Case Study 2

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Read the case "Why Didn't We Know". Read the case carefully before answering the questions. Also read the questions carefully in order to understand exactly what you are being asked to do.

Make sure that your answers are based on the application of appropriate theoretical concepts and techniques in the PPT in attach rather than on a gut-feeling that you might have. Please justify your answers through the use of appropriate concepts and techniques

Answer the following questions:

  1. Identify three actions related to the channel stuffing scheme that you deem to be unethical. Use the ethical analysis techniques discussed in this course to explain why you consider these actions to be unethical.
  2. The case states that Galvatrens had put in place a number of procedures and policies to detect and prevent unethical behavior. Yet, many unethical decisions were made and only one person came forward to report such misconduct. Why did Galvatren's efforts at preventing unethical behavior fail? Justify your answer using concepts discussed in this class.
  3. Do you believe that Galvatren's CEO bears any responsibility for the company's failure to promote ethical behavior. If yes, explain why. If not, explain why not.
  4. Do you believe that Galvatren's board bears any responsibility for the company's failure to promote ethical behavior. If yes, explain why. If not, explain why not. What should the board do now to prevent unethical behavior in the future. Use concepts discussed in class to justify your answer.

Remember that the purpose of a case assignment is to apply the concepts and techniques covered in this course (PPT) .

It is not allowed to use outside resource as reference only materials in attach, Please

I need the answer to be 5 pages and try to focus in the 4 question equally


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9 - 307- 059 R E V : M A Y 15 , 2 0 0 7 Ethics: A Basic Framework Markets are sometimes described as ―amoral,‖ but market participants frequently make ethical judgments about the people and practices they encounter in the marketplace. Indeed, most market actors prefer doing business with companies and individuals they can trust, and few—at least in a free and open society—willingly submit to treatment they regard as unethical. Wronged, injured, slighted, or ignored, many will take their business elsewhere, and some will actively seek redress through the courts, media, legislature, or other channels. Some will even ―reward‖ or ―punish‖ companies for their conduct toward third parties—for example, investors who favor good corporate citizens or customers who shun human rights violators. A growing body of research points to these and other links between ethics and performance. Researchers have found, for example, that greater creativity is associated with fair rewards, mutual helpfulness, and honest information;1 that employees are more likely to share knowledge in an environment of trust;2 that avoiding misconduct and practicing good corporate citizenship contribute to a positive reputation;3 and that firms convicted of wrongdoing often experience lower returns in succeeding years.4 Of course, these findings do not prove that ethics always ―pays.‖ Indeed, such a conclusion would be mistaken. But this and other research does show that a company’s ethics has important implications for its functioning as an organization, its ability to manage risk, its reputation in the marketplace, and its standing in the community.5 Despite these findings, ethical analysis has not traditionally been a defined part of management decision making. In most well-run companies, financial, legal, and competitive analyses are explicit and routine. Ethics, by contrast, is often left to instinct or ―gut feel‖ and managed on an ad hoc basis as problems arise. As social science research indicates, many people make ethical judgments on the basis of instinct and emotion.6 If they use reason and analysis at all, they do so after the fact—to justify their instinctual response rather than to formulate or test their judgment. Instinct, of course, is an important guide to action and should rarely be ignored. But people’s instincts frequently differ, and few people have such well-honed instincts that they automatically see the ethical issues involved in, say, a complex financial restructuring, a new business model, or a technology breakthrough. While instinct alone may work well enough in relatively simple, familiar situations, a more structured approach to identifying and addressing ethical issues is essential for business leaders today. This note outlines one such approach. Professor Lynn Sharp Paine prepared this note as the basis for class discussion. The note reflects contributions from Professors Joseph L. Badaracco, Jr., Joshua D. Margolis, Thomas R. Piper, Sandra Sucher, and other members of the Leadership and Corporate Accountability teaching group. Copyright © 2006, 2007 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-5457685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. 307-59 Ethics: A Basic Framework A Framework Scholars have long debated the definition of ethics.7 It has been defined as narrowly as ―the study of right and wrong‖ and as broadly as ―the general inquiry into what is good.‖ 8 Our framework draws from only a small part of this vast territory. It involves four fundamental questions that an actor—individual, company, or group—should consider when evaluating a possible course of action:  Is the action consistent with the actor’s basic duties?  Does it respect the rights and other legitimate claims of the affected parties?  Does it reflect best practice?  Is it compatible with the actor’s own deeply held commitments? These questions elicit different types of ethical norms or standards. The first two questions bring out basic requirements—the ethical minimum that would be expected of anyone in the situation. The third and fourth raise considerations that are somewhat more discretionary though nonetheless important for companies and individuals who view themselves as leaders, given that leadership, almost by definition, means doing more than the minimum. Effective use of this framework requires an understanding of four concepts from ethical theory, each associated with one of the questions: Duties A basic moral duty is a requirement to act—or not act—in a certain way. Duties are typically owed to other parties—the company, colleagues, customers, the general public—though duties to oneself are also important. A distinction is sometimes drawn between ―perfect‖ duties, which involve specific obligations to particular parties (e.g., to keep a promise), and ―imperfect‖ duties, which are more general and open-ended (e.g., a duty of charity). Although any competent actor is presumed to be capable of fulfilling basic duties, specialized knowledge and expertise are often required. Many basic moral duties have been written into law or otherwise codified. For example, duties to respect property, refrain from fraud, and avoid certain injuries to others are enforced by many legal systems, and similar provisions are found in many codes of business conduct. Basic duties are not always explicit; they may also reside in tacit understandings of what human beings owe to one another. Because basic duties reflect widely held expectations, actions that breach these duties may give rise to criticism or blame. They may also subject the actor to demands for an apology or compensation for injuries caused by the offending action. Rights Moral duties go hand in hand with moral rights. A right is often the converse of a duty. For example, one party’s property right corresponds with other parties’ duty not to steal. Similarly, one party’s right to know typically corresponds with another party’s duty to inform. A right is thus an entitlement to certain behavior from other people.9 Rights are sometimes categorized as ―positive‖ if they require others to commit resources or take affirmative action (e.g., the right to education) and ―negative‖ if they require others to forbear from certain actions (e.g., the right to privacy). Even though rights and duties are correlated, it is sometimes useful to focus on the rights side of the equation as rights are sometimes better defined than the related duties. Like basic duties, basic rights are often written into law or formal codes such as the Universal Declaration of Human Rights. Like failure to fulfill basic duties, failure to respect basic rights may be cause for blame, and rights violators may be penalized or required to compensate for harm caused by their actions. Best practice Beyond basic rights and duties, most ethical systems also posit certain principles or standards of excellence. In ethical theory, these are sometimes referred to as ―ideals,‖ ―values,‖ or ―aspirations.‖ They might also be termed ―best practice‖ standards since they represent conduct that is desirable but not necessarily obligatory. The distinction between behavior that is ethically required 2 Ethics: A Basic Framework 307-059 (the ―musts‖) and behavior that is good but not mandatory (―shoulds‖ or ―good-to-dos‖) is not always clear. One test is how the behavior would be received. Conduct that exemplifies best practice will often elicit praise or admiration even though its absence would not merit criticism or blame. For instance, honoring an agreement that it is not binding may earn the actor ―moral credit‖ even if failure to carry out the agreement would have been excused. Similarly, a company that provides information beyond the requirements of law and basic honesty may garner praise for its candor even though nondisclosure would not have been blameworthy. Commitments Most individuals and organizations take on moral commitments that stand outside—or go beyond—the publicly defined rights, duties, and standards that apply to all. These self-chosen, or subjective, commitments may be rooted in an individual’s personal values and beliefs, the culture and practices of the organization, or the needs of the larger society. For example, a manager may believe deeply in honesty—telling it ―straight‖ when most others would spin or shade the truth. Or a company may define itself around a commitment to the environment, employee development, or extraordinary service to the customer. Such commitments typically represent an important aspect of the actor’s identity. Thus, although falling short on these commitments may not generate external criticism, it can be quite damaging to the actor’s self-concept and may even lead to the actor’s impaired functioning. Applying the Framework This framework sounds simple, but applying it can be difficult. In using it to evaluate a possible course of action, challenges arise at each step in the process. Understanding the facts A crucial first step is to understand the proposed course of action. This may seem obvious, but in many cases decision makers do not fully understand the nature or consequences of actions they are contemplating or even their own ultimate purpose in acting. Confident in their own good intentions and focused on their own narrow objectives, they often overlook collateral effects, alternative interpretations, and likely impacts on others. Yet, such considerations are integral to a reliable analysis. Without them, it is impossible to determine whether an action is harmful, fair, or even legal—or to predict its effectiveness in furthering the actor’s own aims. Understanding key aspects of the action—its intended purpose, its proper description, and its likely consequences—is thus an essential step in the analytic process. A useful tool for this purpose is what is sometimes called ―stakeholder analysis‖ or ―stakeholder impact assessment.‖ 10 Stakeholder analysis has two basic components: identifying the parties likely to be affected by the action (that is, those with a ―stake‖ to consider); and, for each party, mapping the action’s likely consequences—both positive and negative, short term and long. With the likely outcomes for various stakeholders thus arrayed, the proposed action can be more thoroughly and systematically evaluated against the relevant ethical standards (duties, rights, best practices, and commitments). This process may also reveal opportunities to mitigate unnecessary harms or enhance the planned action’s benefits. The workbook provided in Exhibit 1 can be used to guide this analysis. Identifying relevant standards A second challenge is defining what ethical standards to apply. Because ethical norms are often tacit rather than explicit and because they derive from varied sources—reason, law, philosophy, religion, custom, and perhaps even biology—deciding on the appropriate standards in a given situation is not always straightforward. 