BusinessEthics
When a group of aggressive managers at Enron wanted to use dubious transactions for
creating tax credits, they needed the approval of an auditor. They did not have to look far.
Enron had outsourced its "internal auditing to Arthur Andersen and 150 Andersen
employees worked in Enron's Houston headquarters. A meeting was scheduled.
The managers wanted an opinion letter stating that the tax credits were legitimate. When
the Andersen auditor entered the conference room one of them rocked the back of a chair
under the doorknob and said, "Nobody leaves until I get that opinion letter." 1 For the next
half hour they coaxed, implored, and intimidated the auditor, who, visibly upset, gave in,
agreeing to write it. Afterward, no superior at Andersen would countermand the opinion.
This scene in June 2000 foreshadowed Arthur Andersen's collapse two years later when a
federal jury would convict it of obstructing justice. How did a leading accounting firm,
once a paragon of sound practice, fall to such faint integrity?
The story begins with founder Arthur Andersen. At the age of 16 he was orphaned
when his parents, Norwegian immigrants, died. Working in a mail room he finished school
and eventually became an accounting professor at Northwestern University. In 1913, when
he was 28, he opened an accounting firm in Chicago with a partner. From the beginning, he
insisted on principled work. Two stories of these early days entered company lore. In its
first year, when the firm was struggling to survive, he refused to allow a railroad to defer
major charges instead of registering them as current operating expenses. The president of
the railroad released his wrath on Andersen, but Andersen stood firm. Within a year the
railroad went bankrupt. Then, in 1915, a shipping company wanted the date on its financial
results moved back so they would not reflect the loss of a vessel. Again Andersen refused and
the shipper took its business away.
Andersen is described as "a stern, demanding man who set himself high standards for hard
work and long hours."2 He favored a slogan that his mother taught him "think straight,
talk straight"and made it the firm's credo, putting it on memos and stationery. His
commitment to integrity came to be called the "Andersen Way." As new offices opened,
the Andersen Way stood for the idea that the same principles ofindependence, sense of
duty, and absolute integrity should characterize every branch office. It defined a strong,
unified corporate culture. New recruits were indoctrinated in its values at a campus like
training center. After Andersen died in 1947, artifacts of his vision were enshrined in
lobby displays at offices around the world.
For years after his death, Andersen's firm maintained high standards. Yet the world was
changing. In 1950 an employee planted one seed of change by building a primitive
computer and experimenting with its business applications. When Andersen consultants
began to help General Electric manage a computerized payroll, the company found a new
source of revenue. Soon it set up a division offering a range of consulting services. It was
this division that would challenge the Andersen Way.
Over time, the consulting division grew much faster than the basic accounting
business. At first consultants had to have two years of accounting experience, but the
requirement was dropped in the 1960s. By themid-1970s consultants were bringing in
more revenue than accountants and conflict arose between the two groups. Consultants
resented reporting to auditors and disliked a compensation system that subsidized the
accounting partners. Trying to resolve these growing tensions, the firm adopted a new
structure in 1989 that split the consulting and auditing practices into separate businesses
under a parent company called Andersen Worldwide.
Following the split, the accounting business started its own consulting operation in
competition with the consulting business. This outraged the consultants and in 2000, after
a long battle, they broke away completely to become an independent firm named
Accenture. One effect of the protracted struggle was strain on the Andersen culture that
caused it to change from a culture of unity to one of competitiveness, jealousy, and
bitterness.
The consultants' breakaway left Arthur Andersen in an unattractive position. Its main
audit and tax businesses faced heavy competition and showed little prospect for growth. Its
still-small consulting business, however, could rapidly grow. One problem was that the
Securities and Exchange Commission (SEC) viewed the growth of consulting in auditing
firms with alarm, believing it would lead to conflicts of interest in which auditors took it
easy on corporate clients who bought consulting services that were more lucrative than
basic auditing.
