Why do some managers behave unethically? What motivates them to engage in actions that violate accepted principles of right and wrong, trample on the rights of stakeholder groups, or

simply break the law? There is no simple answer to this question, but a few generalizations can be made. First, business ethics are not divorced from personal ethics. As individuals we are taught that it is wrong and unethical to lie and cheat and that it is right to behave with integrity and honour and to stand up for what we believe to be right and true. The personal ethical code that guides our behaviour comes from a number of sources, including our parents, schools, religion, and the media. Our personal ethical code exerts a profound influence on how we behave as businesspeople. An individual with a strong sense of personal ethics is less likely to behave in an unethical manner in a business setting and in particular is less likely to engage in self-dealing and more likely to behave with integrity.

 

Second, many studies of unethical business behaviour have concluded that businesspeople sometimes do not realize they are behaving unethically, primarily because they simply fail to ask the relevant question: Is this decision or action ethical? Instead they apply a straightforward business calculus to what they perceive as a business decision, forgetting that the decision may also have an important ethical dimension. The fault here lies in processes that do not incorporate ethical considerations into business decision making. This may have been the case at Nike when managers originally decided to subcontract work to businesses in developing nations that had poor working conditions. Those decisions were probably made on the basis of good economic logic. Subcontractors may have been chosen on the basis of business variables such as cost, delivery, and product quality, and the key managers simply failed to ask how the subcontractors treated their workers. If they thought about the question at all, they probably reasoned that it was the subcontractors’ concern, not theirs.

 

Unfortunately, the climate in some businesses does not encourage people to think through the ethical consequences of business decisions. This brings us to the third cause of unethical behaviour in businesses: an organizational culture that deemphasizes business ethics, reducing all decisions to purely economic factors. Author Robert Bryce has explained how the organizational culture at now-bankrupt energy company Enron was built on values that emphasized greed and deception. According to Bryce, the tone was set by top managers who engaged in self-dealing to enrich themselves and their own families. Bryce tells how former Enron CEO Kenneth Lay made sure his own family benefited handsomely from Enron (which is an example of self-dealing). Much of Enron’s corporate travel business was handled by a travel agency partly owned by Lay’s sister. When an internal auditor recommended that the company could do better by using another travel agency, he was fired. In 1997 Enron acquired a company owned by Kenneth Lay’s son, Mark Lay, which was trying to establish a business trading paper and pulp products. At the time Mark Lay and another company he controlled were targets of a federal criminal investigation of bankruptcy fraud and embezzlement. As part of the deal, Enron hired Mark Lay as an executive with a three-year contract that guaranteed him at least $1 million in pay over that period, plus options to purchase about 20,000 shares of Enron. Bryce also details how Lay’s grown daughter used an Enron jet to transport her king-sized bed to France. With Kenneth Lay as an example, it is perhaps not surprising that self-dealing soon became endemic at Enron. Another notable example was CFO Andrew Fastow, who set up the off-balance sheet partnerships that not only hid Enron’s true financial condition from investors, but also paid tens of millions of dollars directly to Fastow (Fastow was subsequently indicted by the government for criminal fraud and went to jail).

 

A fourth cause of unethical behaviour has already been hinted at. This is pressure from top management to meet performance goals that are unrealistic and can be attained only by cutting corners or acting in an unethical manner. Again, Bryce discusses how this may have occurred at Enron. Lay’s successor as CEO, Jeff Skilling, put a performance evaluation system in place that weeded out 15 percent of “underperformers” every six months. This created a pressure­ cooker culture with a myopic focus on short-term performance. Some executives and energy traders responded to that pressure by falsifying their performance (such as by inflating the value of trades) to make it look as if they were performing better than was actually the case. The lesson from the Enron debacle is that an organizational culture can appear to legitimize behaviour that society would judge as unethical, particularly when this culture is mixed with a focus on unrealistic performance goals, such as maximizing short-term economic performance no matter what the costs. In such circumstances there is a high probability that managers may violate their own personal ethics and engage in behaviour that is unethical. By the same token, an organizational culture can do just the opposite and reinforce the need for ethical behaviour. At Hewlett-Packard, for example, Bill Hewlett and David Packard, the company’s founders, propagated a set of values known as the HP Way. These values, which shape the way business is conducted both within and by the corporation, have an important ethical component. Among other things, they stress the need for confidence in and respect for people, open communication, and concern for the individual employee.

The Enron and Hewlett-Packard examples suggest a fifth root cause of unethical behaviour: leadership. Leaders help to establish the culture of an organization, and they set an example that others follow. Other employees in a business often take their cue from business leader; and if those leaders do not behave in an ethical manner, other employees may see this as justification for their own unethical behaviour. It is not what leaders say that matters, but what they do. Enron, for example, had a code of ethics that Kenneth Lay himself often referred to; but Lays own actions to enrich family members spoke louder than any words.

 

Reference:

S.W. Gellerman, “Why Good Managers Make Bad Ethical Choices,” in Ethics in Practice: Managing the Moral Corporation, ed. K.R. Andrews (Harvard Business School Press, 1989)

  1. Messick and M.H. Bazerman, “Ethical Leadership and the Psychology of Decision Making,” Sloan Management Review 37 (Winter 1996), pp 9-20.
  2. Bryce, Pipe Dreams: Greed, Ego, and the Death of Enron (New York: Public Affairs, 2002)

 

Dr. Asare Bediako Adams, FCILG

The author is the Director of Africa Operations for Chartered Institute of Leadership and Governance. He is also the Executive Director of PMRIG Group of Companies and Bedoak Global Ltd and its affiliates. He also serves as a board member of several companies.

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