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E1FTOC 07/09/2010 Page 4 E1FFIRS 07/09/2010 Page 1 MANAGING BUSINESS ETHICS Straight Talk About How To Do It Right Fifth Edition LINDA KLEBE TREVIÑO Distinguished Professor of Organizational Behavior and Ethics Smeal College of Business The Pennsylvania State University KATHERINE A. NELSON Lecturer Fox School of Business Temple University JOHN WILEY & SONS, INC. E1FFIRS 07/09/2010 Page 2 VP & PUBLISHER EXECUTIVE EDITOR ASSISTANT EDITOR EDITORIAL ASSISTANT MARKETING MANAGER MEDIA EDITOR PRODUCTION MANAGER ASSISTANT PRODUCTION EDITOR COVER DESIGNER COVER PHOTO CREDIT George Hoffman Lise Johnson Sarah Vernon Chelsea Theis Karolina Zarychta Allison Morris Janis Soo Yee Lyn Song RDC Publishing Group Sdn Bhd Photo provided courtesy of Greg Kuhnen This book was set in 10/12 Times Roman by Thomson Digital, and printed and bound by Courier Westford. The cover was printed by Courier Westford. 1 This book is printed on acid free paper. ! Copyright # 2011, 2007, 2004, 1999 John Wiley & Sons, Inc. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc. 222 Rosewood Drive, Danvers, MA 01923, website www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, (201)748-6011, fax (201)748-6008, website http://www.wiley. com/go/permissions. Evaluation copies are provided to qualified academics and professionals for review purposes only, for use in their courses during the next academic year. These copies are licensed and may not be sold or transferred to a third party. Upon completion of the review period, please return the evaluation copy to Wiley. Return instructions and a free of charge return shipping label are available at www.wiley.com/go/returnlabel. Outside of the United States, please contact your local representative. Library of Congress Cataloging-in-Publication Data Treviño, Linda Klebe. Managing business ethics : straight talk about how to do it right / Linda Klebe Treviño, Katherine A. Nelson. – 5th ed. p. cm. Includes index. ISBN 978-0-470-34394-4 (pbk.) 1. Business ethics. 2. Business ethics–Case studies. I. Nelson, Katherine A. II. Title. HF5387.T734 2010 1740 .4–dc22 2010020659 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 E1FTOC 07/09/2010 Page 3 BRIEF CONTENTS SECTION I CHAPTER 1 SECTION II CHAPTER 2 CHAPTER 3 CHAPTER 4 INTRODUCTION INTRODUCING STRAIGHT TALK ABOUT MANAGING BUSINESS ETHICS: WHERE WE’RE GOING AND WHY 2 ETHICS AND THE INDIVIDUAL DECIDING WHAT’S RIGHT: A PRESCRIPTIVE APPROACH 38 DECIDING WHAT’S RIGHT: A PSYCHOLOGICAL APPROACH 71 ADDRESSING INDIVIDUALS’ COMMON ETHICAL PROBLEMS 111 SECTION III MANAGING ETHICS IN THE ORGANIZATION CHAPTER 5 ETHICS AS ORGANIZATIONAL CULTURE CHAPTER 6 MANAGING ETHICS AND LEGAL COMPLIANCE CHAPTER 7 MANAGING FOR ETHICAL CONDUCT CHAPTER 8 ETHICAL PROBLEMS OF MANAGERS 150 207 255 292 SECTION IV ORGANIZATIONAL ETHICS AND SOCIAL RESPONSIBILITY CHAPTER 9 CORPORATE SOCIAL RESPONSIBILITY 322 CHAPTER 10 ETHICAL PROBLEMS OF ORGANIZATIONS 354 CHAPTER 11 MANAGING FOR ETHICS AND SOCIAL RESPONSIBILITY IN A GLOBAL BUSINESS ENVIRONMENT INDEX 399 449 iii E1FTOC 07/09/2010 Page 4 E1FTOC1 07/09/2010 Page 5 CONTENTS PREFACE XIII SECTION I INTRODUCTION CHAPTER 1 INTRODUCING STRAIGHT TALK ABOUT MANAGING BUSINESS ETHICS: WHERE WE’RE GOING AND WHY Introduction 2 The Financial Disaster of 2008 4 Borrowing Was Cheap 4 Real Estate Became the Investment of Choice 5 Mortgage Originators Peddled ‘‘Liar Loans’’ 5 Banks Securitized the Poison and Spread It Around 6 Those Who Were Supposed to Protect Us Didn’t 7 Moving Beyond Cynicism 9 Can Business Ethics Be Taught 13 Aren’t Bad Apples the Cause of Ethical Problems in Organizations? 13 Shouldn’t Employees Already Know the Difference between Right and Wrong? Aren’t Adults’ Ethics Fully Formed and Unchangeable? 16 This Book is about Managing Ethics in Business 19 Ethics and the Law 20 Why Be Ethical? Why Bother? Who Cares? 21 Individuals Care about Ethics: The Motivation to be Ethical 21 Employees Care about Ethics Employee Attraction and Commitment 23 Managers Care about Ethics 23 Executive Leaders Care about Ethics 24 Industries Care about Ethics 26 Society Cares about Ethics: Business and Social Responsibility 27 The Importance of Trust 27 The Importance of Values 29 How the Book is Structured 30 Conclusion 32 Discussion Questions 32 2 15 v E1FTOC1 07/09/2010 vi Page 6 CONTENTS Exercise: Your Cynicism Quotient Notes 34 33 SECTION II ETHICS AND THE INDIVIDUAL CHAPTER 2 DECIDING WHAT’S RIGHT: A PRESCRIPTIVE APPROACH 38 Introduction 38 Ethical Dilemmas 38 Prescriptive Approaches to Ethical Decision Making in Business 39 Focus on Consequences (Consequentialist Theories) 40 Focus on Duties, Obligations, and Principles (Deontological Theories) Focus on Integrity (Virtue Ethics) 46 Eight Steps to Sound Ethical Decision Making in Business 52 Step One: Gather the Facts 52 Step Two: Define the Ethical Issues 52 Step Three: Identify the Affected Parties (the Stakeholders) 53 Step Four: Identify the Consequences 54 Step Five: Identify the Obligations 56 Step Six: Consider Your Character and Integrity 56 Step Seven: Think Creatively about Potential Actions 57 Step Eight: Check Your Gut 58 Practical Preventive Medicine 58 Doing Your Homework 58 When You’re Asked to Make a Snap Decision 59 Conclusion 61 Discussion Questions 62 Exercise: Clarifying Your Values 63 Case: Pinto Fires 64 Notes 69 CHAPTER 3 DECIDING WHAT’S RIGHT: A PSYCHOLOGICAL APPROACH 71 Introduction 71 Ethical Awareness and Ethical Judgment 71 Individual Differences, Ethical Judgment, and Ethical Behavior Ethical Decision-Making Style 76 Cognitive Moral Development 77 Locus of Control 84 Machiavellianism 85 75 42 E1FTOC1 07/09/2010 Page 7 CONTENTS Moral Disengagement 86 Facilitators of and Barriers to Good Ethical Judgment 88 Thinking about Fact Gathering 88 Thinking about Consequences 89 Thinking about Integrity 91 Thinking about Your Gut 93 Unconscious Biases 94 Emotions in Ethical Decision Making 95 Toward Ethical Action 97 Revisiting the Pinto Fires Case: Script Processing and Cost-Benefit Analysis Cost-Benefit Analysis 103 Conclusion 105 Exercise: Understanding Cognitive Moral Development 105 Discussion Questions 106 Notes 107 CHAPTER 4 ADDRESSING INDIVIDUALS’ COMMON ETHICAL PROBLEMS 111 Introduction 111 Identifying Your Values—and Voicing Them 112 People Issues 114 Discrimination 115 Harassment, Sexual and Otherwise 119 Conflicts of Interest 122 What Is It? 123 How We Can Think about This Issue 125 Why Is It an Ethical Problem? 126 Costs 126 Customer Confidence Issues 127 What Is It? 127 How We Can Think about This Issue 131 Why Is It an Ethical Problem? 131 Costs 131 Use of Corporate Resources 132 What Is It? 132 How We Can Think about This Issue 136 Why Is It an Ethical Problem? 136 Costs 136 When All Else Fails: Blowing the Whistle 137 When Do You Blow the Whistle? 139 How to Blow the Whistle 140 Conclusion 145 Discussion Questions 145 Notes 147 102 vii E1FTOC1 07/09/2010 viii Page 8 CONTENTS SECTION III MANAGING ETHICS IN THE ORGANIZATION CHAPTER 5 ETHICS AS ORGANIZATIONAL CULTURE 150 Introduction 150 Organizational Ethics as Culture 151 What Is Culture? 151 Strong versus Weak Cultures 151 How Culture Influences Behavior: Socialization and Internalization 152 Ethical Culture: A Multisystem Framework 153 Alignment of Ethical Culture Systems 154 Ethical Leadership 156 Executive Leaders Create Culture 156 Leaders Maintain or Change Organizational Culture 157 Other Formal Cultural Systems 166 Selection Systems 166 Values and Mission Statements 168 Policies and Codes 169 Orientation and Training Programs 171 Performance Management Systems 172 Organizational Authority Structure 175 Decision-Making Processes 178 Informal Cultural Systems 180 Role Models and Heroes 180 Norms: ‘‘The Way We Do Things around Here’’ 182 Rituals 182 Myths and Stories 183 Language 185 Organizational Climates: Fairness, Benevolence, Self-Interest, Principles 187 Developing and Changing the Ethical Culture 188 How an Ethical Culture Can Become an Unethical Culture 189 Becoming a More Ethical Culture 190 A Cultural Approach to Changing Organizational Ethics 192 Audit of the Ethical Culture 193 A Cultural Systems View 193 A Long-Term View 194 Assumptions about People 194 Diagnosis: The Ethical Culture Audit 194 Ethical Culture Change Intervention 196 The Ethics of Managing Organizational Ethics 198 Conclusion 198 Discussion Questions 198 E1FTOC1 07/09/2010 Page 9 CONTENTS Case: Culture Change at Texaco 199 Case: An Unethical Culture in Need of Change: Tap Pharmaceuticals Notes 203 CHAPTER 6 201 MANAGING ETHICS AND LEGAL COMPLIANCE 207 Introduction 207 Structuring Ethics Management 208 Making Ethics Comprehensive and Holistic 210 Managing Ethics: The Corporate Ethics Office 211 Ethics and Compliance Officers 212 The Ethics Infrastructure 214 The Corporate Ethics Committee 215 Communicating Ethics 215 Basic Communications Principles 216 Evaluating the Current State of Ethics Communications 219 Multiple Communication Channels for Formal Ethics Communication 220 Interactive Approaches to Ethics Communication at USAA 222 Mission or Values Statements 224 Organizational Policy 226 Codes of Conduct 227 Communicating Senior Management Commitment to Ethics 227 Formal and Informal Systems to Resolve Questions and Report Ethical Concerns Using the Reward System to Reinforce the Ethics Message 238 Evaluating the Ethics Program 239 Surveys 240 Values or Compliance Approaches 242 Globalizing An Ethics Program 243 Conclusion 245 Discussion Questions 245 Case: Improving an Ethical Culture at Georgia-Pacific 247 Appendix: How Fines Are Determined under the U.S. Sentencing Guidelines 252 Notes 253 CHAPTER 7 MANAGING FOR ETHICAL CONDUCT 255 Introduction 255 In Business, Ethics Is about Behavior 255 Practical Advice for Managers: Ethical Behavior 256 Our Multiple Ethical Selves 256 The Kenneth Lay Example 257 The Dennis Levine Example 259 Practical Advice for Managers: Multiple Ethical Selves 259 Rewards and Discipline 260 People Do What’s Rewarded and Avoid Doing What’s Punished 260 People Will Go the Extra Mile to Achieve Goals Set by Managers 261 235 ix E1FTOC1 07/09/2010 x Page 10 CONTENTS How Goals Combined with Rewards Can Encourage Unethical Behavior Practical Advice for Managers: Goals, Rewards and Discipline 263 Recognize the Power of Indirect Rewards and Punishments 264 Can Managers Really Reward Ethical Behavior? 266 What about the Role of Discipline? 267 Practical Advice for Managers: Discipline 269 ‘‘Everyone’s Doing It’’ 270 People Follow Group Norms 270 Rationalizing Unethical Behavior 270 Pressure to Go Along 271 Practical Advice for Managers: Group Norms 271 People Fulfill Assigned Roles 272 The Zimbardo Prison Experiment 273 Roles at Work 274 Conflicting Roles Can Lead to Unethical Behavior 275 Roles Can Also Support Ethical Behavior 275 Practical Advice for Managers: Roles 276 People Do What They’re Told 276 The Milgram Experiments 277 Obedience to Authority at Work 279 Practical Advice for Managers: Obedience to Authority 279 Responsibility Is Diffused in Organizations 279 ‘‘Don’t Worry—We’re Taking Care of Everything’’ 280 Diffusing Responsibility in Groups 280 Diffusing Responsibility by Dividing Responsibility 281 Diffusing Responsibility by Creating Psychological Distance 282 Practical Advice for Managers: Personal Responsibility 283 Conclusion 284 Discussion Questions 285 Case: Sears, Roebuck, and Co.: The Auto Center Scandal 285 Notes 289 CHAPTER 8 ETHICAL PROBLEMS OF MANAGERS Introduction 292 Managers and Employee Engagement 292 Managing the ‘‘Basics’’ 295 Hiring and Work Assignments 295 Performance Evaluation 296 Discipline 299 Terminations 301 Why Are These Ethical Problems? 303 Costs 303 Managing a Diverse Workforce 304 Diversity 305 292 262 E1FTOC1 07/09/2010 Page 11 CONTENTS Harassment 306 Family and Personal Issues 307 Why Are These Ethical Problems? 309 Costs 309 The Manager as a Lens 310 The Buck Stops with Managers 310 Managers Are Role Models 313 Managing Up and Across 314 Honesty Is Rule One 315 Standards Go Both Ways 315 Conclusion 316 Discussion Questions 317 Notes 318 SECTION IV ORGANIZATIONAL ETHICS AND SOCIAL RESPONSIBILITY CHAPTER 9 CORPORATE SOCIAL RESPONSIBILITY 322 Introduction 322 Why Corporate Social Responsibility? 