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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.
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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
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(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
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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
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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
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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
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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
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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
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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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