Despite the SEC's preaching, Andersen set itself firmly on rapid expansion in consulting.
In the old Arthur Andersen, auditors never sold services. But after the 1989 split between
accounting and consulting, auditors were evaluated on the amount of additional services
they sold to clients. Andersen began to move from an auditing culture to a sales culture.
According to one former employee, "Somewhere along the way, Arthur Andersen's
messagethat you could make good money using good principlesgot lost."3 To cut
costs, partners were forced to retire at age 56. This removed a layer of leadership
experienced in the Andersen Way. As time passed, auditors faced growing revenue pressure
and they became reluctant to alienate clients.
The result was a series of disgraceful audit performances that would have astounded the
firm's founder. In 1993 Waste Management restated $1.7 billion in earnings. Although
Andersen auditors had spotted the bad accounting, they signed off on it when the
company's management refused to make changes. This cowardly act was motivated by fear
of losing Waste Management's fees. Andersen settled an SEC| enforcement action against
it for $7 million while denying any guilt.
Similar incidents followed. In 1998 falsified earnings of Boston Chicken and McKesson-
HBOC had to be restated. In 2001 Sunbeam filed for bankruptcy after Andersen auditors failed
to prevent earnings fraud. The collapse of Enron later that year sealed Andersen's fate.
Although partners in the firm had held meetings about Enron's bizarre and suspicious
balance sheet, they lacked the courage to confront their largest client. When Enron's earnings
vaporized, the SEC began an investigation. The Andersen partner in Houston who ran the
Enron account shredded documents, leading to an obstruction of justice indictment. The
partner pled guilty, but because of Andersen's past behavior the government put the firm
itself on trial and a jury found it guilty of obstruction of justice.
In late 2002 a federal judge sentenced Andersen to a $500,000 criminal fine and
five years' probation.4 But the firm was doomed. Two more of its clients, WorldCom and
Qwest Communications, lit up in bankruptcy fireworks after earnings had to be restated.
Andersen was a defendant in 90 civil lawsuits, most by stockholders of failed companies.
One by one, its clients left. What company wanted an auditor whose name was
synonymous with scandal? Since its conviction, Andersen has shrunk from an elite $9.3
billion firm with 85,000 employees to about 200 attorneys and staff working on one
floor of its Chicago headquarters.5
Ethical behavior is never automatic. Managers must instill it and intervene to ensure
its continuation. Arthur Andersen founded a culture of rectitude that warped because
several generations of management allowed the Andersen Way to be undermined. They
reduced training, eliminated experienced leaders, and introduced compensation and
evaluation criteria that put pressure on the independence of auditors. These are classic
danger signs. If they had been recognized, the outcome for Andersen, its clients, and their
stakeholders might have been different.
.
Major Sources of Business Ethics
Bible comes from parables. The parable of the prodigal son (Luke 15:11-
32) tells the story of an unconditionally merciful fatheran image applicable to
ethical conflicts in corporate superior-subordinate relationships. The story of
the rich man and Lazarus (Luke 16:19-31) teaches concern for the poor and
challenges Christian managers to consider the less privileged, a fitting
admonition in a world where billions of people survive on less than $1 a day.15
16
Quoted in Tanri Abeng,"Business Ethics in Islamic Context: Perspectives of a Muslim Business Leader," Business Ethics Quarterly, July 1997, p.
52.
17
Moses L. Pava, Business Ethics: A Jewish Perspective (New York: Yeshiva University Press, 1997), pp. 72-73.
leg irons, and waist chains. It sells only to legitimate law enforcement
agencies and refuses orders from some nations because it does not condone
torture.13 Although Peerless knows that its restraints could wind up in torture
chambers, it lacks power to oversee the lifetime ownership and use of each
device it makes.
Aristotle cautioned, however, that "[t]here are some things such that a man
cannot be compelled to do themthat he must sooner die than do, though he
suffer the most dreadful fate."14 Unethical behavior involving coercion is
voluntary if a manager can simply refuse to cdmply with the external force.
