AN INTRODUCTION TO

BUSINESS ETHICS
CHAPTER 4: CORPORATE
CULTURE, GOVERNANCE AND
ETHICAL LEADERSHIP

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This chapter seeks to

• Define corporate culture
• Explain how corporate culture impacts ethical decision making
• Discuss the role of corporate leadership in establishing the
culture
• Explain the differences between effective leaders and ethical
leaders
• Discuss the role of mission statements and codes in creating
an ethical corporate culture
• Explain how various reporting mechanisms such as ethics
hotlines and ombudsmen can help
• Integrate ethics within a firm
• Discuss the role of assessment, monitoring, and auditing of the
culture and ethics program
• Explain how culture can be enforced via governmental
regulation

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J & J Credo History

• General Robert Wood Johnson guided
Johnson & Johnson from a small family-
owned business to a worldwide enterprise.
• In 1935 he wrote a pamphlet titled Try Reality
in which he proposed “a new industrial
philosophy” defined as the corporation’s
responsibility to customers, employees, the
community, and stockholders.
• In 1943 he wrote and first published the J&J
credo to wide public attention and acclaim.

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J & J Credo History

• Putting customers first and stockholders last
was a refreshing approach to business
management.
• During the Tylenol® crises of 1982 and 1986,
the philosophy embodied in the credo
inspired decisions which preserved the
company’s reputation and regained the
Tylenol® business.
• More than 60 years after it was introduced,
J&J’s credo continues to guide the destiny of
the world’s largest and most diversified
health care company.

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Ethical Responsibilities from an Internal 5

Perspective
• As citizens we ask if business has any social
responsibility beyond the economic ones of
providing goods and services, jobs, and
profits.
• This chapter examines business from an
internal perspective.
• The classical model described in Chapter 3
treats ethical considerations as external
constraints placed on business.
• But the Johnson & Johnson credo
demonstrates that many businesses take
social responsibility as an inherent element of
their business model.
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Ethical Responsibilities from an Internal 6

Perspective
• It is easy to emphasize individual
responsibility for decisions, but these
decisions do not exist in a vacuum.
• Decision making will be influenced, even
determined, by the corporate culture of the
firm.
• This chapter surveys some of the major
issues around the development and
management of a corporate culture, and the
role of business leaders in creating and
maintaining ethical cultures.

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What is Corporate Culture?

• Every organization has a culture.
• A culture is made by a shared pattern of beliefs,
expectations, and meanings that guide the behavior
of its members.
• Businesses also have unspoken yet influential
standards and expectations. Some examples are
dress codes, working hours, and also a firm’s
values.
• No culture is static.
• Cultures change, but modifying or having any
impact on culture is like moving an iceberg. One
person cannot alter its course alone, but strong
leaders can have a significant impact on a culture.

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What is Corporate Culture?

• A firm’s culture can be its sustaining
value.
• Culture can offer direction and stability in
challenging times, but can also constrain
a firm to the common ways of managing
issues.
• The stability that is a benefit at one time
can be a barrier to success at another
time.

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 9

What is Corporate Culture?

• Collins and Porras (1994) studied companies
such as IBM, Johnson & Johnson, Hewlett
Packard, Procter and Gamble, Wal-Mart,
Merck, Motorola, Sony, Disney, General
Electric, and Philip Morris, looking for
common elements to explain these
companies’ success.
• The common element among successful
companies was their core ideology, which is
made up of core values and a clear corporate
purpose. All these companies have strong
corporate cultures and clear sets of values.

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Culture and Ethics

• In situations where the law is an incomplete guide for
ethical decision making, the corporate culture is likely
to be the determining factor.
• An ethical culture is one in which employees are
empowered and expected to act in ethically
responsible ways even when the law does not require
it.
• A corporate culture sets the norms and expectations
that will determine which decisions get made.
• An example of how cultures encourage some
behaviors and discourage others is the two
organizational approaches to relief efforts after
Hurricane Katrina in September 2005.