11 One starting point will be the company’s own code and relevant industry standards. Another useful point of reference is the Global Business Standards Codex, a compilation of standards commonly found in leading codes of conduct for business around the world.12 Although the codex does not differentiate between basic 3 307-059 Ethics: A Basic Framework duties and best practices, it provides a list of widely accepted standards to govern a company’s dealings with its stakeholders, including precepts such as obey the law, forgo bribery and deception, disclose conflicts of interest, practice fair dealing, safeguard health, and protect the environment. 13 The creators of the codex found that most of the commonly occurring standards were elaborations of just eight basic principles. A summary of the standards associated with each is found in Exhibit 2. Fiduciary principle: Act in the best interests of the company and its investors. Property principle: Respect property and the rights of those who own it. Reliability principle: Keep promises, agreements, contracts, and other commitments. Transparency principle: Conduct business in a truthful and open manner. Dignity principle: Respect the dignity of all people. Fairness principle: Deal fairly with all parties. Citizenship principle: Act as responsible members of the community. Responsiveness principle: Be responsive to the legitimate claims and concerns of others. While many of these principles—and their associated standards—have roots in numerous ethical traditions, their significance and interpretation can vary enormously across different social and cultural contexts. So it would be simplistic to call them ―universal values.‖ Still, given their widespread endorsement, they provide a useful point of reference.14 Maintaining objectivity All forms of analysis are vulnerable to the prejudices of their users. To correct for self-serving and other biases in ethical analysis, many ―tests‖ of ethical judgment have been offered. Three of the best known and most useful are: Visibility: Would I be comfortable if this action were described on the front page of a respected newspaper? Generality: Would I be comfortable if everyone in a similar situation did this? Legacy: Is this how I’d like my leadership to be remembered? These tests evoke varied perspectives for evaluating our judgments. 15 The ―visibility‖ test—also called the ―transparency,‖ ―sunshine,‖ or ―newspaper‖ test—reminds us to consider how our actions may be viewed by others. The ―generality‖ test asks us to consider what would happen if our actions became the general practice.16 Would society benefit? Would we want to live in such a society? The legacy test appeals to the decision maker’s own future self-evaluation. Although these tests are presented as hypothetical, their importance for leaders is often real—given that leaders’ actions are frequently reported in the press, replicated by others, and even, in some cases, recorded in history. As this discussion indicates, ethical analysis requires rigorous thought and careful deliberation. In many cases, it will also require research and information gathering—on law and regulation, codes of conduct, customary practice, expert opinion, stakeholder concerns, public opinion, and other matters. Of course, ethical analysis is, to some extent, situational across time and cultures. As with legal and economic analysis, reasonable people will disagree, and errors will be made. But the magnitude of the errors can be substantially lessened and better decisions made if the method is consistently and carefully applied. 4 307-059 -5- Exhibit 1 Action Planning: Ethical Analysis Workbook Proposed action: Main objectives: Principal actor(s): Assumed time frame: Other assumptions: Key stakeholders (affected parties) Likely consequences Positive Negative (short and long term) (short and long term) RA ALMUHAN Duties to this party Ethical standards Rights Best practice of this party toward this party Commitments to this party NA in Leading Organizations a l 2019. nd People- Fal 2018 taught by JOSE PROE 307-59 Ethics: A Basic Framework Exhibit 2 Principles Widely Endorsed Standards of Corporate Conduct What they prohibit Unauthorized self-dealing Self-benefit at expense of company Fiduciary Negligence, carelessness, half-hearted effort Bribery, inducing breach of fiduciary duty Protect human health, safety, privacy, dignity Coercion, humiliation, invasion of privacy Respect fundamental human rights Injury to health, safety Dignity Affirmative action to develop human capacities Force, violence, harming the innocent Special concern for the vulnerable Violations of basic human rights Respect for others’ property Theft, embezzlement Safeguarding own property Misappropriation of intellectual property Property Responsible use of own property Waste Infringement on others’ property Accuracy, truthfulness, honesty Fraud, deceit Accurate presentation of information Misrepresentation Transparency Disclosure of material information Materially misleading nondisclosures Correction of misinformation Breach of promise Fidelity to commitments, keeping promises Breach of contract Fulfilling contracts, carrying out agreements Reliability Care in making commitments—not more than Going back on one’s word can deliver Fraudulent promises Fair dealing (in exchange) Preferential or arbitrary treatment Fair treatment (opportunity, pay) Unfair discrimination Fairness Due process (notice, opportunity to be heard) Unfair competitive advantage Suppressing competition Fair competition (conduct among rivals) Respect for law and regulation Illegality, indifference to the law Share in maintaining the commons Freeloading, free riding Cooperation with public officials Injury, damage to society, the environment Citizenship Civic contribution Improper involvement in politics or Recognizing government’s jurisdiction government Readiness to listen Indifference to legitimate claims and claimants Neglect of serious concerns Responsiveness Responding to complaints and suggestions Addressing legitimate concerns of others Source: 6 What they require Diligence, candor, loyalty to company Disclosure of conflicts of interest Prudence, intelligence, best efforts Based on Lynn S. Paine, Rohit Deshpandé, Joshua D. Margolis, and Kim E. Bettcher, ―Up to Code: Does Your Company’s Conduct Meet World-Class Standards?‖ Harvard Business Review (December 2005). Ethics: A Basic Framework 307-059 Endnotes 1 Teresa M. Amabile, ―How to Kill Creativity,‖ Harvard Business Review (September–October 1998): 77–87; ―Mobilizing Creativity in Organizations,‖ California Management Review, vol. 40, no. 1 (Fall 1997): 39–58. 2 Anil K. Gupta and Vijay Govindarajan, ―Knowledge Management’s Social Dimension: Lessons from Nucor Steel,‖ Sloan Management Review (Fall 2000): 71–80. 3 See, for example, Charles J. Fombrun, Reputation: Realizing Value from the Corporate Image (Boston, Mass.: Harvard Business School Press, 1996), esp. p. 6; Grahame Dowling, Creating Corporate Reputations: Identity, Image, and Performance (Oxford, U.K.: Oxford University Press, 2001), pp. 49–63. 4 Melissa S. Baucus and David A. Baucus, ―Paying the Piper: An Empirical Examination of Longer-Term Financial Consequences of Illegal Corporate Behavior,‖ Academy of Management Review, vol. 40, no. 1 (1997): 129– 151. 5 For a review of this research, see Lynn Sharp Paine, Value Shift: Why Companies Must Merge Social and Financial Imperatives to Achieve Superior Performance (New York, N.Y.: McGraw-Hill, 2003), Ch. 2. 6 Jon Haidt, ―The emotional dog and its rational tail: A social intuitionist approach to moral judgment,‖ Psychological Review 108 (2001): 814–834. 7 Although the terms ―ethics‖ and ―morality‖ are sometimes defined differently, they are frequently used as interchangeable synonyms. This note treats the terms as interchangeable. 8 G.E. Moore, Principia Ethica, orig. 1903 (Cambridge, U.K.: Cambridge University Press, 1968), p. 2. For an overview of definitions, see, for example, The Definition of Morality, eds. G. Wallace and A.D.M. Walker (London: Methuen & Co Ltd, 1970). 9 On rights as compared to interests, see Ronald Dworkin, Taking Rights Seriously (Cambridge, Mass.: Harvard University Press, 1978). 10 A 1964 document is often cited as the origin of the term ―stakeholder,‖ but use became widespread after the 1984 publication of R. Edward Freeman, Strategic Planning: A Stakeholder Approach (Boston, Mass.: Pitman Publishing, 1984). Interpretations and usages have since proliferated, and the term has even given rise to a theory of the firm. For a roundup, see Thomas Donaldson and Lee E. Preston, ―The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications,‖ Academy of Management Review, vol. 20, no. 1 (1995): 65–91. Although the stakeholder theory of the firm has been criticized on various grounds, most critics acknowledge that stakeholders’ claims cannot be ignored. See, for example, Elaine Sternberg, ―Stakeholder Theory Exposed,‖ Corporate Governance Quarterly, vol. 2, no. 1 (March 1996). 11 See, for example, the research of Frans B.M. de Waal, research professor in psychobiology, Yerkes Regional Primate Research Center, Emory University, Atlanta, Georgia. 12 Lynn S. Paine, Rohit Deshpande, Joshua D. Margolis, and Kim E. Bettcher, ―Up to Code: Does Your Company’s Conduct Meet World-Class Standards,‖ Harvard Business Review (December 2005). 13 Compare, for example, recently promulgated codes such as the OECD Guidelines for Multinational Enterprises, OECD Policy Brief (June 2001); Caux Round Table Principles for Business (1994); United Nations Global Compact (1999). See also Muel Kaptein, ―Business Codes of Multinational Firms: What Do They Say,‖ Journal of Business Ethics, vol. 50, no. 1 (March 2004). 14 Widespread endorsement of these principles should perhaps be unsurprising. Although the world’s ethical traditions vary widely, scholars tell us that some themes appear repeatedly over time and across traditions. Calls for honesty, fairness, reciprocity, and mutual assistance can be found in virtually all traditions, as can injunctions against deception, betrayal, theft, injustice, violence, and indifference to others. The recurrence of these themes suggests that humans may be biologically programmed for morality (as for language) and that certain ethical norms may have survival value for groups that embrace them. See, for example, Sissela Bok, 7 307-059 Ethics: A Basic Framework Common Values (Columbia, Mo.: University of Missouri Press, 1995); H.L.A., Hart, The Concept of Law (Oxford, U.K.: Clarendon Press, 1961), pp. 187–191 (on basic standards of conduct necessary for any society’s functioning). 15 Other frequently cited tests include the ―golden rule,‖ the ―mirror test,‖ and the ―sleep test.‖ For different formulations of the ―golden rule‖ in different cultures, see Sissela Bok’s entry on this topic in The Oxford Companion to Philosophy, ed. Ted Honderich (Oxford, U.K.: Oxford University Press, 1995), p. 321. For different versions of the ―mirror‖ test, see Wendy Fischman, Becca Solomon, Deborah Greenspan, and Howard Gardner, Making Good: How Young People Cope with Moral Dilemmas at Work (Cambridge, Mass.: Harvard University Press, 2004), pp. 178–179. 16 The generality test is closely related to the ―universalizability‖ test. See, for example, R.M. Hare, ―The Structure of Ethics and Morals,‖ in Essays in Ethical Theory (Oxford, U.K.: Clarendon Press, 1989); Marcus Singer, Generalization in Ethics (New York, N.Y.: Knopf, 1961). 