Those who argue that market forces or an order from the boss are irresistible
forces overriding individual choice give too little credit to the strength of
human will.
MAJOR SOURCES OF ETHICAL VALUES IN BUSINESS
Religion
Christian managers often seek guidance in the Bible. Like the source books
and writings of other main religions, the Bible was written in a premodern,
agricultural society, and many of its ethical teachings require interpretation before
they can be applied to problems in the modern workplace. Much of the ethical
teaching in the originally written c. 334-323 B.C.
13
Robert Weissman, "The Torture Trade," Multinational Monitor, April 2001, p. 7.
14
N/chomachean Ethics, trans. J. A. K. Thomson (New York: Penguin, 1953), p. 112;
The Stoic school of ethics, spanning four centuries from the death of Alexander to
the rise of Christianity in Rome, furthered the trend toward character development
in Greek ethics. Epictetus (A.D. 50-100), for instance, taught that virtue was found
solely within and should be valued for its own sake, arguing that this inner virtue
was a higher reward than external riches or worldly success.
In business, the ethical legacy of the Greeks and Romans lives on in the convic-
tion that virtues such as truth telling, charity, obeying the law, justice, courage,
friendship, and the just use of power are important qualities. Today when a man-
ager trades integrity for profit, we condemn this on the basis of the teachings of the
ancient Mediterranean world.
Ethical thinking after the rise of Christianity was dominated by the great
Catholic theologians St. Augustine (354-430) and St. Thomas Aquinas (1225-1274).
Both believed that humanity should follow God's will; correct behavior in business
and in all worldly activity was necessary to achieve salvation and life after death.
Christianity was the source of many ethical teachings, including specific rules
such as the Ten Commandments.
Christian theology created a lasting reservoir of ethical doctrine, but its com-
mand of ethical thought weakened during the historical period of intellectual and
industrial expansion in Europe called the Enlightenment. Secular philosophers
such as Baruch Spinoza (1632-1677) tried to demonstrate ethical principles with
logical analysis rather than ordain them by reference to God's will. So also,
Immanuel Kant (1724-1804) tried to find universal and objective ethical rules in
logic. Kant and Spinoza, and others who followed, created a great estrangement
with moral theology by believing that humanity could discover the nature of good
behavior without reference to God. To this day, there is a deep divide between
Christian managers who look to the Bible for divine guidance and other managers
who look to worldly writing for ethical wisdom.
Other milestones of secular thinking followed. Jeremy Bentham (1748-1832) de-
veloped the idea of utilitarianism as a guide to ethics. Bentham observed that an
ethical action was the one among all alternatives that brought pleasure to the
largest number of persons and pain to the fewest. The worldly impact of this ethical
philosophy is almost impossible to overestimate, because it validated two dominant
ideologies, democracy and industrialism, allowing them first to arise and then to
flourish. The legitimacy of majority rule in democratic governments rests in large
part on Bentham's theory of utility as later refined by John Stuart Mill (1806-
1873). Utilitarianism also sanctified industrial development by legitimizing the
notion that economic growth benefits the majority; thus the pain and dislocation it
brings to a few may be ethically permitted.
John Locke (1632-1704) developed and refined doctrines of human rights and
left an ethical legacy supporting belief in the inalienable rights of human beings,
including the right to pursue life, liberty, and happiness, and the right to freedom
from tyranny. Our leaders, including business leaders, continue to be restrained by
these beliefs.
