A cHAPTER Corporate Culture, Governance, and Ethical Leadership een a OBJ FC Tt VE Ss After reading this chapter, you will be able to: * Define corporate culture; © Explain how corporate culture impacts ethical decision making; Discuss the role of corporate leadership in establishing the culture; © Explain the difference between effective leaders and ethical leaders; TY30 Chapter 4 © Discuss the role of mission statements and codes in creating, an ethical corpo- rate culture; Explain how various reporting mechanisms such as ethics hotlines and ombudsman can help; © Integrate ethics within a firm; © Discuss the role of assessment, monitoring, and auditing, of the culture and ethics program; » Explain how culture can be enforced via governmental regulation DISCUSSION CASE: Goldman Sachs’s “ toxic Culture” n March 14, 2012, Greg Smith, executive director and head of the Goldman Sachs’ United States equity derivatives business in Burope, the Middle East and Africa, resigned his position. While resignations occur every day, this ‘one was unusual because it was announced in a letter to the editor published in the New York Times, a letter in which Smith lambasted the corporate culture and leadership of Goldman Sachs. ‘After 12 years at Goldman Sachs, Smith concluded that “I can honestly say that the environment now is as toxic and destructive as I have ever seen it.” Smith weni on to describe a corporate culture in which the interests of the cli- ents, the people whom Goldman Sachs was supposedly serving, were systemat- icaliy and continuously disregarded in favor of making ever-increasing profits for the firm. Managers were described as asking not “What is good for the cli- ent?” but “How much money did we make off the client?” Smith characterized meetings in which clients were described as “muppets,” and in which employ- ees spoke of “ripping off” clients with complex financial deals that would ben- efit Goldman but that seldom benefited the client. Smith faulted senior leadership, including the present CEO and president, for the “decline of the firm’s moral fiber” and for having lost a culture of integrity, trust, pride, and honesty. Instead, “The firm changed the way it thought about leadership. Leadership used to be about ideas, setting an example and doing, the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.” Smith ended. his letter with the hope that his resignation would be a “wake-up call” for the board of directors and warning them that they will not survive if they lose the trust of their clients. He concluded by advising them to “Weed out the morally bankrupt people, no matter how much money they make for the firm. And get the culture right again, so people want to work here for the right reasons, People who care only about making money will not sustain this firm—or the trust of its clients—for very much longer.” Not surprisingly, Goldman’s CEO Lloyd C. Blankfein, and the president, Gary D. Cohn disputed Smith’s claims. In a press release issued shortly after Smith’s letter was published, they argued that Smith’s letter failed to represent83 fe. and Bthical Leadership ye Culture, Go comport culture can be its sustaining value—that which offers it direction and stability during challenging times. Tt cary howerey also serve to constrain ani mganization to the common ways of managing Sect that’s how things have always been done here” or “that’s our prevailing climate.” The stability fant ean be a benefit at one time can be a barrier to succees another. ‘Does a corporate culture matter? As described in their best-selling book Built to Las sful Habits of Visionary Companies, authors James Collins and Jerry Porras researched dozens of successful companies looking for common A fire ertices that might explain their success. These companies not only outper- Pinned their competitors in financial terms, but also have outperformed their competition over the long term. On average, the companies they studied were founded in 1897, Among their key findings was the fact that the truly excep- Honal and enduring companies ail placed great emphasis on a set Of con val- ues. These core values are described as the “essential and enduring tenets” that help define the company and are “not to be compromised for financial gain or short-term expediency." Collins and Porras cite numerous examples of core values being articulated and promoted by the founders and CEOs of such companies as IBM, Johnson & Johnson, Hewlett Packard, Procter and Gamble, Walmaxt, Merck, Motorola, Sony, Walt Disney, General Electric, and Philip Morris. Some companies made a commitment te customers as their core value; others focused on employees, their products, innovation, or even risk-taking. The common theme was that core values and a clear corporate purpose, what together are described as the organization's core ideology, were essential elements of enduring and finan- cially successful companies. When we talk about a corporation's “culture” we are saying that a corpora- tion has a set of identifiable values. All the companies discussed by Collins and Porras have been described as having strong corporate cultures and a clear set of values. Of course, as the opening discussion case suggests, corporate values themselves might be open to ethical criticism. 