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Throughout 2002 our headlines were filled with revelations of accounting fraud, blind greed and staggering billion dollar losses in stock evaluations that have affected financial markets around the world. While the Corporate Reform Bill signed last year by President Bush will help curb corporate corruption, we cannot legislate our way to integrity. The scandals have continued into 2003. In just one day, April 03, 2003, The Wall Street Journal reported that:
We know that when times are the worst it brings out the best and the worst in human character. Our headlines are filled weekly with stories of shareholder lawsuits, accounting fraud and white-collar crime. You need only to pick up a morning paper or watch the nightly news for the discouraging evidence. We've almost become numbed, accepting the cost as part of our competitive business culture.
Yet, 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. When people make mistakes of judgment, the cost to companies is staggering. Litigation, plunging share 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 are human costs to morale and productivity - employees who lose heart as their company is dragged through the headlines.
How can we restore confidence in our corporate leadership and faith in our financial markets? Certainly we need enforcement of existing laws and regulations. Clearly we need stiffer penalties - executives who raid corporate coffers should swap their pin stripes for horizontal stripes. But legislation alone will not correct corruption. Individual CEOs cannot bear full responsibility for the actions of thousands of employees.
The responsibility for organizational integrity must start with the organization's framework and end with individual accountability. Federal regulations and organizational ethics statements act as the white lines on either side of the road; giving us freedom to drive fast within the boundaries. But as all of the recent fraud and accounting scandals have shown, it isn't a faceless organization doing wrong, it is individuals within their organizations making mistakes in a misguided attempt to please their bosses and Wall Street.
The answer to how can we fix this problem of corruption that threatens our financial markets is not what, but who. The answer is you and I. We can create a company culture where it matters to take a measure of a leader's character. To understand where we must lead, we must first look back at where we have come.
A look back at business ethics
Harvard Business School was the first to offer a class on "social factors in business enterprise" in 1915, but the modern business ethics movement grew out of widespread distrust of government 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 Ethics first applied for to the National Endowment for the Humanities for a grant to fund the center, he was rejected - the agency had never heard of business ethics. When The Wall Street Journal first wrote about CBE, they called business ethics an oxymoron.
In the following decade, the need for CBE became clear. The roaring 1980s were brought to an abrupt close by discovery of Wall Street insider trading and U.S. department of defense scandals surrounding $600 hammers and $800 toilet seats.
The 1990s opened quietly except for a bond scandal at Solomon Brothers for illegal bidding at US Treasury auctions. Under the business-friendly climate of the Reagan-Bush era, business had an opportunity to police itself.
Carrot and stick compliance
In 1991, the Federal Sentencing Guidelines for Organizations (FSGO) outlined corporate guidelines for an effective ethics program. By successfully following the guidelines, companies accused of criminal conduct can reduce federal fines by up to 95%. This is significant, because under stricter punishment guidelines for white-collar crimes financial settlements can reach $500 million and more.
The FSGO outlined a minimum framework that includes, among other components: clear standards, ethics training for employees, a reporting system to report misconduct anonymously and establishing a track record of disciplining violators.
For the first time, executives were held responsible for the misconduct of subordinates, but if organizations could show they made a serious, pro-active effort to prevent white-collar crime it would mitigate a judgment against the company and lessen their liability.
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 liability seemed to have worked. A 2000 study by the Society of Financial Service Professionals found that almost 90% of respondents reported that their companies have a written code of ethics and conduct.
Enron was not supposed to happen.
What went wrong? The white hot economy of the late 1990s put profits ahead of people, putting those same people under 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, sure punishment.
Why ethics programs aren't enough
Up to this point, business ethics has been largely a legal issue because of the mandatory sentencing guidelines established in 1991 by the U.S. Sentencing Commission. Company codes of conduct are often written in "legalese" by the legal or internal audit department. Drafted only to protect the organization from potential vulnerability; they poorly cover everything from discrimination to sexual harassment, from overseas bribery to insider trading.
Frequently, these codes of conduct are drafted without commitment from senior management or the involvement of those doing the work. This approach misses the opportunity to strengthen the company culture and reputation. A survey by Ethics Resource Center shows that corporate ethics statements may actually lower morale if workers perceive them as nothing more than paper tigers.
What then is the responsibility of organizations? Should they be expected to do more than the bare minimum of sticking to the letter of the law? Is it enough not to cook the books, cheat suppliers or foist overpriced and unsafe products on an unsuspecting public with a "caveat emptor"?
If we are to change American business we must realize afresh that we serve more than Wall Street; we serve the shareholders, our employees, our communities and the environment. We can't be forced to choose between integrity and profits; rather we must strengthen the relationship between financial performance and social responsibility.
Many companies have learned that organizational integrity is more than following laws and regulations. They are evolving from reactive, post-scandal compliance programs to pro-active, values-driven programs.
Replacing corruption with character-centered leadership
Doing what is right always comes down to the individual. It begins with the most basic leadership skills, supported by the organizational framework. It ends with no less than creating a new corporate culture, by communicating the fundamental principles that the company stands for through stories of leaders doing the right thing.
You can develop a department based on character and integrity. You can create the kind of company you are proud to lead. Not by rigidly following the rules or by handing down moral authority from on high like a home grown version of the ten commandants. Not by dictating your values or trying to force your faith on others.
But by helping the people you lead understand their values and by helping incorporate their core values into the organization's values. By having them understand that honor is more than following rules and regulations, it is the responsibility of each person.
"But wait," you argue, "I am just one person. I can't change the company." But you can change you. You can change your department. One person can make a difference. The level and impact of difference is dependent on the leadership position. The CEO is responsible for setting the values and vision of the organization. But you can build a departmental culture based on values, by telling your people what the organization stands for, what it is trying to achieve and what is in it for them.
Most of us are never tested in a dramatic fashion. We aren't challenged in our career in any dramatic fashion. Most of us never get the opportunity to find out what we are really made of.
But all of us face complex issues everyday: at the office, as parents and in our community involvement. Our integrity is tested when we must make split second decisions, like the man who had to decide which three of ten people in his department to cut while his vice president waited on hold.
Your leadership must be grounded in the bedrock of your beliefs as you make decisions about people and strategy. Today, we cannot predict where we are going or how our lives will unfold, but we can understand who we are, what we believe and what we stand for. Your values become bedrock in a storm of uncertainly and change.
Many more articles in Ethics in The CEO Refresher Archives