managing organizational integrity

8/12/2019 Managing organizational integrity

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Managing for

Organizational Integrity

by Lynn Sharp Pa ine

Reprint 94207

Harvard Business Review


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Copyright 1994 by th e President and Fellows of H arvard C ollege. All rights reserved. HARVARD BUSINESS REVIEW March-Apri l 1994

Many managers think of ethics as a question of

personal scruples, a conf idential m att er betw een

individuals and their consciences. These execu-

tives are quick to describe any wrongdoing as an

isolat ed incident, the w ork of a rogue employee.

The thought that the company could bear any re-sponsibility for an individuals misdeeds never en-

ters their minds. Ethics, after all , has nothing to do

w i th m anagement .

In fact, ethics has everything to do with m anage-

m ent. Rarely do the charact er flaw s of a lone actor

fully explain corporate m isconduct. More ty pically,

unethical business practice involves the ta cit, if not

explicit, cooperation of others and reflects the val-

ues, att itudes, beliefs, language, and behavioral pat -

terns that define an organizations operating cul-

ture. Ethics, th en, is as m uch an organizationa l as a

personal issue. M ana gers w ho fail t o provide proper

leadership and to institute systems that facilitate

e th ica l conduct share responsib i l i ty wi th those

w ho conceive, execute, and know ingly benefit from

corporate misdeeds.

Managers must acknowledge their role in shap-

ing organizat ional ethics a nd seize this opportunit y

to create a clima te that can strengthen the relat ion-

ships and reputa tions on w hich th eir com panies

success depends. Execut ives w ho ignore eth ics run

the risk of personal and corporate liability in to-

days increasingly t ough legal environm ent. In addi-

tion, t hey deprive their organizations of t he bene-

fits a vaila ble under new federal guidelines for sen-

tenc ing o rgan iza t ions convic ted o f w rongdo ing .

These sentencin g guidelines recognize for the first

tim e the organizat ional and m anagerial roots of un-law ful conduct and base fines partly on t he extent

to w hich companies have taken steps to prevent

that m isconduct .

Prompted by t he prospect of leniency, ma ny com -

panies are rushing to implement compliance-based

ethics programs. Designed by corporate counsel,

the goal of t hese programs is to prevent, detect, and

punish legal violations. But organizational ethics

m eans m ore than a voiding illegal pract ice; and pro-

viding employees wit h a rule book w ill do little to

address the problem s underlying unlaw ful conduct.

To foster a clim at e tha t encourages exemplary be-

havio r , co rpora t ions need a comprehensive ap-

proach that goes beyond the often punitive legal

compliance stance.

An integrity-based approach to ethics manage-

ment com bines a concern for the law w ith an em-

phasis on m anagerial responsibility for ethical be-

By support i ng et hi cal l y sound behavi or, m anagers can st rengthen

t he rel at i onshi ps and reput ati ons t heir compani es depend on.

Managing forOrganizational Integrity

by Lynn Sharp Pa ine

Lynn Shar p Pain e is associate professor at t he Har vardBusiness School, speciali zing i n m anagem ent eth ics. Hercurrent research focuses on l eadershi p and organi zation -al int egr i ty i n a global environm ent.


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DRAWINGS BY DAVID HORII 107

havior. Though integrity st rategies m ay vary in de-

sign and scope, all strive to define com panies guid-

ing values, aspirat ions, and patterns of thought an d

conduct . When int egrat ed into t he day-to-day oper-

ations of an organization, such strategies can help

prevent dam aging ethica l lapses w hile tapping into

pow erful human impulses for moral thought an dac t ion . Then an e th ica l f ramework becomes no

longer a burdensome constraint w ithin w hich com-

panies must operate, but t he governing ethos of an

organization.

How Organizations ShapeIndividuals Behavior

The once familiar picture of ethics as individ-

ualistic, unchanging, and impervious to organiza-

t ional in f luences has not stood up to scrutiny in

recent years. Sears Auto Centers and Beech-Nut

Nutrition Corporations experiences illustrate therole organizations play in shaping individuals behav-

ior and how even sound moral fiber can fray w hen

stretched too thin.

In 1992, Sears, Roebuck & C ompany w as inun-

dated w ith com plaints about i t s autom otive service

business. C onsumers and at torneys general in m ore

tha n 40 stat es had accused the company of m islead-

ing custom ers and selling them un necessary parts

and services, from brake jobs to front-end align-

m ents. It w ould be a m istake, how ever, to see this

situat ion exclusively in terms of any one individu-

als moral failings. Nor did m anagement set out t o

defraud Sears custom ers. Instead, a n um ber of orga-

nizat ional factors contributed to the problematicsales pract ices.

In the face of declining revenues, shrinking mar-

ket share, and an increasingly com petit ive market

for undercar services, Sears m anagement at tem pt-

e d to sp u r th e p e r fo rm a n c e o f i t s a u to c e n t e rs

by in t roducing new goals and incentives for em-

ployees. The company increased minim um w ork

quotas and introduced productivity incentives for

m echanics. The aut omot ive service advisers w ere

given product-specific sales quot as sell so ma ny

springs, shock absorbers, alignm ents, or brak e jobs

per shif t and paid a comm ission based on sales.

