Category: Business Laws & Ethics

Business ethics in the workplace is about prioritizing moral values for the workplace and ensuring behaviors are aligned with those values — it’s values management. Yet, myths abound about business ethics. Some of these myths arise from general confusion about the notion of ethics. Other myths arise from narrow or simplistic views of ethical dilemmas.

1. Myth: Business ethics is more a matter of religion than management.

Diane Kirrane, in “Managing Values: A Systematic Approach to Business Ethics,”(Training and Development Journal, November 1990), asserts that “altering people’s values or souls isn’t the aim of an organizational ethics program — managing values and conflict among them is …”

2. Myth: Our employees are ethical so we don’t need attention to business ethics.

Most of the ethical dilemmas faced by managers in the workplace are highly complex. Wallace explains that one knows when they have a significant ethical conflict when there is presence of a) significant value conflicts among differing interests, b) real alternatives that are equality justifiable, and c) significant consequences on “stakeholders” in the situation. Kirrane mentions that when the topic of business ethics comes up, people are quick to speak of the Golden Rule, honesty and courtesy. But when presented with complex ethical dilemmas, most people realize there’s a wide “gray area” when trying to apply ethical principles.

3. Myth: Business ethics is a discipline best led by philosophers, academics and theologians.

Lack of involvement of leaders and managers in business ethics literature and discussions has led many to believe that business ethics is a fad or movement, having little to do with the day-to-day realities of running an organization. They believe business ethics is primarily a complex philosophical debate or a religion. However, business ethics is a management discipline with a programmatic approach that includes several practical tools. Ethics management programs have practical applications in other areas of management areas, as well. (These applications are listed later on in this document.)

4. Myth: Business ethics is superfluous — it only asserts the obvious: “do good!”

Many people react that codes of ethics, or lists of ethical values to which the organization aspires, are rather superfluous because they represent values to which everyone should naturally aspire. However, the value of a codes of ethics to an organization is its priority and focus regarding certain ethical values in that workplace. For example, it’s obvious that all people should be honest. However, if an organization is struggling around continuing occasions of deceit in the workplace, a priority on honesty is very timely — and honesty should be listed in that organization’s code of ethics. Note that a code of ethics is an organic instrument that changes with the needs of society and the organization.

5. Myth: Business ethics is a matter of the good guys preaching to the bad guys.

Some writers do seem to claim a moral high ground while lamenting the poor condition of business and its leaders. However, those people well versed in managing organizations realize that good people can take bad actions, particularly when stressed or confused. (Stress and confusion are not excuses for unethical actions — they are reasons.) Managing ethics in the workplace includes all of us working together to help each other remain ethical and to work through confusing and stressful ethical dilemmas.

6. Myth: Business ethics in the new policeperson on the block.

Many believe business ethics is a recent phenomenon because of increased attention to the topic in popular and management literature. However, business ethics was written about even 2,000 years ago — at least since Cicero wrote about the topic in his On Duties. Business ethics has gotten more attention recently because of the social responsibility movement that started in the 1960s.

7. Myth: Ethics can’t be managed.

Actually, ethics is always “managed” — but, too often, indirectly. For example, the behavior of the organization’s founder or current leader is a strong moral influence, or directive if you will, on behavior or employees in the workplace. Strategic priorities (profit maximization, expanding marketshare, cutting costs, etc.) can be very strong influences on morality. Laws, regulations and rules directly influence behaviors to be more ethical, usually in a manner that improves the general good and/or minimizes harm to the community. Some are still skeptical about business ethics, believing you can’t manage values in an organization. Donaldson and Davis (Management Decision, V28, N6) note that management, after all, is a value system. Skeptics might consider the tremendous influence of several “codes of ethics,” such as the “10 Commandments” in Christian religions or the U.S. Constitution. Codes can be very powerful in smaller “organizations” as well.

8. Myth: Business ethics and social responsibility are the same thing.

The social responsibility movement is one aspect of the overall discipline of business ethics. Madsen and Shafritz refine the definition of business ethics to be: 1) an application of ethics to the corporate community, 2) a way to determine responsibility in business dealings, 3) the identification of important business and social issues, and 4) a critique of business. Items 3 and 4 are often matters of social responsibility. (There has been a great deal of public discussion and writing about items 3 and 4. However, there needs to be more written about items 1 and 2, about how business ethics can be managed.) Writings about social responsibility often do not address practical matters of managing ethics in the workplace, e.g., developing codes, updating polices and procedures, approaches to resolving ethical dilemmas, etc.

