Taking the Lead

HR must play an increasingly significant role in guiding a company toward ethical behavior and conduct, say practitioners and experts. Understanding that role, and why things go wrong, is crucial.

By Richard F. Stolz


Is there any ethical breach within an organization that cannot, ultimately, be laid at the feet of HR? Even when it involves the CEO?

Probably not. At least in a broad, if not strictly legal, sense.

Looked at another way, HR "is chartered with the responsibility of developing a performance-based culture," according to J. Randall (Randy) MacDonald, senior vice president of human resources for Armonk, N.Y.-based IBM. And a strong foundation of integrity and ethics, along with "a sense of competition and overachievement," remain key ingredients of that culture, he says.

Unfortunately, sleazy corporate behavior, far from being eradicated by Congress five years ago when it enacted the 66-page Sarbanes-Oxley Act in response to the stunning scandals of the day, is alive and well.

The recent spate of options backdating cases is just the latest manifestation of the very human tendency to be driven by financial ambition to push -- and sometimes leap far beyond -- the boundaries of acceptable behavior.

And unlike the Enron-esque corporate misdeeds that inspired Sarbanes-Oxley, often involving Byzantine financial fraud generally obscured from the line of sight of HR executives, the options backdating cases pertain to executive compensation -- a subject of more than casual interest to HR.

The good news is that certain HR leaders and experts have not surrendered to any defeatist sense of inevitability about all of this. Some practitioners, in fact, are willing to butt heads with top management when they detect a foul smell. Nor are they willing to settle for some bureaucratic compartmentalization of responsibility for building and maintaining high ethical standards within their organizations.

Rather than hide behind such diffused layers of culpability, some are even rising to the occasion and embracing the solitary role of corporate watchdog. Nor, in the case of companies with a strong reputation for ethical behavior, are they prepared to assume they are immune from scandalous behavior by virtue of a proud, unblemished corporate history. Their heads are out of the sand and they're watching for trouble.

Indeed, a heightened awareness of organizational vulnerability to high-profile ethics lapses is leading not only to internal scrutiny but to the seeking of advice and strategy assistance from experts such as Michael Josephson, a former law school professor at the University of Michigan and Loyola University in Los Angeles, and founder of the nonprofit Josephson Institute of Ethics in Los Angeles.

"There is much more pervasive concern" about ethical decision-making in corporations today, he says.

That concern, he adds, appears to be driven less by "virtue" and more by risk-management considerations. "There is little doubt that people can get your company into incredible trouble by exercising bad judgment," Josephson says.

"There have been longer prison sentences than ever in our history given to executives and sometimes subordinates. Stock prices have collapsed. The impact on morale has been enormous."

Part of the "problem," Josephson says, is perhaps a positive trend: Society is raising the bar on ethics. "The target is getting smaller. There was a time when people believed that if something's legal, it's ethical. They were assumed to be parallel. That has clearly changed. You have to be beyond reproach."

Case in point: Backdating stock options. In some cases, the practice will prove to have been legal. "Backdating of options is not necessarily unlawful," in the absence of fraud or falsification of documents, says John B. Gamble Jr., an Atlanta-based partner with the Fisher & Phillips law firm. But who today would welcome the task of justifying to shareholders and employees a technically legal instance of options backdating?

If that ethical bar is indeed being raised, the change may be, at least in part, a public reaction to a perception that unethical behavior within business (or its toleration) is on the rise. But is it?

Josephson says yes, and attributes that conclusion to "a culture that's exemplified by these survival TV shows. The basic theme is last man standing -- you have to find a way to shaft your competitors, that it's everyone for themselves."

Beyond sociological generalities, Josephson and others offer possible explanations for an ethical crisis that get to the heart of the quality and effectiveness of corporate leadership in general and HR in particular -- pointing the way to possible HR-led solutions.

For example, Josephson considers some unethical behavior within a corporation as a response to betrayal of the company. "You don't have all that much loyalty to the company, because the company hasn't been that loyal to employees." And that lack of loyalty can be manifested as much in the acceptance of unethical behavior -- agreeing to look the other way -- as in the actual commission of the unethical deeds, he says.