8 www.hbr.org Directors can reclaim their agendas and refocus on the work of leadership. Here’s how. Leading from the Boardroom by Jay W. Lorsch and Robert C. Clark Reprint R0804G Directors can reclaim their agendas and refocus on the work of leadership. Here’s how. Leading from the Boardroom by Jay W. Lorsch and Robert C. Clark It’s no exaggeration to say that the governance of companies has moved from the inner sanctum of the boardroom to the whitehot spotlight of public discourse. More is demanded these days from independent directors: They’re expected to ensure their firms’ compliance with an ever-evolving set of regulations, head off executive wrongdoing at the pass, and appease shareholders’ and Wall Street’s never-ending hunger for positive short-term results. Directors seem to be rising to this challenge. They’re more serious, they’re working harder, and in most cases governance reform appears to have given them real power to oversee management’s actions. As a result, corporate boards have taken big steps forward in the past decade. But having to operate in a post-Enron world has also produced some negative and unintended consequences for boards—the most critical one being directors’ inability to be leaders who focus on ensuring the long-term success of their companies. harvard business review • april 2008 Major public companies are important engines of economic prosperity, and boards have a paramount obligation to see that these national assets thrive. As historian Alfred D. Chandler, Jr., pointed out, the decline and ultimate failure of once-great companies has been a historical fact. But such decline is not inevitable. Rather, it results when corporate leaders (CEOs and directors alike) don’t anticipate and deal with the long-term threats facing their companies. By necessity, boards are working overtime to comply with Sarbanes-Oxley and other relatively new reporting requirements. To keep pace, they’re overemphasizing committee work instead of harnessing the intellectual power of the whole board to deal with complex matters. Instead of working collaboratively with management, they’re creating or perpetuating dysfunctional relationships that cast directors as corporate police who enforce rules and trace managers’ missteps, rather than guides who help managers choose the right path. page 1 Leading from the Boardroom Jay W. Lorsch (jlorsch@hbs.edu) is the Louis E. Kirstein Professor of Human Relations at Harvard Business School in Boston. Robert C. Clark (clark@law .harvard.edu) is the Harvard University Distinguished Service Professor at Harvard Law School in Cambridge, Massachusetts. harvard business review • april 2008 Further, boards’ long-standing focus on quarterly results has intensified. This emphasis on the short term has repercussions. (See Robert H. Hayes and William J. Abernathy’s ―Managing Our Way to Economic Decline,‖ HBR July–August 1980.) In March 2007 the U.S. Chamber of Commerce, one of the world’s largest business federations, with about 3 million members, even went so far as to recommend that companies move away from posting quarterly earnings guidance. The thinking was that such reports inevitably put the squeeze on boards and on CEOs— whose average tenures during the past decade have shrunk even as their pay packages have increased—to take the quickest route to results, not necessarily the path to long-term success. The knee-jerk reaction of most boards when confronted with corporate decline over several quarters has been to remove the CEO and search for a replacement—often from outside, since boards frequently fail to ensure internal management continuity. Boards can and must do better at balancing their function as compliance officers with their function as shapers of the future. From their places around the table, directors must steer themselves and the company’s management team toward farsighted strategic and financial thinking and succession planning. Certainly it is management’s responsibility to develop and implement strategy, but the board must use a long-range lens when requesting and vetting senior leaders’ proposals—encouraging the top team to raise its game even when things are going well and challenging it to respond creatively when threats or problems emerge. Independent directors cannot be expected to understand all the details of their companies’ performance successes or failures, but they can and should be able to stay focused on longterm trends and the impact of those trends on their companies. In short, they must learn to lead from the boardroom. In the following pages, we’ll provide some advice for doing just that. We’ll explore the changed environment directors are operating in, what they need to do to regain control of their agendas, and what it looks like when directors take the lead in critical, forwardlooking discussions about finance, strategy, and talent development. Coming Up Short Last year a board we’re familiar with created a strategy committee of the five directors who had the most knowledge about the company’s industry. The idea was that the committee would work closely with management to study the likely evolution of the industry and the company’s position in it. The team’s mandate was to come back to the full board with some long-term strategy recommendations, ones that management wholeheartedly supported. For six months, the members of the committee labored; they collected information and met frequently, by themselves and with senior leaders at the company. The result? A plan for containing costs and growing revenues—over a mere two years. Obviously, the plan was focused neither on significant changes in strategy nor on the long term, yet the full board did not seem particularly bothered by that fact. There are several reasons why this board and those of plenty of other struggling public companies are coming up short—or short-term, as the case may be. More focus on compliance means longer agendas. New regulations have increased directors’ workloads, yet the amount of time they have together to do their jobs hasn’t changed. The average board, even at a very large company, meets only five or six times a year, for just over a day each time. Board agendas, meanwhile, are overflowing with governance matters—compliance, accounting, legal, and shareholder-related issues—all of them important, all clearly of concern at the board level, but none of them germane to leadership or strategy. Since the introduction of Sarbanes-Oxley, in 2002, for instance, the time required for audit committee meetings has at least doubled. This, in turn, has increased the time the whole board spends on accounting and financial-reporting matters. Despite the added demands, most boards are stuck in a time warp, conducting their affairs pretty much as they always have: the same number and length of meetings, the same committees, and the same patterns of interaction among directors and between directors and management. Their response to new compliance requirements has been to stuff 10 pounds of content into a five-pound bag. The directors’ committee work usually cannot be completed in the allotted time, and their discussions often end up being page 2 Leading from the Boardroom As directors have become more hands-on with compliance, they’ve become more hands-off with long-range planning, exposing shareholders to another kind of risk. harvard business review • april 2008 truncated or spilling over into hastily arranged teleconferences. Agenda items that might address future concerns get short shrift. Directors put their heads down and push ahead; they do not step back and ask themselves how to change their processes and procedures to accomplish more. Boards’ relationship with management has changed. Directors typically have relied on senior management for most of their information about the company. After all, the directors aren’t—and don’t want to be—as immersed in the minutiae of their organizations as management is. From the directors’ perspective, the CEO and his or her team should have the latitude and responsibility to run the company the way they see fit, with the board providing high-level guidance. Because of their current focus on compliance, however, directors find themselves in the very role they have long tried to avoid—that of micromanager, probing the senior team’s actions, taking less for granted, looking more closely at proposals and reports to be certain that management’s behaviors are free of malfeasance and illegalities. To us, the irony here is that as directors have become more hands-on in the area of compliance, they’ve become more hands-off in the area of long-range planning, which exposes shareholders to another—potentially greater—kind of risk. The pressure for immediate, measurable results is still there in spades. The obsession with quarterly earnings impedes boards’ ability to plan for the long term. Some business leaders argue that all their companies need are short-term goals and results. After all, the long term is made up of a series of short-term accomplishments, they point out. We strongly disagree. We’ve been on boards where directors and management were so absorbed with quarterly earnings or fast-track product launches that they were slow to recognize trends that ultimately created problems for their organizations—disruptive technologies in their industries, for instance, or new competitors from emerging markets. If companies are to succeed in the global economy, their directors and top executives need to have a clear view of where they want their organizations to be in five or 10 years. Most directors will say they squeeze some time into their meetings to discuss what they call ―strategic matters.‖ In most cases, how- ever, they’re actually talking tactics: They’re answering questions like ―How did we do last quarter?‖ and ―What do we need to do differently in the next three months?‖ The metrics considered are almost always financial, because that is a language that directors with different backgrounds share and can converse in knowledgeably. Strategic capabilities such as technology or marketing often get only limited attention. When the company’s ultimate destination is always just 90 days away, neither the board nor the senior managers will have the time or incentive to draft explicit and well-articulated long-term organizational goals. Admittedly, today’s public companies are growing bigger and more complex—and it has become more of a challenge for directors to keep up with various facets of their businesses and industries. It may be unrealistic, for example, to expect the independent director of an automobile manufacturer to know the details of a new engine technology. But that director should be able to, say, understand the implications of the large pension and health care obligations of the company, or participate in talks about the company’s global brand strategies—should we expand in India, and if so, should we outsource or find a JV partner?—or conduct regular reviews of competitive intelligence. Directors similarly should be able to reasonably discuss issues of talent development and succession. Sadly, this is more the exception than the rule in most boardrooms. Taking the Long View In assuming leadership of their companies’ long-term destiny, boards first need to be clear with themselves and with management about the complementary roles each side must play. Each group must be realistic about what it has the time and knowledge to do on its own. Different boards and management teams will define their roles differently, of course, according to company circumstances. In general, however, the setup will look familiar— but with an emphasis on the long term: Management will develop and propose longrange plans, and the board will react to these proposals and debate among itself (and with management) their validity and wisdom. Second, since directors are forced by law and regulations to get into the weeds on page 3 Leading from the Boardroom compliance, they’ll have to be smarter about staying out of the weeds as much as possible when considering strategic issues. Instead of worrying about coming up to speed on the fine details of the business, they should exercise their broad knowledge and accumulated wisdom about a range of relevant business domains: finance, strategy, marketing, technology, and the like. It is precisely their 10,000-foot view that allows boards to more easily identify trends and threats on the horizon. Third, directors must not only be intelligent, well-informed, highly interactive audiences for management but also push management to address the company’s future. Boards have the power to approve plans and proposals, they can change the top management of companies, and they are unavoidable—they must be reported to regularly. Boards, therefore, have an effective platform from which to evangelize for the long term—that is, to deliberately engage senior managers in discussions about critical future concerns and to signal that those issues are priorities. And fourth, the directors must encourage leadership not just from the boardroom but within it. There has been a long-running debate in U.S. companies about whether the top executives at organizations should continue to assume the roles of both CEO and chairman of the board. It’s hard to argue with the premise that separating the jobs can strengthen independent leadership in the boardroom. But a survey we conducted in 2005 of directors of Fortune 200 companies suggests that boardroom effectiveness has less to do with formal structure than with the quality of the directors themselves and how they interact. (See the sidebar ―The Real Signs of a Strong Board.