Ethical Leadership in Business: How to Deal with Dilemmas

Remember Sherron Watkins? You might not. It’s been almost two decades since Watkins was the vice-president of corporate development at the disgraced Enron energy company, but today is most often referred to as its whistleblower. A certified public accountant with a master’s degree in professional accounting from the University of Texas, Watkins joined Enron after working for the poster child of accounting fraud, auditing firm Arthur Andersen, for eight years.

Why was the Enron financial scandal not exposed earlier? Why did it take years before a concerned employee came forward? Why did no one stop the “smartest guys” when the lights went out in California? Ms. Watkins cited four key factors that could be applied to many organizations and their employees:

• fear of losing one’s job
• fear of rocking the boat and being ridiculed
• an “it’s not my concern” attitude
• a “group think” culture that does not tolerate criticism of the corporate viewpoint

Fear, apathy and peer pressure. It sounds like high school. But how many employees, regulators, investors and others with links to today’s scandals are now saying, “if only I had shown some ethical leadership and done something”?

Who “Made Off” with the Money?

While the full story is not yet known—and experience tells us that it will take years to uncover all the facts—the sheer size of the fraud allegedly committed by Bernard Madoff, the American businessman and former chairman of the NASDAQ stock exchange, adds another layer to the general public’s mistrust and cynicism of the ethics of people in high places.

The Madoff case appears to be a Ponzi scheme of gigantic proportion but subtle variation. The structure of such schemes have been around for centuries but were made famous by the eponymous Charles Ponzi, who defrauded investors in the United States through fraudulent activity involving the exchange on international postal reply coupons. The classic Ponzi scheme is one in which the returns on investors’ funds are not obtained through actual earnings but from the principal contributed by subsequent investors. No legitimate investment exists, and the funding from subsequent investors is used to pay off earlier obligations, which provides the appearance of legitimacy.

Madoff’s scheme was typically Ponzian in structure, but varied in both pace and marketing. Bernard l. Madoff investment Securities offered its exclusive clientele modest but steady returns in both bull and bear markets, rather than the typical Ponzi paradigm of suspiciously high returns to all comers. Furthermore, charitable foundations, rather than individual investors, were many of Madoff’s victims, organizations that one would assume to be sufficiently sophisticated to see through all his smoke and mirrors.

Nevertheless, not only was the Madoff scheme typical in Ponzi structure (using new or annual investments as “returns” to established clients), it also shared a few other attributes. Madoff indicated to clients that the intricacies of his investment strategy were too complicated to explain in simple terms. Madoff also claimed that the secrecy of his strategy and investments was important. The “beauty” of the Madoff scheme, however, was in how it diverged from three key aspects of the traditional Ponzi:

• Questionable or limited information on the background of the promoters of the investment
• Promoters who are not registered with any securities regulator or self-regulatory organization
• Obstructions to due diligence because of key offices or institutions in foreign jurisdictions

Mr. Madoff was an established investment veteran with impeccable credentials operating in plain sight in one of the foremost investment capitals in the world. In the end, who had the courage to come forward and blow the whistle? Not the regulators. Certainly not the investors, who were blinded by steady returns and a false front of legitimacy. It was instead the Sherron Watkins of Bernard l. Madoff investment Securities: Mark and Andrew Madoff, sons of Bernard.

Ethical Issues

One can only imagine the horror experienced by Watkins and the Madoff boys. To discover that fraud is occurring all around you is to be faced with an ethical dilemma that many would prefer to simply ignore. Though the ethical dilemma is personal (“should I blow the whistle?”) the ethical issue is institutional.

Ethical issues come in all shapes and sizes, and by no means are they all related to financial fraud. They can be legal or illegal. They can be simple or complex. Their consequences can be minor or severe. Some of the topical ethical issues that companies face today are:

• affirmative action or preferential hiring programs
• corporate donations to non-profit organizations
• the outsourcing of jobs to countries where labour is less ex-pensive
• the outsourcing of production to countries with looser environmental or health and safety laws
• tax minimization strategies

Note that none of these practices are illegal. Indeed some, like affirmative action programs or outsourcing, become popular economic or social trends. Others, like corporate donations to non-profits or tax minimization strategies, are simply good business.

What they share, however, is the advantageous treatment of one group at the expense of another. They involve choice. And choice requires leadership. So how do people guide themselves in their choices when ethical roadmaps don’t exist and ethical issues are a moving tar-get? After all, ethics vary from person to person. Ethics vary from country to country. Ethics vary from culture to culture. It may help to take a step back for a moment and imagine a pyramid based on enforceability.

