Corporate Ethics and Corporate Governance

Corporations are under fire. Hardly a day goes by that executive conduct doesn’t appear as a topic—or, more accurately, as a problem—in the media. This leads to increased public pressure on corporations, many of whom are reacting and publicly assuming their corporate responsibility. But how serious are they? Doesn’t the shiny façade of an environmentally and socially aware corporation simply conceal a game played according to the market’s purely economic rules? The notion that business and ethics are mutually exclusive refuses to die. And the prejudice that business success is possible only at the expense of morality continues to prevail. Or as the satirist Karl Kraus alledgedly responded to a student: “You want to study business ethics? Then study either one or the other!”

Last Thursday, you went out for lunch with an acquaintance from class, a nice-enough fellow but not a candidate for lifelong friendship. As you were wolfing down your last bite of cheeseburger, you suddenly gulped and flushed: you realized that you had forgotten your wallet. You were flat broke. Embarrassed, you entreated your classmate to lend you five dollars, which you would, of course, pay back on Tuesday. Today is Wednesday; you forgot.

The problem business ethics—as any other applied ethics — is facing to put formal ethical considerations developed a priori into practical use in real-life situations. It becomes apparent that applied ethics in this sense must do more than just reflect on philosophical principles if it is to be of relevance in the dynamically developing real world. This means we must move away from the idea implied by the term “applied ethics” that we can simply take — from whichever source — pure ethics and apply it wherever we like. However, this makes it impossible to separate the ultimate justification of principles from practical implementation in order to solve real ethical problems, as propagated for example by transcendental pragmatics. In applied ethics there is a fundamental relationship between applying valid principles, and criticising and modifying them. In the prescriptive field this relationship exhibits structures similar to those in the field of understanding. Ethics which takes this into consideration can be called “hermeneutical ethics” (Zimmerli 1995). It can resolve the “dilemma of philosophical ethics” (Zimmerli 1990, pp. 205f.): that ethics as a theory for justifying moral norms presupposes that they are factually valid, yet must be able to distinguish between legitimate and illegitimate validations. Hermeneutical ethics resolves this dilemma thus: when applying ethical principles, it presupposes their factual validity; when however, testing their suitability in altered situations, it questions it.

The accelerating globalization of economic transactions provokes the impression that human values and patterns of behavior will sooner or later converge into one worldwide culture. This assumption seems to be especially true for the business world with its ‘culturally invariant rules of the market’. In fact, however, this convergence of the various business cultures of the world takes place only on their very surface and does not reach the different fundamental value systems. They are the result of a mostly unconscious and complex process, having developed over centuries, and thus resisting short-term change.

Few doubt that leaders play a role, either as founders or promoters of values in organizations. So the more important question is not “Whose values?” but “What values?” Just because a leader has values doesn’t mean that they are good ones. Furthermore, the question is not so much about what a leader values, but what a leader actually does to demonstrate his or her values. This paper is about how leaders translate values into action and actions into enduring organizational values. I first examine how we have come to think about the values of business leaders and success. I also reflect on what theories of leadership say about how leaders influence followers. Then I argue that the language of having values is often inadequate for understanding individual and organizational ethics. Lastly, I look at the leadership of P. Roy Vagelos of Merck & Company to illustrate the how the values of founders and current leaders shape the values of their own organizations, and can shape the values of the industries in which they operate.

Servant and leader — can these two roles be fused in one real person, in all levels of status or calling? If so, can that person live and be productive in the real world of the present? My sense of the present leads me to say yes to both questions. This chapter is an attempt to explain why and to suggest how.