322 Types of Corporate Social Responsibility 329 Economic Responsibilities 329 Legal Responsibilities 330 Ethical Responsibilities 330 Philanthropic Responsibilities 331 Triple Bottom Line and Environmental Sustainability 334 Is Socially Responsible Business Good Business? 337 The Benefit of a Good Reputation 338 Socially Responsible Investors Reward Social Responsibility 338 The Cost of Illegal Conduct 339 The Cost of Government Regulation 340 What the Research Says about Social Responsibility and Firm Performance Being Socially Responsible Because It’s the Right Thing to Do 346 Conclusion 348 Discussion Questions 348 Case: Merck and River Blindness 349 Notes 351 CHAPTER 10 ETHICAL PROBLEMS OF ORGANIZATIONS Introduction 354 Managing Stakeholders 355 354 343 xi E1FTOC1 07/09/2010 xii Page 12 CONTENTS Ethics and Consumers 356 Conflicts of Interest 357 Product Safety 365 Advertising 369 Ethics and Employees 373 Employee Safety 374 Employee Downsizings 378 Ethics and Shareholders 381 Ethics and the Community 386 Why Are These Ethical Issues 388 Costs 388 Conclusion 389 Discussion Questions 389 Notes 394 CHAPTER 11 MANAGING FOR ETHICS AND SOCIAL RESPONSIBILITY IN A GLOBAL ENVIRONMENT 399 Introduction 399 Focus on the Individual Expatriate Manager 400 The Difficulties of Foreign Business Assignments 400 The Need for Structure, Training, and Guidance 400 Foreign Language Proficiency 401 Learning about the Culture 401 Recognizing the Power of Selective Perception 403 Assumption of Behavioral Consistency 404 Assumption of Cultural Homogeneity 404 Assumption of Similarity 405 Ethics-Related Training and Guidance 405 How Different Are Ethical Standards in Different Cultures—Really? 411 Development of Corporate Guidelines and Policies for Global Business Ethics The Organization in a Global Business Environment 417 Deciding to Do Business in a Foreign Country 417 Development of a Transcultural Corporate Ethic 425 Conclusion 429 Discussion Questions 429 Case: Selling Medical Ultrasound Technology in Asia 431 Case: Google Goes to China 434 Appendix: Caux Round Table Principles for Business 440 Notes 444 INDEX 449 413 E1PREF 07/09/2010 Page 13 PREFACE WHY DOES THE WORLD NEED ANOTHER BUSINESS ETHICS TEXT? The popular business press is replete with feature stories describing ethical meltdowns and how those corporate misdeeds have eroded the public trust of business leaders and their organizations. As most of us learned at our parents’ knees, trust and reputation are built over many years and take but an instant to be destroyed. So here we stand at a crossroads. Is it going to be business as usual for business? Or are businesspeople going to commit to regaining the trust of our peers, our families, and our fellow citizens? In response to this crisis of trust, universities across the country are scrambling to design new courses that incorporate leadership, communication skills, the basics of human resources management, and ethics. That’s why we wrote this book; we want to make the study of ethics relevant to real-life work situations. We want to help businesspeople regain the trust that’s been squandered in the last few years. This book is different from other business ethics texts in several key ways: First, it was written by an unusual team. Linda Trevi~no is Distinguished Professor of Organizational Behavior and Ethics in the Management and Organization Department of the Smeal College of Business at the Pennsylvania State University. Her prolific research on the management of ethical conduct in organizations is published in the field’s best journals and is internationally known and referenced. She has more than 20 years of experience in teaching students and executives in university and nonuniversity settings, and she also has experience as a corporate consultant and speaker on ethics and management issues. Kate Nelson is a full-time faculty member at the Fox School of Business at Temple University in Philadelphia, where she teaches management, business ethics, and human resources to undergraduates. Before joining Temple’s faculty, Kate worked for more than 30 years in strategic organizational communication and human resources at a variety of companies including Citicorp, Merrill Lynch, and Mercer HR Consulting. She also has worked as a consultant specializing in ethics and strategic employee communications and has designed ethics programs for numerous organizations. We think that bringing together this diverse mix of theory and practice makes the book unique. xiii E1PREF 07/09/2010 xiv Page 14 PREFACE Second, the approach of this book is pragmatic, and that approach is a direct response to complaints and suggestions we have heard from students, employees, and corporate executives. ‘‘Make it real,’’ they have said. ‘‘Tell us what we need to know to effectively manage people. Take the mystery out of this subject that seems so murky. Get to the point.’’ This book starts with the assumption that ethics in organizations is about human behavior in those organizations. We believe that behavior results from a number of factors, many of which can be influenced by managers and the organizations themselves. As a result, this book is organized into sections about individuals, managing in organizational context, and organizations in their broader environment, the ethical dilemmas managers face, and how they might solve them. It also features philosophical and psychological factors of decision making, ethical culture, how managers can influence employees’ behavior through ethical leadership, what corporations are doing to encourage ethical behavior and corporate social responsibility, and international business ethics. Third, we have used a different mix of examples than is found in conventional business ethics texts. Most texts focus on high-level, corporate dilemmas: ‘‘Should senior executives be paid at a particular level? Should this industry do business in China? Should American environmental laws apply to American companies operating overseas?’’ Although these are interesting issues, the vast majority of students and employees will never have to face them. However, they will have to hire, manage, assess performance, discipline, fire, and provide incentives for staff, as well as produce quality products and services and deal effectively and fairly with customers, vendors, and other stakeholders. As a result, although we do feature some classic corporate ethics cases, many of the cases in this book center on the kinds of problems that most people will encounter during the course of their careers. All of the ‘‘hypothetical’’ cases in this text are based on actual incidents that have happened somewhere—it’s the real stuff that goes on every day in offices across the country. Fourth, this book was developed with the help of students at a number of universities and with guidance from numerous managers and senior executives from various corporations and organizations. We have incorporated the latest research on ethics and organizational behavior into this text, and much of the material that appears within these pages has been tested in both university and corporate settings. Fifth, we believe this book is easy to use because it is organized to be flexible. It can be used alone to teach an ethics course, or it can be used as a supplement to a more conventional, philosophical text. The sections in this book basically stand alone and can be taught in a different sequence than is presented here, and the book also has many cases and vignettes you can use for class discussion. Wiley will create custom versions of the text with selected chapters if requested to do so. To help teach this course, the instructor’s guide provides resources such as outlines, overheads, discussion questions, and additional cases E1PREF 07/09/2010 Page 15 PREFACE xv for class discussion; it also supplies references to many other resources that can be used to teach the course. A NOTE TO STUDENTS This book was written for you. We have listened to your complaints and your wish lists and have tried to pare this complicated subject down to a digestible size. The cases that appear in this book all happened to people just like you, who were not as prepared to deal with the dilemmas as you will be after taking this course. Before you get into this book, we have one suggestion: know that regardless of how large an organization you find yourself in, you’re not some little cog in a giant wheel. You have the power to change not only your own behavior and knowledge of ethics but also the behavior and knowledge of the people you work with. Use that power: the job you save may be your own. We also want to suggest that when interviewing for your next job, you try to make sure that you’re joining an organization that values ethics. Are ethics and values described in the firm’s recruiting materials? Do organizational representatives talk about ethics and values during their interviews with you? When you ask about how their organization demonstrates ethics and values, does your interviewer respond enthusiastically, or does he or she look like a deer caught in headlights so you instantly know that he or she has never even considered this question before? It’s much easier to get into an ethical organization in the first place than try to get out of an unethical one later on. ACKNOWLEDGMENTS It takes a lot of work by a lot of people to make a project like this come together. We’ll begin with some joint thank-yous. Then, because this process has been so meaningful for each of us, we will separately share our more personal thanks. We both offer our heartfelt appreciation to current and former executives who helped us with this and previous editions, in particular, Larry Axline, Jeffrey Braun, Jacquelyn Brevard, Earnie Broughton, Steve Church, Frank Daly, Srinivas Dixit, Ray Dravesky, Kent Druyvesteyn, Dennis Jorgensen, John O’Byrne, Joe Paterno, Robert Paul, Jo Pease, Shirley Peterson, Vin Sarni, Carl Skooglund, Nan Stout, Phil Tenney, and George Wratney. All shared their valuable time and advice, some of them on multiple occasions. Their wisdom can be found throughout this book, but especially in Chapter 6. They helped bring the subject of managing business ethics to life. We also wish to thank Gary Weaver (University of Delaware) for being our philosophy adviser for the first edition, and Dennis Gioia (Penn State faculty member and dear friend) for sharing his Pinto fire case and especially his reflections. E1PREF 07/09/2010 xvi Page 16 PREFACE John Wiley & Sons, Inc. is a fine publisher with a superb team. These people encouraged, nudged, nudged, and nudged again. We have many Wiley people to thank for helping to make this book a success. The book’s past and present reviewers also contributed significantly to making this a better book, and we thank them as well. We also thank our students and particularly Penn State undergraduate, MBA, and Executive MBA students who provide us with excellent feedback and advice semester after semester. SPECIAL ACKNOWLEDGMENTS—FROM LINDA K. TREVIIÑO I have always wondered what makes people do especially good and bad things. As the child of Holocaust survivors, I have a unique perspective on and curiosity about such issues. My parents and their families escaped Nazi Germany before Hitler began killing Jews en masse, but not before my maternal grandfather was severely beaten and not before my fraternal grandfather was taken to a concentration camp (euphemistically referred to as a work camp at the time). My father’s family received papers allowing them to emigrate from Germany to the United States shortly before the war began (in spring 1939), allowing my grandfather to be released from the camp where he was being held. Both families landed in New York, where they survived through sheer grit, perseverance, and belief in the American dream. Although my family never dwelled on their experiences in Germany, I grew up with a special sensitivity and concern for equality and fair treatment. I traveled to Germany with my dad and brother about 30 years ago. We visited the tiny towns where Mom and Dad were born and met some