‖) Legally, boards are groups of peers, with collective rather than individual responsibility, but the most effective ones include multiple directors willing to don the leadership mantle when it comes to particular issues, no matter what their titles are. Sometimes a committee chair can be the catalyst for improvement. Sometimes a plain-vanilla director, seeing the need to get the ball rolling on an issue, takes the initiative. In the case of the strategy committee we mentioned earlier, a director who wasn’t on the committee pointed out the lack of long-term focus in the group’s proposal and the need for a more farsighted look. (What’s our plan for 10 years out, not just two?) Initially, the other board members ignored his comments, particularly the directors who had been on the committee and worked so hard on the recommendations. But the dissident director persisted with his arguments, and eventually the board concluded that a longer-term strategic plan was in order. The Real Signs of a Strong Board The intention of shareholder activism is to improve corporate governance, but in fact, it has very little effect on how well boards do their jobs. A survey we conducted in 2005 of directors of Fortune 200 companies suggests they do not believe that many criteria used by ISS Governance Services (formerly Institutional Shareholder Services) and other ratings agencies to assess board performance have much to do with board effectiveness. We asked the directors their opinions about 52 of the so-called indicators of effective corporate governance favored by ratings agencies— which included many check-the-box factors such as the appointment of a lead or presiding director and compliance with relatively new stock exchange requirements. The directors didn’t find much value in those factors. In- harvard business review • april 2008 stead, they gave more credence to criteria that related to the quality of board composition, talents, and processes. Three of the most highly rated factors concerned the specific background, knowledge, and abilities of directors—“Is there understanding among board members on the key drivers of the company’s business?” and “Is there understanding among board members on appropriate metrics of corporate performance?” and “Is the mix of experience and backgrounds of directors appropriate to the company’s business(es)?” Also among the highest-rated factors were specific activities or processes—for instance, did the board have manageable agendas and allocate time appropriately at meetings, so management could present information but have adequate time left for discussion and decision making? And did the board disseminate information to directors before meetings, so they could consider the issues at hand and prepare ahead of time? Among the less-favored factors were those related to publicly visible characteristics— whether the board was large, whether it limited independent directors’ involvement to a small number of other boards, whether it separated the positions of chairman and chief executive, whether it set a mandatory retirement age for directors, and whether it required director education programs. Such indicators trumpeted by the ratings agencies were treated with great skepticism by the directors surveyed—yet the search for talismanic indicators of quality continues. page 4 Leading from the Boardroom As the example suggests, it’s just as critical for individual directors to speak up and ask tough questions as it is for the board as a collective. Yet such leadership is rarely realized because it poses an overt challenge to the board’s basic modus operandi and because any conflict consumes a precious resource— the directors’ time together to discuss and reach decisions. When the Board Reasserts Its Leadership Once directors accept the need for more consideration of the long term, they can allocate their time more efficiently—meeting compliance standards but also buying back hours to go over future-focused concerns. Let’s take a closer look at what happens when the board assumes a more active leadership role. Defining the long term. This process has to start with a common understanding between directors and senior management about how far out the ―long term‖ goes. All too often, boards will think their discussions about a discrete transaction—an acquisition or a divestiture, for instance—constitute consideration of the company’s long-term strategy and finances. In fact, that is rarely the case. An individual company’s definition of the long term will depend on how confident directors and management teams are in their ability to project several years into the future with reasonable accuracy. Industry activity may be a factor: It can be difficult to make farreaching predictions in industries in which there are frequent technological or product innovations or low barriers to entry (for instance, internet-based businesses). Conversely, it may be easier to forecast events further into the future in industries where innovation is less frequent and dramatic and demand is tied to population growth (consumer products and household goods). Taking the lead in finance discussions. Once the time frame has been determined, the board and management must create a set of financial goals for the long term—for example, clearly articulated expectations for revenue and profit growth, returns on assets or investments, cash flows, and debt-to-equity ratios, as well as dividend and share-repurchase policies. Those measures will in turn help determine the company’s strategic direction. Such objectives will also reflect to the public harvard business review • april 2008 how the board intends to allocate the wealth the company creates. As we mentioned earlier, management in most instances will actually draft the financial goals and the means for achieving them. But boards must help determine whether the senior team is creating the right capital structure. The important point here is that directors should spend less time on quarterly earnings and more time on financial infrastructure—delving into questions about, say, the cost of capital or the debt-to-equity balance that the company is wrestling with. Taking the lead in strategy discussions. Once the board and management have crafted explicit financial goals, they need to turn their attention to how the company will hit those targets. Specifically, the directors must step back from fighting fires and consider how management’s view of the future squares with their own broader, higher-altitude views. Board retreats provide a good setting for this. The board and management at Philips Electronics hold an annual two- to three-day retreat—uninterrupted time devoted to discussing the company’s direction for the next several years. There is time for management and the board to interact, certainly, but time is also set aside for director-only sessions, which encourage open and frank discussions and draw out knowledge and insights in an uninhibited way. It was such discussions, for example, that led Philips in 2006 to exit the semiconductor business, a segment in which it was losing ground, and focus more heavily on medical technology—in particular, on the quickly growing market for home health care. Everyone involved in such retreats should understand that these getaways aren’t the only time to look ahead: ―Strategy time‖ should be set aside at most, if not all, board meetings. Such time must remain sacrosanct, interrupted only for dire emergencies. The focus of management’s proposals and boardroom discussions should be on the long-term logic, not the short-term implications. The two parties must systematically examine the company’s competitive advantages and opportunities through several long-range lenses—industry trends, geographies, brands, IP, talent, labor contracts, and product and operational costs. Any agreed-upon strategic plans should be reassessed regularly—not to fit management page 5 Leading from the Boardroom Directors must get serious about their role in ensuring the development of the next generation of senior leaders at their organizations. harvard business review • april 2008 with a straitjacket but to help directors and senior executives understand whether factors have emerged that may require a shift in priorities or a move in another direction. Time should be reserved at each board meeting for such reassessments. The board of a software company we observed successfully followed this practice: The firm had acquired a smaller rival in the hopes of capitalizing on the former competitor’s promising new product. Within months of the acquisition, the product met with such enthusiastic customer response that the board pressed management to raise its revenue and profit goals for this new business over the next several years. Like Rome, new strategies aren’t built in a day. We’ve found that shaping (or reshaping) strategies for the long term is a process that takes place over multiple board meetings. But we wonder how many directors have participated in such lengthy exercises—too few, we fear. Taking the lead in developing talent. Directors must also get serious about their role in ensuring the development of the next generation of senior leaders at their organizations— that is, creating a deep bench of potential successors to the CEO and other top executives. When agendas become overcrowded, talent development and CEO succession are among the easiest topics to ignore or at least defer, even while directors recognize the importance of having the right people at the top. A few years ago, a midsize company we observed had a successful CEO who was three years away from the mandatory retirement age. The directors began to discuss informally how to approach the situation and decided to put the process of identifying a successor on the board’s agenda. Unfortunately, when the time arrived to address this agenda item, the board and management were immersed in deliberations about a possible acquisition. Over the next 18 months, the succession issue was put on the agenda at each board meeting. Every time, a more pressing issue arose. With only a little over a year left until the CEO was slated to step down, the directors finally began active talks about this topic. By then, they had a severe problem: The CEO was an adamant supporter of an internal candidate for succession with whom the board felt uncomfortable. After a couple of hastily arranged discussions among themselves, the independent directors insisted that a search firm be retained to look outside. The CEO was opposed and continued to argue for his choice. Soon he began to insist that the succession decision was his alone, while the directors argued it was theirs. In the end, the board brought in an outsider, but the retiring CEO left in anger and frustration, which had a negative impact on the other members of the C-suite. As this example illustrates, independent directors need to be particularly hands-on when it is time to select a new CEO. While most companies have a clear policy about the retirement age for their CEOs, the transition can still be a tricky one to navigate. CEOs, of course, don’t want directors to believe anyone can replace them; they may downplay internal candidates’ readiness to take over and overstate the lack of leadership talent available outside the organization. To counteract these tactics, boards must come to a firm agreement with their CEOs—from the earliest days of their relationship—about when the chief executive will step down and how and when the board will find a successor. Specifically, there must be a few directors who build trust with the CEO so they can talk candidly with him about his personal situation—what he is planning to do after his retirement, how he can best help his successor, and how he can exit gracefully. In some cases, a few of the directors themselves may have gone through a retirement process and can share their experiences with the CEO. Directors often have only a superficial knowledge of the up-and-coming talent in their companies. Acquaintances are made at board dinners, and this social chitchat becomes the primary means by which directors are supposed to assess the strengths and weaknesses of the managers before them for promotion. This is hardly adequate. Directors need to devote more time to their companies’ emerging leaders. A good way to start is periodic on-site visits by the directors— something that is done by board members at GE, where directors meet younger executives on their own turf and observe how they work with their subordinates. GE’s directors also meet with and address rising talent during development programs at the company’s page 6 Leading from the Boardroom Crotonville training facility and