Cultural Experience
Every culture transmits between generations a set of traditional values, rules, and
standards that define acceptable behavior. In this way, individuals channel their
conduct in socially approved directions. Civilization itself is a cumulative cultural
experience consisting of three stages; in each, economic and social arrangements
have dictated a distinct moral code.25
For millions of generations in the hunting and gathering stage of human develop-
ment, ethics were adapted to conditions in which our ancestors had to be ready to
fight, face brutal foes, and suffer hostile forces of nature. Under such circumstances,
a premium was placed on pugnacity, appetite, greed, and sexual readiness, since it
was often the strongest who survived. Trade ethics in early civilizations were prob-
ably deceitful and dishonest by our standards, and economic transactions were
frequently conducted by brute force and violence.
Civilization passed into an agricultural stage approximately 10,000 years ago, be-
ginning a time when industriousness was more important than ferocity, thrift paid
greater dividends than violence, monogamy became the prevailing sexual custom
because of the relatively equal numbers of the sexes, and peace came to be valued
over wars, which destroyed crops and animals. These new values were codified
24
His exact words were "the general welfare is no ideal, no goal, no remotely intelligible
concept, but only an emetic." In Beyond Good and Evil (New York: Vintage Books, 1966), p.
157; originally published in 1886.
25
Will Durant and Ariel Durant, The Lessons of History (New York: Simon & Schuster, 1968),
pp. 37-42.
into ethical systems by philosophers and founders of religions. So the great ethical
philosophies and theologies that guide managers today are largely products of the
agricultural revolution.
Two centuries ago, society entered an industrial stage of cultural experience, and
ethical systems began to reflect an evolving institutional, intellectual, and ecological
environment. Powerful forces such as global corporations, population growth, the
capitalist ideology, constitutional democracy, new technology, and ecological
damage have appeared. Industrialism has not yet created a distinct ethic, but rising
postmodern values put stress on ethical values that evolved in ancient, agriculture-
based worlds. Postmodern values alter people's judgments about good and evil.
For example, the copious outpouring of material goods from factories encourages
materialism and consumption at the expense of older, scarcity-based virtues such as
moderation and thrift. The old truism that nature exists for human exploitation is
less compelling when reexamined in a cloud of industrial pollution.
The school of ethical universalism holds that in terms of biological and psycho-
logical needs, human nature is everywhere the same. Ethical rules are transcul-tural
because behavior that fulfills basic human needs should be the same everywhere
for example, basic rules of justice must be followed. Basic justice might be
achieved, however, by emphasizing group ethics or by emphasizing individual
ethics, leaving room for cultural variation.
The school of ethical relativism holds that although human biology is everywhere
similar, cultural experience creates widely diverging values, including ethical values.
Ethical values are subjective. There is no objective way to prove them right or wrong
as with scientific facts. A society cannot know that its ethics are superior, so it is
wrong for one nation to impose standards on another.
What guidelines exist for companies that want flexibility in their conduct codes?
Some scholars argue that at a high level of abstraction, the ethical ideals of all
cultures converge to basic sameness. Thomas Donaldson and Thomas W. Dunfee see a
deep social contract underlying all human societies. This contract is based on what
they call hypernorms, or principles at the root of all human ethics. Examples are
basic rights, such as rights to life and to political participation. These hyper norms
validate other ethical norms, which can differ from nation to nation but still be
consistent with the hypernorms. For example, many U.S. corporations prohibit
people from hiring their relatives. In India, however, tradition places a high value on
supporting family and clan members, and some companies promise to hire workers'
children when they grow up. Although these practices are inconsistent, neither
violates any universal prohibition. They exist in what Donaldson and Dunfee call
"moral free space" where inconsistent norms are permitted if they do not violate any
hypernorms.26
Law
1
responded to public anger by passing the Sarbanes-Oxley Act of 2002. This law
created new duties for corporations and executives, increased criminal penalties for a
range of financial crimes, and gaye regulators more power.