According to advisers, failure to m eet q uotas couldlead to a t rans fer o r a reduct ion in w ork hours.

Som e employees spoke of the pressure, pressure,

pressure to bring in sales.

U nder th is new set o f organizat ional pressures

and incentives, w ith few options for meeting their

sales goals legitim at ely, som e employ ees judgm ent

understandably suffered. Managements failure to

At Sears Auto

Centers,

managementsfailure to clarify the

line between

unnecessary service

and legitimate

preventive

maintenance cost

the company an

estimated $60

million.


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clarify th e line betw een unneces-

sary se rv ice and leg i t im at e pre-

v e n t i v e m a i n t e n a n c e , c o u p l e d

w i t h c o n s u m e r i g n o r a n c e, l e ft

e m p l o y e es t o c h a r t t h e i r o w n

courses through a vast gray area,

subject t o a w ide range of int erpre-tat ions. Without act ive manage-

ment support for ethical practice

a n d m e c h a n i s m s t o d e t e c t a n d

check questionable sales methods

and poor w ork, it is not surprising

th a t so m e em p l o ye es m ay h av e

reacted to cont extual forces by re-

sorting to exaggeration, careless-

ness, or even misrepresentation.

S h o r t l y a f t e r t h e a l l e g a t i o n s

against Sears became public, C EO

E d wa rd B re n n an ac k n o w l e d ge d

managements responsibi l i ty forp u t t i n g i n p l ac e c o m p e n sa t i o n

and goal-setting systems that cre-

a t e d a n e n v i r o n m e n t i n w h i c h

m i s t ak e s d i d o c c u r . A l th o u g h

th e c o m p an y d e n i e d an y i n te n t

t o d e c e i v e c o n s u m e r s , s e n i o r

e xec u t i v e s e l i m i n a te d c o m m i s-

sions for service advisers and dis-

continued sales q uotas for specif-

i c p a r t s . Th e y a l so i n s t i tu t e d a

system of unannounced shopping

audits and made plans to expand

the int ernal m onitoring of service.In sett l ing the pending law suits ,

S e a r s o f f e re d c o u p o n s t o c u s -

to m e rs w h o h ad b o u gh t c e r t a i n

aut o services betw een 1990 and

1992. The total cost of the settle-

m e n t , i n c l u d i n g po t e n t i a l c u s -

tom er refunds, was a n est imat ed

$60 million .

Contextual forces can also in-

fluence the behavior of top man-

a g e m e n t , a s a f o r m e r C E O o f

Beech-N ut N utrition C orporation

discovered. In th e early 1980s, on-

ly tw o years after joining the com-

p a n y , t h e C E O f o u n d e v i d en c e

su g ge s t i n g th a t th e ap pl e ju i c e

concentrate, supplied by th e com-

panys vendors for use in Beech-

N uts 100% pure apple juice ,

contain ed nothin g more tha n sug-

ar w at er and chemica ls. The CEO

could have destroyed the bogus in-

ventory and withdrawn the juice

from grocers shelves, but he w as

under extraordinary pressure to

turn the ai l ing company around.

Eliminating the inventory would

have k i l led any h ope o f tu rn ing

even the meager $700,000 profitpromised to Beech-N ut s th en par-

ent, Nestl.

A number of people in the cor-

poration, it turned out, had doubt-

ed the purity of th e juice for sever-

al years before the CEO arrived.

But the 25% price advantage of-

fered by the supplier of the bogus

c o n c e n t r a te a l l o we d th e o p e ra-

t ions head to mee t cos t-con tro l

goals. Furthermore, the company

lacked an effective quality control

system, and a conclusive lab testfor juice purity did not yet exist.

When a member of the research

departm ent voiced concerns a bout

th e j u i c e to o p e ra t i n g m an ag e -

ment, he was accused of not be-

i n g a t e am p laye r an d o f a c t i n g

l ike C h icken L i t t le . His judg-

ment, his supervisor wrote in an

annual performance review, was

colored by navet and impracti-

cal ideals. N o one else seemed to

have cons idered the companys

obligations to its customers or tohave thought about the potential

harm of disclosure . No one con-

s idered the f ac t tha t the sa le o f

adulterated or m isbranded juice is

a legal offense, putt ing the com pa-

ny and i t s top management at r isk

of crim inal liability.

A n FD A i n v e s t i ga t i o n t au g h t

Beech-N ut t he hard w ay. In 1987,

t h e c o m p a n y p l ea d e d gu i l t y t o

selling adulterated and m isbrand-

ed juice. Tw o years and t w o crimi-

nal tr ials later , the CEO pleaded

guil ty to ten counts o f mislabel-

ing. The total cost to the compa-

ny including fines, legal expenses,

and los t sa les w as an est imat ed

$25 million .