sometimes invite high potentials to make presentations at GE board meetings. The board should also hold the CEO and the company’s human resources director accountable for at least an annual in-depth review of the company’s top management bench: What does the CEO think of these executives? How is this cadre of managers being developed, and are there potential successors for each of them? As they must do with their strategy and finance discussions, boards must carefully protect the time set aside to discuss talent—probably not at every meeting but often enough so that directors have some knowledge about the high potentials on the company roster. ••• The basic argument for boards’ intense focus on compliance is to prevent the loss of shareholder value that corporate misdeeds create. harvard business review • april 2008 But the argument for strong leadership from boards is even more compelling. Without it, there may be even greater destruction of shareholder value as companies go into decline. Obviously, whatever changes boards choose to make to achieve a longer-term perspective, they cannot abandon or even diminish their attention to compliance. Current laws and regulations require it, and shareholders and the public expect it— and will continue to demand it. But boards cannot afford to become so mired in it that they lose their way and fail to live up to their larger obligation: to help their companies grow and prosper, not just in the next quarter but in the next decade and beyond. Reprint R0804G To order, see the next page or call 800-988-0886 or 617-783-7500 or go to www.hbr.org page 7 Further Reading The Harvard Business Review Paperback Series Here are the landmark ideas—both contemporary and classic—that have established Harvard Business Review as required reading for businesspeople around the globe. Each paperback includes eight of the leading articles on a particular business topic. The series includes over thirty titles, including the following best-sellers: Harvard Business Review on Brand Management Product no. 1445 Harvard Business Review on Change Product no. 8842 Harvard Business Review on Leadership Product no. 8834 Harvard Business Review on Managing People Product no. 9075 Harvard Business Review on Measuring Corporate Performance Product no. 8826 For a complete list of the Harvard Business Review paperback series, go to www.hbr.org. To Order For Harvard Business Review reprints and subscriptions, call 800-988-0886 or 617-783-7500. Go to www.hbr.org For customized and quantity orders of Harvard Business Review article reprints, call 617-783-7626, or e-mail customizations@hbsp.harvard.edu page 8 Leading with Integrity Ethics and Governance Learning Objectives • Understand ethics and why leaders are responsible for preventing unethical behavior in their firms. • Conduct ethical analysis to determine if an action or decision is unethical. • Use ethical principles as decision guides for dealing with ethical dilemmas. • Deploy two approaches to promote ethical behavior in organizations - legal compliance programs and organizational integrity programs • Recognize the role of board leadership and governance in providing ethical oversight. Why is Ethics a Management Responsibility? • Has economic, not just moral, implications. – Ethical actions affect the firm’s performance • Unethical behavior requires cooperation of others and reflects firm’s values and norms. • Unethical behavior by individuals is usually prompted by managerial actions – pressure to achieve unrealistic goals, lack of support, improper incentives, poor controls/policies • U.S. Sentencing Commission Guidelines Causes of Unethical Behavior Emphasis on shortterm revenues Shareholders concerns take precedence over other constituencies Lack clear procedures for dealing with ethical problems Ethics considered from legal or public relations viewpoint No written code of ethics Danger Signs Desire for “quick fix” solutions Financial concerns take precedence over ethical considerations What is Ethics? • Moral principles/standards that determine what is right and wrong with respect to the decisions, actions, and behaviors of firms or individuals. • Some standards are codified in law while others are not. Ethical problems arise when actions that are considered “legal” may still harm others. • To determine if an action or decision is unethical, perform an ethical analysis – a tool to figure out the potential negative consequences of any action, decision, or behavior, and evaluate its compliance with a set of standards and norms. Ethical Dilemmas • Some decisions fall in the ill-defined area between codified law and free choice. • There is uncertainty about what is right or wrong – our biases may also affect our evaluation of which choice of action is right or wrong. • Ethical theory provides a system of rules or principles that guide us in making decisions about what is right or wrong, and good or bad in a particular situation. • In some cases, every choice of action has some potential negative impact – this is referred to as an ethical dilemma • Use ethical principles to guide your discussion of ethical dilemmas Ethical Theories • Teleological theories – Whether your behavior is right or wrong is determined by the consequences of your actions. Focus is on “ends” or “purpose”. • Utilitarianism – a morally correct action is one that does the greatest good for the greatest number of people • Altruism – an action is moral when it promotes the best interests of others, even if it runs contrary to your own self-interests • Deontological theories – Whether your behavior is right or wrong is determined by the inherent goodness of your action. Focus is on “duty”. • An action is moral if you have a moral duty to do so, if the action does not infringe on the rights of others, or if the action promotes the rights of others. • Telling the truth, being fair, respecting others, and keeping promises are all examples of actions that are considered to be inherently good, independent of their consequences. Ethical Analysis • Used to determine if an action is unethical • Used to identify ethical problems posed by: – a firm’s activities, policies, strategy, systems – an individual’s behavior, actions, decisions • Two steps to perform an ethical analysis 1. Do a Stakeholder Impact Analysis to identify the positive and negative consequences of an action 2. Evaluate if the action complies with 4 standards: Duties, Rights, Best Practice, and Commitments Stakeholder Impact Analysis • Analyze key aspects of the action – its intention, consequences, collateral effects • Who are the key stakeholders? - parties that are or will be affected by the action • What are the positive short-term and longterm consequences for each stakeholder? • What are the negative short-term and longterm consequences for each stakeholder? – Do negative impacts outweigh the positive ones? – Can harms be mitigated and benefits enhanced? Evaluate the Action against Standards • Does the action respect the rights of the affected parties? (as defined by law, codes, societal norms) – E.g. Right to privacy or self-preservation • Is the action consistent with the proponent’s duties? – E.g. Do not harm others, protect public interest • Does the action reflect best practices (is it desirable to act in this way even though it is not obligatory)? – E.g. Full disclosure – is not mandatory, but good to do • Is it compatible with firm’s values/commitments? – E.g. Putting employees or customers first Duties • Duties are obligations to other parties – Requirements to act (or not act) in certain ways – Not always explicit – ‘what we owe to each other’ • Some duties are enforced by law or written into codes of conduct – E.g. Respect property, refrain from fraud, avoid injury • Violation of duties may bring external blame, criticism and penalties (legal and/or financial) Rights • Rights are entitlements to certain behaviors from other people – Rights are the converse of duties • E.g. ‘Right to know’ corresponds with ‘duty to inform’ • May be enforced by laws and written into declarations of rights or codes of ethics • Failure to respect rights brings blame and violators may face legal or financial penalties Best Practices • Principles or standards of excellence that go beyond basic rights and duties – Behavior that is desirable but not obligatory • Distinction between behavior that is required (“must do”) and behavior that is good but not mandatory (“good-to-do”) is not always clear – One test is how the behavior would be received – Best practice behavior will get praise/admiration but its absence may not produce criticism/blame Commitments • Self-chosen commitments that may be rooted in personal values, organizational culture, or societal needs – affect behavior and actions – E.g. A firm’s commitment to protect environment, to put customers first, to develop employees – E.g. Personal commitment to ‘straight talk’ • Represent an important aspect of identity – Violation may not bring external criticism but can damage self-concept and impair functioning Ethical Principles To Guide Decision-Making • Utilitarian principle – Do the greatest good for the greatest number of people. • Individualism principle – Promote the best longterm interests of the individual. • Moral-rights/dignity principle – Do not violate the fundamental rights of people, especially those who cannot protect themselves. • Justice/fairness principle – Make decisions that are fair, equitable, and impartial. • Fiduciary principle – act in the best interests of the firm. Ethical Judgment Tests • To prevent self-serving biases in how an ethical issue is analyzed, or in how ethical principles are applied, perform 3 judgment tests before you commit to an action or decision: • Visibility test – “newspaper headline test” – “Would I do this if everyone knew I was doing it”? • Generality test – “Would I care if everyone acted this way?” • Legacy – “Is this how I want to be remembered?” • These tests may stop you from acting unethically To Promote Ethical Behavior – use two types of programs • Legal Compliance Programs – Build compliance systems to catch or prevent illegal and unethical behavior and to facilitate legal and ethical behavior. • Organizational Integrity Programs – Leaders role model ethical behavior and create a work environment and culture that promotes ethical conduct by the firm and its employees. Legal Compliance Programs • Prevent misconduct through surveillance, controls, and penalties. They include: – Compliance standards/procedures – Code of ethics – Oversight mechanisms – Training (to communicate standards) – Employee Hotlines (to report violations) – Audits/monitoring to track compliance – Preventive and disciplinary measures Integrity Programs • Promote beliefs in the legitimacy and moral correctness of law, emphasize obligations to society, and create conditions for ethical conduct. • Employees must value ethical behavior – Code of ethics that embody company values – Lead by example – ethical behavior by top managers – Ethical structures – ombudsman, ethics office, training programs to promote ethical values, reward systems – Embed ethical standards in firm’s policies, plans and budgets, employee evaluation and incentive systems, decision-making criteria Why Ethics Programs fail • Many firms rely solely on legal compliance programs – like codes, training, audits – this is not enough because it does not convince employees to value ethical behavior – the message is “do it if it boosts revenues, as long as you do not get caught” • In addition to legal compliance programs, firms must also implement organizational integrity programs and practices Board Leadership • What is governance? • Functions and roles of the board of directors • Why do boards fail? • How to build effective boards that can exercise effective and ethical leadership? Governance and the Role of Boards • Governance: systems/processes aimed at ensuring openness and accountability in the conduct of a firm’s business – to protect stakeholder interests. • Board are responsible for governance: – – – – – – Oversight of management decisions and firm’s finances Scrutiny of strategic plans and the firm’s performance Hold CEO accountable – evaluate/compensate T.M Oversee CEO (and Board) succession Review and ensure compliance with laws/regulations Oversight to ensure ethical behavior and decisions Why do boards fail? • Failure to balance short and long term focus – Too much focus on compliance – micromanage – Too little focus on strategic issues/LT performance • Failure to deal with the CEO and firm’s problems – Not enough knowledge of the business – No clue about firm’s talent pool – succession