wonderful German people who had helped them or at least tried to. I walked through a German village holding hands with the elderly woman who had been my maternal grandmother’s best friend and who urged the family to leave Germany because she anticipated the worst. I met another elderly woman who had cared for my father and aunt when they were children and who tried to take care of their home when they were forced to leave everything behind. These were special people, and the opportunity to connect with them holds a special place in my heart. So my family and background influenced me in ways I can’t fully grasp with my mind but in ways that I feel in my soul. And I know that my quest to understand what makes people do good and bad things has something to do with that influence. Many special people have helped along the path that brought me to the writing of this book. I’ll begin by thanking my mentors in the doctoral program at Texas A&M University’s management department. Many thanks to Stuart Youngblood (now at Texas Christian University), Don Hellriegel, Richard Woodman, Dick Daft (now at Vanderbilt University), and Mary Zey, who encouraged my early theorizing and research in business ethics. They told me to go with my gut and to do what was important, and they supported my every step. My exceptional colleagues in the E1PREF 07/09/2010 Page 17 PREFACE xvii Management and Organizational Department at Penn State have also been supportive all along the way. They have read my papers and challenged me to think harder and make my work ever better. My thanks also to the colleagues who have worked with me on ethics-related research over the years and who have been partners in learning about the management of business ethics: particularly Gail Ball, Michael Brown, Ken Butterfield, James Detert, David Harrison, Laura Hartman, Jennifer Kish Gephart, Don McCabe, Bart Victor, Gary Weaver, and more. This shared learning has contributed to the book in important ways. Shortly after becoming a faculty member at Penn State, I had the good fortune to meet my friend and coauthor, Kate Nelson. I was intrigued by a brief Wall Street Journal article about Kate’s work at Citibank (you’ll read more about that later). We met and became fast friends, who (believe it or not) loved talking about business ethics. We decided to write an article together, and the rest, as Kate says, is history. Kate brought the real world into this book. She was also willing to tell me when I was getting too academic (not her words exactly). It became clearer and clearer to me that we were supposed to write this book together, and I’m very glad we did. Thanks, Kate! The article became a book proposal that we first shared with publishers at the Academy of Management meeting in 1992 (almost 20 years ago now). Shortly thereafter, Bill Oldsey (formerly publisher at John Wiley & Sons, Inc.) showed up in my office at Penn State. His enthusiasm for the book was immediate and infectious, and he talked us into writing a textbook rather than a trade book. I want to thank Bill for the special part he played. Over the years, Penn State colleagues, administrators, and donors have continued to support my efforts in the area of business ethics. I am grateful to the Cook family, especially the late Ann Cook, for supporting business ethics at Smeal and the Cook Fellowship that I held for a number of years. My thanks also to Mrs. Mercedes Shoemaker (and her late husband, Albert) for supporting the Shoemaker program in Business Ethics that has brought us wonderful speakers on the topic of business ethics year after year. Finally, I am especially grateful to Dean James Thomas for naming me Distinguished Professor of Organizational Behavior and Ethics. My association with the Ethics Resource Center Fellows program (see www. ethics.org) has connected me with executives who manage ethics in large business organizations as well as consultants and those in government who are interested in making the business world (and the rest of the world, for that matter) a more ethical place. I appreciate the relationships and the learning that have come from this association as well as the time these executives have shared with me. In particular, I appreciate the funding that this group has provided for research that has found its way into this book, especially research on executive ethical leadership. My heartfelt thanks also go to family members, colleagues, and many dear friends not only for cheering me on (as usual) but also for their many contributions to this book. They have served as readers and interviewees. They have provided clipping services, helped me make contacts, and offered ideas for cases. They were there E1PREF 07/09/2010 xviii Page 18 PREFACE when I was overwhelmed. I can’t thank them enough. Finally, I thank the light of my life, Dan, for the inspiration, love, and support he provides every day of my life and for being one of the most ethical human beings I know. SPECIAL ACKNOWLEDGMENTS—FROM KATHERINE A. NELSON I began to learn about ethics and integrity as a very young child in a family where ‘‘doing it right’’ was the only option. I was blessed to grow up hearing about how your reputation is priceless and you must always guard it and act in ways that enhance that reputation. As a result, my biggest debt is to my parents, the late Harry R. and Bernadette Prendergast Nelson (formerly of New Hartford, New York), and my brother, James V. Nelson of Pasadena, California. My parents worked tirelessly to set Jim and me on the right path, and Jim’s generosity and enthusiastic support encouraged me not only to teach ethics but also to write this book. (Jim proved to me that one can be an investment banker and have high ethical standards, and I’m very proud of him.) I’m also grateful to Jim’s wife, Susan, for her many encouraging words of support and for giving our family its two most precious additions, Conor Vincent and James Patrick Nelson. Thanks to my dearest friends, for their friendship, love, and support: Rose Ciotta, Elizabeth Dow, Carol Dygert, Ann Frazier Hedberg, and Gail Martin. Thanks also to the educational institutions that provided me with a sound footing in values: Utica Catholic Academy in Utica, New York, and the College of Mount St. Vincent in Riverdale, New York. If I had ever known how much fun it is to teach, I might have made the transition to academia much earlier. Many thanks to the deans at the Fox School of Business at Temple University—including Moshe Porat, Rajan Chandran, and Diana Breslin Knudson, who took a chance on my teaching ability—and thanks to my many students past and present, who have enriched my life in ways I could not have imagined. Sincere thanks also to my many colleagues at Temple, who were so welcoming to this corporate refugee and who made me feel so much a part of this wonderful institution, especially: Norm Baglini, Gary Blau, Debbie Campbell, Kathleen Davis, Arlene Dowd, Deanna Geddes, Terry Halbert, John McClendon, and Don Wargo. Thanks go to the many managers who, each in his or her own way, taught me that business ethics need not be an oxymoron: Christopher York, Don Armiger, Peter Thorp, Judith Fullmer, Jerry Lieberman, and Jane Shannon—all formerly with Citicorp in New York City; and Debra Besch, Charlie Scott, and Lea Peterson, all currently or formerly with Mercer HR Consulting in Philadelphia and Boston. And thank you to Allan Kennedy, the coauthor of the groundbreaking book from the late 1970s, Corporate Cultures. While working at Citicorp as a McKinsey consultant back in 1985, Allan was the very first person who encouraged me to go into ethics by helping me germinate the idea of designing an ethics game for Citicorp. E1PREF 07/09/2010 Page 19 PREFACE xix The most important thank-you goes to my wonderful husband, Stephen J. Morgan—an honorable man if there ever was one—who inspires and loves me every day. This book and my teaching would not be possible without his support, wisdom, and encouragement. Of course, a final thank-you goes to my coauthor, Linda Trevi~no, for her dear, dear friendship and for working with me to produce this book in what, in comparison to accounts from other writing teams, was an almost painless experience. E1PREF 07/09/2010 Page 20 E1C01 07/09/2010 Page 1 SECTION I INTRODUCTION 1 E1C01 07/09/2010 Page 2 CHAPTER 1 INTRODUCING STRAIGHT TALK ABOUT MANAGING BUSINESS ETHICS: WHERE WE’RE GOING AND WHY INTRODUCTION Back in 1993, when we sat down to write the first edition of this book, people wondered if business ethics was just a fad. At that point, companies were just beginning to introduce ethics into orientations and management training programs. In academia, business ethics was just beginning to gain traction as a subject for serious academic study and some business schools were going so far as to require a business ethics course to graduate. Back then there was still the feeling among many experts that business ethics— like time management, quality circles, and other management buzzwords of the day—would soon become a footnote in texts that described business fads of the late twentieth century. Despite multiple waves of scandal over the years, these have often been portrayed as temporary blips. For example, one prominent business writer for Fortune Magazine wrote an article in 2007 entitled ‘‘Business is Back!’’ Here’s a choice excerpt . . . ‘‘It must be said: The shaming is over. The 51/2 year humiliation of American business following the tech bubble’s burst and the Lay-Skilling-FastowEbbers-Kozlowski-Scrushy perp walks that will forever define an era has run its course. After the pounding and the ridicule, penance has finally been done. No longer despised by the public, increasingly speaking up and taking stands, beloved again by investors, chastened and much changed—business is back.’’1 Could he have been more wrong? Business managed to outdo itself on the shame index yet again just about a year later. We’ve seen these ethical debacles occur regularly for the past 25 years. As a result, we’re convinced that business ethics is far from a fad. It’s an ongoing phenomenon that must be better understood and managed and for which business professionals must be better prepared. We tell our students that serious ethical scandals often result from multiple parties contributing in their own small or large ways to the creation of a catastrophe. As you’ll 2 E1C01 07/09/2010 Page 3 CHAPTER 1 INTRODUCING STRAIGHT TALK ABOUT MANAGING BUSINESS ETHICS 3 read later on in this book, Enron’s collapse in 2001 was not just the failure of Enron executives and employees, but also the failure of Enron’s auditors, the bankers who loaned the company money, and the lawyers who never blew the whistle on Enron’s shenanigans. However, no scandal of recent years—not even Enron—matches the financial industry debacle in 2008. The crisis was unparalleled in its scope and has fueled public outrage like no other business disaster in our lifetime. The aftermath has people around the world angry and mistrustful of companies, governments, regulators, rating agencies, and the people who work in them. If there was ever a crisis of trust and confidence, this is it. It is also a textbook-perfect example of how numerous people’s actions (and inactions) can conspire to spawn an almost unimaginable calamity. Recent business history has proven beyond any doubt that divorcing business from ethics and values runs huge risks. Rushworth Kidder,2 the highly regarded ethics writer and thinker, recently wrote about the financial debacle and the resulting public anger. He eloquently described how free marketers cite Adam Smith’s Wealth of Nations to justify a breed of capitalism that abhors regulation and focuses on shortterm profits over long-term stewardship. Kidder wisely noted that 17 years before his more famous book, Smith wrote another one entitled The Theory of Moral Sentiments. Smith’s first book deserves more attention because he always presumed that the messages from these two books would go hand in hand. Smith’s ‘‘moral sentiments’’ work rests on the assumption that human beings are empathetic; they care about others, and they derive the most joy from human