Such errors of judgment rarely

ref lect an organizat ional culture

and management philosophy that

sets out t o harm or deceive. More

ORGANIZATIONAL INTEGRITY

108 HARVARD BUSINESS REVIEW March-Apri l 1994


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HARVARD BUSINESS REVIEW March-Apri l 1994 109

often, they reveal a culture that is insensitive or in-

different t o ethical considerations or one that lacks

effective organizational systems. By the same to-

ken, exem plary conduct usually reflects a n organi-

za t ional cu l ture and ph i losophy tha t i s in fused

w ith a sense of responsibility.

For example, Johnson & Johnsons handling ofth e Tylenol crisis is somet im es at tribut ed to t he

s i n g u l a r p er so n a l i t y o f th e n -C E O

James Burke. How ever, t he decision

to do a nat ionw ide recall of Tylenol

capsu les in o rder to avo id fu r ther

loss of life from product tampering

w as in real i ty not one decision but

thousands of decisions made by indi-

viduals at all levels of the organiza-

tion. The Tylenol decision, th en,

is best un derstood not as an isolated

incident , the achievement o f a lone

individual, but as t he reflection of an organizationsculture. Without a sha red set of v alues and guiding

principles deeply ingrained throughout the organi-

zat ion, it is doubtful t hat Johnson & Johnsons re-

sponse w ould hav e been as rapid, cohesive, and eth -

ically sound.

Man y people resist ackn ow ledging the influence

of organizat ional factors on individual behavior

especially on m isconduct for fear of diluting peo-

ples sense of personal m oral responsibilit y. But t his

fear is based on a false dichotom y betw een holding

individual transgressors accountable and holding

the system accountable. Acknowledging the im-

portan ce of organizationa l context n eed not im plyexculpat ing individua l w rongdoers. To understand

all is not to forgive all .

The Limits of a LegalCompliance Program

The consequences of an et hica l lapse can be seri-

ous and far-reaching. Organizat ions can quickly be-

come enta ngled in an all-consuming w eb of legal

proceedings. The risk of litigation and liability has

increased in t he past decade as law ma kers have leg-

islated new civil and criminal offenses, stepped up

penalt ies, and im proved support for law enforce-

ment . Equal ly i f no t m ore importan t i s the dam-

age an e th ica l l apse can do to an o rgan iza t ion s

reputat ion an d relationships. Both Sears and Beech-

Nut, for instance, s truggled to regain consumer

trust and m arket share long aft er legal proceedings

had ended.

As more managers have become alerted to the

importance o f o rgan iza t ional e th ics , many have

asked their law yers to develop corporate ethics pro-

grams to detect and prevent violations of the law.

The 1991 Federal Sent encin g G uidelin es offer a

compelling rationale. Sanctions such as fines and

probation for organizations convicted of w rongdo-

ing can vary dram atica lly depending both on t he de-

gree of management cooperation in reporting and

investigating corporate m isdeeds and on w hether ornot the company has implemented a legal compli-

ance program. (See the insert C orporate Fines U n-der the Federal Sentencing G uidelines. )

Such programs t end to em phasize the prevention

of unlawful conduct, primarily by increasing sur-

veillance and cont rol and by imposing penalties for

w rongdoers. While plans vary, t he basic fram ew ork

is outlined in the sentencing guidelines. Ma nagers

m ust establish com pliance standards and procedures;

designate high-level personnel to oversee compli-

ance; avoid delegating discretionary authori ty to

those likely to act unlaw fully; effectively comm u-

nica te the companys s tandards and procedures

through training or publications; take reasonable

steps to achieve compliance through audits, mon-itoring processes, and a system for employees to

report criminal misconduct w ithout fear o f re tri-

bution; consistently enforce standards t hrough ap-

propriate disciplinary measures; respond appropri-

at ely w hen offenses are detected; and, finally, take

reasonable steps to prevent the occurrence of simi-

lar offenses in the futu re.

There is no question of the necessity of a sound,

w ell-articulat ed strategy for legal compliance in an

organizat ion. After all , employees can be frustrated

and frightened by the complexity of todays legal

environment. And even ma nagers w ho claim t o use

the law as a guide to e thical behavior o f ten lack

more than a rudimentary understanding of com-

plex legal issues.

Man agers w ould be mistaken, how ever, to regard

legal com pliance as an adequat e means for address-

ing the full range of ethical issues that arise every

day. If it s legal, it s ethica l, is a frequently heard

slogan. But conduct that is law ful may be highly

problem atic from a n ethical point of view. C onsider

the sale in some countries of hazardous products

Acknowledging the importanceof organizational context in

ethics does not imply forgivingindividual wrongdoers.


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w ithout appropriate w arnings or the purchase of

goods from suppliers w ho operate inhum ane sw eat-

shops in developing countries. Companies engaged

in international business often discover that con-

duct t hat infringes on recognized stan dards of hu-

man rights and decency is legal ly permissible in

some jurisdictions.

