The word oxymoron is formed from two Greek words meaning “sharp” and “dull.” And if you take a look at oxymoronlist.com, right there between “business casual” and “butthead” is “business ethics.” In 2016, a Gallup poll reported that “the only people less ethical than business executives are telemarketers, lobbyists and members of Congress.” The idea that business can, or does, conduct itself ethically is not widely shared.
So why the bad rap?
Well, there’s the impression that business execs and their companies are all about the buck; that “greed is good,” and that ethics and principles, honesty and integrity, often take a back seat to the single-minded pursuit of the dollar. And that impression may not be far off the mark.
Alexander Wagner, a finance professor at the University of Zurich, maintains that one in seven large public corporations commits fraud every year. Certainly, highly publicized ethical meltdowns like Bernie Madoff and Richard Scrushy, Volkswagen and Wells Fargo, add fuel to this fire. By the way, all the companies that have experienced epic fails have espoused high-minded core values and equipped employees with extensive, detailed codes of conduct. “Communication, Respect, Integrity, and Excellence,” coupled with a 64-page manual that states unequivocally that “Moral as well as legal obligations will be fulfilled in a manner which will reflect pride on the Company’s name.”—that’s Enron. It appears that Adam Smith’s “invisible hand” of capitalism is up to no good.
But before we wholly condemn capitalism and the profit motive, what’s wrong with being focused on the bottom line? If you’ve worked hard for your money and you invest it carefully, trusting that your nest egg will grow, don’t you want someone dedicated and focused on improving that investment? Of course, transgressions like fraud, embezzlement, and insider trading cross the line, but we’ve got laws for that. Shouldn’t companies and execs be allowed to push on the laws a bit?
Think sports for a moment.
There are rules, but we expect the players and the coaches to push right up against the rules to eke out every bit of competitive advantage. Steroids are a no-no, but Adderall is OK . . . for now.
The law sets some very broad boundaries. You might not agree with a given law, but if you break it, you stand a good chance of being punished. So, is legal, ethical? It’s certainly not in the court of public opinion. Martin Shkreli, former CEO of Turning Pharmaceuticals, raised the price of the drug Daraprim from $13.50 a pill to $750. He reasoned that raising the price of the drug would provide more money for better treatments and would maximize profits and shareholder value.
It’s certainly legal for a company to raise the price of its products and what Shkreli did was no different than what other companies have done. However, Shkreli was vilified and ultimately ousted from his job. Apparently, his critics felt that he failed his social responsibility test and that failure was seen as an intolerable ethical breach.
On reflection, Shkreli commented, “I could have raised it higher and made more profits for our shareholders. Which is my primary duty.” Maybe between reasonable profit and unreasonable exploitation is what we would call “fair,” and maybe we all reacted because what Shkreli did wasn’t fair.
Fair. Ah, there’s a concept. Fairness, quite often, gets all muddled up in issues of equality. Is that $12 jump drive in your pocket one you picked up from work? How about that pen? No big deal, right? It’s not really theft. Doesn’t have any real impact on the bottom line. But in a multi-billion-dollar company where a C-suite exec makes a thousand times more than the $12-an-hour employee, is it fair if the CEO pockets something worth $12,000? 12 bucks or 12,000, we have established what you are. Now we’re just haggling about price.
Fair and its close sibling, ethical, may lie somewhere between reasonable profit and unreasonable exploitation, between a gracious favor and a vulgar bribe, or a courtesy benefit and a thoughtless theft. But discovering that elusive state often proves difficult.
Despite the infamous examples, not all companies and not all business executives are on the wrong side of ethics. Harvard Professor Joseph Badarocco puts it well: for most companies and execs it’s “not issues of right versus wrong, but conflicts of right versus right.” And figuring out a way to resolve those conflicts when pressured by the competitive nature of business.
Research indicates, and Larry Fink’s recent letter to CEOs bears witness, that companies that operate ethically, that are aware of their obligations, not just to shareholders, but to stakeholders, employees, the community, the environment are companies that perform well in the long run. In fact, a focus on the short run can be a recipe for ethical disaster. The pressure to hit the quota, to make the goal, can cause companies to cut corners on quality, shade accounting rules, churn or inflate accounts. These transgressions don’t come cheap. They often cost millions. On the other hand, there’s every indication that you can do well by doing good. Why is it so hard?
In 1943, Abraham Maslow proposed a theory of human motivation based on a hierarchy of need. At the bottom of the pyramid are our physiological needs, things like air and water. Above those are safety needs—no threat of physical violence—social needs—the need to belong to a group—and esteem needs —the need for respect. Maslow further characterized these needs as deficiency needs. When one deficiency is met, we become motivated to meet the next deficiency, the next need. At the top of the pyramid, Maslow talked about self-actualization, the desire (as opposed to need) to realize one’sfull potential.