9. Myth: Our organization is not in trouble with the law, so we’re ethical.

One can often be unethical, yet operate within the limits of the law, e.g., withhold information from superiors, fudge on budgets, constantly complain about others, etc. However, breaking the law often starts with unethical behavior that has gone unnoticed. The “boil the frog” phenomena is a useful parable here: If you put a frog in hot water, it immediately jumps out. If you put a frog in cool water and slowly heat up the water, you can eventually boil the frog. The frog doesn’t seem to notice the adverse change in its environment.

10. Myth: Managing ethics in the workplace has little practical relevance.

Managing ethics in the workplace involves identifying and prioritizing values to guide behaviors in the organization, and establishing associated policies and procedures to ensure those behaviors are conducted. One might call this “values management.” Values management is also highly important in other management practices, e.g., managing diversity, Total Quality Management and strategic planning.

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Carter McNamara, MBA, PhD – Authenticity Consulting, LLC – 763-971-8890
Read my weekly blogs: Boards, Consulting and OD, Nonprofits and Strategic Planning.

Boards need to discuss horrible ideas: the idea that your product might no longer be relevant to your target market, the idea that your staff might prefer to work elsewhere, or that your technology might leave you unable to deliver goods and services. These are not issues that management like to talk about and, indeed, when we are being honest these issues scare directors as well as executives. But we do need to talk about them.

A recent failure in IT service left an airline unable to fly because it could not book passengers on to flights, work out where its planes were, or roster crews to work. The booking platform had been outsourced and the failure breached the service level provided under the outsourcing contract. Now journalists are reporting that the resulting damages may bankrupt the IT service company and the airline is struggling to reassure potential passengers that they can be relied upon; not an easy task when for several days the news headlines were about executives missing meetings, families unable to return from holidays and brides unable to attend their own weddings.

The key question of ‘what will happen if the technology fails’ had been asked and answered with assurances of back up sites, time limits on outages and other comforting facts. These assurances proved false. Did something stop the board from asking questions that might have revealed that the assurances were not deliverable under the arrangement as implemented?

Was it a lack of understanding of the importance of a booking system to an airline? I don’t think so.

Could it have been that the board were totally trusting of IT suppliers who had never before failed in any way? I doubt it.

Or was it that, having asked a good question and received a satisfactory answer, the board conversation quickly moved on? Could directors have been uncomfortable with pursuing the idea of what a total failure would mean?

Boards need to be places where uncomfortable conversations happen. A recent harassment case was followed by a spate of embarrassing remarks such as ‘we always knew he was a party guy’ or ‘everyone knew he liked the ladies’. Why did the board not consider the implications of these gems of knowledge? With hindsight it all seems so predictable. Why was it too hard to apply foresight?

Occasionally boards discuss issues that dramatically affect the future of the company. It is imperative that directors speak up and follow their trains of thought to the most uncomfortable destinations, as well as to the most likely, or most profitable ones. Questions such as ‘What is the worst thing that can go wrong’ should receive several considered answers, from the board, management or specialist advisers. Mitigation or avoidance strategies can only be designed if the underlying events have been deemed possible.

As directors we must tackle the dangerous ideas in a safe environment; before we ever encounter them in real life. We need to allow thoughts to wander to the darkest outcomes and to contemplate with serious intent exactly how much we are willing to risk on each strategic venture. The trouble is, we often find it hard to give voice to these thoughts for fear of being perceived as unhelpful, unsupportive, or biased against the proponent of each strategy.

Chairmen can help by encouraging their boards to spend more time on the potential downsides than they do on the potential upsides. Only when it is safe to discuss the unspeakable horror of adverse outcomes will it be possible to avoid them.

What do you think?

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Julie Garland-McLellan has been internationally acclaimed as a leading expert on board governance. See her website and LinkedIn profiles, and get her book Dilemmas, Dilemmas: Practical Case Studies for Company Directors.

Let’s Start With “What is ethics?”

