Leadership and the Ethical
Environment
Breakout Session A03
Charles D. Chadwick, Fellow
Retired Vice President,
Contracts & Business Conduct,
BAE Systems
July 28, 2014
11:30 AM to 12:45 PM
What we will discuss
• The current organizational ethics environment:
the hard data
• Assumptions and definitions on organizational
ethics
• The “Big Picture”: Why people act unethically
and the warning signs
• Rules and values: Some background to ethics
and culture
• The role of leadership
• Some closing thoughts
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So how does the environment
look?
2011: “Based on what we see now, we expect
workplace ethics to decline. The extent to which
that will happen is largely dependent on how
business leaders respond ….”
2013: “Companies’ investments in ethics and
compliance are paying off, but there remains
room for improvement. The data show just
enough negative results to suggest that
progress is not necessarily irreversible –
especially if a revitalized economy arouses
workers’ willingness to engage in riskier
behavior.
Ethics Resource Center, National Business Ethics Survey
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Ethics Resource Center, 2013 National Business Ethics Survey
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Ethics Resource Center, 2013 National Business Ethics Survey
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Ethics Resource Center, 2013 National Business Ethics Survey
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Ethics Resource Center, 2013 National Business Ethics Survey
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Senior and middle
managers
were actually the
groups most likely to
point a finger at
senior leaders (41
percent and 28
percent,
respectively).
Ethics Resource Center, 2013 National Business Ethics Survey
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It’s far from a U.S. phenomenon
• The World Bank estimates the 'Global
Corruption Industry‘ annual worldwide bribery
at about U.S. $1 trillion dollars.
• bribes paid for the corporate operations (licenses,
regulations, etc.)
• bribes paid to get favorable decisions on public
procurement
• bribes paid by household users of public services
• does not include embezzlement of public funds or theft
(or misuse) of public assets
10
70% score < 50 of a 100; average is 43
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Impact Of Concern About Breaking
Regulations
Source: Dow Jones 2014 Anti-Corruption Survey
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And it’s not just the commercial sector
Consider
• The current Glenn Defense case in the Navy or the
Druyun case in the AF of a few years ago
• The Diederick Stapel case at Tilburg University in
the Netherlands or the Penn State case in the U.S.
• The child abuse scandals in the Catholic Church
• The Educap case or the William Aramony/United
Way case among nonprofits
The question: Why do people act unethically?
And for that matter, what is ethics?
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Some assumptions…
• “Organizational ethics” is a particular domain
within the larger set of “ethics”
• “Character ethics” effects organizational ethics but is
distinct
• Ethics and morality are not synonymous; an
action can be moral but have no ethical content
• A legal act is not necessarily an ethical act
However, can an act be ethical without a moral
context?
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…and a definition
“Organizational Ethics” is the application of a value system to the
decision making process when the outcome will be of significance
to the principles and structure of a social group.
Value system: may vary by geography, profession, religious beliefs
Decision: ethics talks about “what will I do”; not theoretical; action based;
pragmatic
Significance: some decisions are value neutral (vis a vis principles) or do
not affect the social group structure per se (e.g., vendor selection
decision is important, but probably not an ethical issue)
Social group: groups have to have rules to function (e.g., lawyers,
business community, doctors, cities, etc.)
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So why do people act unethically?
One thing is obvious after the fact…
“What we have seen and continue to witness is ethically ‘dumb’
behavior. There was no discussion of gray areas as these stories
unfolded. When WorldCom was forced to reveal that its officers had
capitalized $11 billion in ordinary expenses, no one slapped his
forehead and said, ‘Gosh, I never would have seen that ethical issue
coming!’
“When Enron collapsed because it had created more than three
thousand off-the-book entities in order to make its debt burden look
better and its financial picture seem brighter, no one looked at the
Caribbean infrastructure of deceit and muttered, ‘Wow – that was a
really nuanced ethical issue.’”
Marianne M. Jennings
The Seven Signs of Ethical Collapse (2006)
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To put it simply…
• What was done was clearly wrong
• The people doing it knew it was wrong
• They did it anyway
Our question is what caused them to do what
they knew was wrong?