Legal clearance does not certify the absence of

ethical problems in the United States either, as a

1991 case at Sa lom on Brothers illust rat es. Four top-

level executives failed to take appropriate action

w hen learning of unlaw ful activit ies on the govern-

m ent trading desk. Com pany law yers found no law

obligatin g th e executives to disclose th e im propri-

eties. Nevertheless, the executives delay in dis-

closing and failure to reveal their prior know ledge

prompted a serious crisis of confidence among em-

ployees, creditors , shareholders, and customers.

The executiv es w ere forced to resign, havin g lost

the mora l au thor i ty to lead . The ir e th ica l l apse

compounded the trading desks legal offenses, and

the com pany ended up suffering losses including

legal costs, increased funding costs, and lost busi-

ness estima ted at nearly $1 billion.

A compliance approach to e thics also overem-

phasizes the th reat of detection an d punishm ent in

order to cha nnel behavior in law ful directions. The

underlying model for this approach is deterrence

theory, w hich envisions people as rat ional ma xi-

mizers of self-interest, responsive to the personal

costs and benefits of t heir choices, yet in different to

the m oral legitim acy of those choices. But a recent

Corporate Fines Under the Federal Sentencing Guidelines

What size fine is a corporation likely to pay if con -

victed of a crim e? It depends on a num ber of factors,

some of w hich are beyond a C EOs control, such as the

existence of a prior record of similar m isconduct. But

it also depends on m ore controllable factors. The m ost

importan t of t hese are reporting and accepting respon-

sibil i ty for the crime, cooperat ing w ith au thorit ies ,

and having an effective program in place to prevent

and detect unlaw ful behavior.

The follow ing exam ple, based on a case studied by

t h e U n i t ed S t a t es Sen t en c in g C o m m is sio n , s h ow s

how the 1991 Federal Sentencing G uidelines have af-

fected overall fine levels and how m anagers action s

influence organizat ional f ines .

Acme C orporation w as charged

a n d c o n v i c t e d o f m a i l f r a u d .

T h e c o m p a n y s y s t em a t i c a l l y

c h a r ged c u s t o m er s w h o da m -

aged rented automobiles more

than the actual cost of repairs.

A c m e a l s o b i l l e d s o m e c u s -

tom ers for the cost of repairs to

v eh ic les f o r w h ic h t h ey w ere

n o t r es p o n s ib le . P r io r t o t h e

c r i m i n a l a d j u d i c a t i o n , A c m e

paid $13.7 million in restitut ion

to the customers wh o had been

overcharged.

D ec id in g be f o r e t h e en a c t -

ment of the sentencing guide-

lines, the judge in the criminalcase imposed a f ine o f $6.85

million, roughly half the pecu-

niary loss suffered by Acmes

custom ers. Un der the sentencin g guidelines, how ever,

the results could have been dramat ica lly dif ferent .

Acme could have been f ined anyw here from 5% to

200% the loss suffered by customers, depending on

w hether or not it had an effective program t o prevent

and detect viola t ions of law and on w hether or not i t

reported the crime, cooperated w ith aut horities, and

accepted responsibility for the unlaw ful conduct. If a

high ranking official at Acm e w ere found to have been

involved, the ma xim um fine could have been as large

as $54,800,000 or four times the loss to Acme cus-

tom ers. The follow ing chart show s a possible range of

fines for each situat ion:

What Fine Can Acme Expect?

Maximum Minimum

Program, reporting,

cooperation, responsibility

Program only

No program, no reporting

no cooperation, no responsibility

$2,740,000

10,960,000

27,400,000

$685,000

5,480,000

13,700,000

Based on Case No.: 88-266, United States Sentencing Commission,Supplementary Report on Sentencing Guidelines for Organizations.

No program, no reporting

no cooperation, no

responsibility, involvement

of high-level personnel

54,800,000 27,400,000


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study reported in Wh y People O bey the Law by

Tom R. Tyler show s tha t obedience to the law is

strongly influenced by a belief in its legitim acy and

its moral correctness. People general ly feel that

they ha ve a strong obligation to obey the law . Edu-

cation about the legal standards and a supportive

environment may be al l that s required to insurecompliance.

Discipline is, of course, a necessary part of any

ethical system . Justified penalties for the infringe-

m e n t o f l eg i t i m a t e n o rm s a re f a i r

an d appropriat e. Some people do need

the threat of sanctions. How ever, an

overem phasis on potential sanctions

can be superfluous an d even counter-

product ive . Employees may rebe l

against programs that s tress penal-

ties, particularly if they are designed

and im posed w ithout em ployee in-

v o l v e m e n t o r i f th e s t an d ard s a revague o r unrea l i s t ic . Management

may talk of mutual t rust w hen unveil ing a compli-

ance plan, but employees often receive the m essage

as a w arning from on high. Indeed, the more skepti-

cal am ong them m ay view compliance programs as

nothing more than l iabi l i ty insurance for senior

management. This is not an unreasonable conclu-

sion, considering th at compliance programs rarely

address the root causes of misconduct .