Some management researchers have adapted this hierarchy to business. At the most basic level, what does a business need to operate? An employee, a product or service, some capital, a work space, etc. At the next level, safety, it’s steady employees, a stream of revenue, next a community of investors and partners, then brand recognition, etc. You get the idea.
With this hierarchy in mind, it’s understandable that a business struggling with deficiency needs might find it difficult to focus on anything other than doing those things that are necessary to staying in business. Doing business ethically, exhibiting social responsibility, may be great in the long run, but a business has to be in business for a long time to get to the long run. This is not to say that ethics must be secondary to profit, but rather to point out that any discussion of business ethics presupposes that there is
a business.
Looking at the individual, ego, ambition, desire, and greed can be significant spurs to performance. And management has systems—raises, promotions, bonuses, commissions—that put these impulses to profitable use. Again, this is not to say that incentives are bad or that they promote ruthless behavior, but rather that professional managers face institutional pressures to perform, and just as their athletic counterparts, the desire to excel in an environment of tough competition can place employees, and the companies for which they work, on an ethically slippery slope.
Few executives, few companies, consciously make the decision to be unethical, but often, companies inadvertently create environments that prompt lapses. Is it safe for employees to raise ethical questions without fear of reprisal? Is there too much pressure to reach sales, production, creative targets? Do the company and the managers create goals and policies that are logically consistent, that treat people fairly? Do executives follow the same rules they suggest for the rank and file? Seems clear and easy, but it’s surprising how often those elements
get missed.
So that’s what you don’t do. What do you do?
Borrowing from management consultant Patrick Lencioni, set and state your company’s core values. You can’t expect employees to follow the company’s ethical standards if those standards aren’t clearly articulated. This articulation will take some thinking as, ideally, these values are the bedrock on which the codes of conduct and ethical guidelines rest. Core values should never be compromised. Ultimately, these core values should be simple statements, but bear in mind that the very simplicity necessary will make them all the more difficult to craft. When you undertake this task, recognize that you may be shooting at a moving target. Laws change, social responsibilities evolve, markets expand across different cultures, and expectations ebb and flow. You may need a new or expanded set of values to augment the ones you have.
And know that the minute you set, change, or augment core values, you will be met with skepticism. Remember Enron’s “Communication, Respect, Integrity, and Excellence.” These grand values proved to be virtually meaningless. Why are the values you espouse different? Skepticism can be overcome, but it won’t be easy and it will incur some discomfort. You’ll actually have to live up to your company’s values and expect, demand actually, that your employees do the same. That consistency applies to the Board of Directors as well as the line worker. It’s not a periodic ethics flu shot. It’s daily reinforcement and practice, from the top down.
Most businesses have value statements, and those that do usually have codes of conduct, but often things go awry when it comes to implementation. Note, there’s a difference between legal compliance and ethical, responsible behavior. The former tells us what not to do, as opposed to the latter, which should point us toward what we should do.
Thus, a code of conduct, grounded in the company’s core values, should provide some practical guide to the resolution of ethical dilemmas. This code must contain clear language on the various common considerations: bribes, benefits received, expenses, entertainment costs, etc. And it should provide some guidance for those dilemmas that cannot be covered by policy.
Admittedly, this is where things get a little squishy. Executives and managers are called on to make decisions about what is ethically good and bad, to “do the right thing.” But, in the absence of clear, specific guidelines, what does that mean? And how do you set up clear, specific guidelines for every potential ethical situation? Impossible.
Jeffery Pfeffer, a professor at Stanford Graduate School of Business, has some suggestions. First, sign your work, and ask employees to sign theirs. No plausible deniability. You may not have to sign, literally, but be prepared to state, “This is mine. I did it. I’m responsible.” Second, expect excellence of yourself and your employees. Third, measure ethical performance. It’s not unusual for a company to have performance metrics for its employees. It is a bit unusual for companies to measure ethics and values performance. With clear values and a defined sense of social responsibility, you can create the metrics to gauge ethical performance. Fourth, openly share what you find about ethical performance and finally, make ethical performance part of employee performance. In other words, hire and fire for character.
These ideas point to an idea that has been gaining ground—that businesses should be measured by more than one bottom line. Harvard Business Review recently named Pablo Isla as 2017’s top CEO. Isla runs Inditex, a retailer which has become Spain’s most valuable company. In a lot of ways, Isla’s choice is unexpected. “Measured on financial returns alone, Isla comes in 18th in our ranking,” says the commentary. “His company’s performance on environmental, social, and governance factors, which count for 20 percent of a leader’s score, propelled him to the top spot.” Wow. And we have another business acronym, CSR: Corporate Social Responsibility. As consumers and employees have exhibited a desire to favor companies with a strong CSR, business success is measured by more than just the financial bottom line, but by environmental, philanthropic, and ethical performance as well.
You could look at these additional metrics as another set of complications for the executive, more rings to shoot through before the target even comes into view. Or you could look at this triple bottom line as a sensible, core business value that promotes a considered, responsible, and above all, ethical relationship to the world in which a business operates.