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Possible explanations…
• There’s always money: “A central concern about
white-collar and corporate crime is that the riskreward ratio is out of balance - that is, potential
rewards greatly outweigh the risks. Given the low
probability of apprehension and the likelihood of
no, or light punishment, white-collar crime is seen
as a ‘rational’ action in many cases.”
(University of California criminologist Henry Pontell)
• And the track record shows some predispositions:
• A sense of invulnerability
• Arrogance: I’m too smart to get caught
• Entitlement
•
But there are warning signs
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The Seven Signs of Ethical Collapse
Marianne M. Jennings’ The Seven Signs of Ethical Collapse
• Pressure to maintain numbers
•
Tension between ethics and the bottom line
•
Obsession with quantitative goals
•
17% of public company CFOs felt pressure from the
CEO to misrepresent financial results (USA Today
survey, 2002)
• Fear and Silence
• “Moral meltdown [in an organization] cannot occur with
objection in the air”
• But too often “the first whale to the surface gets
harpooned”
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The Seven Signs of Ethical Collapse
• Young ‘Uns and a Bigger-than-Life CEO
• Sycophantic management team
• They are hooked on the rewards and perks that come with
riding the coattails of an iconic CEO
• A Weak Board
• Choose your poison: lack of experience, family ties,
conflicts of interest, negligence, board decision structure,
deferral to a charismatic CEO, etc.
• The one constant: failure to provide proper oversight
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The Seven Signs of Ethical Collapse
• Conflicts of Interest
• Nepotism and favoritism in hiring, promotion and
contracting
• Purpose of business becomes mutual benefit/self-interest
• Innovation like no other
• Rules are for everyone else who need them, not for
innovators pushing boundaries
• The rules are obstacles to “reinventing business”
• Goodness in some areas atones for evil in others
• Rationalizing questionable business conduct by
philanthropic activity
• Non-profits are particularly vulnerable
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An ethical collapse does not happen
in a vacuum. Consider this example…
•
•
In 2007 ITT Corp. agreed to plead guilty to illegally exporting
night-vision technology to China and other countries and pay a
$100 million fine, one of the largest penalties in a U.S. criminal
prosecution.
ITT was the first major U.S. defense contractor convicted of a
criminal violation of the Arms Export Control Act. The penalty
was at the time the largest fine of a U.S. defense contractor
involving an export violation.
"There was a culture at this company where they viewed
export laws as an obstacle to making money and they
actively and willfully worked to circumvent the U.S. laws
to increase profits."
DOJ spokesman Dean Boyd
The word to focus on is “culture”
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A brief digression: rules & values
• Everyone agrees that rules are important/necessary
• Many ethics programs are oriented around compliance
– rules/regulations/laws/policies. They are really (and
understandably) compliance programs
• And even the most values-driven leaders accept the
“Thomas Moore argument”:
“And when the last law was down, and the devil turned round
on you – where would you hide…the laws all being flat?”
(Robert Bolt, A Man for All Seasons)
• Rules establish common understanding of accepted
behavior within a social group (country, state, city,
company, agency)
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The Rules/Values Dichotomy
• The question is: are rules necessary but not sufficient?
• The rule based system is predicated on being able to
anticipate each situation and match it to a pre-existing
paradigm (rule). Rules based systems are at best reactive
– they are aimed at preventing a recurrence of a problem
• Viewed this way, the rules based system must ultimately
break down – it is not possible to anticipate every situation
– or to instruct individuals on an almost infinite set of
variables
• And what about the person who rationalizes their way
around the rules?
• This is where value based systems enter
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The Rules/Values Dichotomy
• Values based systems are intrinsically pro-active –
they attempt to equip employees to identify and
deal with ethical situations
• For better or worse, we tend to label these
systems
• Rules based systems are “compliance”
• Values or principles based systems are “ethics”
• In reality organizations need both
• Principles-based behavior
• Rule-based behavior
• The integration of rules and values begins with
culture
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Ethics Resource Center, 2013 National Business Ethics Survey
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Ethics Resource Center, 2013 National Business Ethics Survey
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The problems with culture
• What is “culture”?