Even in the best cases, legal compliance is un-

l ikely t o unleash m uch moral im agination or com-

mit ment. The law does not general ly seek to in-

spire huma n excellence or distinct ion. It is no guidefo r exemplary behavio r or even good prac t ice .

Those ma nagers w ho define ethics as legal com pli-

ance are implicitly endorsing a code of moral m edi-

ocrity for their organizations. As Richard Breeden,

former chairman of the Securi t ies and Exchange

C omm ission, noted, I t is not an adequate ethical

standard to aspire to get through the day without

being indicted.

Integrity as a Governing Ethic

A strategy based on integrity holds organizat ions

to a more robust standard. While compliance is

rooted in avoiding legal sanctions, organizational

int egrity is based on th e concept of self-governanc e

in accorda nce w ith a set of guiding principles. From

the perspective of integrity, the ta sk of ethics ma n-

agement is to define and give life to an organiza-

tions guiding values, to create an environment tha t

supports ethically sound behavior, and to inst ill a

sense of shared accountability among employees.

The need to obey t he law is view ed as a positive as-

pect o f organizat ional l i fe, rather than an unw el-

come constraint imposed by external authorities.

An integrity strategy is characterized by a con-

ception of ethic s as a driving force of an enterprise.

Ethical values shape the search for opportunities,

the design of organizational systems, and the de-

c is ion-making process used by ind iv iduals andgroups. They provide a com m on fram e of reference

and serve as a unifying force across different func-

tion s, lines of business, and em ployee groups. Orga-

nizat ional e thics helps define w hat a company is

and w hat i t s tands for .

Many in tegr i ty in i t i a t ives have s t ruc tura l fea-

tures comm on t o com pliance-based in i t iat ives: a

code of conduct, training in relevant areas of law,

m echanisms for reporting and in vestigating poten-

tial misconduct, and audits and controls to insure

tha t law s and company sta ndards are being met . In

addit ion , i f sui tably designed, an in tegri ty-based

initiat ive can establish a foundation for seeking the

legal benefits that are available under the sentenc-

ing guidelines should crimina l w rongdoing occur.(See th e insert The Ha llm arks of an Effect ive In-

tegri ty Strategy. )

But a n int egrity strat egy is broader, deeper, and

m ore demanding tha n a legal compliance initiat ive.

Broader in that it seeks to enable responsible con-

duct. D eeper in that it cut s to the ethos and operat-

ing systems of the organization and its members,

their guiding values and patterns of thought a nd ac-

tion . And more demanding in that i t requires an

activ e effort t o define the responsibilities and aspi-

ra t ions tha t cons t i tu te an o rgan iza t ion s e th ica l

compass. Above all , organizat ional ethics is seen as

the work of management. Corporate counsel may

play a role in the design and implementa tion of in-

tegri ty strategies, but managers at al l levels and

across all fu nct ions are inv olved in t he process. (See

the chart , Strategies for Ethics Mana gement. )

D uring the past decade, a num ber of companies

have undertaken integrity initia tives. They vary ac-

cording to t he ethical values focused on and t he im-

plementation approaches used. Some companies

focus on the core values of integrity tha t reflect ba -

Management may talk of mutualtrust when unveiling a

compliance plan, but employeesoften see a warning from on high.


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The corporate general counsel played a pivotal

role in promoting the program, and legal compli-

ance w as a critical objective. But it w as conceived

of and implemented from the start as a company-

w ide management in i t iat ive aimed at creating and

m aint aining a do-it-right clima te. In its original

conception, the program emphasized core values,such as honesty and fair play. Over tim e, it expand-

ed to encompass quality a nd environmental respon-

sibi l i ty as w ell .

Today t he initiat ive consists of a code of conduct,

an ethics training program, and procedures for re-

porting and investigating ethical concerns w ithin

the com pany. It a lso includes a syst em for disclos-

ing vio lat ions of federal procurement law to the

governm ent. A corporate ethics office manages the

program , and ethics representat ives are stat ioned at

major f ac i l i t ie s . An e th ics s teer ing commit tee ,

m ade up of Mart in M ariettas president, senior ex-

ecutives, and tw o rotat ing mem bers selected from

field operat ions, oversees the eth ics office. The au-dit and ethics committee of the board of directors

oversees t he steering comm itt ee.

The eth ics office is responsible for responding t o

questions and concerns from the companys em-

ployees. Its net w ork of representa tiv es serves as a

sounding board, a source of guidance, and a channel

for raising a range of issues, f rom al legations of

Strategies for Ethics Management

conformity with externally

imposed standards

prevent criminal misconduct

lawyer driven

education, reduced discretion,

auditing and controls, penalties

autonomous beings guided by

material self-interest

Ethos

Objective

Leadership

Methods

Behavioral

Assumptions

self-governance according

to chosen standards

enable responsible conduct

management driven with

aid of lawyers, HR, others

education, leadership,

accountability, organizational

systems and decision processes,

auditing and controls, penalties

social beings guided by material

self-interest, values, ideals, peers

Ethos

Objective

Leadership

Methods

Behavioral

Assumptions

Characteristics of Compliance Strategy Characteristics of Integrity Strategy

criminal and regulatory law

lawyers

develop compliance standards

train and communicate

handle reports of misconduct

conduct investigations

oversee compliance auditsenforce standards

compliance standards and system

Standards

Staffing

Activities

Education

company values and aspirations

social obligations, including law

executives and managers

with lawyers, others

lead development of company

values and standards

train and communicateintegrate into company systems

provide guidance and consultation

assess values performance

identify and resolve problems

oversee compliance activities

decision making and values

compliance standards and system

Standards

Staffing

Activities

Education

Implementation of Compliance Strategy Implementation of Integrity Strategy


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w ro n gd o i n g to c o m p l a i n t s ab o u t p oo r m an a g e-