love and friendship. His book opened with the following statement: ‘‘How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others. . . . ’’3 Smith believed that a good life derives from the expression of ‘‘beneficence,’’ not from material wealth. He acknowledged that self-love (which he also acknowledged) can spur the individual to better his own condition by besting competitors. But he argued that this must be done in a just manner and in the spirit of fair play as judged by an informed, ethical, and impartial spectator. We care what others think of us because we are first and foremost social beings. But we also are moral beings who want to do the right thing because it is the right thing to do (not just to win the praise of others). According to Smith, virtuous persons balance prudence (mature self-love), strict justice, and benevolence, and ideal societies are comprised of such persons. Finally, a flourishing and happy society is built upon a foundation of justice and rules of conduct that create social order. Smith was confident that humankind would progress toward this positive ethical state; he called on leaders to avoid the arrogance of power and, instead, to be virtuous statesmen. Kidder’s point was that capitalism will succeed only when firmly tethered to a moral base, and he reminds us that Adam Smith—that hero of free marketers—knew that better than anyone. We completely agree. We began this book almost 20 years ago with the firm belief that business isn’t just ‘‘better’’ when companies and businesspeople are ethical, but rather that good ethics is absolutely essential for effective business practice. This is not just empty rhetoric. Work is essential to life, and most people work for a business of some kind. How we work and the standards we uphold while we are working affect much more than just commerce. Our business behavior also affects E1C01 07/09/2010 4 Page 4 SECTION I INTRODUCTION our personal and company reputations, politics, society at large, and even national reputation. For example, the 2008 financial crisis, while global in scope, had its roots in the United States, and the nation’s reputation has suffered because of the behavior of individuals and companies. Similarly, China’s reputation has suffered because of contaminants found in Chinese exports such as infant formula, drywall (used in construction), and children’s toys. So, corporate misbehavior does not happen in a vacuum, and it’s not just corporate reputations that suffer as a result. These scandals cast long shadows, and they often affect entire industries and countries. In this complex and increasingly transparent world, where reputation influences everything from who wants to hire you or trade with you to who buys your products to who finances your debt—and much more—unethical behavior in business is a very big deal indeed. So, let’s take a closer look at the elephant in the room: the near collapse of the financial markets in 2008 and what it has to do with business ethics. THE FINANCIAL DISASTER OF 2008 The implosion of the financial markets in 2008 was largely not the result of illegal behavior. For the most part, the activities that brought down the U.S. economy and others around the world were not against the law, at least not yet (government regulators and the legal system often play catch-up after ethical debacles in business). Many of those activities, however, were unethical in that they ultimately produced great harm and were contrary to a number of ethical principles such as responsibility, transparency, and fairness. Let’s start with some of the factors that laid the groundwork for the disaster in the United States. Borrowing Was Cheap First, borrowing money became really cheap. In 2000, stocks in high-technology companies had soared to unsustainable heights and that bubble finally burst. To soften the effects on the U.S. financial markets, Alan Greenspan, who headed the Federal Reserve at that time, lowered the Fed Funds rate (the rate at which banks borrow money from the Federal Reserve) to almost zero. That move, seemingly innocent at the time, injected huge amounts of money into the U.S. financial system. It made the cost of borrowing so low that it fueled a glut of consumer borrowing. Suddenly, it was amazingly cheap to buy a new car, a wide-screen television, a backyard pool, a larger home, a second home, and all sorts of designer goodies. There was even encouragement to indulge. Following the terrorist attacks in September 2001, President George W. Bush told people that if they wanted to help the economy they should go shopping. And people did. Household debt levels rose to $13.9 billion in 2008, almost double what households owed in 2000, and savings dipped into negative territory. (Since the financial crisis, household savings have risen to 6.9 percent.4) Responsible borrowers should have thought about what they could afford rather than what bankers would lend to them. And responsible lenders should have established that borrowers could actually afford to pay back the loans before lending them money. E1C01 07/09/2010 Page 5 CHAPTER 1 INTRODUCING STRAIGHT TALK ABOUT MANAGING BUSINESS ETHICS 5 Real Estate Became the Investment of Choice Of course, people also want to invest in something safe, and what could be safer than real estate? There had been relatively few instances of real estate values declining, and when they did the declines were generally shallow and short-lived. A point of pride in the United States was the high percentage of Americans who owned their own homes. Investing in a home traditionally had been a very safe investment and one that was slow to appreciate in value. But suddenly in the early 2000s, real estate investing became a real moneymaker. With a backdrop of historically low interest rates, real estate became such a popular way to invest that demand soon outstripped supply and prices soared. The value of homes skyrocketed—homes that were selling for $300,000 in one year sold for $450,000 the next. Prices rose so fast that speculation grew tremendously. People bought houses with almost no down payment, remodeled them or waited a few months, and then resold the houses for a quick profit. A number of popular television programs showed viewers how to ‘‘flip’’ real estate properties for profit. Since the cost of borrowing was so low and home equity had grown so quickly, many consumers borrowed on the equity in their homes and purchased additional real estate or a new car or financed a luxury vacation. For example, suppose someone purchased a house for $500,000 in 2003. By 2005, the home might have been worth $800,000. The home owner refinanced the mortgage—borrowing as much as the entire current worth of the house (because its value could only go up, right?), which resulted in a $300,000 cash infusion for the home owner. This practice was very popular, and it laid the groundwork for a huge disaster when the housing values fell off a cliff in 2008 and 2009. Imagine the home owner who refinanced the home just described. Imagine that he took the $300,000 and purchased a summer home and a sports car and paid for his children’s college educations. Suddenly, home values plummeted and his house lost 30 percent of its value, which was common in markets such as California, Florida, Nevada, or Arizona, where the real estate bubble was particularly inflated. After the real estate bubble burst, his house was worth $560,000. Now suppose he loses his job and needs to sell his house because he can’t afford the mortgage payments. He can’t get $800,000 for his home, which is what he owes on his mortgage. His only choice is to work with the mortgage holder (probably a bank) to refinance (unlikely) or declare bankruptcy and walk away from the house. This is what a lot of home owners have done, and it is one of the factors at the heart of the current financial crisis. Lots of folks were in on this bubble mentality, getting what they could in the short term and not thinking very much about the likelihood (or inevitability) that the bubble would burst. Mortgage Originators Peddled ‘‘Liar Loans’’ In the early 2000s, as housing investments increased in popularity, more and more people got involved. Congress urged lenders Freddie Mac and Fannie Mae to expand home ownership to lower-income Americans. Mortgage lenders began to rethink the E1C01 07/09/2010 6 Page 6 SECTION I INTRODUCTION old rules of financing home ownership. As recently as the late 1990s, potential home owners not only had to provide solid proof of employment and income to qualify for a mortgage, but they also had to make a cash down payment of between 5 and 20 percent of the estimated value of the home. But real estate was so hot and returns on investment were growing so quickly that mortgage lenders decided to loosen those ‘‘old-fashioned’’ credit restrictions. In the early 2000s, the rules for obtaining a mortgage became way less restrictive. Suddenly, because real estate values were rising so quickly, borrowers didn’t have to put any money down on a house. They could borrow the entire estimated worth of the house; this is known as 100-percent financing. Also, borrowers no longer needed to provide proof of employment or income. These were popularly called ‘‘no doc’’ (no documentation) or ‘‘liar loans’’ because banks weren’t bothering to verify the ‘‘truth’’ of what borrowers were claiming on their mortgage applications. Banks Securitized the Poison and Spread It Around At about the same time liar loans were becoming popular, another new practice was introduced to mortgage markets. Investors in developing countries were looking to the United States and its seemingly ‘‘safe’’ markets for investment opportunities. Cash poured into the country from abroad—especially from countries like China and Russia, which were awash in cash from manufacturing and oil respectively. Wall Street bankers developed new products to provide investment vehicles for this new cash. One new product involved the securitization of mortgages. (Note: structured finance began in 1984, when a large number of GMAC auto receivables were bundled into a single security by First Boston Corporation, now part of Credit Suisse.) Here’s how it worked: Instead of your bank keeping your mortgage until it matured, as had traditionally been the case, your bank would sell your mortgage— usually to a larger bank that would then combine your mortgage with many others (reducing the bank’s incentive to be sure you would pay it back). Then the bankers sold these mortgage-backed securities to investors, which seemed like a great idea at the time. Real estate was traditionally safe, and ‘‘slicing and dicing’’ mortgages divided the risk into small pieces with different credit ratings and spread the risk around. Of course, the reverse was also true, as the bankers learned to their horror. This method of dividing mortgages into little pieces and spreading them around could also spread the contagion of poor risk. However, starting in 2002 and for several years thereafter, people couldn’t imagine housing values falling. So much money poured into the system, and the demand for these mortgage-backed security products was so great, that bankers demanded more and more mortgages from mortgage originators. That situation encouraged the traditional barriers to getting a home mortgage to fall even farther. These investment vehicles were also based upon extremely complex mathematical formulas (and old numbers) that everyone took on faith and few attempted to understand. It looks like more people should have followed Warren Buffett’s sage advice not to invest in anything you don’t comprehend! Add to that toxic mix the relatively new idea of credit-default swaps E1C01 07/09/2010 Page 7 CHAPTER 1 INTRODUCING STRAIGHT TALK ABOUT MANAGING BUSINESS ETHICS 7 (CDS). These complex financial instruments were created to mitigate the risk financial firms took when peddling products like securitized mortgages. CDS are insurance contracts that protect the holder against an event of default on the part of a debtor. One need not own the loan or debt instrument to own the protection, and the amount of capital tied up in trading CDS is very small