in
accounting and reporting practices.
 Establishes enhanced governance and management
standards for all US publicly listed companies and
public accounting firms.
 Establishes the Public Company Accounting
Oversight Board under the SEC to oversee public
accounting firms and issue accounting standards.
The effect …?
 Accounting firms
and lawyers are booming on
the back of Sarbanes-Oxley.
 In May 2004, RateFinancials found that most
financial statements did not reflect public
companies' true financial states.
 In November it found that related party
transactions were still common.
Misconduct encouraged by
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A lack of a system of laws that clearly state
obligations and prohibitions
A diminished sense of personal responsibility
A lack of enforcable laws and regulations
A a small risk of being detected
A insufficient penalties
A a climate of sharp practice
A a lack of ethical recognition
But law and enforcement
 Will
not replace ethics and a personal
sense of responsibility
 Will not prevent corruption by themselves
 Still rely upon a level of trust: fear will
make people risk averse and stifle
business.
 Are expensive means of securing
compliance
Al Dunlap
''He is the logical extreme of an executive who has no
values, no honor, no loyalty, and no ethics. And yet he
was held up as a corporate god in our culture.”
 At Scott Paper he fired 35% of the workforce and
sold the company to Kimberly-Clark.
 Recruited to Sunbeam in July 1996, drove the stock
price up steeply by sacking half the corporation’s
12,000 workforce, closing 12 of its 18 factories, and
inflating inventories.
 The stock price collapsed and he was sacked in June
1998. A cruel and uncaring man he was over rated as
a manager by the markets and media.
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An Example of Excellence:
Merck and Mectizan
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In 1979, Merck scientist William Campbell, suggested
that the company’s veterinary product, Ivermectin,
should be appraised to combat ‘river blindness’ in
humans.
River blindness is a disease of the poor of tropical Africa
and South America caused by a parasitic worm, which
burrows beneath the skin and breeds there. These
subcutaneous parasites colonise the skin to such an
extent that people are driven to suicide by the itching
they cause.
Justifiable goodness?
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If Campbell was correct, then Merck would be able to cure
river blindness cheaply and safely.
But development - trials etc. - would cost $M100 and as the
afflicted were poor, there would be no profit in developing it.
The point in Merck’s case is that it held the patent for a
potential life saver: could it lock it up? Would it not protect its
patent by developing a human version?
An example of direct corporate humanitarian investment
Merck’s decision
 Merck
did develop the drug, Mectizan, and
tried to interest the US and UN agencies in
supporting its distribution. Eventually, after
10 years of development, they not only
gave the drug away, but paid for its
distribution.
 Was this decision justifiable?
The case of Enron
 Kenneth
Lay, former chairman and CEO of
Enron, claims that he and the board were
misled by CFO, Andrew Fastow (who has
pleaded guilty to fraud and is to be sent to
jail).
 A clutch of Enron officers have pleaded
guilty to crimes, so what does that say
about the CEO and board’s governance?
Not just rotten apples
Enron’s culture, which included strategies such
as the ‘war for talent’, licenced officers to act on
their own initiative but to act without regard for
probity. This made it possible for Enron to
manipulate the Californian energy market.
 It adopted a veritable thicket of questionable
accounting practices, such as booking its energy
trades at full value rather than at the value of its
margin, thus inflating profits.
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The culture at Enron
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It was clear that Enron routinely engaged in
sharp practice, that it sought to disguise this
from investors and the financial world by a
complex and an all but unintelligible structure of
accounts and partnerships.
 It is clear that Enron encouraged maverick
behaviour by sacking the lowest performing 10%
of staff and promoting the best 10%. Results
were all that counted.
Conversing with Enron
traders
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Kevin: So the rumour’s true? They’re fuckin’ takin’ all the money back
from you guys? All those money you guys stole from those poor
grandmothers in California?
Bob: Yeah, grandma Millie, man. But she’s the one who couldn’t figure
out how to fuckin’ vote on the butterfly ballot.
Kevin: Yeah, now she wants her fuckin’ money back for all the power
you’ve charged right up - jammed right up her ass for fuckin’ $ 250 a
megawatt hour. Laughter
 These
guys were beating up
grandmothers, not regulators, legislators
or legal draftsmen.
Corporate ethics
 Should
not have to rely on individuals to
do the jobs of regulators.
 Should support individuals in their ordinary
ethical commitments.
 Should be exemplified in formal and
informal practices in the organisation.
 Should be led from the top and throughout
management structure.
 Can always be improved by an inch.