problems – Failure to create trust or a culture of candor • Failure to protect shareholder interests – Conflicts of interest, lack of accountability for firm’s results – Too willing to do the CEO’s bidding – Difficult for shareholders to replace board members Why do boards fail? (cont.) • Poor board composition and structure – Lack of skills and diversity among members - not enough outside or independent directors – Underutilization of members’ skills, no teamwork • Unable to exercise effective leadership – No separation between CEO and Chairman • Lack of independent/external oversight of CEO – Unclear Role – participatory or advisory? – Members are unable or unwilling to act How to build a board that can lead with integrity? • Select appropriate role – passive role or operating role? • Assign the right tasks – decide on engagement level – Balance between strategic and operational tasks • Cultivate the right membership and structure of the board – Board compensation should not create conflicts of interest • Manage the agenda – address strategic items first – Not just “show and tell” – also debate troublesome issues – Put succession issues and accountability high on the list • Get the right information needed to question/review actions – Not just from management – from customers, vendors, employees • Create a culture of trust and candor – foster dissent • Board evaluates own performance – have a mechanism to replace board members and board chairperson Managing for Organizational Integrity by Lynn Sharp Paine Harvard Business Review Reprint 94207 By supporting ethically sound behavior, managers can strengthen the relationships and reputations their companies depend on. Managing for Organizational Integrity by Lynn Sharp Paine Many managers think of ethics as a question of personal scruples, a confidential matter between individuals and their consciences. These executives are quick to describe any wrongdoing as an isolated incident, the work of a rogue employee. The thought that the company could bear any responsibility for an individual‟s misdeeds never enters their minds. Ethics, after all, has nothing to do with management. In fact, ethics has everything to do with manage- ment. Rarely do the character flaws of a lone actor fully explain corporate misconduct. More typically, unethical business practice involves the tacit, if not explicit, cooperation of others and reflects the val- ues, attitudes, beliefs, language, and behavioral pat- terns that define an organization‟s operating cul- ture. Ethics, then, is as m uch an organizational as a personal issue. Managers who fail to provide proper leadership and to institute systems that facilitate ethical conduct share responsibility with those who conceive, execute, and knowingly benefit from corporate misdeeds. Managers m ust acknowledge their role in shap- ing organizational ethics and seize this opportunity to create a climate that can strengthen the relation- ships and reputations on which their companies‟ success depends. Executives who ignore ethics run the risk of personal and corporate liability in to- day‟s increasingly tough legal environ ment. In addition, they deprive their organizations of the benefits available under new federal guidelines for sentencing organizations convicted of wrongdoing. These sentencing guidelines recognize for the first time the organizational and managerial roots of unlawful conduct and base fines partly on the extent to which companies have taken steps to prevent that misconduct. Prompted by the prospect of leniency, many companies are rushing to implement compliance-based ethics progra m s. Designed by corporate counsel, the goal of these programs is to prevent, detect, and punish legal violations. But organizational ethics means more than avoiding illegal practice; and pro- viding employees with a rule book will do little to address the problems underlying unlawful conduct. To foster a climate that encourages exemplary be- havior, corporations need a co m prehensive ap- proach that goes beyond the often punitive legal compliance stance. An integrity-based approach to ethics manage- ment combines a concern for the law with an em- phasis on managerial responsibility for ethical beLynn Sharp Paine is associate professor at the Harvard Business School, specializing in management ethics. Her current research focuses on leadership and organization- al integrity in a global environ ment. Copyright © 1994 by the President and Fellows of Harvard College. All rights reserved. HARVARD BUSINESS REVIEW March-April 1994 havior. Though integrity strategies may vary in de- sign and scope, all strive to define companies‟ guid- ing values, aspirations, and patterns of thought and conduct. When integrated into the day-to-day oper- ations of an organization, such strategies can help prevent damaging ethical lapses while tapping into powerful hu man impulses for moral thought and action. Then an ethical fra m ework beco m es no longer a burdensome constraint within which com- panies m ust operate, but the governing ethos of an organization. How Organizations Shape Individuals’ Behavior The once familiar picture of ethics as individualistic, unchanging, and impervious to organizational influences has not stood up to scrutiny in recent years. Sears Auto Centers‟ and Beech- N ut N utrition Corporation‟s experiences illustrate the role organizations play in shaping individuals‟ behavior – and how even sound moral fiber can fray when stretched too thin. In 1992, Sears, Roebuck & Company was inun- dated with complaints about its automotive service business. Consu mers and attorneys general in more than 40 states had accused the company of mislead- ing customers and selling them unnecessary parts and services, fro m brake jobs to front-end align- ments. It would be a mistake, however, to see this situation exclusively in terms of any one individu- al‟s moral failings. Nor did management set out to defraud Sears customers. Instead, a nu mber of orga- nizational factors contributed to the problematic sales practices. In the face of declining revenues, shrinking market share, and an increasingly competitive market for undercar services, Sears management attempted t o spur th e perfor m a n ce of i t s a ut o ce nt ers by introducing new goals and incentives for employees. The company increased minim u m work quotas and introduced productivity incentives for mechanics. The automotive service advisers were given product-specific sales quotas – sell so many springs, shock absorbers, align ments, or brake jobs per shift – and paid a commission based on sales. According to advisers, failure to meet quotas could lead to a transfer or a reduction in work hours. Some employees spoke of the “pressure, pressure, pressure” to bring in sales. Under this new set of organizational pressures and incentives, with few options for meeting their sales goals legitimately, some employees‟ judgment understandably suffered. Management‟s failure to At Sears Auto Centers, management’s failure to clarify the line betw een unnecessa ry service and legitimate preventive maintenance cost the company an estimated $60 million. DRAWINGS BY DAVID HORII 107 ORGANIZATIONAL INTEGRITY clarify the line between unnecessary service and legiti m ate preve nt ive m ai nt e n a n ce, co u pled w i th co n s u m er ign ora n ce, left e m ployees t o c h ar t th eir o wn courses through a vast gray area, subject to a wide range of interpretations. Without active m anagement support for ethical practice a n d m ec h a n is m s t o de t ec t a n d check questionable sales methods and poor work, it is not surprising that so m e e m ployees m ay have reacted to contextual forces by resorting to exaggeration, carelessness, or even m isrepresentation. Sh ort ly aft er th e allega t io n s against Sears became public, CEO Edward Brenn a n ac kn owledged m anage m ent‟s responsibility for p utt i ng i n place co m pe n sa t io n and goal-setting systems that “crea t ed a n e n viro n m e nt i n wh ic h m is t a k es did occ u r. ” Al th o ugh the co m pany denied any in te n t t o deceive co n s u m ers, se n ior executives eli m inated co mm issions for service advisers and discontinued sales quotas for specific parts. They also i nsti tuted a system of unannounced shopping audits and made plans to expand the internal monitoring of service. In settling the pending lawsuits, Sears offered co u po n s t o c u sto m ers who had bought certain auto services between 1990 and 1992. The total cost of the settlem e nt, i n cl u di ng po t e nt ial c u stomer refunds, was an estimated $60 million. Contextual forces can also influence the behavior of top manage m e nt , as a for m er C E O of Beech-N ut N utrition Corporation discovered. In the early 1980s, only two years after joining the compa n y, th e CEO fo un d evide n ce s ugges t i ng th a t th e apple ju ice concentrate, supplied by the company‟s vendors for use in BeechN ut‟s “ 100 % pure” apple juice, contained nothing more than sugar water and chemicals. The CEO could have destroyed the bogus in108 ventory and withdrawn the juice from grocers‟ shelves, but he was under extraordinary pressure to turn the ailing company around. Eliminating the inventory would have killed any hope of turning even the meager $700,000 profit promised to Beech-N ut‟s then par- ent, Nestlé. A nu mber of people in the corporation, it turned out, had doubted the purity of the juice for several years before the CEO arrived. But the 25 % price advantage offered by the supplier of the bogus co ncentrate allowed the operations head to m eet cost-control goals. Furthermore, the company lacked an effective quality control system, and a conclusive lab test for juice purity did not yet exist. When a m e m ber of the research depart ment voiced concerns about th e ju ice t o opera t i ng m a n agement, he was accused of not being a tea m player and of acting like “Chicken Little.” His judgment, his supervisor wrote in an annual performance review, was “colored by naïveté and impractical ideals.” No one else seemed to have considered the co m pany‟s obligations to its customers or to have thought about the potential harm of disclosure. No one considered the fact that the sale of adulterated or misbranded juice is a legal offense, putting the company and its top management at risk of criminal liability. An FDA investigation t aught Beech-N ut the hard way. In 1987, th e co m pa n y pleaded gu il t y t o selling adulterated and misbranded juice. Two years and two criminal trials later, the CEO pleaded guilty to ten counts of mislabeling. The total cost to the company – including fines, legal expenses, and lost sales – was an estimated $25 million. Such errors of judgment rarely reflect an organizational culture and management philosophy that sets out to harm or deceive. More HARVARD BUSINESS REVIEW March-April 1994 often, they reveal a culture that is insensitive or indifferent to ethical considerations or one that lacks effective organizational systems. By the same to- ken, exemplary conduct usually reflects an organi- zational culture and philosophy that is infused with a sense of responsibility. For example, Johnson & Johnson‟s handling of the Tylenol crisis is sometimes attributed to the si ngu lar perso n ali t y of th e n- CEO James Burke. However, the decision grams to detect and prevent violations of the law. The 1991 Federal Sentencing Guidelines offer a compelling rationale. Sanctions such as fines and probation for organizations convicted of wrongdo- ing can vary dramatically depending both on the de- gree of management cooperation in reporting and investigating corporate misdeeds and on whether or not the company has implemented a legal compli- Acknowledging the importance of organizational context in ethics does not imply forgiving individual wrongdoers. to do a nationwide recall of Tylenol capsules in order to avoid further loss of life from product tampering was in reality not one decision but thousands of decisions made by individuals at all levels of the organization. The “Tylenol decision,” then, is best understood not as an isolated incident, the achievement of a lone individual, but as the reflection of an organization‟s culture. Without a shared set of values and guiding principles deeply ingrained throughout the organi- zation, it is doubtful that Johnson & Johnson‟s re- sponse would have been as rapid, cohesive, and eth- ically sound. Many people resist acknowledging the influence of organizational factors on individual behavior – especially on misconduct – for fear of diluting peo- ple‟s sense of personal moral responsibility. But this fear is based on a false dichotomy between