A distinction needs to be drawn, however, between acts leading to the enrichment of an individual and efforts to cut ethical corners in hopes of bringing about at least the appearance of organizational success. In the latter case, Josephson and others fault hyper-focus on the measurement of performance.

An American Management Association survey of more than 1,000 managers and HR experts published last year attributed unethical corporate behavior to "pressure to meet unrealistic business objectives and deadlines."

Curtis J. Crawford, author of Compliance & Conviction: The Evolution of Enlightened Corporate Governance, concurs. "The pressure for improved quarterly performance, to constantly do better, may have impacted people's judgment in the process of running a business," says Crawford, of Wilmington, Del., a governance and executive leadership expert who serves on several corporate boards, including DuPont's.

"Ego, Hubris, Opportunism"


But corporate pressure is only part of the picture. Executive judgment can also become flawed due to the very human pitfall of egoism, says Pat Wright, a professor of human resource studies at Cornell University and director of Cornell's Center for Advanced Human Resource Studies. In studying how companies have gone astray, "one of the things that has become obvious," he says, is the role of "ego, hubris or opportunism on the part of senior executives."

It's a surprisingly common trap, he says, and often results "from being very successful and being surrounded by people who talk about how successful you are. The further you move up the organization, the stronger the situational pressures are," he says.

The process is insidious, he says, and evolves in small, nearly imperceptible steps. "Most ethical violations don't happen when somebody knows something's wrong and does it. I've heard it described as drinking your own bath water. The first time you sip it, you think it's disgusting. After the 10th sip, you say, 'Well, it's really not that bad.' "

So what can HR executives do to keep executives and others from sipping -- or gulping -- that bathwater?

It starts with an acknowledgement of a basic fact that rests at the foundation of any effort to build and maintain an ethical organization. "There's got to be leadership at the top," says Wright. "You need leaders with an incredible amount of integrity who know their own weaknesses, and are willing to model what it means [to be ethical] for the rest of the organization, and enforce it."

Or, to look at it from the opposite perspective, "It's the old adage, 'a fish rots from the head down,' " he adds.

As MacDonald sees it, "the development of leaders is the way of setting the tone of the culture. You drive ethical behavior because people tend to watch what leaders do. That's why somebody is a leader. Most people don't follow followers."

But what can HR do to influence the ethical behavior of an existing CEO and the rest of the C-suite whose behavior may be beyond the reach of basic leadership-training efforts? Training that focuses specifically on ethical conduct is certainly a start.

Periodic ethics training exercises for senior leadership is one approach that has been employed over the years at Johnson & Johnson, the New Brunswick, N.J.-based health-care-products giant renowned for its focus on corporate rectitude. (J&J's ethical values are embedded in the company's official Credo, originally adopted in 1943.)

Bill Nielsen, whose responsibilities as the company's public affairs director (until his retirement in 2004) included a major role in ethics oversight, says J&J executives are regularly required to ponder the Credo and its application to business decisions.

"We run a thing called the 'Credo Challenge,' " he says, in which executives from around the globe come to headquarters to get an ethics pep talk from the CEO. Following that, they spend the day reviewing company actions, and measure them against the Credo's standards, in an effort to keep them focused on the Credo's practical meaning for both past and potential future events.

Credo compliance training is also a regular feature of more general executive conferences and training exercises, Nielsen says.

What's more, every two years, every J&J employee is asked to complete a comprehensive survey "to measure attitudes and the performance of the company relative to the Credo values," Nielsen says.

Although individual responses are confidential, results are analyzed by business units. Survey results are shared with appropriate leaders, who are expected to address any problems identified by the survey, Nielsen says.

The importance of such follow-up is echoed by Janet Gunn, director of HR for Akal Security, a 15,000-employee protection services company based in Santa Cruz, N.M. "We found that you really get what you inspect. Discussions and trainings aren't enough," she says.

"We spend a lot of energy," Gunn says, exploring the tension between profitability goals and maximizing customer service. Making sure that employees act, and service is delivered, with those challenges properly balanced, requires constant focus, she adds.