Simply put, ethics involves learning what is right or wrong, and then doing the right thing — but “the right thing” is not nearly as straightforward as conveyed in a great deal of business ethics literature. Most ethical dilemmas in the workplace are not simply a matter of “Should Bob steal from Jack?” or “Should Jack lie to his boss?”

(Many ethicists assert there’s always a right thing to do based on moral principle, and others believe the right thing to do depends on the situation — ultimately it’s up to the individual.) Many philosophers consider ethics to be the “science of conduct.” Twin Cities consultants Doug Wallace and John Pekel (of the Twin Cities-based Fulcrum Group) explain that ethics includes the fundamental ground rules by which we live our lives. Philosophers have been discussing ethics for at least 2500 years, since the time of Socrates and Plato. Many ethicists consider emerging ethical beliefs to be “state of the art” legal matters, i.e., what becomes an ethical guideline today is often translated to a law, regulation or rule tomorrow. Values which guide how we ought to behave are considered moral values, e.g., values such as respect, honesty, fairness, responsibility, etc. Statements around how these values are applied are sometimes called moral or ethical principles.

So What is “Business Ethics”?

The concept has come to mean various things to various people, but generally it’s coming to know what it right or wrong in the workplace and doing what’s right — this is in regard to effects of products/services and in relationships with stakeholders. Wallace and Pekel explain that attention to business ethics is critical during times of fundamental change — times much like those faced now by businesses, both nonprofit or for-profit. In times of fundamental change, values that were previously taken for granted are now strongly questioned. Many of these values are no longer followed. Consequently, there is no clear moral compass to guide leaders through complex dilemmas about what is right or wrong. Attention to ethics in the workplace sensitizes leaders and staff to how they should act. Perhaps most important, attention to ethics in the workplaces helps ensure that when leaders and managers are struggling in times of crises and confusion, they retain a strong moral compass. However, attention to business ethics provides numerous other benefits, as well (these benefits are listed later in this document).

Note that many people react that business ethics, with its continuing attention to “doing the right thing,” only asserts the obvious (“be good,” “don’t lie,” etc.), and so these people don’t take business ethics seriously. For many of us, these principles of the obvious can go right out the door during times of stress. Consequently, business ethics can be strong preventative medicine. Anyway, there are many other benefits of managing ethics in the workplace. These benefits are explained later in this document.

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Carter McNamara, MBA, PhD – Authenticity Consulting, LLC – 800-971-2250
Read my weekly blogs: Boards, Consulting and OD, Nonprofits and Strategic Planning.

Company directors on not-for-profit boards are often required to make substantial donations to the cause, or to elicit substantial donations from their network. Those that can’t or won’t become major benefactors are, more or less subtly, removed from the boardroom. But does this model sit well with current notions of directors’ responsibility and the professionalization of the role.

All around the world there are stories (often in the form of court case judgements) about boards of charitable organisations who were found to have been inappropriately focussed on only a few aspects of governance – or worse still, operations – and to have neglected their governance role to the point where they were found personally liable for corporate losses or other faults. Discussions with CEOs in the sector reveal a deep frustration that not all boards are living up to current expectations but that ‘it is hard to demand more’ given that the board members are unpaid volunteers.

Prime among the CEOs lists of grievances is the inability of the board to contribute at a strategic level to the company or to provide the CEO with meaningful mentoring. Even when boards are contributing to financial oversight it is often at a superficial level such as checking expenditures against budgets rather than at a strategic level such as determining the appropriate amount of financial reserves and investment strategies. Many boards leave the financial oversight entirely to the executives or concentrate only on the aspects that they can influence such as donations, fund raisers, etc.

Then there are the ‘two tier boards’ not, alas, the carefully designed and culturally appropriate management and governing boards that prevail in some jurisdictions, but those where some board members are ‘more equal than others’. On these boards there is an inner circle of members who take a strong interest in the governance, often chairing committees whose membership excludes their ‘outer circle’ board colleagues and assuming responsibility in line with modern expectations of the director role. The ‘outer circle’ members frequently provide funding or host fundraising activities or otherwise use their personal networks to support the aims of the organisation. These boards are frequently characterised by high levels of mistrust and occasionally by mutual loathing amongst the board members. Each circle can easily resent the other as having a role that excludes the other.

