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Perspectives in Consulting
Business Ethics: Oxymoron or New Reality?
By Thomas Casey, Karen Warlin and David Driscoll
Corporations are responsible for providing the framework for sound decision-making.
This framework, and ultimately the corporate value system, is the basis for business
ethics.
The concept of corporate business ethics is not new. In fact, over 20 years ago, a
Harvard Business Review article asked, "Can an Organization Have a Conscience?" Its
authors, Kenneth Goodpaster and John Mathews, answered by promoting "responsibility
of persons," the idea that people should be held responsible regardless of the ethical
dilemma, as long as they understand the rules.
In their argument, an ethical organization exists only when ethical behavior is the
company norm. And, while most corporations will argue that they've always had ethics
policies, in the whirlwind corporate environment of the 80's and 90's, very few companies
enforced them. Skyrocketing 401(k)s, dot-com millionaires and a general feeling of
financial immortality blurred the line between right and wrong. We were untouchable
and, if we looked the other way once or twice, who really got hurt?
Plenty of people, it turns out. In fact, part of the reason for a renewed interest in business
ethics is good, old-fashioned self-interest. Business leaders have learned that the correct
answer to the question "if we looked the other way once or twice, who got hurt?" is
"maybe, me." The press coverage of Enron and other similarly afflicted organizations
focused on the massive losses of employees' retirement savings after they had been
induced to hold a large portion of their 401(k) savings in improperly valued company
stock.
Those who directed the manipulation of financial statements to prop up that stock's value
under the assumption that such unethical behavior held no risk for them surely now know
better. Beyond the moral issues, there are also very real legal issues as well. Not only do
some leaders stand to lose their money, if charged with a crime and found guilty, they
stand to lose their freedom as well.
But, how should business ethics be perceived? Are they an organization's published rules
and regulations that employees must memorize and follow? Or are they values that
permeate a corporate culture from the top down, touching all levels of decision-making?
Let's consider some likely implications of these two possibilities. If business ethics are
viewed as a set of rules and regulations:

An environment of compliance rather than informed decision-making develops.

Employees find the rule that applies to each situation; if there is no rule, they
assume they can behave as they please, since there is no defined or expected
action.
If a company does not keep its employees apprised of updates it must continually
make to rules and regulations, employees will rightfully assume they can't be held
accountable for their behavior.
Rules and regulations that are not regularly enforced become a dusty manual on a
bookshelf.

On the other hand, developing a set of corporate values that form the framework within
which to make all business decisions:

Provides a context of principled reasoning that can be employed in any number of

situations.

Allows an employee to evaluate a situation and make an informed decision that

fits the ethics framework and corporate values rather than search for a rule that
fits a specific situation.

As it is nearly impossible to create a set of rigid, unambiguous rules that will be

appropriate to all circumstances, the proper emphasis of a well-constructed business
ethics policy is to develop a tendency toward "right thinking." The following two
examples illustrate this point. The first reflects the type of day-to-day decision that could
face many employees; the second reflects an organizational mindset that, in the absence
of "right thinking", follows the letter but not the spirit of the law.
First example: Let's say, while flying to an important meeting with a customer, an
employee spills coffee on his suit when the plane hits turbulence. A light traveller, this is
the only suit he has with him. His hotel provides dry cleaning services; however, the
company policy is that dry-cleaning expenses are non-reimbursable. Since this is a
business trip and the client is important, the employee believes the expense is justified.
Given the company policy, which option should he choose?
1.
2.
3.
4.

Not seek reimbursement;

Charge to "laundry", include a receipt and hope for the best;
Charge to miscellaneous expenses with no explanation;
Charge to meals and do not include a receipt or include a false receipt.

In an environment where policy is tempered by ethics, the rule might have been to
disallow cleaning expenses except for business related expenses. This allows the
employee some decision-making flexibility. He can choose from the four options after
considering his own and the firm's ethical values.

This isn't to say that all employees will make the right decision every time when faced
with an ethical dilemma. However, using a "principle" or "value" based approach to
corporate policy does help foster behavior that is more consistent with ethical practice
than rules alone.
Second example: Over the past several years, many companies set assumptions about
expected long-term returns on their pension plan assets at levels seen only in a boom
market. Those assumptions were used in financial reporting and left in place after the
recent boom had clearly run out of steam. Using them had the effect of significantly
lowering reported pension expense, or even making the pension plan a source of reported
income in some cases.
Although maintaining unrealistically high return assumptions contravened the principles
that should determine return rate assumptions, it did not violate any law, per se. Nor were
there immediate negative financial consequences for the company. Until share values
began to fall substantially over the past two years, it was possible to defer most or all of
the negative financial effects of not reaching the returns targeted under these unrealistic
assumptions. However, when a company's pension-plan asset values have fallen below
critical levels of liabilities, accounting rules require that the company immediately
recognize these previously deferred losses as an often-substantial charge against equity.
In these instances, as in others, some executives come to see their less-than-realistic
assumptions as bad because of the long-term financial consequences they eventually had
to report. In a right thinking ethical environment, they could have seen why regulators
discourage unrealistic assumptions in the first place.
How Some Companies Promote Ethical Behavior
Between August and October, 2002, at least 100 firms hired Chief Ethics
Officers to help implement their ethics programs. These positions are senior level
positions, with 27 percent reporting directly to the CEO (from the 2000 Ethics
Officer Association Member Survey).
Executive compensation programs are being revamped to ensure corporate and
C-suite governance. Too many CEOs were surprised when they found out what
their senior managers were doing therefore, management is now expected to
exercise more authority, accept increased accountability and maintain greater
independence than in the past through newly formed compensation committees
and redesigned corporate governance structure.
Succession planning now looks at "What kind of person are you?" in addition to
"What have you achieved?" as criteria for promotion to senior management.
Recent corporate misdeeds have elevated business ethics from lip service, a wink and a
chuckle to a force to be reckoned with. Smart companies recognize that developing and
promoting ethics programs brings competitive advantages from increased consumer
confidence to shareholder support and employee loyalty. Once implemented, the ethics
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program must be clearly communicated and reinforced from the top down so that it
becomes part of the daily mindset of all employees. To become a reality, ethics must
permeate all aspects of the business, from the supply room to the boardroom.