4.3 CULTURE AND ETHICS How, exactly, does the notion of culture connect with ethics? ‘fi what role does corporate culture play in business ethics? eee ee questions by reflecting on several topics introduced previously. Chapter 1 considered the relationship between law and ethics and con- peed that compliance ‘with the law is insufficient to guarantee ethical conduct. ee the Americans with Disabilities Act requires businesses to make Dera eee for employees with disabilities. But the law can be hoes lel eos ifa business should make a reasonable accommo- eran ne loyee with allergies, depression, dyslexia, arthritis, hearing pang ee In situations where the law is an incomplete guide Bsns pal ig, the business culture is likely to be the determining C y Bet lecided. Ethical businesses must find ways to encourage, toChapter 4 88 One key difference lies with the means used to motivate others and achieve one’s goals. Steve Jobs is said to have been a very difficult boss. Ef- fective leaders might be able to achieve their goals through threats, inti™ Gation, harassment, and coercion. One can also lead using more attractive means such as modeling ethical behavior, persuasion, or simply by dint of one’s institutional role. ‘ussions in the literature on leadership often suggest that ethical leadership is determined solely by the methods used in leading Pro- moters of certain styles of leadership want to suggest that their style is superior to others. Consequently, they tend to identify a method of leading with “true leadership in an ethical conse. On this line, fo: example, Robert Greenleaf’ book Sertant Leadership suggests that the best leaders are nonhierarchical indi- viduals who lead by the example of serving others. Other discussions similarly suggest that “transformative” or “transactional” leaders employ methods that empower subordinates to take the initiative and solve problems for themselves, and that this constitutes the best ethical leadership style. Certainly ethically appropriate methods of leadership are central to be- coming an ethical leader. Creating a corporate culture in which employees are empowered and expected to make ethically responsible decisions is a neces” sary part of being an ethical business leader. But while some means may be ethically better than others (e.g., persuasion rather than coercion), it is not the method alone that establishes a leader as ethical. While perhaps necessary, ethi- cal means of leading others are not sufficient for establishing ethical leadership. The other element of ethical leadership involves the end or goal toward which the leader leads. One cannot be a leader, and there cannot be followers, unless there is a direction or goal toward which one is heading. In the business context, produc- tivity, efficiency, and profitability are minimal goals. A business executive who leads a firm into bankruptcy is unlikely to qualify as an effective or good leader. ‘An executive who transforms a business into a productive, efficient, and profit- able business will be judged as an effective business leader. One who does this in a way that respects subordinates, or empowers them to become creative and successful, is (at least at first glance) both an effective and ethical leader. But, is profitability and efficiency done through ethical means alone enough to make a business leader an ethical leader? Imagine a business leader who empowers his subordinates, respects their autonomy by consulting and listening, but who leads a business that publishes child pornography, or pollutes the environment, or sells weapons to radical or- ganizations. Would the method alone determine the ethical standing of such a leader? Beyond the goaf of profitability, other socially responsible goals might be necessary before we conclude that the leader is fully ethical. _ Inmany ways, the remaining chapters of this book examine other goals that might be a part of the vision for an ethical business leader. Goals that address such topics as employee rights, consumer safety, ethical marketing, diversity, _ and environmental responsibilities are likely elements of the mission and goals ly ethical, and not merely effective, corporate leader. a90 Chapter 4 make these determinations, how will you share them and encourage a commit- ment to them among your colleagues and subordinate: The second step in the development of guiding principles for the firm is the articulation of a clear vision regarding the firm’s direction. Why have a code? Bobby Kipp, PricewaterhouseCoopers’ Global Ethics Leader, explains that “we felt it was important for all our clients, our people and other stakeholders to understand exactly what we stand for and how they can expect us to conduct ‘ourselves. ... The code doesn’t change the basic nature of the business we un- dertake, but instead it articulates the way we strive to conduct ourselves. The code shows how we apply our values to our daily business practices.”° The third step in this process is to identify how this cultural shift will ‘occur. Referring io Enron’s prominent Code of Ethics, Ethics Resource Center President Stuart Gilman advises that you can’t simply “print, post and pray.” Follow-through and implementation are crucial. Finally, to have an effective code that will successfully impact culture, there must be a belief throughout the organization that this culture is actuaily pos- sible, achievable. If conflicts remain that will preveut certain components from being realized, or if key leadership is not on board, no one will have faith in the changes articulated. Ethics Hotlines, Ombudsmen, and Integrating Ethical Culture Recailing Gilman’s warning not to “print, post and pray,” business firms must have mechanisms in place that allow employees to come forward with ques- tions, concerns, and information about unethical behavior. Integrating