compared to trading other debt instruments. That is a very significant part in the increase in popularity at sell-side and buy-side trading desks. The big insurance company, AIG, was a huge player in this market, and so were the large banks. The firms that were counterparties to CDS never stepped back from the trading frenzy to imagine what would happen if both the structured finance market and the real estate bubble burst (as all bubbles eventually do) at the same time. Both underwriters and investors would be left holding the bag when the music stopped playing—and the U.S. taxpayer has had to bail out most of the financially-stressed firms to save the entire financial system from collapse. Please note that all of this happened in a part of the market that was virtually unregulated. Those Who Were Supposed to Protect Us Didn’t One protection against financial calamity was thought to be the rating agencies such as Standard and Poor’s and Moody’s. They rate the safety or soundness of securities, including those securitized mortgage products. A credit opinion is defined as one which rates the timeliness and ultimate repayment of principal and interest. But, like everyone else, the rating agencies say they didn’t foresee a decline in housing prices; and consequently, they rated the mortgage securities as being AAA—the highest rating possible, which meant that the rating agencies considered these securities to be highly safe. The agencies are the subject of much criticism for their role in the crisis. If they had done a better job analyzing the risk (their responsibility), much of the crisis might have been avoided. But note that these rating agencies are hired and paid by the companies whose products they rate, thus causing a conflict of interest that many believe biased their ratings in a positive direction. So, people who thought they were making responsible investments because they checked the ratings were misled. Another protection that failed was the network of risk managers and boards of directors of the financial community. How is it that one 400-person business that was part of the formerly successful insurance behemoth, AIG, could invest in such a way that it brought the world’s largest insurance company to its knees? The risk was underestimated all around by those professionals charged with anticipating such problems and by the board of directors that didn’t see the problem coming. The U.S. government (actually taxpayers) ended up bailing out AIG to the tune of $170 billion. The risk managers and boards of other financial firms such as Citigroup, Merrill Lynch, Lehman Brothers, Bear Stearns, and Wachovia were similarly blind. On Wall Street, there were other contributing factors. First, bank CEOs and other executives were paid huge salaries to keep the price of their firms’ stocks at high levels. If their institutions lost money, their personal payouts would shrink. So, bank executives were paid handsomely to bolster short-term profits. The Wall Street E1C01 07/09/2010 8 Page 8 SECTION I INTRODUCTION traders were similarly compensated—they were paid multimillion-dollar bonuses for taking outsized risks in the market. What seemed to matter most were the short-term profits of the firm and the short-term compensation of those making risky decisions. The traders took risks, the bets were at least temporarily successful, and the bankers walked off with multimillion-dollar bonuses. It didn’t matter that the risk taking was foolish and completely irresponsible in the long run. The bonus had already been paid. Consequently, a short-term mentality took firm root among the nation’s bankers, CEOs, and boards of directors. Finally, we can’t examine the financial crisis without questioning the role of regulatory agencies and legislators. For example, for a decade, investor Harry Markopolos tried on numerous occasions to spur the Securities and Exchange Commission to investigate Bernard L. Madoff. The SEC never did uncover the largest Ponzi scheme in the history of finance. The $65-billion-dollar swindle unraveled only when Madoff admitted the fraud to his sons, who alerted the SEC and the U.S. attorney’s office in New York in December 2008. Others who are culpable in the financial crisis are members of the U.S. Congress, who deregulated the financial industry, the source of some of their largest campaign contributions. Among other things, they repealed the Glass-Steagall Act, which had been passed after the U.S. stock market crash in 1929 to protect commercial banking customers from the aggression and extreme risk taking of investment bank cultures. The act created separate institutions for commercial and investment banks, and they stayed separate until the merger of Citicorp and Travelers to form Citigroup in 1998. The two companies petitioned Congress to eliminate Glass-Steagall, claiming that it was an old, restrictive law and that today’s markets were too modern and sophisticated to need such protection. And Congress listened. Those 1930s congressmen knew that if two banking cultures tried to exist in the same company—the staid, conservative culture of commercial banking (our savings and checking accounts) and the razzle-dazzle, high-risk culture of investment banking—the ‘‘eat what you kill’’ investment bank culture would win out. Some said that staid old commercial banks turned into ‘‘casinos.’’ But, interestingly, casinos are highly regulated and are required to keep funds on hand to pay winners. In the coming months, we expect to learn more about the behavior that led to this crisis. As we noted earlier, much if not most of it was probably legal because of the lack of regulation in the mortgage and investment banking industries. But look at the outcome! If only ethical antennae had been more sensitive, more people might have questioned products they didn’t understand, or spoken out or refused to participate in practices that were clearly questionable. As just one tiny example, could anyone have thought it was ethical to sell a product they called a liar loan, knowing that the customer surely would be unable to repay (even if it was legal to do so)? You’ll read much more about the crisis and its relationship to ethics in subsequent chapters. Right now, let’s delve into the cynicism this and previous scandals have created and then try to move beyond it so that you can do things differently in the future. E1C01 07/09/2010 Page 9 CHAPTER 1 INTRODUCING STRAIGHT TALK ABOUT MANAGING BUSINESS ETHICS 9 MOVING BEYOND CYNICISM After multiple waves of business scandal, some cynicism (a general distrust) about business and its role in society is probably healthy. But cynicism about business has truly become an epidemic in the United States. To be fair, we should note that although the financial industry screwed up royally, at the same time most other mainstream American companies were ‘‘running their companies with strong balance sheets and sensible business models.’’5 Most companies were responsible, profitable, and prudent. Because they had serious cash reserves, many of them have actually managed to weather the recent crisis reasonably well. But the attention has not been on these responsible companies. It’s been on the financial sector and its irresponsibility. How bad is the cynicism? According to the 2009 Edelman Trust Barometer6—a survey of almost 4,500 college-educated people around the world— it’s very bad, especially in the United States. (Edelman is the world’s largest independent public relations firm with 53 offices around the world. Its business is helping companies build and maintain reputation.) Edelman’s study shows that consumer trust in corporations has declined precipitously. More than half of the respondents stated that they trust business less than they did one year ago (in 2008). The decrease is particularly acute in the United States, where citizens have traditionally had higher opinions of business than they do in Europe. The only part of the world where trust levels have not declined is in the developing world—the so-called BRIC nations (Brazil, Russia, India, China). The study also outlines the business case for trust. Over a one-year period, 91 percent of consumers stated that they purchased a product of service from a company they trust. Conversely, 77 percent of consumers refused to purchase a product or service from a company that they mistrusted. This study suggests that corporate reputation affects consumer buying patterns, and companies risk harming their bottom line when they do not act to protect their good name. But, consistent with our idea that business ethics is not a fad, neither is public cynicism about business ethics new. We have written about it in every edition of our book (since 1995). Surely, the factor that has contributed the most to cynicism in recent years is the highly visible behavior of some of the nation’s leading corporations and executives, whose activities have garnered so much space in the business press and on the evening news. How do you watch hour after hour of such reporting and not walk away jaded? In the last few years, all you had to do was read about or watch the news to feel cynical, and business school students are no exception. We also note that business is not alone in its scandalous behavior. In recent years, we’ve learned about government employees who stole or misused funds, academics who falsified their research results, ministers who stole from their congregations, priests who abused children, and athletes who took bribes or used performance-enhancing drugs. It seems that no societal sector is immune. Many of our readers are business school students, the current or future managers of business enterprises. Surveys suggest that many business students are themselves surprisingly cynical about business (given that they’ve chosen it as their future profession). They believe that they’ll be expected to check their ethics at the corporate E1C01 07/09/2010 10 Page 10 SECTION I INTRODUCTION door or that they will be pressured to compromise their own ethical standards in order to succeed.7 Consider this scenario that took place at a large university: A professor asked his class to name management behaviors that are morally repugnant. His class struggled to name one! In another of his classes, the professor asked if the students would dump carcinogens in a river. This time the class agreed that they would do so because if they didn’t, someone else would. When the professor asked if they really wanted to live in such a cynical environment, the class insisted that they already did. The dismayed professor believed that the attitudes of his students were formed long before they landed in his classroom. He agreed with other observers that the problem goes way beyond business and business schools and that our society, with its emphasis on money and material success, is rearing young people who strive for achievement at any cost. One symptom: cheating is pervasive in many high schools and colleges.8 This scenario is enough to make anyone wonder about today’s business students. But at the same time, we know that students at many colleges and universities, including business schools, are encouraging their own faculty and administrators to establish newly invigorated academic integrity policies and honor codes. In an honor code community, students take responsibility for implementing the academic integrity policy and for holding each other accountable to it. They manage study-run judiciaries that mete out serious discipline to their fellow students who tarnish the community by cheating. These efforts, which are gaining real traction at many schools, suggest that at least some students have had enough and are willing turn from cynicism toward a proactive approach to change things. A 2008 Aspen Institute study of nearly 2,000 MBA students from 15 leading international business schools provides some insight into MBA students’ attitudes, which appear to be moving in a less cynical direction. Similar to the findings of Aspen’s 2002 survey, the 2008 survey of MBA students indicates that they anticipate facing difficult values conflicts in their jobs and suggests some cynicism about ethics