holding individual transgressors accountable and holding “the system ” accountable. Acknowledging the im- portance of organizational context need not imply exculpating individual wrongdoers. To understand all is not to forgive all. The Limits of a Legal Compliance Program The consequences of an ethical lapse can be seri- ous and far-reaching. Organizations can quickly be- come entangled in an all-consu ming web of legal proceedings. The risk of litigation and liability has increased in the past decade as law makers have leg- islated new civil and criminal offenses, stepped up penalties, and improved support for law enforce- ment. Equally – if not more – important is the dam- age an ethical lapse can do to an organization‟s reputation and relationships. Both Sears and Beech- N ut, for instance, s t ruggled to regain consu m er trust and market share long after legal proceedings had ended. As more managers have become alerted to the i m portance of organizational ethics, m any have asked their lawyers to develop corporate ethics pro- HARVARD BUSINESS REVIEW March-April 1994 ance program. (See the insert “Corporate Fines Un- der the Federal Sentencing Guidelines.”) Such programs tend to emphasize the prevention of unlawful conduct, primarily by increasing surveillance and control and by imposing penalties for wrongdoers. While plans vary, the basic framework is outlined in the sentencing guidelines. Managers must establish compliance standards and procedures; designate high-level personnel to oversee compliance; avoid delegating discretionary authority to those likely to act unlawfully; effectively comm unicate the co m pany‟s s t andards and procedures through training or publications; take reasonable steps to achieve compliance through audits, moni toring processes, and a system for employees to report criminal misconduct without fear of retribution; consistently enforce standards through appropriate disciplinary measures; respond appropriately when offenses are detected; and, finally, take reasonable steps to prevent the occurrence of similar offenses in the future. There is no question of the necessity of a sound, wellarticulated strategy for legal compliance in an organization. After all, employees can be frustrated and frightened by the complexity of today‟s legal environ ment. And even managers who claim to use the law as a guide to ethical behavior often lack more than a rudimentary understanding of com- plex legal issues. Managers would be mistaken, however, to regard legal compliance as an adequate means for address- ing the full range of ethical issues that arise every day. “If it‟s legal, it‟s ethical,” is a frequently heard slogan. But conduct that is lawful may be highly problematic from an ethical point of view. Consider the sale in some countries of hazardous products 109 Corporate Fines Under the Federal Sentencing Guidelines What size fine is a corporation likely to pay if concustomers. Under the sentencing guidelines, however, victed of a crime? It depends on a nu mber of factors, the results could have been dra m atically different. some of which are beyond a CEO‟s control, such as the Acme could have been fined anywhere from 5 % to existence of a prior record of similar misconduct. But 200 % the loss suffered by customers, depending on it also depends on more controllable factors. The most whether or not it had an effective program to prevent important of these are reporting and accepting responand detect violations of law and on whether or not it reported the crime, cooperated with authorities, and sibility for the crime, cooperating with authorities, and having an effective program in place to prevent accepted responsibility for the unlawful conduct. If a and detect unlawful behavior. high ranking official at Acme were found to have been involved, the maxim u m fine could have been as large The following example, based on a case studied by the as $54,800,000 or four t imes the loss to Acme cusUnited States Sentencing Co mm ission, shows how the tomers. The following chart shows a possible range of 1991 Federal Sentencing Guidelines have af- fected overall fines for each situation: fine levels and how managers‟ actions influence organizational fines. Acme Corporation was charged What Fine Can Acme Expect? a n d co n vic t ed of m ail fra u d. Th e co m pa n y sys t e m a t ically charged custo m ers who da mMinimum M a ximum aged rented automobiles more Program, reporting, than the actual cost of repairs. $2,740,000 $685,000 cooperation, responsibility Ac m e also billed so m e c u stomers for the cost of repairs to 10,960,000 5,480,000 Program only vehicles for which they were n o t respo n sible. Prior t o th e cri m i n al adju dica t io n , Ac m e No program, no reporting 27,400,000 13,700,000 paid $13.7 million in restitution no cooperation, no responsibility to the customers who had been overcharged. No program, no reporting no 54,800,000 27,400,000 D ecidi ng before th e e n ac t cooperation, no m ent of the sentencing guideresponsibility, involvement of high-level personnel lines, the judge in the criminal case i m posed a fi n e of $6. 85 million, Based on Case No.: 88-266, United States Sentencing Commission, roughly half the pecu- niary loss Supplementary Report on Sentencing Guidelines for Organizations. suffered by Ac m e‟s without appropriate warnings or the purchase of goods from suppliers who operate inhu mane sweat- shops in developing countries. Companies engaged in international business often discover that con- duct that infringes on recognized standards of hu- man rights and decency is legally permissible in some jurisdictions. Legal clearance does not certify the absence of ethical problems in the United States either, as a 1991 case at Salomon Brothers illustrates. Four top- level executives failed to take appropriate action when learning of unlawful activities on the govern- ment trading desk. Company lawyers found no law obligating the executives to disclose the impropri- eties. Nevertheless, the executives‟ delay in dis- closing and failure to reveal their prior knowledge 110 prompted a serious crisis of confidence among employees, creditors, shareholders, and custo m ers. The executives were forced to resign, having lost the m oral authority to lead. Their ethical lapse compounded the trading desk‟s legal offenses, and the company ended up suffering losses – including legal costs, increased funding costs, and lost business – estimated at nearly $1 billion. A compliance approach to ethics also overemphasizes the threat of detection and punish ment in order to channel behavior in lawful directions. The underlying model for this approach is deterrence theory, which envisions people as rational maxi- mizers of self-interest, responsive to the personal costs and benefits of their choices, yet indifferent to the moral legitimacy of those choices. But a recent HARVARD BUSINESS REVIEW March-April 1994 ORGANIZATIONAL INTEGRITY study reported in W hy People O bey the Law by Tom R. Tyler shows that obedience to the law is strongly influenced by a belief in its legitimacy and i ts m oral correctness. People generally feel that they have a strong obligation to obey the law. Education about the legal standards and a supportive environ ment may be all that‟s required to insure compliance. Discipline is, of course, a necessary part of any ethical system. Justified penalties for the infringem ent of legiti m a t e nor m s are fair and appropriate. Some people do need pect of organizational life, rather than an unwelcome constraint imposed by external authorities. An integrity strategy is characterized by a conception of ethics as a driving force of an enterprise. Ethical values shape the search for opportunities, the design of organizational systems, and the decision- m aking process used by individuals and groups. They provide a common frame of reference and serve as a unifying force across different functions, lines of business, and employee groups. Orga- Management may talk of mutual trust when unveiling a compliance plan, but employees often see a warning from on high. the threat of sanctions. However, an overemphasis on potential sanctions can be superfluous and even counter- prod u c t ive. E m ployees m ay rebel against programs that stress penal- ties, particularly if they are designed and imposed without employee in- volve m ent or if the s t andards are vague or unrealistic. Manage m ent may talk of m utual trust when unveiling a compli- ance plan, but employees often receive the message as a warning from on high. Indeed, the more skepti- cal among them may view compliance programs as nothing m ore than liability insurance for senior management. This is not an unreasonable conclu- sion, considering that compliance programs rarely address the root causes of misconduct. Even in the best cases, legal compliance is un- likely to unleash m uch moral imagination or com- mit ment. The law does not generally seek to in- spire hu man excellence or distinction. It is no guide for exe m plary behavior – or even good practice. Those managers who define ethics as legal compli- ance are implicitly endorsing a code of moral medi- ocrity for their organizations. As Richard Breeden, former chairman of the Securities and Exchange Commission, noted, “It is not an adequate ethical standard to aspire to get through the day without being indicted.” Integrity as a Governing Ethic A strategy based on integrity holds organizations to a m ore robust s tandard. While co m pliance is rooted in avoiding legal sanctions, organizational integrity is based on the concept of self-governance in accordance with a set of guiding principles. From the perspective of integrity, the task of ethics man- agement is to define and give life to an organiza- tion‟s guiding values, to create an environ ment that supports ethically sound behavior, and to instill a sense of shared accountability among employees. The need to obey the law is viewed as a positive asHARVARD BUSINESS REVIEW March-April 1994 nizational ethics helps define what a company is and what it stands for. Many integrity initiatives have structural fea- tures common to compliance-based initiatives: a code of conduct, training in relevant areas of law, mechanisms for reporting and investigating poten- tial misconduct, and audits and controls to insure that laws and company standards are being met. In addition, if suitably designed, an integrity-based initiative can establish a foundation for seeking the legal benefits that are available under the sentenc- ing guidelines should criminal wrongdoing occur. (See the insert “The Hallmarks of an Effective Integrity Strategy.”) But an integrity strategy is broader, deeper, and more demanding than a legal compliance initiative. Broader in that it seeks to enable responsible con- duct. Deeper in that it cuts to the ethos and operat- ing systems of the organization and its members, their guiding values and patterns of thought and ac- tion. And more demanding in that i t requires an active effort to define the responsibilities and aspi- rations that constitute an organization‟s ethical compass. Above all, organizational ethics is seen as the work of management. Corporate counsel may play a role in the design and implementation of in- tegrity strategies, but m anagers at all levels and across all functions are involved in the process. (See the chart, “Strategies for Ethics Management.”) During the past decade, a nu mber of companies have undertaken integrity initiatives. They vary ac- cording to the ethical values focused on and the im- ple m entation approaches used. So m e co m panies focus on the core values of integrity that reflect ba- 111 The Hallmarks of an Effective Integrity Strategy There is no one right integrity strategy. Factors such as management personality, company history, culture, lines of business, and industry regulations m ust be taken into account when shaping an appropriate set of values and designing an i m ple m entation progra m. Still, several features are common to efforts that have achieved some success: # The guiding values and commit ments make sense and are clearly comm unicated. They reflect impor- tant organizational obligations and widely shared as- pirations that appeal to the organization‟s members. Employees at all levels take them seriously, feel com- fortable discussing them, and have a concrete under- standing of their practical importance. This does not signal the absence of ambiguity and conflict but a will- ingness to seek solutions compatible with the frame- work of values. # Company leaders are personally committed, credible, and willing to take action on the values they espouse. They