• Is “corporate culture” a reality?
• Can there be a common culture across a large,
geographically dispersed organization?
• What is a “good” culture?
• U.S. Sentencing Guidelines?
• FAR requirements?
• These largely describe programs and compliance
efforts
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Some definitions…
Clifford Geertz described culture as
“…a system of inherited conceptions expressed in
symbolic forms by means of which people
communicate, perpetuate, and develop their
knowledge about and attitudes toward life"
The Interpretation of Cultures (1973)
“Culture is a company’s unique character, its
lifeblood… Much as some people say that character is
one’s destiny, culture can be thought of as the destiny
of an organization.”
Dov Seidman
HOW: Why How We Do Anything
Means Everything (2007/2011)
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Conclusions on culture
• Ethics and culture are closely aligned in an
organization
• Culture answers the question, “Who are you?” and
that is a question about values and, therefore,
ethics
• Does culture create the ethical environment or do
ethics create the culture?
• The real issue is that they are closely related
• Culture tells us “how things really get done around
here”
Culture Trumps Compliance
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Culture & Leadership in organizations:
Consider the organization chart…
• The organization chart does not define
leadership
•
•
Leadership is granted not imposed
Leadership is earned not taken
• The organization chart imposes obstacles
•
•
to initiative
to accountability
• That doesn’t mean that the organization chart
does not serve a useful and valid purpose
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Use & abuse of the organization chart
• The organization chart is fundamentally a
command and control device
• Necessary in any organization where
span of control becomes an issue
• Command functions
• If there is no consensus, someone needs to decide
• Since all decisions cannot go to the top, the right
level needs to decide
• Policies and procedures assume an organization
chart for command decisions
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Use & abuse of the organization chart
• Control functions
• Information needs to move in an organization;
it’s a fundamental element of appropriate span
of control
• We need to move information to the right level
• We need to distill information at the right level
• Policies and procedures assume an
organization chart for information movement
• But information is not communication
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Use & abuse of the organization chart
•
It may be “Command & Control” but an organization
chart is not a communication device
•
•
•
•
Genuine communication almost always exists primarily
outside of the organization chart’s “swim lanes”
•
•
•
Transferring information is not communication
Communication is a transmitter/receiver phenomenon
It requires understanding and it has a non-optional feedback
loop
It resists “information hoarding”
It can happen through the organization chart levels, but that is
coincidental
Organizational culture starts (and ends) outside the
organization chart. You can’t command and control
culture
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How do leaders nurture an ethical
culture? Words matter
• What you say matters
•
•
•
Clear statements to the employees (and to the
public) are necessary
Communicate ethics as a priority in staff
meetings and all hands meetings
Keep employees informed
• How you say it matters
•
•
•
•
Above all: transparency and candor
Don’t pretend you don’t know
Show up in a crisis
Listen honestly
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What else can you do?
• Remember: most employees (and most regulators
and NGOs) are more convinced by what backs up
the words
• Your biggest obstacle inside the organization will
always be skepticism: “They don’t really mean what
they say”
• So… Ensure that business decisions are only taken
following an explicit consideration of ethical and
reputational risks
• Make ethics (and, yes, compliance) part of the
strategic plan – and not just an “add-on”
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Some fundamental actions
• Senior leadership must
•
•
•
Be held to the same standards as all employees
Take steps to positively model the behaviors
desired
Keep commitments
• Performance appraisals of all employees should
explicitly address the above
• Bonus and other incentive compensation should
take into consideration ethics efforts and
performance
• Above all, create trust!
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What effect does leadership have?
Ethics Resource Center, 2013 National Business Ethics Survey
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A closing thought
“I believe that the very heart of building an ethical
culture in a post-fraud environment is restoring
trust in leadership. Without trust, leaders can’t
lead, they can only force. In this respect, ethics is
the most fundamental element of an effective
organization, whether you’ve just been through a
fraud or not. The stronger the trust within a
company, the better it can operate on all fronts.
The creation, nurturing and reinforcement of an
ethical, trustful environment are the leader’s most
important responsibilities.”
Lawrence S. Benjamin
Former CEO, U.S. Foodservice
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