Performing at a Higher Level – Building Your Company’s Ethical Competency

1. Performing at a Higher Level – Building Your Company’s Ethical Competency Professor Lynn Sharp Paine John G. McLean Professor of Business Administration Harvard Business School Leadership Forum 2002 – Ethical Challenges for Business and Government Leaders ICAC, Hong Kong, December 12th, 2002

2. Ethics as a corporate priority • On July 9, 2002, U.S. President Bush declared that “America’s greatest economic need is higher ethical standards.” • In August 2002, the New York Stock Exchange proposed that listed companies be required to adopt and disclose codes of business ethics and conduct. • In April 2002, an advisory panel to Japan’s prime minister called on companies to adopt codes of behavior to restore consumer confidence in business. • In March 2002 the Swedish government launched an initiative to promote a higher ethical standard and greater social responsibility among Swedish companies.

3. Ethics as a corporate priority • In 2001, European Commission green paper proposing a European framework for corporate social responsibility. • In 2000, London Stock Exchange began to require that listed companies disclose whether they have policies for managing significant risks, including legal, health, safety, environmental, reputation, and business probity risks. • In 2000, the OECD issued a revised set of ethical guidelines for multinational companies. • In 1999, the UN Secretary-General called on leading companies worldwide to adopt a set of guiding principles for corporate social responsibility.

4. 13th century: Pope Innocent IV as “fictional persons” lacking body and soul, corporations cannot be punished 17th century: Sir Edward Coke, Chief Justice, King’s Bench as “fictional persons” lacking a soul, corporations cannot commit treason, be outlawed, or excommunicated 18th century: Edward Thurlow, First Baron, Lord Chancellor as “fictional persons,” corporations have neither “pants to kick” nor a “soul to damn” 19th century: Chief Justice John Marshall as “artificial beings,” corporations have only those properties conferred by charter of creation 20th century: Nobel Economist Milton Friedman as “artificial persons,” corporations cannot have “real” responsibilities Departing from a long tradition The corporation as amoral …

5. Self Perception Ethical Leader Others’ Perception Ethical Neutral Leader Differing perceptions vs. Source: Linda Klebe Treviño, Laura Pincus Hartman, Michael Brown, California Management Review, vol. 42, no. 4 (Summer 2000).

6. How do employees perceive management? • Do your CEO and other senior managers know what type of behavior goes on in the company? • Are your CEO and other senior managers approachable if an employee needs to deliver bad news? • Would your CEO or other senior managers authorize illegal or unethical conduct to meet business goals? • Would your CEO and other senior managers respond appropriately if they became aware of misconduct? Source: KPMG, 2000 Organizational Integrity Survey Summary (2,390 employees in selected industries).

7. Employees’ perceptions of management • Only 43% believe their executives know what type of behavior goes on. • Only 45% believe their executives are approachable with bad news. • Only 62% believe their executives would not authorize illegal or unethical behavior. • Only 64% believe their executives would respond appropriately if they became aware of misconduct. Source: KPMG, 2000 Organizational Integrity Survey Summary (2,390 employees in selected industries).

8. Managing corporate values – 1995 Forbes 500 Companies (237 respondents): Date Introduced Revised in ‘90s < 5 yrs. >20 yrs. Code of Ethics Values Statement Corporate Credo All Three Documents 91% 53% 34% 49 cos. 18.5% 51.0% 41.0% 15.5% 8.0% 22.0% 82% 83% 81% Source: Patrick E. Murphy, “Corporate Ethics Statements: Current Status and Future Prospects,” Journal of Business Ethics 14: 727-740 (1995).

9. Origins of misconduct • individual wrongdoing • good people with • insufficient knowledge and awareness • inadequate job skills • lacking prudence, judgment, courage • management and organizational design • misaligned management systems • inadequate information flows • perceived management indifference • social and institutional context • inadequate legal and regulatory framework • pressures from unethical customers, competitors

10. House member: Firestone exec: “So you looked at it from a financial point of view and not a consumer safety point of view? I’m sorry to say that I believe that is the case.” Points of view Source: Congressional Hearings, U.S. House of Representatives, September 6, 2000.

11. The manager’s compass

12. Performing at a higher level • Adequacy of standards and policies • Adequacy of decision models and criteria • Suitability of organizational structures, systems, processes • Suitability of performance measures and incentives • Suitability of prevailing habits and attitudes • Adequacy of leadership models and competencies Some implications: