English: Thomas Hobbes (Photo credit: Wikipedia)

The Barclays fine for the LIBOR scandal and Glaxo Smith Kline (GSK)’s massive fine by regulators raises the question whether corporate integrity programmes work. All major firms have the programmes in some form either as a corporate social responsibility programme or as an explicit corporate ethics.  The corporate integrity is supposed to be the ethical structure within an organisation to keep it acting legally and ethically.  The CEO and senior management are responsible for ensuring the ethical code is followed. When the company fails to meet its corporate ethics, depending on the size of the breach, the CEO, as we saw at Barclays, will resign.  In Barclays case, the CEO stepped down because investors, regulators and politicians did not believe he was not the right person to change a corporate culture that had been weakened by scandal. Yet, in calling for his dismissal, the politicians, in particular, called for a return to “responsible banking” without explaining what that is except by its absence.

In the case of GSK, the company settled its lawsuits on fraudulent promotions of its products and paid nearly $3 billion in fines.  The company says it has learned from past mistakes and put in place a corporate integrity programme for the next five years.

GSK has also signed up to a five-year corporate integrity agreement that require the company to “implement and/or maintain major changes to the way it does business [and] implement and maintain transparency in its research practices”.

 Both incidents raise questions about the efficacy of corporate integrity programmes. On the surface, we can ask, “why if the programmes work, do we continue to have corporate scandals?”  If they do not work, what is the purpose in having the integrity programmes?  The surface questions show that the programmes have a punitive as well as a preventative element.  The programmes show staff how to behave and they are a standard for punishing breaches. The programmes serve other goals because they can reassure investors, customers, and, perhaps, future employees, that the organisation follows an ethical code. Yet, the deeper question remains: do they work?

Any code can be subverted so why have them?

The codes exist and people may follow them, but they can be subverted.  If the company’s code becomes a servant of the company’s goals, then it has lost its purpose.  In the case of Enron, senior management subverted the elaborate management controls.  The management pursued larger and larger deals to enrich themselves and not the company’s shareholders.  In effect, the ethical code was used to benefit the senior managers.  As the former Chief Financial Officer said, he thought he was protecting the organisation by what he was doing. He thought he was a hero for creating the financial instruments that hid the losses and enabled further illegal behaviour.  What is particularly chilling about his belief was that it reflects the idea that the company or the organisation has to be protected. Instead of obeying the law or the company’s ethical code, he believed and accepted that he had to “protect” the organisation.  In effect, the organisation became the ethical horizon and his place within it became the dominant criteria for assessing the ethical standards to be followed.

Is an MBA too late to learn ethics?

We can look back on Enron and think that things have gotten better; after all, we have more corporate integrity programmes.  Yet, we have to ask whether MBA students as well as the people being hired understand what corporate integrity means.  In one example, a professor recounted how in an MBA ethics class, the professor had an assignment where students were given the following scenario.  The FDA had identified their company’s product has serious side effects and will kill 20 people a year.  The MBA students discussed it and decided to fight the FDA and not pull the product. Even though they knew it would kill 20 people a year, they would fight the company.  In that scenario, the company had to be defended at the cost of any ethical considerations.  Even though this was from 1987, the issue is timeless.

We can see that recent research from MBA programmes shows that students with higher ethical standards earn lower salaries. We are supposed to be reassured that ethics are receiving an emphasis in MBA programmes. Yet, illegal and unethical behaviour is being reported regularly.  A recent National Business Ethics Survey showed employees are feeling pressure to compromise their ethical position more than at any time since 2000.

Is corporate ethics simply about survival at any cost?

If a company’s ethics is reduced to doing anything to survive a corporate integrity programmes will not work. In such a situation, pace Thomas Hobbes, there are no ethical standards because the company becomes its own ethical standard. The company will do what it must do to survive.  There is no question of whether it should survive, despite acting corruptly or being corrupted by the senior management. Instead, the highest view for an officer becomes “I must protect the organisation”.  The ethical horizon is limited so the officer does not ask whether the company is acting appropriately, is just, or noble, in its behaviour. 