What’s so good about work? Throughout history some have praised it, others have cursed it, but few escaped it or had the luxury of deciding whether they should work or not. At some time or another we all wish that we didn’t have to work. We fantasize about catching up on chores or hobbies, spending more time with family, friends or a loved one, reading great books, and traveling. Lotteries seduce with the vision of freedom from work and material need, yet a surprisingly large number of lottery winners and other independently wealthy individuals continue to work. It is easy to imagine not working for a short time; the task of imagining a whole life without work is more difficult. For some people the question “Why work?” is ridiculous because they don’t have a choice in the matter. “We work because we have to make a living.” That is why people have paid jobs, but it doesn’t explain why they do other kinds of work. Nonetheless, the economic interpretation of work is so strong in our culture and a growing number of other cultures, that we tend to equate work with “being on the job”.

Organizational integrity refers to the ethical integrity of the individual actors, the ethical quality of their interaction as well as that of the dominating norms, activities, decision making procedures and results within a given organization. This article discusses these manifold aspects of organizational integrity and outlines the main driving forces and dimensions of ethical and unethical behavior in corporations. Reflections on ethics in general start with the assumption that it has to do with human actors who do or omit something. It has to do with their motives and the product of their interrelated activities. Thus, the individual might be regarded as the main point of reference for analyzing organizational integrity. However, the ongoing formalization and institutionalization of the ethical dimension of management is based on a simple observation: Organizational integrity goes beyond managerial integrity and is more than the presence of individuals with good characters within the organization. Having “good” managers is certainly a precondition for organizational integrity, but it does not prevent organizations from obtaining bad ethical results. It is possible to take the bad apples out of the barrel but the risk of deviant organizational behavior will not be reduced to zero. The good apples might develop a bad taste and sometimes it might be a problem of the barrel itself.

At first it seemed as if Enron was just too big, just too important and just too valuable to fail (Walker 2002). It ranked seventh among the world’s largest corporations in the Fortune 500 list, and for six consecutive years since the mid-1990s, it was voted “America’s Most Innovative Company”. During that period, Enron reported an almost eight-fold increase in sales from $13.3 billion to $100.8 billion, with a market capitalization of $63 billion. Its financial statement in 2000 reported a record-setting net income of $1.3 billion, with recurring earnings per share up by 25 per cent, and a total return to shareholders of nearly 89 per cent. Even as late as 2001, Enron’s board of directors was named the third best board in the US by Chief Executive magazine. Yet on 3 December 2001, the unbelievable became inevitable and Enron became the largest corporation ever to file for bankruptcy in American history (Oppel & Sorkin 2001). Enron and its affiliates sought Chapter 11 court protection for assets worth $49.8 billion and debts of $31.2 billion. The air was heavy with accusations of accounting fraud, insider trading and other securities law violations.

The Arthur Andersen auditing firm was founded in 1913 by an accounting professor of the same name. After Mr. Andersen’s death in 1947, the firm found itself on the verge of collapse. But in the end it was saved thanks to the efforts of Leonard Spacek, who convinced partners to remain together despite looming uncertainty. Spacek, who was Andersen’s chief executive from 1947 to 1963, had the reputation of being the “conscience” of the auditing profession (Norris 2002a). He was among the first to warn that the auditing profession’s very existence could be put in danger if it did not show sufficient independence from clients. He also complained whenever the US Accounting Principles Board yielded too quickly to pressure from companies which thought that auditing rules would significantly reduce profits. Spacek always insisted that Andersen provide above all high-quality accounting, in accordance with its corporate motto, “Think straight. Talk straight”.

It all started in the late 90s. Allegations of corruption led to the resignation of the team of EU-Commissioners under Jacques Delors. The International Olympic Committee (IOC) had to investigate corruption inside their prominent delegates. Presidents of a significant number of countries — from the Philippines to Kenya — were forced out of office because of charges of bribery and corruption. Even the crash of the total economies in Asia and Russia in 1998 was to some extent related to the tradition of nepotism and the culture of bribery and corruption. In 2002 also the crash of Argentina — 45 years ago among the top 5 richest countries of the world — was argued as being the result of a culture of bribery and corruption — widely spread in the upper and medium class. All this caused poverty and destruction of still rather weak social welfare systems. The middle class was completely wiped out and the wealthier people moved more funds to offshore-financial-centers or even completely left their ailing home countries. The collapse of Enron, WorldCom and Parmalat was also attributed to corrupt business practices and caused heavy losses for shareholders and thousands of pensioners. Last but not least thousands of people lost their jobs.

Companies don’t become model citizens overnight. Nike’s metamorphosis from the poster child for irresponsibility to a leader in progressive practices reveals the five stages of organizational growth.

When I hear businessmen speak eloquently about the “social responsibilities of business in a free-enterprise system”, I am reminded of the wonderful line about the Frenchman who discovered at the age of 70 that he had been speaking prose all his life. The businessmen believe that they are defending free enterprise when they declaim that business is not concerned “merely” with profit but also with promoting desirable “social” ends; that business has a “social conscience” and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers. In fact they are — or would be if they or anyone else took them seriously -preaching pure and unadulterated socialism. Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.

Corporate Social Responsibility (CSR) consists in a company reconciling its economic aims with sustainable growth and human progress. Although every company has its own unique approach to value-oriented corporate management, this approach is usually based on established concepts. These concepts of corporate citizenship or corporate social responsibility emphasize a company’s willingness to assume social responsibility, and include components such as its attitude towards human rights, the needs of its employees and suppliers, and commitment to social issues.

The call to take historical responsibility is mostly found in connection with the consequences that arise from the National Socialist mass crimes.(Baer 2000)) The warning “Never again” was last linked with calls for an appropriate memorial and extensive compensation for the victims.(Spoerer 2002, Thompson 2002) But there are considerable complications with the term: theologians see a comprehensive, “historical responsibility through the eyes of the present day” (Virt 1993) while educationalists prefer “education as historical responsibility”. (Mogge 1988) The dictum is used for political instrumentalisation, rather as the long-serving president of the Socialist Federative Republic of Yugoslavia, Joseph Broz Tito, assigned a historical responsibility vis-à-vis world development to his movement of non-aligned countries. Tito 1979)

Geert Hofstede was one of the first to attempt to develop a universal framework for understanding cultural differences in managers’ and employees’ values based on a world-wide survey. Hofstede’s work focuses on ‘value systems’ of national cultures which are represented by four dimensions:

The United Nations Global Compact is a new initiative intended to increase and to diffuse the benefits of global economic development through voluntary corporate policies and actions. Kofi Annan, secretary-general of the United Nations, addressing the Davos World Economic Forum in January 1999, challenged business leaders to join a “global compact of shared values and principles” and to provide globalization a human face. Annan argued that shared values provide a stable environment for a world market and that without these explicit values business could expect backlashes from protectionism, populism, fanaticism and terrorism.’ Following the 1999 Davos meeting, Annan and a group of business leaders formulated nine principles, which have come to be known as the UN Global Compact. After lengthy consultation, a tenth principle against corruption was added in June 2004.

Economic activities require the existence of rules and their enforcement as preconditions that the market cannot generate itself. Property rights, contractual rights and obligations are minimal conditions that in modern societies are provided and enforced by the state. Without such rules, the market cannot flourish. The state thus determines regulations and delineates the sphere of private freedom, within which individual citizens and private institutions are entitled to conclude contracts amongst each other but are as well forced to abide by the contracted rules. In line of the development of modern nation states, the state has not only been the guarantor of civil rights, e.g. the right to own property, to enter into private contracts, and to engage in market activity. In its role as a democratic constitutional state it has also been the guarantor of political participation rights, the right of the citizen to take part in the processes to determine public rules and issues of public concern. Finally, in its role as a welfare state it has provided social rights for citizens, such as the right to education, to healthcare and welfare (Marshall, 1965). The combination of state-guaranteed civil, political, and social rights provided modern society with welfare, legitimacy and solidarity, thereby contributing to peacefully stabilize the community of anonymous individuals (Habermas, 2001). Following Matten and Crane (2005) we refer to this triad of rights as citizenship rights.