m ent, unfair supervision, and company policies and

practices. Martin Ma riett as ethics netw ork, w hich

accepts anonymous complaints, logged over 9,000

calls in 1991, w hen th e company had a bout 60,000

employ ees. In 1992, it invest igated 684 cases. The

ethics office also w orks closely w ith t he huma n re-sources, legal, audit, com m unicat ions, and security

functions t o respond t o employee concerns.

Shortly aft er establishing the program , the com-

pany began its first round of ethics t raining for the

entire w orkforce, start ing wit h the C EO and senior

executives. Now in its t hird round, training for se-

nior executives focuses on decision making, the

challenges of balancing multiple responsibilities,

and compliance with law s and regulat ions crit ical

to t he company. The incentive compensation plan

for executives m akes responsibility for promot ing

ethical conduct an explicit requirement for rew ard

eligibility and requires that business and personalgoals be achieved in accordance w ith t he compa-

nys policy on ethics. Ethical conduct and support

for the ethics program are also criteria in regular

performance review s.

Today top-level ma nagers say t he ethic s program

has helped the company avoid serious problems

an d b e c o m e m o re re sp o n s i v e to i t s m o re th an

90,000 em ployees . The e th ics ne t w ork , w h ich

tracks the number and types o f cases and com-

plaints, has served as an early w arning system for

poor mana gem ent, qualit y and safety defects, racial

and gender d iscr iminat ion , environmenta l con-

cerns, inaccurate and false records, and personnelgrievances regarding salaries, promotions, and lay-

offs. By providing an alt ernative chan nel for raising

such concerns, Mart in Mariett a is able to take cor-

rective action m ore quickly a nd w ith a lot less pain.

In ma ny ca ses, potentially em barrassing problems

have been identified and dealt w ith before becom-

ing a management crisis, a lawsuit, or a criminal

investigation. Among employees w ho brought com-

plaint s in 1993, 75% w ere sat isfied w ith t he result s.

Company executives are also convinced that the

program has helped reduce the incidence of mis-

conduct. When allegations of misconduct do sur-

face , the company says i t dea ls wi th them more

openly. On several occasions, for instance, Ma rtin

Marietta has voluntarily disclosed and made resti-

tut ion to the government for misconduct involving

potential violat ions of federal procurement law s. In

addition, when an employee alleged that the com-

pany had retaliated against him for voicing safety

concerns about his plant on C BS new s, top m anage-

m ent comm issioned an investigation by an outside

law f irm. Although fai l ing to support t he al lega-

Martin Mariettas

ethics training

program teaches

senior executives

how to balanceresponsibilities.


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tions, the investigation found tha t employees at t he

plant feared reta liation w hen raising health , safety,

or environm ental com plaints. The company redou-

bled its efforts t o identify an d discipline those em-

ployees taking retaliatory action and stressed the

desi rab il i ty o f an open w ork environment in i t s

e thics training and company comm unications.Although the ethics program helps Mart in Ma ri-

etta avoid certain types of l i t igat ion , i t has occa-

sionally led to ot her kinds of legal action. In a few

cases, employees dismissed for violat ing the code of

ethics sued Martin M arietta , arguing that the com-

pany had violat ed its own code by im posing unfair

and excessive discipline.

Still , the company believes that its

at t ention to e thics has been w orth i t .

The ethics program has led to better

relat ionships w ith the governm ent,

as w e l l as to new business oppor-

tunit ies. Along w ith prices and t ech-nology, Martin Mariettas record of

integri ty , qual i ty , and rel iabi l i ty o f

estima tes plays a role in the aw ard-

ing of defense contracts , w hich ac-

count for some 75% of th e com pany s revenues. Ex-

ecutives believe that the reputat ion th eyve earned

through t heir ethics program has h elped them build

trust w ith government audit ors, as w ell. By open-

ing up comm unications, th e company has reduced

the tim e spent on redundant audits.

The program has also helped change employees

perceptions and priorities. Some ma nagers compare

their new w ays of th inking about e thics to the w aythey understand qualit y. They consider more care-

fully how situat ions w ill be perceived by others, the

possible long-term consequences of short- term

thinking, and the need for continuous improve-

m ent. CEO N orma n Augustine notes, Ten years

ago, people w ould have said th at there w ere no ethi-

cal issues in business. Today em ployees think t heir

num ber-one objectiv e is to be thought of as decent

people doing quality w ork.

NovaCare: Building

Shared AspirationsNovaCare Inc. , one of the largest providers o f

rehabilitation services to nursing homes and hos-

pitals in the United States, has oriented its ethics

ef fort t ow ard building a com m on core of shared

aspirat ions. But in 1988, w hen the company w as

ca l led InSpeech , th e on ly sen t im ent shared w as

mut ual mistrust .

Senior executives built the company from a se-

ries of aggressive acq uisit ions over a brief period of

t ime to take advantage of the expanding market

for therapeutic services. H ow ever, in 1988, the vi-

ability of the company w as in question. Turnover

am ong its frontline employees the clinicians and

therapists who care for patients in nursing homes

and hospitals escalated to 57% per year. The com-

pany s inab i l i ty t o re ta in t herapis ts caused cus-tom ers to defect and t he stock price to languish in

an extended slump.

After m ont hs of soul-searching, InSpeech execu-

tives realized that t he turnover rate w as a sym ptom

of a m ore basic problem : the lack of a com m on set

of values and aspirat ions. There wa s, as one execu-

tive put i t , a huge disconnect betw een t he values

of the therapists and cl in icians and those of the

m anagers who ran t he company. The therapists and

c l i n i c i an s e v a l u a te d th e c o m p an y s su c c e ss i n

term s of its delivery of high-qualit y h ealth ca re. In-

Speech m anagement , led by executives wit h finan-

cial services and venture capital ba ckgrounds, mea-

sured the company s w orth exclusively in t erms of

f inanc ia l success. M anagement s s ing le-m indedemphasis on increasing hours of reimbursable care

turned clinicians off . They t ook m anagements per-

formance orientat ion for indif ference to patient

care and left t he company in droves.

CEO John Foster recognized the need for a com-

m on frame of reference and a comm on language to

unify the diverse groups. So he brought in consul-

ta nts to conduct int erview s and focus groups w ith

the com panys health care professionals, ma nagers,

and cust omers. Based on t he results, an employee

ta sk force drafted a proposed vision stat ement for

th e company, a nd anot her 250 employ ees suggested

revisions. Then Foster and several senior ma nagers

developed a succinct statement of the companys

guiding purpose and fundam ental beliefs tha t could

be used as a framework for making decisions and

sett ing goals, policies, and practices.

U nlike a code of conduct, w hich articula tes spe-

cific behavioral stan dards, the stat ement of vision,

purposes, and beliefs lays out in very sim ple terms

th e compan ys central purpose and core values. The

purpose meeting the rehabil i tat ion needs of pa-

At NovaCare, executives definedorganizational values and

introduced structural changesto support those values.


12/14


tients t hrough clinical leadership is supported by

four key beliefs: respect for the individual, service

to t he customer, pursuit of excellence, and com mit -

m ent t o personal integrity. Each value is discussed

w ith examples of how i t is manifested in the day-to-day act ivities and policies of the company, such

as how to m easure the qual i ty o f care.

To support t he new ly defined values, th e compa-

ny chan ged its name to N ovaC are and introduced a

num ber of structural a nd operat ional cha nges. Field

m ana gers and clinician s w ere given greater deci-

sion-ma king auth ori ty ; c l in icia ns w ere provided

w ith a dditional resources to assist in th e delivery of

effective therapy; and a new m anagement struct ure

integrated the v arious therapies offered by t he com-

pany. The hiring of new corporate personnel w ith

health care backgrounds reinforced the com panys

new clinical focus.

The introduction of the vision, purpose, and be-

l ie fs met with varied reactions from employees,

ranging from cool skepticism t o open enthusiasm .

One employee remem bered thinking the t alk about

v a l u e s m u c h a d o ab o u t n o th i n g . A n o th e r re-

called, It w as really w onderful. It gave us a goal

tha t everyone aspired to, no m att er w hat t heir place

in the com pany. At first, som e w ere baffled about

how th e vision, purpose, and belie fs w ere to be

used. But, over tim e, man agers became m ore adept

at explaining and using them as a guide. When a

custom er tried to hire aw ay a valued employee, for

example, man agers considered raiding the custom -

ers company for em ployees. After review ing thebeliefs, the m anagers abandoned the idea.

NovaCare managers acknowledge and company

surveys indicate that there is plenty of room for im-

provement . While th e values are used as a firm ref-

erence point for decision m aking and evaluation in

some areas of the com pany, they are still viewed

w ith reservation in others. Some m anagers do not

w alk the ta lk , employees complain . And recently

acquired companies have yet t o be fully int egrated

into the program. Nevertheless, many NovaCare

employees say t he values initiative played a critical

role in the compan ys 1990 tu rnaroun d.