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 11

Culture and Ethics

• FEMA and the Coast Guard responded
differently following Hurricane Katrina.
• Because of its bureaucratic hierarchical
procedures, FEMA was unable to
respond in a timely manner when the
situation did not fit their usual rules.
• FEMA Director Michael Brown was
eventually removed and replaced with a
Coast Guard admiral.
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 12

Culture and Ethics

• The U.S. Coast Guard has a reputation for
being less bureaucratic. Their unofficial
motto is “rescue first, and get permission
later.” The Coast Guard empowers front-line
individuals to solve problems without waiting
for authorization.
• While FEMA and the Coast Guard are similar
organizations with similar missions, rules,
and legal regulations, their cultures are very
different, and their respective decisions
reflect these cultures.
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 13

Culture and Ethics

• The cultivation of one’s habits, including the
cultivation of ethical virtue, is greatly shaped
by the culture in which one lives.
• We are often as likely, or more likely, to act
out of habit and based on our character, as to
act based on careful deliberation.
• Business institutions provide an environment
in which habits are formed and virtues are
created. Such an environment is an ethical
corporate culture.

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 14

Culture and Ethics

• Besides abstract considerations, an
ethical culture can also have a direct
practical impact on the bottom line.

• Responsibility for creating and

sustaining ethical corporate cultures lies
with business leaders.

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 15

Culture and Ethics

• Corporate cultures have great power to
shape the individuals who work within
them.
• See Collins and Porras’ book, Built to
Last: Successful Habits of Visionary
Companies.
• The person that you become, in your
attitudes, values, expectations, mind-set,
and habits, will be significantly
determined by the organization in which
you work.
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 16

Ethical Leadership and Corporate Culture

• Corporate leaders must both advocate

and model ethical behavior.

• Leadership sets the tone not only via

personal behavior, but also via
allocating corporate resources to
support and promote ethical behavior.

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Ethical Leadership and Corporate Culture

• It is important in ethical leadership to be

perceived as a people-oriented leader.
• Even traditional leadership duties are
perceived as being done within the
context of an ethics agenda.
• Ethical traits and behavior must be
socially visible and understood
(“walking the talk”) to have influence.

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Effective Leadership and Ethical 18

Leadership
• Being a good or effective leader does
not necessarily mean being an ethical
leader.

• Ken Lay and Jeffrey Skilling of Enron

were good and effective business
leaders, and were also unethical
leaders.

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Effective Leadership and Ethical 19

Leadership
• One key difference between effective
leaders and ethical leaders is the
motivators used to achieve goals.

• Threats, intimidation, harassment, and

coercion can be used effectively, but
modeling, persuasion, and use of one’s
role in the company are ethical as well
as effective.

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Effective Leadership and Ethical 20

Leadership

• An ethical style or method of leading,

while central, is not sufficient to
establishing ethical leadership.

• The other element involves the goal or

end toward which the leader leads.

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Effective Leadership and Ethical 21

Leadership

• There cannot be leaders or followers

without a goal or direction.

• Productivity, efficiency, and profitability

are minimal goals.

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Effective Leadership and Ethical 22

Leadership
• An executive who makes a business
productive, efficient, and profitable, and
respects and empowers subordinates, may
seem to be both effective and ethical at first
glance.
• But what if this executive’s business has
unethical products – i.e., publishing child
pornography, polluting the environment, or
selling weapons to terrorists?
• Socially responsible goals may be necessary
for a leader to be fully ethical.

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 23

Building a Values-Based Corporate Culture

• Before impacting the culture via a code

of conduct or statement of values, a
firm must first determine its mission.

• The Johnson & Johnson credo is an

excellent example of a clear ethical
mission statement.

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 24

Building a Values-Based Corporate Culture

• After developing a mission statement, a

code of conduct then can delineate this
foundation more specifically.
• The code of conduct can enhance
corporate reputation.
• The code can give concrete guidance
for internal decision making, thus
creating a built-in system for risk
management.
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 25

Building a Values-Based Corporate Culture

• After establishing corporate codes of

conduct and mission statements, the
second step in developing guiding
principles for a firm is articulating a
clear vision statement.
• In addition to showing the firm’s
direction, the vision shows how its
members apply their values to their daily
business practices.
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 26

Building a Values-Based Corporate Culture

• After the mission statement and code of

conduct, and the vision statement, the
third step in the process is to identify
how the cultural shift will occur.
• You can’t simply “print, post and pray”
(-- Stuart Gilman, President, Ethics
Resource Center).
• Implementation and follow-through are
critical.
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 27

Building a Values-Based Corporate Culture

• The final step in having an effective

code that will influence the culture is a
company-wide belief that this culture is
attainable.
• If conflicts prevent certain parts from
being realized, or if key leadership is not
on board, no one will have faith in the
proposed changes.