Some organisations are restructuring their boards to allow for a proper governance function and creating specific committees or communities for volunteers, donors and supporters. These organisations manage to achieve a ‘best of both worlds’ solution with fit for purpose membership of societies of friends, councils of patrons or boards of directors. The result is an organisation that knows where to look for board leadership and is not disappointed when it does look there. The CEOs of these organisations report that they are better able to design engagement strategies for each group, and that they benefit greatly from the increased input of a governing board that takes on all the aspects of its professional role.

Perhaps the day of the professional director is dawning in our not-for-profits. With increased director liability, greater demands for transparency, more rigorous regulation it is certainly time for directors to play a bigger role in governance.

What do you think?

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Julie Garland-McLellan has been internationally acclaimed as a leading expert on board governance. See her website and LinkedIn profiles, and get her book Dilemmas, Dilemmas: Practical Case Studies for Company Directors.

Our firm regularly gets calls, asking about the differences between for-profit and nonprofit Boards. Although there are certain differences, there are more similarities than people often realize.

Misconceptions often stem from the belief that nonprofits have to have a Board because they’re nonprofits. Not true. Chartered, or registered, nonprofits have to have a Board because they’re nonprofit corporations — they’re corporations just like for-profit corporations. Corporations must have Boards, whether nonprofit or for-profit.

Boards of corporations have certain legal duties, or fiduciary duties, the most basic of which are the duties of loyalty and care. Recent literature also refers to a duty of obedience. Both nonprofit and for-profit Boards must adhere to these duties — and the ways that they do that are very similar between both types of Boards.

This table gives a listing of the specific differences between the Boards, but keep in mind that those differences don’t result in major differences between how the Boards recruit and develop and organize members, do their planning, hold their meetings, make decisions, supervise the CEO, approve budgets and major contracts, etc.

There’s many more free resources about Boards — for-profit and nonprofit – in the “Free Complete Toolkit for Boards.”

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Carter McNamara, MBA, PhD – Authenticity Consulting, LLC – 800-971-2250
Read my weekly blogs: Boards, Consulting and OD, Nonprofits and Strategic Planning.

The role of the board changes as the company grows and the management team becomes more diverse, with a wide range of experts who can contribute to strategy in different ways.

A company passes through several stages in its life cycle. In the first stage ‘Start-up’ strategy is developed and implemented by the founder and a close team. At this stage it is not often clear who is doing what. The team will switch from their shareholder role, to their executive role and then their board role quickly whenever the need arises. Usually, whichever role the founder plays most can be said to be the place in the organisation where the strategy is developed.

As the company enters the second stage ‘Growth’ more people join and the roles start to be defined with greater clarity. Skilled or qualified staff start to offer their inputs to strategy and the board needs to be explicit about the sharing of the roles to ensure that efforts are coordinated so that people feel engaged. Failure to separate and define roles will lead to dissent and disorder. Failure to share opportunities to contribute will disenfranchise management. The board need to be especially vigilant that the founder does not continue to dominate the process although they may still design the process so that the founder has the final say.

Eventually growth will start to slow down. This is a stage at which a company needs to focus efforts on internal effectiveness, systems and processes. It is also a stage during which the strategy development, in good companies, is formally delegated to the now strong and experienced management team and the board moves into the more traditional role of understanding, testing and endorsing strategy. Much will depend on the decision of the founder to remain as an executive (usually CEO) or to move to a non executive role (often Chairman but not necessarily always so).

If the transition is an abrupt or unexpected slowing of growth and represents a deviation from agreed plans it is not uncommon for a board, at this stage, to step in and remove the CEO or undertake other actions to restructure management so as to gain better visibility of the path ahead. If the transition is smooth, expected and well prepared for then the role of the board is not as overt.

At this point the company needs to decide if there are additional activities they wish to undertake that would effectively renew the organisation and continue the growth or if they are happy to transition to a less volatile mature operating state as the company becomes ‘Sustainable’ or ‘Mature’. This is the stage of life of most large blue chip organisations. They undertake enough new developments to maintain their sustainability but never so many that they revert to the risky volatile growth phase. Outcomes are expected to conform to plans and the board spends as much or more time monitoring strategy implementation as they do developing strategy.