in the workplace. However, about 40 percent of these students believe that their business education is preparing them to manage values conflicts ‘‘a lot,’’ and another 50 percent believe that they’re being prepared somewhat. Also, more than a quarter of the respondents said they are interested in finding a job that gives them the opportunity to contribute to society (compared to only 15 percent in 2002). More than half believe that safe, high-quality products and responsible governance and transparent business practices are very important for a potential employer. In addition, more than half said they would advocate alternative values or approaches in response to values conflicts at work (many more than in 2002).9 The media may be largely responsible for students’ cynical attitudes. Think about the depiction of business and its leaders in movies and on television. The Media Research Center conducted a survey of 863 network TV sitcoms, dramas, and movies in the mid-1990s. Nearly 30 percent of the criminal characters in these programs were business owners or corporate executives. Entrepreneurs were represented as drug dealers, kidnappers, or sellers of defective gear to the military.10Fortune magazine called this ‘‘the rise of corporate villainy in prime time.’’11 Movies have abounded with negative messages about corporate America. Think Wall Street, E1C01 07/09/2010 Page 11 CHAPTER 1 INTRODUCING STRAIGHT TALK ABOUT MANAGING BUSINESS ETHICS 11 Boiler Room, Civil Action, Glengarry Glen Ross, The Insider, Erin Brockovich, Supersize Me, The Corporation, Enron: The Smartest Guys in the Room, Michael Clayton, The International, Quiz Show, The Insider, and Bowling for Columbine. And there are more such movies every year; we’re sure you can add to the list. A much tougher exercise is to generate a list of movies that actually create a positive ethical impression of business. Can you think of any? Consistent negative representation of business in the media has its effects. Academic research suggests that cynicism toward American business increased after study participants viewed the film Roger & Me, which depicted ruthless plant closings and layoffs at General Motors.12 Imagine the cumulative, daunting effect of viewing countless movies and television programs that portray business as corrupt and business leaders as ruthless and unethical. To counter that media-fueled cynicism at least somewhat, we encourage you to think about your own life and the hundreds of reliable products and services you trust and depend on every day as well as the people and businesses that produce them. These good folks are businesspeople too, but it isn’t nearly as exciting or sexy for the media to portray businesspeople who do the right thing every day. We also encourage you to talk with businesspeople you know, perhaps people in your own family who work for businesses. Do they feel pressured to compromise their ethical standards, or do they see their employer in a more positive light? Interestingly, the Ethics Resource Center’s 2009 National Business Ethics Survey found that only 8 percent of employees of for-profit enterprises report feeling pressured to compromise their ethical standards. That means that more than 90 percent say that they’re not feeling such pressure. Also, nearly two thirds of these employees said that their own company has a strong or strong-leaning ethical culture. What does that mean? To us, it means that most Americans who work in business think that their own company and coworkers are pretty ethical. Still, they read the same media accounts and see the same movies and TV programs as everyone else, and these offerings influence cynicism about American business in general.13 Finally, we won’t leave a discussion of cynicism without talking about the events of September 11, 2001. While the business scandals of 2001–02 left many cynical, the events of September 11, 2001, showed us some of the best in many individuals and businesses. We have read about the care, compassion, and assistance that countless American firms gave to those who were harmed by the terrorist attacks. Few firms were hit as hard as Sandler O’Neill & Partners, a small but profitable Wall Street investment bank that lost 66 of its 171 employees—including two of the firm’s leading partners—on September 11. The firm’s offices had been on the 104th floor of the World Trade Center. Despite its dire financial straits, the firm sent every deceased employee’s family a check in the amount of the employee’s salary through the end of the year and extended health-care benefits for five years. Bank of America quickly donated office space for the firm to use. Competitors sent commissions their way and freely gave the company essential information that was lost with the traders who had died. Larger Wall Street firms took it upon themselves to include Sandler in their deals. The goal was simply to help Sandler earn some money and get back on its E1C01 07/09/2010 12 Page 12 SECTION I INTRODUCTION feet.14 This is only one of the many stories that point to the good that exists in the heart of American business. In this book, we offer a number of positive stories to counterbalance the mostly negative stories portrayed in the media. The bottom line is this. We’re as frustrated as you are about the media portrayal of business and the very real, unethical behavior that regularly occurs in the business community. But, we also know that the business landscape is a varied one that is actually dominated by good, solid businesses and people who are even heroic and extraordinarily giving at times. So, for our cynical readers, we want to help by doing two things in this book: (1) empowering managers with the tools they need to address ethical problems and manage for ethical behavior, and (2) providing positive examples of people and organizations who are ‘‘doing things right’’ to offset some of the media-fueled negativity. We agree with Coach Joe Paterno, Penn State’s legendary football coach, whose program has always been known for integrity. He said this in response to our questions about cynicism: ‘‘I don’t care what cynical people say. I don’t really pay attention. These are small people who . . . don’t have the confidence or courage to do it the right way. And when they see someone doing it the right way, deep down they feel guilty. They’d rather say that it can’t be done . . . that everybody cheats. I hear that all the time. ‘Fine,’ I say. ‘You think what you want.’ I know what I do. People around me know. You’ve got to just run your organization. You can’t worry about what these cynical people say.’’ Some business school students seem to agree with Joe. In May 2009, something notable and quite positive happened. A group of 20 second-year students at Harvard Business School created The MBA Oath in an attempt to articulate the values they felt their MBA degree ought to stand for: The MBA Oath As a business leader I recognize my role in society. & & My purpose is to lead people and manage resources to create value that no single individual can create alone. My decisions affect the well-being of individuals inside and outside my enterprise, today and tomorrow. Therefore I promise: & I will manage my enterprise with loyalty and care, and will not advance my personal interests at the expense of my enterprise or society. & I will understand and uphold, in letter and spirit, the laws and contracts governing my conduct and that of my enterprise. I will refrain from corruption, unfair competition, or business practices harmful to society. & E1C01 07/09/2010 Page 13 CHAPTER 1 INTRODUCING STRAIGHT TALK ABOUT MANAGING BUSINESS ETHICS & & & & 13 I will protect the human rights and dignity of all people affected by my enterprise, and I will oppose discrimination and exploitation. I will protect the right of future generations to advance their standard of living and enjoy a healthy planet. I will report the performance and risks of my enterprise accurately and honestly. I will invest in developing myself and others, helping the management profession continue to advance and create sustainable and inclusive prosperity. In exercising my professional duties according to these principles, I recognize that my behavior must set an example of integrity, eliciting trust and esteem from those I serve. I will remain accountable to my peers and to society for my actions and for upholding these standards. This oath I make freely, and upon my honor. This focus on positive values among business students and business in general received significant publicity and turned into something of a movement. More than 400 graduates of Harvard Business School signed the oath, and they were joined by business students from 119 other colleges and universities globally. For more information, go to www.mbaoath.org. CAN BUSINESS ETHICS BE TAUGHT? Given all that has happened, you may be wondering whether business ethics can be taught. Perhaps all of the bad behavior we outlined earlier results from a relatively few ‘‘bad apples’’ who never learned ethics from their families, clergy, previous schools, or employers.15 If this were so, ethics education would be a waste of time and money, and resources should be devoted to identifying and discarding bad apples, not trying to educate them. We strongly disagree, and the evidence is on our side. Aren’t Bad Apples the Cause of Ethical Problems in Organizations? According to the bad apple theory, people are good or bad and organizations are powerless to change these folks. This bad apple idea16 is appealing in part because unethical behavior can then be blamed on a few individuals with poor character. Although it’s unpleasant to fire people, it’s relatively easier for organizations to search for and discard a few bad apples than to search for some organizational problem that caused the apple to rot. Despite the appeal of the bad apple idea, ‘‘character’’ is a poorly defined concept, and when people talk about it, they rarely define what they mean. They’re probably referring to a complex combination of traits that are thought to guide individual E1C01 07/09/2010 14 Page 14 SECTION I INTRODUCTION behavior in ethical dilemma situations. If character guides ethical conduct, training shouldn’t make much difference because character is thought to be relatively stable: it’s difficult to change, persists over time, and guides behavior across different contexts. Character develops slowly as a result of upbringing and the accumulation of values that are transmitted by schools, families, friends, and religious organizations. Therefore, people come to educational institutions or work organizations with an already defined good or poor character. Good apples will be good and bad apples will be bad. In fact, people do have predispositions to behave ethically or unethically (we talk about this in Chapter 3). And sociopaths can certainly slip into organizations with the sole intent of helping themselves to the organization’s resources, cheating customers, and feathering their own nests at the expense of others. Famous scoundrels like Bernie Madoff definitely come to mind. Such individuals have little interest in ‘‘doing the right thing,’’ and when this type of individual shows up in your organization, the best thing to do is discard the bad apple and make an example of the incident to those who remain. But discarding bad apples generally won’t solve an organization’s problem with unethical behavior. The organization must scrutinize itself to determine if something rotten inside the organization is spoiling the apples. For example, Enron encouraged a kind of devil-may-care, unethical culture that is captured in the film, Enron: The Smartest Guys in the Room. Arthur Andersen’s culture morphed from a focus on the integrity of audits to a consulting culture that focused almost exclusively on feeding the bottom line (you’ll read more about that in Chapter 5). In this book you’ll learn that most people are not guided by a strict internal moral compass. Rather, they look outside themselves—to their environment—for cues about how to think and behave. This was certainly true in the financial crisis when the mantra became ‘‘everyone is doing it’’ (and making a lot of money besides). At work, managers and the organizational culture transmit many cues about how employees should think and act. For example, reward systems play a huge role by rewarding short-term thinking and profits, as they did in the recent financial crisis. In this book, you’ll learn about the importance of these organizational influences and how to harness them to support ethical behavior and avoid unethical behavior. So, apples often turn bad because they’re spoiled by ‘‘bad barrels’’—bad work environments that not only condone, but may even expect unethical behavior. Most employees are not bad folks to begin with. But their behavior can easily turn bad if they believe that their boss or their organization expects them to behave unethically or if everyone else appears to be engaging in a particular practice. In this view, an organization that’s serious about supporting ethical behavior and preventing misconduct must delve deeply into its own management systems and cultural norms and practices to search for systemic causes of unethical behavior. Management must take responsibility for the messages it sends or fails to send about what’s expected. If ethics problems are rooted in the organization’s culture, discarding a few bad apples without changing that culture isn’t going to solve the problem. An effective and lasting solution will rely on management’s systematic attention to all aspects of the E1C01 07/09/2010 Page 15 CHAPTER 1 INTRODUCING STRAIGHT TALK ABOUT MANAGING BUSINESS ETHICS 15 organization’s culture and what it is explicitly or implicitly ‘‘teaching’’ organizational members (see Chapter 5). This question about the source of ethical and unethical behavior reflects the broader ‘‘nature/nurture’’ debate in psychology. Are we more the result of our genes (nature) or our environments (nurture)? Most studies find that behavior results from both nature and nurture. So, when it comes to ethical conduct, the answer is not either/or, but and. Individuals do come to work with predispositions that influence their behavior, and they should take responsibility for their own actions. But the work environment can also have a large impact. In this book, you’ll learn a lot about how that work environment can be managed to produce ethical rather than unethical conduct. Shouldn’t Employees Already Know the Difference between Right and Wrong? A belief associated with the good/bad apple idea is that any individual of good character should already know right from wrong and can be ethical without special training—that a lifetime of socialization from parents and religious institutions should prepare people to be ethical at work. You probably think of yourself as an individual of good character, but does your life experience to date prepare you to make a complex business ethics decision? Did your parents, coaches, and other influential people in your life ever discuss situations like the one that follows? Think about this real dilemma. You’re the VP of a medium-sized organization that uses chemicals in its production processes. In good faith, you’ve hired a highly competent scientist to ensure that your company complies with all environmental laws and safety regulations. This individual informs you that a chemical the company now uses in some quantity is not yet on the approved Environmental Protection Agency (EPA) list. However, it has been found to be safe and is scheduled to be placed on the list in about three months. You can’t produce your product without this chemical, yet regulations say that you’re not supposed to use the chemical until it’s officially approved. Waiting for approval would require shutting down the plant for three months, putting hundreds of people out of work, and threatening the company’s very survival. What should you do? The solution isn’t clear, and good character isn’t enough to guide decision making in this case. As with all ethical dilemmas, values are in conflict here—obeying the letter of the law versus keeping the plant open and saving jobs. The decision is complicated because the chemical has been found to be safe and is expected to be approved in a matter of months. As in many of today’s business decisions, this complex issue requires the development of occupation-specific skills and abilities. For example, some knowledge in the area of chemistry, worker safety, and environmental laws and regulations would be essential. Basic good intentions and a good upbringing aren’t enough. James Rest, a scholar in the areas of professional ethics and ethics education, argued convincingly that ‘‘to assume that any 20-year-old of good general character E1C01 07/09/2010 16 Page 16 SECTION I INTRODUCTION can function ethically in professional situations is no more warranted than assuming that any logical 20-year-old can function as a lawyer without special education.’’17 Good general character (whatever that means) doesn’t prepare an individual to deal with the special ethical problems that are likely to arise in a career. Individuals must be trained to recognize and solve the unique ethical problems of their particular occupation. That’s why many professional schools (business, law, medicine, and others) have added ethics courses to their curricula, and it’s why most large business organizations now conduct ethics training for their employees. So, although individual characteristics are a factor in determining ethical behavior, good character alone simply doesn’t prepare people for the special ethical problems they’re likely to face in their jobs or professions. Special training can prepare them to anticipate these problems, recognize ethical dilemmas when they see them, and provide them with frameworks for thinking about ethical issues in the context of their unique jobs and organizations. Aren’t Adults’ Ethics Fully Formed and Unchangeable? Another false assumption guiding the view that business ethics can’t be taught is the belief that one’s ethics are fully formed and unchangeable by the time one is old enough to enter college or a job. However, this is definitely not the case. Research has found that through a complex process of social interaction with peers, parents, and other significant persons, children and young adults develop in their ability to make ethical judgments. This development continues at least through young adulthood. In fact, young adults in their twenties and thirties who attend moral development educational programs have been found to advance in moral reasoning even more than younger individuals do.18 Given that most people enter professional education programs and corporations as young adults, the opportunity to influence their moral reasoning clearly exists. Business school students may need ethics training more than most because research has shown they have ranked lower in moral reasoning than students in philosophy, political science, law, medicine, and dentistry.19 Also, undergraduate business students and those aiming for a business career were found to be more likely to engage in academic cheating (test cheating, plagiarism, etc.) than were students in other majors or those headed toward other careers.20 At a minimum, professional ethics education can direct attention to the ambiguities and ethical gray areas that are easily overlooked without it. Consider this comment from a 27-year-old Harvard student after a required nine-session module in decision making and ethical values at the beginning of the Harvard MBA program. Before, [when] I looked at a problem in the business world, I never consciously examined the ethical issues in play. It was always subconscious and I hope that I somewhat got it. But that [ethics] was never even a consideration. But now, when I look at a problem, I have to look at the impact. I’m going to put in this new ten-million-dollar project. What’s E1C01 07/09/2010 Page 17 CHAPTER 1 INTRODUCING STRAIGHT TALK ABOUT MANAGING BUSINESS ETHICS 17 going to be the impact on the people that live in the area and the environment. . . . It’s opened my mind up on those things. It’s also made me more aware of situations where I might be walking down the wrong path and getting in deeper and deeper, to where I can’t pull back.21 In 2004, Harvard’s MBA class of 1979 met for its 25-year reunion. The alumni gave the dean a standing ovation when he said that a new required course on values and leadership was his highest priority and then pledged to ‘‘live my life and lead the school in a way that will earn your trust.’’22 It should be clear from the above arguments that ethics can indeed be taught. Ethical behavior relies on more than good character. Although good upbringing may provide a kind of moral compass that can help the individual determine the right direction and then follow through on a decision to do the right thing, it’s certainly not the only factor determining ethical conduct. In today’s highly complex organizations, individuals need additional guidance. They can be trained to recognize the ethical dilemmas that are likely to arise in their jobs; the rules, laws, and norms that apply in that context; reasoning strategies that can be used to arrive at the best ethical decision; and the complexities of organizational life that can conflict with one’s desire to do the right thing. For example, businesses that do defense-related work are expected to comply with a multitude of laws and regulations that go far beyond what the average person can be expected to know. The question of whether ethics should be taught remains. Many still believe that ethics is a personal issue best left to individuals. They believe that much like proselytizing about religion, teaching ethics involves inappropriate efforts to impose certain values and control behavior. But we believe that employers have a real responsibility to teach employees what they need to know to recognize and deal with ethical issues they are likely to face at work. Failing to help employees recognize the risks in their jobs is like failing to teach a machinist how to operate a machine safely. Both situations can result in harm, and that’s just poor management. Similarly, we believe that, as business educators, we have a responsibility to prepare you for the complex ethical issues you’re going to face and to help you think about what you can do to lead others in an ethical direction. DEFINING ETHICS Some of the controversy about whether ethics can or should be taught may stem from disagreement about what we mean by ethics. Ethics can be defined as ‘‘a set of moral principles or values’’—a definition that portrays ethics as highly personal and relative. I have my moral principles, you have yours, and neither of us should try to impose our ethics on the other. But our definition of ethics—‘‘the principles, norms, and standards of conduct governing an individual or group’’—focuses on conduct. We expect employers to establish guidelines for work-related conduct, including what time to arrive and leave the workplace, whether smoking is allowed on the premises, how customers are to be treated, and how quickly work should be done. Guidelines about ethical conduct aren’t much different. Many employers spend a lot of time and money developing E1C01 07/09/2010 18 Page 18 SECTION I INTRODUCTION policies for employee activities that range from how to fill out expense reports to what kinds of client gifts are acceptable to what constitutes a conflict of interest or bribe. If we focus on conduct, ethics becomes an extension of good management. Leaders identify appropriate and inappropriate conduct, and they communicate their expectations to employees through ethics codes, training programs, and other communication channels. In most cases, individual employees agree with their company’s expectations and policies. For example, who would disagree that it’s wrong to steal company property, lie to customers, dump cancerous chemicals in the local stream, or comply with regulations on defense contracts? At times, however, an employee may find the organization’s standards inconsistent with his or her own moral values or principles. For example, a highly religious employee of a health maintenance