an ethi- cal culture throughout a firm and providing a means for enforcement is vitally critical both to the success of any cultural shift and to the impact on all stake- holders. Integration can take a number of different forms, depending on the organizational culture and the ultimate goals of the process. One of the most determinative eicments of integration is communication, since without it, there is no clarity of purpose, priorities, or process. Commu- nication of culture must be incorporated into the firm’s vocabulary, habits, and attitudes to become an essential element in the corporate life, decision making, and determination of success. To explore the effectiveness of a corporation’s integration process, con- sider whether incentives are in the right place to encourage ethical decision making and whether ethical behavior is evaluated during a worker's per- formance review. It is difficult to reward people for doing the right thing, such as correctly filing an expense report, but incentives such as appropriate honors and positive appraisals are possible. But how does communication about ethical issues occur? The fact of the matter is that reporting ethically suspect behavior is a difficult thing to do. Childhood memories of “tattletales” or “snitches,” arid a general social prohibition against informing on others, create barriers to reporting unethical behavior. More ominously, individuals often pay a real cost when they report unethical behavior, especially if the people involved are workplace superiors.Chapter 4 92 4.7 MANDATING AND ENFORCING ETHICAL CULTURE: THE FEDERAL SENTENCING GUIDELINES When internal mechanisms for creating ethical corporate cultures Prov’ 6 adequate, the business community can expect governmental regu! ae eat the void. The United States Sentencing Commission (USSC), an incepen« <1" agency in the U.S. judiciary, was created in 1984 to regulate sentencing PO © in the federal court system. Prior to that time, disparity in sentencing, arbi spe punishments, and crime control had been significant congressional issues. 1 mandating sentencing procedures, Congress through the USSC inas been able to incorporate the original purposes of sentencing in their procedures, bringing some of these challenges under control. Beginning in. 1987, the USSC prescribed mandatory Federal Sentencing Guidelines that apply to individual and organizational defendants in the federal system, bringing some amount of uniformity and fairness to the system. These prescriptions, based on the severity of the offense, assign most federal crimes to one of 43 “offense levels.” Each offender also is placed into a criminal his- tory category based upon the extent and recency of past misconduct. The court then inputs this information into a sentencing grid and determines the offender’s guideline range (ranges are either in six-month intervals or 25 percent, whichever is greater) subject to adjustments. In its October 2004 decision in U.S. v. Booker,’ however, the Supreme Court severed the “mandatory” element of the guide- lines from their advisory role, holding that their mandatory nature violated the Sixth Arnendment right to a jury trial. Accordingly, thougin no longer manda- tory, a sentencing court is still required to consider guideline ranges, but is also permitted to tailor a sentence in light of other statutory concerns. This modifica- tion has not come without confusion. “Judges are still generally following the guidelines with new cases. But figuring out what to do with all the cases that have been sentenced under the old guidelines is the closest thing to chaos you can describe,” says Douglas Berman, a law professor. What is the relevance of these guidelines to our exploration of ethics and, in particular, to our discussion of the corporate proactive efforts to create an ethical workplace? The USSC strived in its guidelines to create both a legal and an ethical corporate culture through these adjustments. The Sarbanes-Oxley legislation instructed the USSC to consider and review its guidelines for fraud relating to securities and accounting as well as for obstruction of justice, and specifically asked for severe and aggressive deterrents. In recognition of the enormous impact of corporate culture on ethical decision making, the USSC updated the guidelines in 2004 to include references not only to compliance pooane but to “ethics and compliance” programs. In addition, the criterion ‘or an effective program, which used to be outlined in the guidelines’ commen- eae a separate guideline itself. * ‘idelines i 3 a eta oe ean us oe corporations that create an effective ethics duced) if they h that they are not penalized (or the penalty is re- ‘ave an effective program but they find themselves in court as a result of a bad apple or two. On the other hand, firms that did not have effectiveCorporate Culture, Governance, and Ethical Leadership 93. ethics and compliance systems would be sentenced additionally to a term of ed to develop a program during that time. probation and orde: ‘The USSC notes that [dJue diligence and the promotion of desired organizational culture are indicated by the fulfillment of eight minimum requirements, which are the hallmarks of an effective program that encourages compliance with the law and ethical conduct. The guidelines identify those specific acts of an organization that can serve as due diligence in preventing crime and the minimal requirements for an effec- tive compliance and ethics program. These include: 1. Establish compliance standards and procedures (reasonably