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 28

Building a Values-Based Corporate Culture

• Critical to the success of any cultural

shift are the following:
• Integrating an ethical culture throughout
the firm
• Providing means for enforcement
• Means for enforcement includes
allowing employees to come forward
with questions, concerns, and
information about unethical behavior.
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 29

Building a Values-Based Corporate Culture

• A key element of integration is

communication.
• Without communication, there is no
clarity of purpose, priorities, or process.
• The Ethics & Policy Integration Centre
claims that communication patterns
describe the company better than
organization charts do.
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 30

Building a Values-Based Corporate Culture

• Reporting ethically suspect behavior is

difficult.
• “Whistleblowing” can expose and end
unethical activities.
• Whistleblowing can also seem disloyal,
harm the business, and harm the
whistleblower.
• Because reporting to external groups
can be so harmful, internal reporting
mechanisms are preferable.
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 31

Building a Values-Based Corporate Culture

• Internal mechanisms for reporting

wrongdoing, while preferable, must:
• Be effective
• Allow anonymity
• Protect the rights of the accused
• Allow employees to report wrongdoing
• Create procedures for follow-up and
enforcement
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Building a Values-Based Corporate Culture

• Internal mechanisms for reporting

wrongdoing which have been created by
many firms:
• Responsibilities of ethics officers
• Responsibilities of compliance officers
• Ethics ombudsmen
• Ethics hotlines

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Building a Values-Based Corporate Culture

• If we cannot measure, assess, and monitor

culture, it declines in importance.
• Ongoing ethics audits allow companies to
uncover silent vulnerabilities that could later
pose challenges.
• Ongoing audits serve as a vital element in risk
assessment and prevention.
• A firm’s management of its internal and
external relationships is critical evidence of
its values.
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Mandating and Enforcing Culture: The 34

Federal Sentencing Guidelines

• The United States Sentencing
Commission (USSC) is an independent
agency in the U. S. Judiciary.
• The USSC was formed in 1984 to
regulate sentencing policy in the
federal court system.
• Congress has been able to resolve
disparity in sentencing via the USSC.

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Mandating and Enforcing Culture: The 35

Federal Sentencing Guidelines

• In 1987, the USSC prescribed Federal
Sentencing Guidelines.
• The guidelines apply to individual and
organizational defendants in the federal
system, bringing more uniformity and
fairness to the system.
• The USSC strived in its guidelines to
create both a legal and an ethical
corporate culture.
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Mandating and Enforcing Culture: The 36

Federal Sentencing Guidelines

• In recognition of the enormous impact
of corporate culture on ethical decision
making, the USSC updated its
guidelines in 2004 to include not only
references to compliance programs but
to “ethics and compliance” programs.
• The guidelines identify specific acts of
a firm that serve as due diligence in
preventing crime and the minimal
requirements for an effective
compliance and ethics program.
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Mandating and Enforcing Culture: The 37

Federal Sentencing Guidelines

• USSC’S Eight Minimum Requirements for an
Effective Compliance and Ethics Program:
• 1. Establish compliance standards and
procedures
• 2. Establish a governing body or board
• 3. Assign a specific high-level person to
oversee compliance, be responsible for day-
to-day program operations, and report directly
to the board
• 4. Use due care not to delegate important
responsibilities to known high-risk persons
(cont’d.)
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Mandating and Enforcing Culture: The 38

Federal Sentencing Guidelines

• Summary of USSC’S Eight Minimum Requirements
for an Effective Compliance and Ethics Program
(cont’d.):
• 5. Communicate the program effectively to all
employees and agents
• 6. Monitor and audit program operation for
effectiveness; establish a safe way for employees
and agents to report violations or seek guidance
• 7. Create an incentive and disincentive structure to
encourage compliance and consistently discipline for
violations
• 8. Respond promptly and appropriately to offenses
and remedy program deficiencies
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Mandating and Enforcing Culture: The 39

Federal Sentencing Guidelines

• The concept of due diligence is a restless and
flexible standard.
• The standard reflects changes in daily events
and changes in the ideas of potential
wrongdoers.
• A firm must learn from its mistakes and take
steps to prevent recurrences.
• A 1997 survey found that 47% of ethics officers
reported the USSC’s guidelines to be influential
on their firm’s commitment to ethics.
• Another commission study found that the
guidelines influenced 44.5% of ethics officers to
enhance their existing compliance programs.
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