Beyond such formal training and monitoring exercises, however, Cornell's Wright believes HR leaders need to take the initiative to "look for the warning signs that somebody might derail ethically." Such indicators include unusually extravagant lifestyles (at least relative to professional peers), and tyrannical behavior toward subordinates. "That's a good indication they have a sense of entitlement," he adds.

Wright also urges HR executives to look for the "enablers" who encourage such behavior, including "yes men telling them how great they are," as well as excessive compensation. "When we start focusing people on their compensation, we take their focus off the organization ... . It's not a matter of fairness, but of dysfunction."

But does that mean it's up to the HR leader to tell the CEO he's overpaid or obsessed with accumulating wealth?

Not necessarily, says Wright. Referring to the advice of University of Colorado professor Matthew Hayward, author of the book, Ego Check: Why Executive Hubris is Wrecking Companies and Careers and How to Avoid the Trap, Wright speaks of the need for CEOs to have a foil, "someone who tells you, 'You're full of it. You're not so big,' and can give you very specific feedback."

"In an ideal world, HR would be that foil," Wright says. "But in the more realistic world, HR just has to ensure that the [executive] has at least one foil. It could be the CFO, a spouse, a board member."

Navigating these politically treacherous waters also requires that human resource executives themselves have a candid relationship with at least one board member. Indeed, IBM's MacDonald believes he and others in his position have a "moral commitment to our board to exercise the right to have conversations with members about critical issues involving the corporation."

The good news for MacDonald is that IBM CEO and Board Chairman Sam Palmisano encourages that perspective. "He wants us to engage with the board so that it has a sense of how IBM works on a day-to-day basis, and can see the culture we're creating as well."

In a different situation, where a CEO might jealously guard contact with the board, and an HR executive has ethical concerns about the CEO or simply about his leadership, "you have to work covertly" with board members, says Wright. "That's a very risky role to be in."

However, the need for HR leaders to become "covert operators" has generally lessened in recent years, as they "are increasingly interfacing with board members" on a variety of issues, Wright says. On the delicate subject of executive pay, HR executives need to engage in "some discussion on how pay is going," creating an opportunity to at least raise questions in board members' minds about the matter, if there may be a problem, he adds.

Ethical questions and possible misdeeds involving pay (or any other issue) do not, of course, all begin and end with the CEO. In order for a CEO to perpetrate any significant misdeed, particularly one involving an ongoing unwritten policy or practice, "there have to be hundreds of employees looking the other way," according to Josephson. In other words, a culture that tolerates such behavior has developed.

Josephson illustrates this with a simple medical metaphor. "In a healthy body, if you get an infection, antibodies are formed and they surround the infection and, in most cases, they defeat it. In an organization, you need the same thing. You can't prevent bad acts, necessarily, but does the organization have 'antibodies' who say, 'You can't do that,' or report it?"

And as MacDonald maintains, HR "is chartered" as the chief culture builder, with strong ethics as a key component of that culture. Although IBM and many other companies have rigorous HR-led programs designed explicitly to develop and maintain an ethical business environment (see below), the most powerful "antibody" builders are to be found in the most basic of all HR-oriented functions. Those include hiring, training, performance assessment, promotion, discipline and termination.

Words vs. Actions


Most companies have perfectly adequate formal ethics guidelines and values statements. "The challenge," Josephson says, "is alignment.

"To what extent are those value statements factors that are really driving the recruiting, hiring, training, promotion and review?"

As a practical matter, it's much harder to train somebody inclined to unethical behavior to walk the straight and narrow than simply to avoid hiring such people in the first place. Similarly, it's more effective to deal with them decisively at the first sign of trouble than to try to rehabilitate them with an ethics booster shot.

"At every single phase," says Josephson, "you can either increase or decrease the ethical quality of an organization."

To illustrate, he invokes the painful memory of Enron Corp., whose 2001 downfall in the wake of revelations of massive financial fraud came to symbolize the corporate corruption of that period. "The only question they seemed to ask people when they hired them was, 'Will you do this?' or 'Can you do that?' " Josephson says.

That is, having no interest in a more holistic understanding of a job candidate's credentials and personal make-up facilitated -- or perhaps was symptomatic of -- Enron's dysfunctional culture. Presumably, that narrow view of competence also guided decisions on promotions and terminations. (For what it's worth, Enron did have formal ethics guidelines and training programs.)