designed, implemented, and enforced so that they will generally be effective in pre- venting and detecting violations of law)." Establish a governing body (board), which has a duty to act prudently, to be knowledgeable about the content and operation of the compliance and ethics program, and must undergo ongoing and consistent training, Assign a specific high-level person to oversce compliance and to be sible for the day-to-day operations of the program. This individual shall report directly to the board or other governing authority and shall have sufficient resources. Use due care not to delegate important responsibilities to known high-risk N Spon- ey persons. Communicate the program effectively to all employees and agents. In ad- dition to the board, training musi be conducted throughout the organiza- tional leadership, employees, and (where appropriate) its agents. Monitor and audit program operation for effectiveness and to detect crim- inal activity, and establish a retribution-free, anonymous, or confidential means for employees and agents to report possible violations to manage- ment or to seek guidance. Create an incentive and disincentive structure to encourage performance in accordance with the program, including consistent discipline for em- ployee violations. 8. Respond promptly and appropriately to any offenses and remedy any program deficiencies.” Though these steps are likely to lead to an effective program “[such a pro- gram] is more than checking off the items on a list. This concept of ‘due diligence’ isa restless standard, as flexible as changing events reflected in the day’s headlines and as creative as the minds of potential wrongdoers.”" For instance, the guide- lines require an investigation in response to a report of wrongdoing, but they also seem to require more than that. A firm must learn from its mistakes and take steps to prevent recurrences such as follow-up investigation and program enhance- ments. The USSC also mandates consideration of the size of the organization, the number and nature of its business risks, and the history of the organization; miti- gating factors such as self-reporting of violations, cooperation with authorities, acceptance of responsibility; as well as aggravating factors such as its involvementpete and Ethical Leadership. 95 Corporate Culture. Governars 2. Consider how you evaluate whether a firm is “one of the good guys” or not. What are some of the factors that you use to make this determination? Do you actually know the facts behind each of those elements, or has your judgment been shaped by the firm’s reputation? Identify one firm that you believe to be decent or ethical and make a note of the bases for that conclusion. Next identify a second firm that you do not believe to be ethi- cal or with questionable values.and write down the bases for that conclu- sion. Now, using the Internet and other relevant sources, explore the firms’ cultures and decisions, checking the results of your research against your original impressions of the firms. Try to evaluate the cultures ard deci- sions of each firm as if you had no idea whether they were ethical. Were you accurate in your impressions or do they need to be modified slightly? . Changing a corporate culture is very difficult. Imagine that you are asked by your chief executive to help move your firm toward the use of a triple~ bottom-line accounting model in which environmental and social factors are given equal weight tn financial indicators. Assume that this would represent a major transformation of the firm. How would you begin to set the stage for this transition? What reasons would you use to support the change? How would you change attitudes and values? Now that you have an understanding of corporate culture and the vari- ables that impact it, how would you characterize an ethically effective culture, the one that would effectively lead to a profitable and valuable long-term sustainability for the firm? One element that surely impacts a firm’s cu!ture is its employee pop While a corporate culture can shape an employee's attitudes and habits, this will be moze easily done if people with those attitudes and habits already developed are hired in the first place. How would you develop a recruitment-and-selection process that would most successfully allow you to hire the best workers for your particular culture? How would you, and should you, get rid of employees who do not share the corporate culture? What are some of the greatest benefits and deleterious costs of compliance- based cultures? You are aware of inappropriate behavior and violations of your firm’s code of conduct throughout your operation. In an effort to support a collegial and positive atmosphere, however, you do not encourage co-workers to report on their peers. Unfortunately, you believe that you must make a shift in that area and need to institute a mandatory reporting structure. How would you design the structure and how would you implement the new Program in such a way that the collegiality that exists is not destroyed? 8. Put yourself in the position of someone who is establishing an organization from the ground up. What type of leader would you want to be? How would you create that image or perception? Do you create a mission statement for the firm, a code of conduct? What process would you use to do so? Would you create an ethics and/or compliance program and how would you then integrate the mission statement and program throughout your organization? is do you anticipate might be your successes and challenges? ion.