Corporate Ethics: Right Makes Might

Avoiding scandal isn't the only reason to observe a stringent code of conduct. Doing the right thing also generates more tangible dividends

By Heesun Wee

After the dust from the Enron collapse settles, one positive outcome may arise. CEOs, take note: The energy trader's demise provides an important lesson in the value -- the necessity, really -- of having a corporate conscience and a culture built around knowing the difference between right and wrong.

It's tempting to brush aside business ethics as a nebulous, well-intentioned subject suitable for Business School 101 but of little practical value in the real world. Big mistake. A 2000 survey by the Ethics Resource Center found that 43% of respondents believed their supervisors don't set good examples of integrity. The same percentage felt pressured to compromise their organization's ethics on the job. That's a startling number, two years before Enron imploded.

Now we know the heavy toll that ignoring ethics can exact. Former top Enron executives Jeffrey Skilling and Kenneth Lay insist they were too preoccupied running the global company to know the details of murky, off-the-books partnerships used to hide debt or to question auditor Arthur Andersen's willingness to allow such transactions. It remains to be seen whether prosecutors pursue any criminal charges beyond the felony indictment of Arthur Andersen for destroying documents.


  With Enron the subject of a grand-jury investigation, scrutiny of top execs' behavior is about to intensify. So far, the details that have emerged about the Houston-based energy giant paint a picture of a Wild West culture that sublimated everything to the goal of driving up the stock price. "In this competitive, capitalistic system of ours, of course you have to have financial targets and goals that keep you pointed in the right economic and competitive direction," says W. Michael Hoffman, executive director of the Center for Business Ethics at Bentley College in Waltham, Mass. "But you've also got to tell employees you can only meet those goals with the framework of our ethical values."

Indeed, the story of Enron is fast becoming a textbook case for how not to lead a business. While Lay was busy exercising his stock options and pocketing profits, he was promoting Enron shares as a bargain to employees. Some Enron executives pressed UBS PaineWebber to take action against a broker who advised some Enron workers to sell their shares. The brokerage firm fired the broker within hours of the complaint, e-mail messages released by congressional investigators show.

At Enron, it was all about making the deal

Enron was "a swagger place," recalls Doug Schuler, associate professor of management at the Jones Graduate School of Management at Rice University, who worked for Enron's government affairs department for six months, from February to July of last year. While Schuler conducted research on political activities and corporations and wasn't schmoozing with gung-ho traders, he said the profits uber alles work culture was evident.

Enron hired top graduates from top schools, and the perennial question among colleagues seemed to be, "Can you make the deal?" Schuler recalls. "If you're really a clever person, you make the deal. If you're not clever, you're going to work for [rival] Reliant or Duke because you're not going to last long," he added.


  Lay and Skilling both vehemently insist that they encouraged employees to work with integrity. Enron had an ethics code. But "at Enron, ethics was simply a piece of paper with three Ps -- print, post [in the company lunch room], and then pray that something is actually going to happen," says Stuart Gilman, president of the Ethics Resource Center in Washington, D.C.

Perhaps Skilling and Lay couldn't know all the goings-on at Enron, as they claim. However, "people at the top tend to set the target, the climate, the ethos, the expectations that fuel behavior," says Thomas Donaldson, a business ethics professor at the Wharton School at the University of Pennsylvania. Adds Steven Currall, associate professor of management, psychology, and statistics at Rice: "I don't think it's an adequate defense for a CEO to say, 'How could I know everything that's going on?' It doesn't absolve them of responsibility."

Practicing good business ethics creates dividends that go beyond avoiding legal disaster. A host of studies have shown that employees who perceive their companies to have a conscience possess a higher level of job satisfaction and feel more valued as workers. The 2000 Ethics Resource Center study canvassed corporations and nonprofits across the country. Among its findings: Managers' efforts to instill good business ethics were welcomed overwhelmingly by workers.


  "We found a strong connection between employees' perception of their leaders and their own ethical behavior," says Josh Joseph, top researcher of the ethics center. Workers also said their own behavior was influenced by the perceived ethics of direct supervisors and co-workers.

So, how do you create a positive work environment in which standards for behavior are clear and employees serve as role models for one another? Some businesses promote an ethical work atmosphere, along with salary, as a way to woo top talent. At Illinois-based health-care giant Baxter, employees are encouraged to chat up the company's ethics program as a recruiting tool.

Motorola stresses that ethics must be adhered to at home and abroad

Sometimes, fostering ethics can mean crossing national borders. Motorola, also based in Illinois, published a global ethics guide in 1998 to help managers who work abroad. A sample question: What do you do if you're in a country where payments are expected in business dealings? Motorola's code says no. The upshot of the ethics guide: Just because you're not at headquarters doesn't mean you throw your company's standards out the window.


  How not to instill an ethos in the workplace? Enron also provides a textbook example, say experts. It required employees to sign a code of conduct statement before joining. However, emerging details suggest that any efforts related to a meaningful ethics program may have been window dressing at best. For example, the Enron board twice suspended the company's ethics code in 1999 to allow two outside partnerships to be led by a top Enron executive who stood to gain financially from them, according to a report Houston law firm Vinson & Elkins prepared for Enron.

Companies should instead take a page from health-care giant Johnson & Johnson, where core values have long held center stage. J&J employees periodically survey and evaluate how well the company is adhering to its code of ethics, called "Credo" responsibilities. Their opinions are relayed to senior managers, and any possible shortcomings in the Credo are promptly addressed.

Small wonder that, when the Tylenol scare hit in the '80s and seven Chicago residents died after ingesting cyanide-laced capsules, J&J managers knew what they had to do -- even without consulting with then-CEO James Burke, who was on a plane as the news broke. By the time Burke landed and caught up with his top managers, they already had called for all Tylenol products to be pulled off shelves and for production of all Tylenol items to be halted.


  The J&J managers ignored advice from consultants and attorneys who had argued such dramatic steps might harm the Tylenol brand and imply the contamination was the work of a J&J employee. "In the end, it was a joint consensus agreement around the company's values, the No. 1 value being that the health of our customers comes first before anything else, including stockholder value," says Donaldson of Wharton. "This is a story about a company that really lived its values."

Bentley College's Hoffman points out that the decision to do right was a gut reaction. "Ethics is a matter of developing good habits, and it doesn't happen overnight," he says. "It happens through repetition and a long process of development."

You'll find the roots of a companywide commitment to ethics in the top suite. In 1991, a bid-rigging scandal surrounding senior Salomon Brothers officials in connection with U.S. Treasury securities pushed the Wall Street trading house close to bankruptcy. Enter billionaire Warren Buffett.


  As one of his first actions as interim CEO, Buffett wrote a letter to his managers. "It basically said, 'Here's my home phone number in Omaha. If you see anything unethical, give me a call,'" recalls Donaldson. Managers indeed called Buffett, and they collectively came up with a plan to rehabilitate Salomon's tattered reputation. CEOs also can send a clear message about conduct by making business ethics part of performance reviews -- along with meeting transparent financial targets, experts say.

"The vast majority of CEOs are ethical and diligent in watching over these issues," says Rice's Currall. "But many of them have got so much on their plates it takes something like Enron to really get their attention, to get them to reevaluate their policies and procedures, and to ensure they're not guilty of some of these same things."

The implication is clear: Business ethics aren't just the province of the Ivy Tower. After Enron, smart CEOs will realize that an honest, transparent, and trustworthy culture can also bolster employee morale and ultimately guard shareholder value.

Wee is a reporter for BusinessWeek Online in New York

Edited by Douglas Harbrecht

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