In cases where proven ethics-policy violations lead to disciplinary action or termination, employers have a golden opportunity to strike a blow for the overall ethical standards of the organization. That can be accomplished by broadcasting -- without identifying the individual's identity -- the general nature of the unethical activity, as well as the disciplinary response.

Not only does this provide clarity and credibility on ethics standards, "it will increase employee morale, because people don't like to work with slugs," Josephson says.

Governance consultant Crawford concurs, and further argues that companies need to encourage whistleblowers.

"Employees should be told that if they see somebody doing something inconsistent with the values of the organization, they have an obligation to bring it forward," he says. "And the company's responsibility to potential whistleblowers, Crawford says, "is to create the channel that allows them to do that without any risk of retribution."

Of course, would-be whistleblowers (and everyone else) need to have a clear understanding of what kind of behavior warrants punishment. According to Bill Nielsen, the retired public affairs chief for ethics-conscious J&J, "it's pretty rare in an organization to come around a corner and see someone standing with a smoking gun." Most ethics breaches are far more subtle.

For that reason, companies such as J&J and IBM take great pains to explore and spell out, in some detail, a practical definition of ethical behavior.

Last December, IBM distributed to employees a 20-page document articulating the company's "business conduct guidelines."

In a letter to employees, CEO Palmisano said the document is the subject of regular review and updating "as business and the world at large become more complex, and the need for such guidelines become greater."

"In addition to establishing a baseline for behavior throughout IBM, [the guidelines] provide some excellent examples of how we live out our values as a company. They are an important part of what it means to be an IBMer."

For example, beyond the expected general declarations about the importance of honesty and fair dealing, the document delves into some depth on questions like the meaning of a "firm order." That definition is provided in the context of a declared policy against attempting to sell an IBM product to a prospective customer if that customer has already placed a firm order for a competitor's product. The document also defines permissible contact with employees of competitors.

At IBM, responsibility for establishing, monitoring and enforcing compliance with the code of conduct is shared by three vice presidents on MacDonald's HR staff, with responsibility for "workforce relations," internal audit and privacy. "Many of their inner workings focus on what we can do to ensure that the culture that we've established continues," MacDonald says.

A big part of that effort, he adds, involves giving senior-level briefings about recent ethics "lessons learned."

"This is particularly true in our emerging markets abroad, certain parts of Asia and Eastern Europe," where business conditions and cultural norms are sometimes more accommodating to practices that would, instinctively, be seen as unacceptable elsewhere. Bringing local employees on board with universal IBM principles of conduct requires an extensive orientation process, MacDonald says.

He stresses, however, that ethics training and reinforcement is not limited to remote outposts. "All of our learning programs have a component that deals with business conduct and ethics. We build that into the base of IBM."

When that ethical base is strong -- when the "antibodies" Josephson speaks of are thriving, ethical problems can be self-correcting. For example, a few years ago, the head of a foreign, independent subsidiary of Johnson & Johnson resigned without being pushed, when it was discovered that one of his subordinates had attempted to bribe a local official to win a contract. Although that executive had played no role in the bribe attempt, he nevertheless felt an obligation to fall on his sword.

And for HR leaders dedicated to upholding ethical practices, the ultimate professional sacrifice may also be required -- or at least the willingness to risk it. In a previous job, MacDonald challenged an executive who was advocating an action MacDonald considered unethical. "I remember leaving home one day and telling my wife that I might come home not having a job."

When confronted, the executive backed off, and MacDonald kept his job. "That doesn't make me a hero. The point of the story is that leaders have to have the courage of their convictions. That's how ethics gets ingrained in the organization."

In other words, no number of hours of ethics indoctrination, no depth of nuanced ethics definitions, ultimately can replace bold and decisive personal action.

Although a complicated, multicultural world and challenging business environment may pose a few thorny questions, for the most part, "ethics is not rocket science; it's basic logic streams," says MacDonald.

"You have to be prepared either to say 'no,' or tell other people to say 'no.' You have to live the standard."

May 16, 2007

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