organization may object to offering abortion as an alternative when providing genetic counseling to pregnant women. Or a highly devoted environmentalist may believe that his or her organization should go beyond the minimum standards of environmental law when making decisions about how much to spend on new technology or on environmental cleanup efforts. These individuals may be able to influence their employers’ policies. Otherwise, the person’s only recourse may be to leave the organization for one that is a better values match. Whether or not we prefer to admit it, our ethical conduct is influenced (and to a large degree controlled) by our environment. In work settings, leaders, managers, and the entire cultural context are an important source of this influence and guidance. If, as managers, we allow employees to drift along without our guidance, we’re unintentionally allowing them to be ‘‘controlled’’ by others. If this happens, we’re contributing to the creation of ‘‘loose cannons’’ who can put the entire organization at risk. Guidance regarding ethical conduct is an important aspect of controlling employee behavior. It can provide essential information about organizational rules and policies, and it can give guidance about behavior that is considered to be appropriate or inappropriate in a variety of situations. But should organizations be ‘‘controlling’’ their employees in this way? B. F. Skinner,23 the renowned psychologist, argued that it’s all right, even preferable, to intentionally control behavior. He believed that all behavior is controlled, either intentionally or unintentionally. Therefore what was needed was more intentional control, not less. Similarly, ethical and unethical behavior in organizations is already being controlled explicitly or implicitly by the existing organizational culture (see Chapter 5). Thus organizations that neglect to teach their members ‘‘ethical’’ behavior may be tacitly encouraging ‘‘unethical behavior’’ through benign neglect. It’s management’s responsibility to provide explicit guidance through direct management and through the organization’s culture. The supervisor who attempts to influence the ethical behavior of subordinates should be viewed not as a meddler but as a part of the natural management process. To summarize, we believe that educational institutions and work organizations should teach people about ethics and guide them in an ethical direction. Adults are GOOD CONTROL OR BAD CONTROL? E1C01 07/09/2010 Page 19 CHAPTER 1 INTRODUCING STRAIGHT TALK ABOUT MANAGING BUSINESS ETHICS 19 open to, and generally welcome, this type of guidance. Ethical problems are not caused entirely by bad apples. They’re also the product of bad barrels—work environments that either encourage unethical behavior or merely allow it to occur. Making ethical decisions in today’s complex organizations isn’t easy. Good intentions and a good upbringing aren’t enough. The special knowledge and skill required to make good ethical decisions in a particular job and organizational setting may be different from what’s needed to resolve personal ethical dilemmas, and this knowledge and skill must be taught and cultivated. THIS BOOK IS ABOUT MANAGING ETHICS IN BUSINESS This book offers a somewhat unique approach to teaching business ethics. Instead of the traditional philosophical or legalistic approach, we take a managerial approach. Between us, we have many years of experience in management, in consulting, and in management teaching and research. Based on this experience, we begin with the assumption that business ethics is essentially about human behavior. We believe that by understanding human behavior in an organizational context, we can better understand and manage our own and others’ ethical conduct. Kent Druyvesteyn was vice president for ethics at General Dynamics from 1985 to 1993 and one of the first ‘‘ethics officers’’ in an American company. He made a clear distinction between philosophy and management in his many talks with students and executives over the years. As he put it, ‘‘I am not a philosopher and I am not here to talk about philosophy. Ethics is about conduct.’’ We agree with Mr. Druyvesteyn. After years of study and experience, we’re convinced that a management approach to organizational ethics is needed. As with any other management problem, managers need to understand why people behave the way they do so that they can influence this behavior. Most managers want the people they work with to be productive, to produce high-quality products, to treat customers well, and to do all of this in a highly ethical manner. They also want and need help accomplishing these goals. Therefore we rely on a managerial approach to understanding business ethics. We introduce concepts that can be used to guide managers who want to understand their own ethical behavior and the behavior of others in the organization. And we provide practical guidance to those who wish to lead their department or organization in an ethical direction. We define ethical behavior in business as ‘‘behavior that is consistent with the principles, norms, and standards of business practice that have been agreed upon by society.’’ Although some disagreement exists about what these principles, norms, and standards should be, we believe there is more agreement than disagreement. Many of the standards have been codified into law. Others can be found in company and industry codes of conduct and international trade agreements. Importantly, we treat the decisions of people in work organizations as being influenced by characteristics of individuals and organizations. We also recognize E1C01 07/09/2010 20 Page 20 SECTION I INTRODUCTION CHARACTERISTICS OF INDIVIDUALS Individual differences Cognitive biases Process of Individual Ethical Decision Making ETHICAL AWARENESS ETHICAL JUDGMENT ETHICAL BEHAVIOR CHARACTERISTICS OF ORGANIZATIONS Group and organizational pressures Organizational culture FIGURE 1.1 The Ethical Decision-Making Process that work organizations operate within a broad and complex global business context. We will cover individual decision making, group and organizational influences, and the social and global environment of business. The first part of this perspective, the influences on individual decision making, is represented in Figure 1.1. ETHICS AND THE LAW It’s important to think about the relationship between the law and business ethics because if one could just follow the law, a business ethics book wouldn’t be necessary. Perhaps the easiest way to visualize the relationship between business ethics and the law is in terms of a Venn diagram (Figure 1.2). If we think of the law as reflecting society’s minimum norms and standards of business conduct, we can see a great deal of overlap between what’s legal and what’s ethical. Therefore most people believe that law-abiding behavior is also ethical behavior. But many standards of conduct are agreed upon by society and not codified in law. For example, some conflicts of interest may be legal, but they are generally considered unethical in our society and are commonly prohibited in codes of ethics. Having an affair with someone who reports to you may be legal, but it is considered unethical in most corporate contexts. As we said earlier, much of the behavior leading to the 2008 financial crisis was legal, but unethical. So the domain of ethics includes the law but extends well beyond it to include ethical standards and issues that the law does not address. Finally, there are times when you might encounter a law that you believe is unethical. For example, racial discrimination was legal in the United States for a long time. But racial discrimination was and is highly unethical. Similarly, many companies do business in developing countries with few, if any, laws regulating environmental pollution or labor conditions. They can ‘‘legally’’ pollute the air and water in these countries. Such companies have to choose between adhering to ethical standards that are higher than the legal standards in those countries and deciding that it’s okay to E1C01 07/09/2010 Page 21 CHAPTER 1 INTRODUCING STRAIGHT TALK ABOUT MANAGING BUSINESS ETHICS 21 Ethics Law FIGURE 1.2 Relationship between Ethics and Law harm the well-being of these people and communities. So the legal and ethical domains certainly overlap, but the overlap is far from complete. WHY BE ETHICAL? WHY BOTHER? WHO CARES? Assuming that you ‘‘buy’’ the notion that business ethics can be taught, and that as current or future managers you have a role to play in creating an environment supportive of ethical conduct, you may still wonder why you should care about being ethical. As workers, we should care about ethics because most of us prefer to work for ethical organizations. We want to feel good about ourselves and the work we do. As responsible citizens, we must care about the millions of people who lost retirement savings because of the greed of those at AIG, Citigroup, Lehman Brothers, Merrill Lynch, and other financial firms that brought down the global economy in 2008. These people are our parents, spouses, siblings, children, and friends—they’re us! We live in a world community, and we’re all inextricably connected to each other and to the environment that surrounds us. Our future depends on our caring enough. Above all, it is the right thing to do. Individuals Care about Ethics: The Motivation To Be Ethical Classical economists assume that practically all human behavior, including altruism, is motivated solely by self-interest—that humans are purely rational economic actors who make choices solely on the basis of cold cost-benefit analyses. But a new group of economists who call themselves behavioral economists have found that people are not only less rational than classical economists assumed, but more moral. Much evidence suggests that people act for altruistic or moral purposes that seemingly have little to do with cost-benefit analyses.24 For example, people will mail back lost wallets to strangers, cash and all; help strangers in distress; and donate blood marrow for strangers or a kidney to a family member. Also, the large majority of people will refrain from stealing even if it’s easy to do so. E1C01 07/09/2010 22 Page 22 SECTION I INTRODUCTION In his book The Moral Dimension, Amitai Etzioni25 cited many more examples and research evidence to document his claim that human action has two distinct sources: the pursuit of self-interest and moral commitments. Accordingly, most human decisions are based on ethical and emotional considerations as well as rational economic self-interest. People are motivated by both economic and moral concerns. In a typical behavioral economics experiment called ‘‘the ultimatum game,’’ subject A in the experiment receives 10 one-dollar bills and can give subject B any number of them. Subject B can choose to accept or reject A’s offer. If B accepts, they each get what was offered. If B rejects the offer, each gets nothing. From a pure economics perspective, A would do best offering B one dollar and keeping the rest. B should accept that offer because, in economic terms, getting one dollar is better than nothing. But most A subjects offer B close to half the total, an average of about four dollars. B subjects who are offered one or two dollars generally reject the offer. Economists can’t explain this result based upon rational self-interest. People’s sense of fairness seems to be driving both subjects’ behavior. Interestingly, when people play the game with a machine, they are more likely to play as classical economics would predict because they don’t expect a machine to be ‘‘fair.’’ Autistic A players (whose autism means that they don’t take others’ feelings into account) also play as the theory would predict. So most people expect fair play in their interactions with other human beings, and they will even forgo economic benefits in order to maintain a fair system. Neuroscience is also beginning to substantiate the moral sense that develops in humans. New imaging technologies have allowed scientists to locate a unique type of neuron in the brain—spindle…

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