The values reorientation also helped the com-

pany deal with its most serious problem: turnover

among health care providers. In 1990, the turnover

rate stood at 32%, still above target but a signifi-

cant improvement over the 1988 rate of 57%. By

1993, turnover had dropped to 27%. Moreover, re-

cruiting new clinicians became easier. Barely a ble

to hire 25 new clinicians each m onth in 1988, the

company added 776 in 1990 and 2,546 in 1993. In-

deed, one em ployee w ho left durin g the 1988 tur-

At NovaCare,

clinicians took

managements

performance

orientation forindifference to

patient care and left

the company in

droves.


13/14



m oil said tha t her decision to return in 1990 hinged

on t he com panys adoption of th e vision, purpose,

and beliefs.

Wetherill Associates:Defining Right Action

Wether i l l Assoc ia tes , Inc . a sma l l , pr iva te ly

held supplier of electrical parts t o the a utom otive

ma rket has neither a conventional code of con-

duct n or a sta tem ent of va lues. Instead, WAI has a

Q ual i t y A ssurance M anual a combination of phi-

losophy t ext, conduct guide, technical ma nual, and

c o m p an y p ro fi l e th a t d e sc r i be s th e c o m p an y s

commitment to honesty and its guiding principle

of right a ction.

WAI doesnt have a corporate eth-

ics officer w ho reports to t op m an-

agement, because at WAI, the com-

panys corporate ethics officer i s t opmanagement . Mar ie Bo the , WAI s

c h i e f e x e c u t i v e o f f i c e r , s e e s h e r

main function as keeping the 350-

employee company on the pa th o f

right action and looking for oppor-

tunities to help the community. She

delegates the technical aspects of

the business m arketing, f inance, personnel, opera-

tions t o o ther members o f the organizat ion .

Right act ion, t he basis for all of WAIs decisions,

is a w ell-developed approach t hat cha llenges m ost

conventional m anagement t hinking. The company

explicitly rejects t he usual conceptua l boundariesthat separate moral i ty and self- interest . Instead,

they define right behavior as logically, expediently,

and moral ly r ight . Managers teach employees to

look at the needs of the customers, suppliers, and

the community in addit ion to those of the compa-

ny and i ts employees w hen making decisions.

WAI also has a unique approach to competition.

One em ployee explains, We are not in competi-

t ion w ith any body. We just do w hat w e have to do

to serve the customer. Indeed, w hen occasionally

unable to fill orders, WAI salespeople refer cus-

tomers to competitors. Artificial incentives, such

as sales contests, are never used to spur individual

performance. Nor are sales results used in deter-

m i n i n g c o m p e n sa t i o n . I n s te ad , th e f o c u s i s o n

teamwork and customer service. Managers tell all

new recruits t hat absolute honesty, m utual cour-

tesy, and respect are standard operating procedure.

New comers generally react positively t o compa-

ny philosophy, but not all are prepared for such a

r ad i c a l d e par tu re f ro m t h e p rac t i c e s th e y h av e

know n elsew here. Recalling her initial interview,

one recruit described her response to being told t hat

lying was not a l lowed, What do you m ean? No ly-

ing? Im a buy er. I lie for a living! Today she is per-

suaded that the policy m akes sound business sense.

WAI is know n for inform ing suppliers of overship-

ments as well as undershipments and for scrupu-

lous honesty in the sale of parts, even w hen decep-tion ca nnot be readily detected.

Since its entry in to t he distribution business 13

years ago, WAI has seen its revenues clim b steadily

from just under $1 million t o nearly $98 million in

1993, and th is in an industry with l i t t le growth.

Once seen as an upstart beset by naysa yers and in-

dustry skeptics, WAI is now credited w ith entering

and professional iz ing an industry in w hich kick-

backs, bribes, and grat uities w ere comm onplace.

E m p lo ye es e qu a l n u m b e rs o f m e n an d w o m e n

ranging in age from 17 to 92 praise the w ork envi-

ronment as both productive and supportive.

WAIs approach could be difficult to i nt roduce in

a larger, more tradi t ional organizat ion . WAI is a

sma ll com pany founded by 34 people w ho shared abelief in right a ction; its ethical v alues w ere natu-

ra l ly bu i l t in to the o rgan iza t ion f rom the s tar t .

Those valu es are so deeply in grained in th e compa-

nys culture and operating systems that they have

been largely self-sustaining. Still , t he company has

developed its ow n t raining program and t akes spe-

cial ca re to hire people w illing to support right ac-

tion. Ethics and job skills are considered equally

important in determining an individuals compe-

tence and suitabilit y for employment. For WAI, th e

challenge w ill be to sustain it s vision as the compa-

ny grow s and taps into m arkets overseas.

At WAI, as a t Mar t in M ar iet ta and N ovaC are,

a management-led commitment to e thical values

has contributed to com petit iveness, positive w ork-

force morale, as w ell as solid sustainable relat ion-

ships with the companys key consti tuencies. In

the end, creating a climate that encourages exem-

plary conduct m ay be the best w ay t o discourage

damaging misconduct . Only in such an environ-

m ent do rogues really act alone.

Reprint 94207

Creating an organization thatencourages exemplary conductmay be the best way to prevent

damaging misconduct.


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