What is the point of an ethical standard?

If that is the case, then we have to ask, “What is the point of an ethical standard?”  Why do organisations create them?  What is it about the financial or business world that now requires them?  In having them, we see a problem within society. The question is no longer “Is this right”; it becomes “What can I get away with, within the law”. The corporate integrity programmes become a replacement ethical framework for what society used to provide.  Yet, if they do work, to what extent are they adding anything beyond what any decent regime would expect from its citizens?  Moreover, we seem to know that they work by the absence of scandal and not a positive action.  In effect, the corporate integrity programmes serve more as window dressing than as an actual check on unethical behaviour.  In a sense, they become an elaborate way to reassure people that the organisation acts appropriately.  They represent a further “hedge” that the organisation can be “trusted.” 

What sets the corporate integrity?

When we consider corporate integrity, we always have to start with the top.  The leadership set the tone.  They will set the culture.  In public sector organisations, that culture may be different because of the politics involved.  After the leadership, the next factor for creating corporate integrity is the people you hire.

Who is hired and why you promote will determine the rest.

What emerges from the corporate scandals is the consistent theme is who was hired and why. At Enron, Skilling focused on hiring people who would fit his model of aggressive traders or dealmakers. He would recruit from elite business schools.  He wanted smart people who would who were aggressive deal makers.  The people that could make deals were promoted and rewarded. Those who could not were transferred or released.  The focus in such situations was not on ethics or ethical behaviour, it was to make the deal and ensure the employee’s survival. If the employee survived, produced deals, then, according to the perverted logic within the organisation, the organisation would survive. 

If you hire people without a strong ethical tradition or approach, they are unlikely to remain ethical in difficult situations.  The question to ask is whether they, or the company, are willing to lose money to be ethical.  However, you soon face a difficulty, how do you reward people who may do the right thing for themselves and for the organisation but remain vulnerable to what the competitors are doing?

If you reward risk taking, then people will take risks.  If you reward for deals, people will make deals.  If people are rewarded for what they deliver to the bottom line, they will work to it.  Yet, what is missing in any rewards programme is whether any of this is ethical.  If organisations are not rewarding their employees for acting with integrity, ethically, then it sends an implicit message that behaviour that succeeds that is not ethical is ok.  If a deal maker cuts corners and succeeds, does his firm penalize him or reward him?  The argument, as in LIBOR scandal, is that everyone else is doing it. Yet, does that excuse or justify unethical behaviour?  The answer on Wall Street and in the City appears to be yes.  The question is how you change that approach.

What is to be done?

How do you check on your ethics or integrity?  Is integrity simply a function of risk? In the case of Enron, the leadership subverted the management controls.  The task is to build an internal culture that resists such pressures. The organisation, not just the individual employees, has to be ethically strong.  If ethics are just another risk factor that needs to be hedged, the organisation will fail.  The organisation will succeed to the extent that it, and its employees, acts ethically. However, the staff need to understand that ethics is more than following the rules.  Even though the current maxim is “what the law does not forbid, it allows”, that is not a sound basis for creating an organisational ethics.  What is needed, in these situations, is to remind staff that their personal integrity is linked to corporate integrity, which, in turn, is linked to a higher integrity. What this means is that the organisation has to reiterate there is a law higher than the organisation and the survival of the organisation is not more important than its ethical “soul.” If nothing is more important than survival, then the organisation will soon become corrupted because necessity then determines, and justifies, all behaviour.

Related articles

• Good Corporate Citizen or Good Person: check your ethics at the door? (thoughtmanagement.org)
• Britains biggest corporate crook? – GlaxoSmithKline a clear winner (seroxatsecrets.wordpress.com)
• Corporate Ethics Statements Don’t Work (businessweek.com)
• Fostering a More Ethical Business Culture (aicpa.org)