By Roy C. Smith
I have just finished teaching a required MBA course on
business ethics, called “Professional Responsibility.” During the six-week
duration of the course, we had the lingering effects of the Volkswagen,
Valeant, and Panama Papers scandals, and a new one from Wells Fargo to discuss.
My approach to teaching this subject is to set aside most of
the philosophy and sociology of ethical conduct to focus on the pragmatic
aspects of setting and enforcing standards for such conduct in one’s own
business for the betterment of all. It’s about how managers such as they will
soon be should act in business.
We begin with observations of how varied and selectively
applied ethical standards are in today’s society, how competitive pressures
from the marketplace encourage continuous testing of their outer limits, and
how elected officials and legal systems operate (not always fairly or effectively)
to uphold the public’s interest. Today there are more checks and balances
affecting corporate actions than at any time in history. On the other hand, tolerance
of sloppy ethical conduct in other parts of society, including in the personal histories
of our presidential candidates, may be higher than ever.
Against this dual-standard backdrop, my students were
divided into groups to select an example of ethical failure in business, and to
report on it in depth. Key to their reports is their analysis of why the failure
occurred, and what might have been done to prevent it.
Their reports covered different industries: autos, big
pharma, banking, and private banking for the wealthy. What they had in common
was that the companies involved were large and publicly traded, and their
industries were very competitive, global, affected by sometimes contradictory public
polices and highly regulated. All of the companies were under considerable
pressure from their boards and managers to increase sales, lower costs and, in
general, do what was necessary to increase the stock price. The companies the
groups studied, they believed, were typical of others in these and other industries.
The groups reported on their incidents based on data
available to them from court filings and other public sources. The groups did
not discuss their findings with the other groups, yet, their analyses of why
the ethical failings occurred were surprisingly similar.
Several pointed to aggressive business models coldly engineered
to maximize profits, without much regard to the impact of their actions on
public perceptions beyond those of business success.
These business models were executed and reinforced by top
management, sometimes (but but not usually) to a point of obsession. Management
used compensation and promotion to reward those that went along, and to discipline
those who didn’t. In their enthusiasm to succeed under these arrangements,
subordinate and middle managers tended to amplify the need for results
throughout the organization.
Also our groups believed that internal control systems to detect
abuses were inadequate, underfunded or didn’t cover certain key areas of the
business. And there was little evidence of any internal training for middle managers
on detection and prevention of ethical misconduct before it could occur.
Most of the groups said they believed that dissenting
managers would have had little room to change things at Volkswagen, Valeant, Wells
Fargo or any of the other dozen or so banks that have recently settled misconduct
cases with the US Justice Department for amounts totaling more than $150
billion.
That is a discouraging conclusion, suggesting, among other
things, that teaching Professional Responsibility may be a waste of time – what
does it matter if you have an ethical sensibility if the big guys don’t want to
hear about it?
I understand why the groups concluded as they did, based on
the documents and press coverage that they reviewed. And, they may be right in
some or all of the cases they studied, but I don’t believe they are right as a
general matter. Boards and senior managers of most large corporations want their
junior and middle managers to be aware of ethical infractions that could bring serious
financial or reputational consequences, and to speak out when they encounter
them. If they don’t want to hear from them – as is always true in these
discussions - then the managers should
look for another job.
But without a doubt, many large corporations do little to
train or equip middle managers with the knowledge, resources or procedures for
reporting and defusing ethical misconduct. One of the arguments against big
banks that is brought up periodically is that they are “too big to manage.” Either
top management loses control of what goes on below, or what goes on is not
protected by strong internal controls and middle managers who are rewarded for
defensive play as well as offensive.
What the students appear to agree on is that if they had
their own businesses, employing, say, a hundred or more people, the task of
setting and enforcing ethical standards would be up to them, and they, as
owners of the business, would take the task seriously. Of course, this is
equally true if the company grows and becomes publicly traded – it still needs
its owners (now represented by the board of directors) to take the task seriously.
For many companies this task gets lost in the mix with their
other mission of meeting performance standards. Too many take their boilerplate statements
about ethical standards for granted; by now they should have learned from the
examples we studied and others that the consequences of losing track of ethical
standards can be ruinous. Being in denial about this can be very dangerous.
But, it is also fair to say that examples of ethical failure
have to be kept in perspective. Of the approximately 10,000 public companies
listed on major stock exchanges around the world, only a very small percentage
are involved in examples of ethical failure. And of these, only a very small
number are involved in criminal infractions though of course these get most of
the attention. The ethical performance
of large corporations is certainly far better than it was 40 years ago when price-fixing,
bribery, market rigging and illegal political contributions were not uncommon.
Then transparency was less, enforcement weaker and cynicism by top managers greater;
today these things are reversed but, like everything else, the price of good
behavior is constant vigilance – by middle managers especially.