Ethical Enforceability

In most societies, the basic ethical standard is criminal law. We all agree that people should not break the law. But how many times have you heard that old saw, “if it ain’t illegal, it must be ethical”? Ethical behaviour is not enforceable law, because criminal law alone cannot encompass all ethical issues and therefore cannot enforce ethical behaviour. Yet criminal law—the entirety of the criminal code and its penalties—provides business with an ethical base.

The most difficult ethical dilemma is not about right versus wrong. It’s about right versus right. It’s about the right away to con-duct business, and if the dilemma is particularly tough, that’s usually because there are powerful ethical arguments on both sides. Too often, the scandals that make the headlines are the result of perfectly legal but appalling and outrageous behavior that highly offends the public. That’s why you need regulatory law. It’s the next level in the pyramid.

These are the regulations that govern industries and professions. They may be self-imposed or imposed by government in some form of regulatory agency. They exist not only to regulate the behaviour—typically through a disciplinary process—of organizations and individuals but also to serve as a framework that acts as a moral guide.

Here it may be useful to take note of CGA Ontario’s “Code of Ethical principles and rules of Conduct” (“the Code”), as a template of regulatory law. A professional organization and its members are granted the legal right by society to organize itself, to control en-trance into a profession and to formulate standards of behaviour governing its members. in return for this right, its members are to act in the interest of society and the public.

The Code encompasses both ethical principles and rules of conduct, and articulates the ethical obligations of all CGAs as well as desirable character traits and values that guide our ethical behaviour. It would be impossible to overestimate its importance in both the personal and professional life of every CGA. Without question, to be called upon by the chair of CGA Canada to rise and recite the Oath of Obligation at the Admission to Membership Ceremony is a profound experience, and an occasion no CGA ever forgets.

In this way, we might say that a framework of common behaviour—and the sanction that results when one betrays the trust of one’s colleagues—helps to regulate individuals to a degree to which organizations are immune. Thus the need for corporate policy.

Though corporate policy is typically less enforceable than criminal or regulatory law, it still informs ethical behaviour. The weakness of corporate policy, however, resides in its obligations: if a company’s main purpose is to maximize returns to its shareholders, then it could be seen as unethical for a company to consider the interests and rights of other groups. That is why many people believe that corporate policy primarily exists to limit legal liability or curry favour by presenting the image of the good corporate citizen. it is also why many believe that ethical problems are better dealt with by depending upon employees to use their own values as their guide.

The Behaviour Ladder shows that, while a corporate policy may be legal, it may still fall short of ethical behaviour, and be inconsistent with the values of employees. Similarly, even though ethical behaviour is both higher and dependent upon both criminal law and corporate policy, it may not mesh with individual values. Of course, the value system of many individuals is not consistent with the reality of every criminal law; nevertheless, if we are all to climb the ethical ladder, we need a common rung on which to begin.

Ethical Criteria

So how can you determine what is ethical? For example, if a new corporate marketing decision has been made with which you are uncomfortable, what tests can you apply to see where it stacks up on the ethical scale? Here are a few criteria that will help:

• Is it legal? if the course of action is not legal, then it should not be done. Take steps to identify the illegality of the issue and ensure that you do not participate in its implementation.
• Do the benefits exceed the cost, regardless of to whom they accrue? Ask yourself what the benefits are of the policy and to what extent do they outweigh the costs of the course of action. This may help you to identify who or what benefits from a specific decision.
• Are you prepared to let everyone in your organization carry out the proposed action?
• The Light of Day. Would you be comfortable if your actions were exposed both inside and outside your organization? (A variation of this is the parental test—would you be willing to tell your parents what you have done?)
• The Golden Rule. What would you say if the proposed action were done to you? your own reaction may provide guidance as to whether the action is ethical.
• The External Test. Discuss your proposed course of action with others. If feedback indicates that the proposed course of action is an ethical issue, think long and hard before proceeding.

The late Robert Noyce, legendary co-inventor of the microchip, once said, “if ethics are poor at the top, that behaviour is copied down through the organization.” While I admire the sentiment, I don’t completely agree with it. The fact is that in every organization there are employees who are whistleblowers in waiting. Remember Sherron Watkins? She wrote a detailed, no-holds-barred seven-page letter to her boss, Kenneth lay, telling him company was just a giant Ponzi scheme. And she was circumspect enough to take the external test before writing it—she discussed her ethical dilemma with her former partners at Arthur Andersen.

As long as there is business, there will be situations that test the ethics of business participants. But in the words of the financier Henry Kravis, who knew a thing or two about the ethics of building a business empire in the same city that spawned Bernard Madoff “if you build that foundation—both the moral and the ethical foundation—as well as the business foundation and the experience foundation, then the building won’t crumble.”

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