CDF Key Takeaways – Has the Notion of Business Ethics Become Passé?

CDF Key Takeaways – Has the Notion of Business Ethics Become Passé?

  • Question: Johnson & Johnson’s reaction to the Tylenol Crisis in 1982 was to immediately pull all products from the shelves to reduce the risk for stakeholders and customers. They suffered short-term loses but gained a favorable long-term reputation. Would this be handled differently today?
    • Peer behavior research shows people with a goal are more likely to behave unethically. Why? Because goals work: they make you work harder and do what it takes to achieve the goal, even if it is at the expense of other things.
    • Social Psychology says that it really only takes one person to say what should be done. To shift the behavior of the C-suite or board, only one person has to raise their hand and say what they will gain over what they will lose in the long-run.
      • Example: American Airlines pulling people off the planes. It would have cost less for the company to charter a plane just for those individuals.
    • It depends on which voices dominate at the time. In 1982, they were lucky the right voices dominated. Boeing is a situation where the wrong voices dominated. It was clear they knew the plane had challenges and this was the core problem.
      • One solution to battle group-think is to split the room and pit two groups against each other to debate both sides.
    • Question: It is easy to debate when there are no issues, but what about when the sky is falling? Does this change how the board behaves?
      • Financial pressure = organizational pressure. You set the tone for bad, as well as good things, when this pressure exists. Regulatory pressures are similar. A group may not come up with the right solution that is ethical.
      • In most scandals, when you talk to the people in the middle of it, they never have all the information at once. Small cheats lead to bigger cheats over time. The Volkswagen example is interesting, because it was a purposeful decision. Wells Fargo was different because the goals ended up being the problem, but when they set the goals, they were not intending for people to cheat. Rewards are an interesting aspect of this. Often, when we reward something in hopes of getting one result, it can end up resulting in greater behavioral changes than expected.
    • Question: What is the role of the board to help manage the balance between ethical and financial goals of an organization?
      • The level of analysis being done matters. Think ahead about the questions that need to be asked. What are the potential impacts? If we set this goal without adding more resources, how will employees respond to meet the goal?
      • Sometimes as a board member, you have an outside perspective and independence that the CEO and C-suite do not have, but they don’t have the “on the ground” perspective all of the time. Boards often spend a lot of time discussing whether they have a proper internal process for discovering risk.
      • The board is just another voice to question and think of a new perspective. Management can be very focused on the bottom-line impact, to the detriment of other areas of focus, so the board should be looking at those areas to ensure nothing is slipping through the cracks.
      • Every board is different. Some are toxic and may put more pressure on the management team. Others are concerned with doing the right thing. Each board has its own culture.
      • Boards have visibility into the things management wants them to have visibility into. The key stakeholder for the board is the shareholder. The board focuses more on strategy, not on operations. Management itself is closer to all stakeholders: customers, suppliers, employees, etc. It is not that the board does not care about these levels, but they just do not have the access and time to be as close to them. Management is closer to being able to determine how to balance the needs of all the stakeholders.

Theory: One theory, though controversial, is that board involvement on an operational level can create or exacerbate problems by focusing on short-term, quick wins for the shareholders, especially with shareholders being more vocal than they used to be. This makes it challenging for the C-suite and management to balance the long-term goals of the organization and stakeholders with the board’s short-term goals.

  • Question: Do you think there could be an element of truth to this theory?
    • Not in full agreement: Shareholders have not changed and still expect the returns. There are changes to how the internal stakeholders now share part of the organization with stocks, etc. and are incentivized differently than they used to be. Larger social trends around markets and shareholder reactions are driving a lot of reactions and behaviors of companies.
    • The amount and immediacy of information available to the public has changed dramatically. This has probably forced the board to focus more on immediate, short-term wins.
  • Questions: How do you motivate management to behave ethically? How does the board help management to come up with how to achieve goals? What is the role of the board in setting and monitoring an organization’s culture?
    • In the performance review process, do not only measure what was achieved, but also how it was achieved. This is a lot of work and requires getting 360 feedback for reviews, but it can have a great impact. Reviews should not just be numbers driven.
    • Focus on the Three Ps to ensure employees enjoy the job in itself.
      • Play: Help people enjoy what they do
      • Purpose: Help people understand why what they do is important
      • Potential: Provide development opportunities to help people grow
    • Creating the right tone is about choosing the right leader. That person sets the tone and chooses the right team. The tone is set from the top, regardless of what codes of conduct may state. The wrong tone from the top will lead to the wrong tone throughout the organization, and vice versa.
    • The board is not as close as the management team to the internal tone, but it is incumbent upon board members to listen and pay attention to what the tone is. The board should understand what internal policies are in place and what internal behaviors management is trying to drive with these policies. There should be a healthy debate around whether the results are desirable.
    • Courses on ethics in college programs are not about telling people to do the right things, but about providing them with a structure and process to use when it is time to make the tough decisions. How the organization is structured will impact this, and it should be purposeful and impactful, which is an area where the board should ask questions. Group-think can be dangerous, and people need to be equipped to speak up. Processes should be in place to give people the autonomy to express themselves at all levels of the organization, including the boardroom.
    • The tone at the top is critical, but the tone in the middle matters too. Organizations need to create the resources, tools and support to make the company culture consistent throughout the organization.
    • Create an environment where people are able to come forward.
    • So much importance has been put on market thinking and shareholder value that the discussion stops there, but what about the ethics and impact of the decision beyond just being legal and valuable in the market? We need to go beyond reading the code of conduct to teach leaders how to make tough decisions.
  • Question: Is the treatment of whistleblowers in recent government situations setting the trend for how whistleblowers will be treated in corporate America?
    • Some believe it has created more barriers for people to speak up, for fear of being identified, creating reputational harm, etc.
    • Sometimes small infractions and ethical breaches can cause eye rolling from board members. For example, small dollar amount infractions. However, this leads to much bigger problems in the long-run. All complaints should be taken seriously.

Words of Wisdom (WOWs):

  • Michael: Any of us at the right moment can make an error and it doesn’t make us bad people. But if we are working collectively in organizations, we each have a role to play to ensure we are making fewer bad decisions.
  • Lisa: Have a list of hard questions and ASK them. Think through it and dig into what context and culture we are setting.
  • Phil: Try to make sure organizations, management, and boards have sufficient infomation about all stakeholders. Use a broader stakeholder filter to ensure all needs are balanced and part of the equation.

 

 

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