Damages
In civil cases courts may assess damages, or payments for harm done to others by a
corporation. Compensatory damages are payments awarded to redress concrete
losses suffered by injured parties. Punitive damages, or payments in excess of a
wronged party's actual losses, are awarded to deter similar actions and punish a
corporation. In this way, they serve the same purposes as criminal penalties. Punitive
damages may be awarded only if malicious and willful misconduct exists. For
example, a regional manager for Browning-Ferris Industries ordered a district
manager to drive a small competitor in Vermont out of business using predatory
pricing. His instructions were: "Do whatever it takes. Squish him like a bug." 27
Subsequently, a jury awarded the competitor $51,146 in actual damages, then
added $6 million in punitive damages.
Since the purpose of punitive damages is to punish and deter misconduct, they must
be large enough to cause pain. Yet they raise many questions about fairness. There is
no fixed standard for calculating their size and arbitrary sums may violate
constitutional due process requirements. Given similar offenses, juries often assess
higher damages against a big corporation than against a smaller one simply to
make certain the penalty hurts. And sometimes the sums awarded are so large that
they must be weighed against Eighth Amendment prohibitions against "excessive
fines" and "cruel and unusual punishments."The Supreme Court decided to rein in
punitive damages in the case of an Alabama physician, Dr. Ira Gore, Jr., who bought
a BMW automobile for $40,751 and drove it for nine months without noticing any
problem. After an auto detailer
26
Thomas Donaldson and Thomas W. Dunfee,"When Ethics Travel: The Promise and Peril of
Global Business Ethics," California Management Review, Summer 1999, p. 61.27 Browning-
Ferris Industries v. Kelko Disposal, 57 LW 4986 (1989).
told him that part of the car had been repainted, the owner found out that BMW
North American was secretly repainting cars with shipping damage and selling
them as new. Gore estimated his damages at $4,000 and sued, charging BMW with
gross, oppressive, and malicious fraud. A jury awarded him $4 million in punitive
damages1,000 times his actual loss.
On appeal, the Supreme Court held that the award was unconstitutionally
excessive.28 (Subsequently, the Alabama Supreme Court reconsidered the case and
awarded Gore only $50,000.)29 However, the Court did not set up any formula for
calculating punitive damages, so the definition of excessive is still imprecise. It
continues to resist setting forth a mathematically precise ratio for permissible
punitive damages, but in recent cases it has stated that few punitive awards of 10
times actual damages or greater are justified and that any punitive award of more
than 4 times actual damages is suspect. 30 This guideline has greatly reduced punitive
damage awards.
28
BMW of North America, Inc. v. Gore, 116 S.Ct. 1589 (1996).29 BMW of North America,
Inc. v. Gore, 701 So. 2d 507 Ala. (1997).30 Most recently, the Court held a $145 million
punitive damages award against State Farm Mutual Automobile Insurance Co. unconstitutional.
This award was 145 times actual damages of $1 million awarded by a Utah jury. State Farm
Mutual Automobile Insurance Company v. Campbell, 123 S. Ct. 1513 (2003).31 The Supreme
Court established this precedent for liability in New York Central & Hudson River Railroad Co. v.
United States 212 U.S. 481 (1909).32 However, the prosecution prevailed and the company
finally paid $9 million in fines. See United States v. Royal Caribbean, No. 96-0333 (DPR),
1997.33 Dale A. Oesterle,"Early Observations on the Prosecutions of the Business Scandals of 2002-
03," The Ohio State
Frank Quattrone was an investment banker in California who presided over the
initial public offerings of technology companies such as Amazon.com and Cisco
Systems. A federal investigation revealed that he had designed a subtle scheme of
handing out shares in these offerings to business executives who, in return, gave
investment banking business to Quattrone's firm. Prosecutors feared indicting
Quattrone on this kickback scheme, and then relying on a jury to agree on the
crime after conflicting expert testimony by both sides. Therefore, they charged him
with obstruction of justice for a single e-mail in which he advised his staff to
destroy files and documents. Even so, Quattrone almost escaped when his trial
ended with a hung jury. Prosecutors had to take the expensive course of trying him
a second time. He was then found guilty and sentenced to 18 months in prison In
addition, at trial it is frequently difficult to assign individual fault to managers.