Finally the organisation will enter the stages of decline and, if this is not arrested by reinvention, decay. A good board will be alert for indications that decline is imminent and will ensure that management are challenged with the task of developing new strategies for growth to counteract the tendency of the organisation to drift into these stages. Companies in decline are often paradoxically very profitable as investment in new lines of business and growth projects slows whilst tried and tested products are efficiently produced and sold.

Many family businesses enjoy this phase as a means of creating funding for the retirement of the founder. Other businesses work hard to transcend the tendency towards decline and decay. The board may, again, need to become more active (and possibly even forceful) to ensure that management focus their efforts appropriately depending on the owners’ desires for the organisation.

Some not-for-profit businesses look forward to these stages as they will indicate that the mission has been achieved; when a cure is found for cancer most cancer-related charities will focus on transitional arrangements to assist current sufferers, on providing information about the cure and on closing down in an honourable manner. A few will move into other disease related work whilst most will seek to exit the marketplace. For commercial companies the imperative will be to either create new business streams or to return capital to the shareholders whilst meeting obligations to stakeholders. The board must step into their role as the ultimate endorsers of strategy during these phases.

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Julie Garland-McLellan has been internationally acclaimed as a leading expert on board governance. See her website and LinkedIn profiles, and get her book Dilemmas, Dilemmas: Practical Case Studies for Company Directors.

If you only looked at the headlines of today’s feature in the Wall Street Journal: The Case Against Social Responsibility, you might think that the ire of business ethics professionals would be raised to the level of hysterics. But Professor Aneel Karnani raises a critical point that is at the heart of not only corporate social responsibility, but of business ethics as well.

“In cases where private profits and public interests are aligned, the idea of corporate social responsibility is irrelevant: Companies that simply do everything they can to boost profits will end up increasing social welfare.”

While at first Karnani’s seems provocative. However, the logic is that companies won’t engage in practices that aren’t profitable. Therefore, only when socially responsible practices make business sense and are what the public wants, will companies be acting in a socially responsible manner. But to them, it’s just good business, therefore the “green” labels are mere PR window dressing.

But the heart of Karnani’s argument is exactly at the heart of today’s business ethics issues as well:

When talking about why a company would not do the socially responsible thing, even if it is a profitable avenue, Karnani states:

Unfortunately, not all companies take advantage of such opportunities [of benefiting society while acting in their own interests], and in those cases both social welfare and profits suffer. These companies have one of two problems: Their executives are either incompetent or are putting their own interests ahead of the company’s long-term financial interests. For instance, an executive might be averse to any risk, including the development of new products, that might jeopardize the short-term financial performance of the company and thereby affect his compensation, even if taking that risk would improve the company’s longer-term prospects.

The heart of the argument is that long-term financial interests are in the best interests of both the shareholders and the public. Companies that plan for the future are the ones that see the business benefit of ensuring that their markets and customers will be around the the long-term as well. The problem is not profit per se, the problem is short-term self-interest over long-term corporate interest.

So how do companies position balance profit and socially responsible activities?

The challenge is to design self-regulation in a manner that emphasizes transparency and accountability, consistent with what the public expects from government regulation. It is up to the government to ensure that any self-regulation meets that standard. And the government must be prepared to step in and impose its own regulations if the industry fails to police itself effectively.

It always comes down to values: companies that actively foster transparency and accountability internally will have the easier time creating the alignment between profit and social responsibility, because leaders will have the sense and the capabilities to look out for the long-term interests of shareholders, which will benefit all of the organization’s stakeholders.

Thank you Professor Karnani for highlighting that the source of true social responsibility comes from the core values of leaders and not from a superficial “greenwash” that masks a short-term outlook.

It has often been said that there is no place in the boardroom for a director who does not understand the business. Now we need to consider if there is room for one who does not understand internet enabled connectivity.
Directors need to understand both the risks and the opportunities presented by the internet in general and social media in particular.

The Impact on Business

The days when a corporation’s website was simply an online brochure are long past. Most companies now offer some degree of interaction. World class companies have specific communication strategies and communities that ‘meet’ using the company as a focus for their interests.