are not mere mouthpieces. They are willing to scrutinize their own decisions. Consistency on the part of leadership is key. Waffling on values will lead to employee cynicism and a rejection of the program. At the same time, managers m ust assu me responsibility for making tough calls when ethical obligations conflict. # The espoused values are integrated into the normal channels of management decision making and are re- flected in the organization’s critical activities: the de- sic social obligations, such as respect for the rights of others, honesty, fair dealing, and obedience to the law. Other companies emphasize aspirations – values that are ethically desirable but not necessarily m orally obligatory – such as good service to customers, a commit ment to diversity, and involvement in the comm unity. When it comes to implementation, some companies begin with behavior. Following Aristotle‟s view that one becomes courageous by acting as a courageous person, such companies develop codes of conduct specifying appropriate behavior, along with a system of incentives, audits, and controls. Other companies focus less on specific actions and m ore on developing attitudes, decision- m aking processes, and ways of thinking that reflect their values. The assu mption is that personal commitment and appropriate decision processes will lead to right action. Martin Marietta, NovaCare, and Wetherill Asso- ciates have implemented and lived with quite dif112 velopment of plans, the setting of goals, the search for opportunities, the allocation of resources, the gather- ing and comm unication of information, the measure- ment of performance, and the promotion and advance- ment of personnel. # The company’s systems and structures support and reinforce its values. Information systems, for example, are designed to provide timely and accurate inform a tion. Reporting relationships are s t ructured to build in checks and balances to pro m ote objective judgment. Performance appraisal is sensitive to means as well as ends. # Managers throughout the company have the deci- sion- m aking s k ills, k nowledge, and co m petencies needed to make ethically sound decisions on a day- to-day basis. Ethical thinking and awareness m ust be part of every managers‟ mental equipment. Ethics ed- ucation is usually part of the process. Success in creating a climate for responsible and ethically sound behavior requires continuing effort and a considerable invest ment of time and resources. A glossy code of conduct, a high-ranking ethics officer, a training program, an annual ethics audit – these trappings of an ethics program do not necessarily add up to a responsible, law-abiding organization whose espoused values match its actions. A formal ethics program can serve as a catalyst and a support system, but organizational integrity depends on the integration of the company‟s values into its driving systems. ferent integrity strategies. In each case, manage- ment has found that the initiative has made impor- tant and often unexpected contributions to compet- itiveness, work environ ment, and key relationships on which the company depends. Martin Marietta: Emphasizing Core Values Martin Marietta Corporation, the U.S. aerospace and defense contractor, opted for an integrity-based ethics program in 1985. At the time, the defense in- dustry was under attack for fraud and mismanage- ment, and Martin Marietta was under investigation for improper travel billings. Managers knew they needed a better form of self-governance but were skeptical that an ethics program could influence behavior. “Back then people asked, „Do you really need an ethics program to be ethical?‟” recalls cur- rent President Thomas Young. “Ethics was something personal. Either you had it, or you didn‟t.” HARVARD BUSINESS REVIEW March-April 1994 ORGANIZATIONAL INTEGRITY The corporate general counsel played a pivotal role in promoting the program, and legal compliance was a critical objective. But it was conceived of and implemented from the start as a companywide management initiative aimed at creating and maintaining a “do-it-right” climate. In its original conception, the program emphasized core values, such as honesty and fair play. Over time, it expanded to encompass quality and environ mental responsibility as well. Today the initiative consists of a code of conduct, an ethics training program, and procedures for re- porting and investigating ethical concerns within the company. It also includes a system for disclos- ing violations of federal procure m ent law to the govern ment. A corporate ethics office manages the program, and ethics representatives are stationed at m ajor facilities. An ethics s teering co mm i ttee, made up of Martin Marietta‟s president, senior ex- ecutives, and two rotating members selected from field operations, oversees the ethics office. The au- dit and ethics committee of the board of directors oversees the steering committee. The ethics office is responsible for responding to questions and concerns from the company‟s em- ployees. Its network of representatives serves as a sounding board, a source of guidance, and a channel for raising a range of issues, fro m allegations of Strategies for Ethics M anagement Characteristics of Compliance Strategy Characteristics of Integrity Strategy Ethos conformity with externally imposed standards Ethos self-governance according to chosen standards Objective prevent criminal misconduct Objective enable responsible conduct Leadership la w yer driven Leadership management driven with aid of la w yers, HR, others Methods education, reduced discretion, auditing and controls, penalties Methods education, leadership, accounta bility, organizational systems and decision processes, auditing and controls, penalties Behavioral autonomous beings guided by Assumptions material self-interest Behavioral social beings guided by material Assumptions self-interest, values, ideals, peers Implementation of Compliance Strategy Standards criminal and regulatory la w Staffing la w yers Activities develop compliance standards train and communicate handle reports of misconduct conduct investigations oversee compliance audits enforce standards Education Implementation of Integrity Strategy Standards company values and aspirations social obligations, including la w Staffing executives and managers with la w yers, others Activities lead development of company values and standards train and communicate integrate into company systems provide guidance and consultation assess values performance identify and resolve problems oversee compliance activities Education decision making and values compliance standards and system compliance standards and system HARVARD BUSINESS REVIEW March-April 1994 113 ORGANIZATIONAL INTEGRITY M artin M arietta ’s ethics training program teaches senior executives ho w to balance responsibilities. 114 wrongdoing to co m plaints about poor m anagement, unfair supervision, and company policies and practices. Martin Marietta‟s ethics network, which accepts anonymous complaints, logged over 9,000 calls in 1991, when the company had about 60,000 employees. In 1992, it investigated 684 cases. The ethics office also works closely with the hu man resources, legal, audit, comm unications, and security functions to respond to employee concerns. Shortly after establishing the program, the company began its first round of ethics training for the entire workforce, starting with the CEO and senior executives. Now in its third round, training for senior executives focuses on decision m aking, the challenges of balancing m ultiple responsibilities, and compliance with laws and regulations critical to the company. The incentive compensation plan for executives makes responsibility for promoting ethical conduct an explicit requirement for reward eligibility and requires that business and personal goals be achieved in accordance with the company‟s policy on ethics. Ethical conduct and support for the ethics program are also criteria in regular performance reviews. Today top-level managers say the ethics program has helped the co m pany avoid serious proble m s a n d beco m e m ore respo n sive t o i t s m ore th a n 90,000 e m ployees. Th e e th ics n e tw or k, wh ic h tracks the nu m ber and types of cases and co mplaints, has served as an early warning system for poor management, quality and safety defects, racial and gender discri m inatio n, environ m ental concerns, inaccurate and false records, and personnel grievances regarding salaries, promotions, and layoffs. By providing an alternative channel for raising such concerns, Martin Marietta is able to take corrective action more quickly and with a lot less pain. In many cases, potentially embarrassing problems have been identified and dealt with before becoming a management crisis, a lawsuit, or a criminal investigation. Among employees who brought complaints in 1993, 75 % were satisfied with the results. Company executives are also convinced that the program has helped reduce the incidence of mis- conduct. When allegations of misconduct do sur- face, the company says i t deals with them more openly. On several occasions, for instance, Martin Marietta has voluntarily disclosed and made restitution to the govern ment for misconduct involving potential violations of federal procurement laws. In addition, when an employee alleged that the company had retaliated against him for voicing safety concerns about his plant on CBS news, top management commissioned an investigation by an outside law firm. Although failing to support the allegaHARVARD BUSINESS REVIEW March-April 1994 tions, the investigation found that employees at the plant feared retaliation when raising health, safety, or environ mental complaints. The company redou- bled its efforts to identify and discipline those em- ployees taking retaliatory action and stressed the desirability of an open work environ m ent in i ts ethics training and company comm unications. Although the ethics program helps Martin Mari- etta avoid certain types of litigation, it has occa- sionally led to other kinds of legal action. In a few cases, employees dismissed for violating the code of ethics sued Martin Marietta, arguing that the com- pany had violated its own code by imposing unfair and excessive discipline. Still, the company believes that its t ime to take advantage of the expanding market for therapeutic services. However, in 1988, the viability of the company w...
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Why Didn’t We Know
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WHY DIDN’T WE KNOW
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Identify three actions related to the channel stuffing scheme that you deem to be unethical.
Use the ethical analysis techniques discussed in this course to explain why you consider
these actions to be unethical
First, the transfer and demotion of Mike Fields was unethical. I consider this unethical
because when performing an ethical analysis an action should comply with the four standards
which are; rights, duties, best practice and commitments. This action did not respect the right to
employment security of Mike Fields as defined by codes and law. The action was also not consisted
with the duties of Terry Samples as he harmed Mike and he also did not protect his interest.
Furthermore, the act did not show best practice because it was retaliation on the side of Terry. The
best practice would have been to take into account issues raised by mike about the channel stuffing
scheme. Nevertheless the act did not conform to Galvatrens commitments of putting employees
first. This action was also unethical because upon performing an ethical analysis based on the
impact on stakeholders it had negative consequences to Galvatrens as Mike filled a case in court
against the company and the employees of the company as well. (Hasson, 2007).
Second, manipulation of sales numbers was unethical. This was done to meet the quarterly
targets on sales as well as to trigger bonuses (Hasson, 2007). It was unethical as it did not comply
with the four standards which are duties, best practice, commitments and rights. This action did
not show best practice by the sales team as it was not desirable to act in such a manner. In addition,
it did not conform to the values of Galvatrens of putting cusomers first. Also it did not respect the
right of shareholders to disclosure of genuine information. Nevertheless, the act was not in
consistent with the duties of the sales team and management of not harming the shareholders and
protecting the interest of the public. Also...


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