Most corporate crimes result at least partly from group effort. Individual blame is
clouded by committee decisions and by the fact that organization hierarchies may
separate decisions from actions.
After Enron's fall, Jeffrey Skilling, its former CEO, testified at a Congressional hearing
that he had no knowledge of any financial manipulations. Skilling resigned as CEO
of Enron in August 2001, saying that his decision was for personal reasons. He had
been CEO for only six months. Just two months after he left, information about
Enron's earnings
fraud became public. In the two weeks leading up to hisresignation he had started
selling his stock and by the time its price was buckling he had sold $67 million worth
of shares to unfortunate investors. At the hearing he stated his belief that all of
Enron's financial statements were accurate and insisted he was "not aware of any
financing arrangements designed to conceal liabilities or inflate profitability."35
This was too much even for his mother, Betty Skilling, who berated him, saying, "you
can't get off the hook with me."36 But in a criminal prosecution the government must
prove beyond a reasonable doubt that an executive had specific knowledge of a fraud
and acted to abet it. A provision in the Sarbanes-Oxley Act has eased the
prosecutor's task by establishing a standard of culpability based on "conscious
avoidance." That is, if an executive is aware that a probability of fraud exists, but not
necessarily of the fraud itself, the failure to investigate is sufficient to establish
criminal fault.37 This enacts Aristotle's theory that moral responsibility is not excused
by willful ignorance. Skilling has been indicted on 42 counts of fraud and insider
trading, but so far the Department of Justice has not chosen to bring his case to
trial.38
34
Andrew Ross Sorkin, "Ex-Banking Star Given 18 Months for Obstruction," New York Times, September 9, 2004, p. A1.
35
Carolyn Lochhead, "House Panel Skeptical of Ex-Enron CEO's Story," San Francisco Chronicle, February 8, 2002, p. A1.
36
Quoted in "Ex-Enron Chief Is Told Off by His Mother," The Herald (Glasgow), February 12, 2002, p. 8.
37
David Lowell and Kathryn C. Arnold,"Corporate Crime after 2000: A New Law Enforcement Challenge or Deja Vu?" American
Criminal Law Review, Spring 2003, p. 229-30.
38
Superceding Indictment in U.S. v. Jeffrey K. Skilling and Richard A. Causey, Cr. No. H-04-25, U.S.D.C. (S. Dist. Texas), February 18,
2004.Sentencing, Fines, and Other Penalties
In 1991 the United States Sentencing Commission, a judicial agency that standardizes
penalties for federal crimes, released guidelines for sentencing both managers and
corporations. When managers are convicted of a crime, prison sentences are
imposed on the basis of a numerical point system. Calculations begin with a base
score for the type of offense. Points are then added or subtracted on the basis of
multiple factors. A sentence for fraud, for example, begins with a base score of 6,
then factors such as the number of victims and the amounts lost are considered. If the
loss to victims exceeds $1 million, 16 points are added. If there are 50 or more
victims then 4 more points are added. The point total is then adjusted for factors
such as criminal history or cooperating with authorities and, finally, translated into a
prison sentence.39 Managers may also be fined, put on probation, given community
service, asked to make restitution to injured parties, or banned from working in their
occupations.40
Corporations cannot be imprisoned, but they can be fined and their actions
restricted. Fines are intended to punish, to deter future lawbreaking, to cause dis-
gorgement of wrongful gains, and to remedy harms where possible. As with the
prison sentences of managers, they are calculated using a point system. The calcu-
lation begins with a fine range based on the seriousness of the offense, then adds or
subtracts points on the basis of aggravating or mitigating factors such as the degree of
top management involvement and cooperation during the investigation. If, for
example, management "willfully obstructed" authorities, 3 points are added. Up to 5
points may be subtracted if top managers immediately reported the crime.41
A cynical public doubts that fines are large enough to deter corporate crime.
Sometimes they are, indeed, too small to mar balance sheets. The Environmental
Protection Agency once threatened to impose a $27,500 fine on General Electric
each day it failed to clean up toxic waste at a factory. It was the equivalent of
threatening a person making $1 million a year with a fine of three cents a day.
When GE paid the government $1.84 million in fines to settle a billing fraud case, it
was the same as a $25 parking ticket for a person making $50,000 a year. Yet fines can
also be devastating. Although Arthur Andersen was fined only $500,000, the
collateral effects of the criminal conviction drove it out of business. The largest fine
ever levied was a $750 million civil penalty against WorldCom in 2003 by the Se-
curities and Exchange Commission for accounting fraud.42 The record criminal fine
was a $500 million antitrust penalty imposed on F. Hoffmann-LaRoche Ltd. by the
Department of Justice in 1999.43 The company had led a decade-long conspiracy
between it and six other European and Japanese companies to cheat buyers of
common vitamin supplements by allocating market shares and fixing prices.
39
United States Sentencing Commission, Guidelines Manual, 2B1.1(November 2002).40
Recently, the constitutionality of using these factors in sentencing was challenged. The Supreme
Court, by a narrow 5-4 majority, allowed judges to continue using them if they were considered
advisory, not mandatory. See United States v. Booker, 125 S. Ct. 738 (2005).
41
Ibid., 8C2.1-8C2.10.
42
SEC u WorldCom Inc., Civil Action No. 02-CV-4963 (SONY). See Litigation
Release No. 18219, July 7, 2003.43 U.S. v. F. Hoffmann-LaRoche Ltd., No. 3:99-CR-184-R (NOT), 1999.
Other methods for penalizing corporate crime exist. Courts have required ad-
vertisements and speeches to show contrition for wrongdoing. Some corporations
have paid their fines to charities, and executives have done community service.
Others have been made to adopt policies and procedures ensuring that they follow
the law in the future. In a few cases a person outside the company is appointed to
monitor its compliance.
Following a criminal conviction, both managers and corporations are subject to civil
suits by parties such as shareholders who have been damaged. In these civil cases
the burden of proof is lower than in criminal casesa preponderance of the
/evidenceand the remedy sought is usually financial.
Strong forces in organizations shape ethical behavior. Depending on how they are
managed, these forces elevate or depress standards of conduct. We discuss here four
prominent and interrelated forces that shape conduct: leadership, strategies and
policies, organization culture, and individual characteristics (see Figure 7.2).
Leadership
The example of company leaders is perhaps the strongest influence on integrity. J^,
Not only do leaders set formal rules, but by their example they can reinforce or un-^
dermine right behavior. Subordinates are keen observers and quickly notice if
standards are, in practice, upheld or evaded. Exemplary behavior is a powerful tool
available to all managers. It was used wisely by this executive, who tells about taking
over a financially troubled manufacturing operation.
Most of our management was flying first class. . . . I did not want. . . my first act to be
to tell everybody that they are not gonna fly first class anymore, so I just quit flying
first class. And it wasn't long before people noticed it and pretty soon everybody was
flying coach. . . . I never put out a directive, never said a word to anybody. . . . People
look to the leader. If the leader cuts corners, they say it's okay to cut corners around
here. If the leader doesn't cut corners, we must be expected not to do any of that
around here."44
A common failing is for managers to show by their actions that ethical duties may
be compromised. For example, when managers give themselves expensive perks,
they display irreverence for the stewardship of money that rightly belongs to
investors as owners, not to management. An executive at one large corporation
describes how arrogant behavior sends the wrong signals.
44
Interview quoted in Linda Klebe Trevino, Laura Pincus Hartman, and Michael Brown, "Moral
Person and Moral Manager: How Executives Develop a Reputation for Ethical Leadership,"
California Management Review, Summer 2000, p. 134.