At its most basic level the internet is a source of threat or opportunity for the business. Transactional friction is reduced, customers can communicate across time zones and geographical boundaries, supply chains become ‘transparent pipelines’, employees can collaborate on projects and spread best practice, the possibilities are huge. These opportunities are asymmetrically spread and new competitors can use technology to gain an apparent overnight advantage on established companies. The need for capital is dramatically reduced as new players cooperate to mimic the reach of large multinational companies without incurring the bureaucracy or cost structure. Many an industry leader is watching new competitors scoop the choicest morsels from the market by targeting prospective niches, or simply hijack the revenue stream by delivering an alternate method of satisfying demand.

The Impact on Boards

Technology is also changing the face of the boardroom. Many directors now access secure ‘virtual board papers’ rather than receiving voluminous printed material. For some this is simply an emailed file that mimics the old paper-based pack; for others it is web-enabled environments where directors can self serve their requests for more information by drilling down or through layers of data behind the official board packs.

Meetings themselves are changing with boards opting for web-conferences, virtual presentations, and internet enabled ‘visits’ from external experts. Gone are the days when a director hanging onto a crackling phone line and listening in missed out on vital clues as to his or her colleagues feelings about the issues under discussion!

The Impact on Directors

Directors are also embracing new technology to avail themselves of opportunities to network with their peers, learn when and where it suits them, and research potential new board seats. The number of director-related groups on LinkedIn is growing almost daily and these groups range from select ‘close networks’ of directors who all know each other or serve on the same board to large international communities of interest where a director in Saudi Arabia can comment on proposed regulations for corporate governance in Latvia that are put out for comment by a Danish national and read from Australia to Zimbabwe.

There are a number of places where anonymous requests for advice can be posted and, whilst some of the responses are less than well researched, many of the respondents are well recognised governance experts in whose advice the poster may feel reasonably confident. There are also places for whistle-blowing on unacceptable practices and for keeping up to date with the latest regulatory changes.

Astute directors are reading what their investors (and some traders) are saying about the company and its board in chat-rooms. Others are using these as another vehicle for communicating with shareholders.

The internet ‘Genie’ is definitely well out of the bottle, what will happen next is almost anybody’s guess. The only thing I know for sure is that change is coming and my businesses, boards and director friends must all be ready to meet it.

What do you think?

Julie Garland-McLellan has been internationally acclaimed as a leading expert on board governance. See her website and LinkedIn profiles, and get her book Dilemmas, Dilemmas: Practical Case Studies for Company Directors.

The speed of the announced departure of Hewlett Packard CEO Mark Hurd was in and of itself newsworthy. At first blush it would seem that an action by a leader to warrant such fast response from a board must be quite nefarious; if not fraud, then at least a juicy sex scandal. Instead, as was reported in the Wall Street Journal:

H-P said Friday that Mr. Hurd, 53 years old, didn’t violate the company’s policy regarding sexual-harassment but submitted inaccurate expense reports that were intended to conceal what the company said was a “close personal relationship” with the contractor.

Expense Reports? One CEO friend of mine mused that it would be one thing if Hurd had claimed personal expenses as business expenses in order to hide a liaison from his wife. That would be fraud, even if it was a small amount. But mere false categorization? “That’s absurd,” he said, “to fire a successful leader for not mentioning this contractor on his expense reports.” However, nothing can be farther from the truth.

I give tremendous kudos to the HP Board for taking such swift action on something that might seem so small.

Unlike opportunities for major fraud, which really can only be carried out by a small number of people, expense report violations is something that is within the domain of thousands and thousands of HP employees. False expense reports may seem minor, but it is often the place where larger crimes start, and can serve as a convenient hiding place for many varied violations.

Several pharmaceutical companies have recently paid hundreds of millions of dollars to settle claims by the FDA of kickbacks to doctors. The place where these violations appear: expense reports.

Moreover, there is no more powerful negative influence on a workforce than perceptions of unequal treatment of senior leaders. If a junior manager could be disciplined or fired for the kind of violation that mark Hurd engaged in, and if he was only given a slap on the wrist, the reverberations of inconsistent treatment spread like wildfire. Employees are willing to make sacrifices for the company and to even look out for the company’s interests over their own, but only when they feel they are being treated “fairly.” Once an event occurs that gives them grounds to perceive they are being “suckered,” then all that commitment vanishes in a flash. It’s back to looking out for #1.

The Board did the right thing, signaling to all HP employees that no one, even the CEO is exempt for holding to the stated standards of business conduct.