The efficacy and/or necessity of Codes of Ethics

I’ve got a long-ish consulting engagement that’s taking a lot of my time right now, so blog posts will be a little thin on the ground for while. What I do find time for is the occasional LinkedIn group debate, this one on the Ethics Professionals group, debating the original poster’s view that Codes of Ethics do nothing to stop unethical behaviour. I, and others, jump in.*1_*1_*1%2Egde_61769_member_27674474
You see, there are two aspects to ethics: discernment – knowing right from wrong – and discipline – having the moral will power to do what’s right. A code can help define what’s right and acceptable and provide a basis for imposing sanctions on those who don’t follow it. But unless it reinforces an established ethical culture, it won’t do much to assure that people do what’s right
James Meacham  Saying that Codes of Ethics don’t make people ethical is about the same as saying laws don’t make people law-abiding. Kind of obvious, really. Having a Code of Ethics is perhaps a necessary, though clearly not a sufficient, condition for ethical behaviour. They are helpful in a couple of ways. First, they make it clear what the ethical aspirations of your organization are, they set the tone for ethical engagement. While it’s true that they can be empty words, mere shelf-ware if they are not reinforced and modeled at the top of the organization, they can act as a rallying point for what the the leadership decide they want to aim for, ethically speaking. Second, they can help disambiguate and/or clarify questions that are not obvious, especially issue where “the right thing” for the organization might be a sort of dilemma (e.g., bribery).

No one who wants to be evil (or ethically non-compliant) is going to be persuaded to do so by a Code of Ethics. There are very few of those people, though. Most employees want to do the right thing, they just need to be reminded of the importance of doing it and given some guidance in how to. That’s why we need Codes of Ethics.

Leslie Levy  The 10 Commandments is an ethics code. How much do you think people understand it, much less comply?

Think back. Ethics codes were introduced in corporate governance by active shareholders who thought an ethics code would be useful, in court or otherwise, in proving that executives had been sinning. Next thing we knew, half the corporate world had ethics codes, only no one was sure what to put in them. Directors and senior managements, on the whole, figured ethics codes were harmless and gladly created them as a no-cost concession to activists. Only a few companies (probably mostly the Minnesota contingent) took ethics codes seriously.

I listened to debates on ethics and ethics codes ad nauseam in the days when a session on ethics preceded (but wasn’t fully part of) the national conference of the then American Society of Corporate Secretaries. At the time, “corporate ethics” was an oxymoron. The term literally lacked meaning. Lots of discussion since is beginning to create some consensus on ordinary usage. As I keep pointing out, we need to be schooled in Wittgenstein to make sense of this topic (admittedly a difficult challenge). Wittgenstein said, if people apply a term in ordinary usage in the same way or at least in ways that can be linked to one another, then the term gains meaning, and its meaning or meanings solidify over time.

What really interests me, however, aside from question of how all this fits with Milton Friedman’s theories of economics, is this: How about thinking about ethics codes, not in terms of what action they DETER, but in terms of what action they INSPIRE.

James Meacham  I’m not sure what your point about Wittgenstein’s theory of language is, Leslie. Maybe you can say a little more about that? Are you arguing that because of the tension between Friedman’s idea that the *only* imperative for management is to maximise shareholder value and any ethical consideration that might preempt that the term “corporate ethics” was oxymoronic? I can’t say I’m convinced by that because clearly everyone has always known that there’s a difference between ethical and non-ethical behaviour in the corporate setting, even if it was a fairly inchoate sense. There’s a difference in arguing that and, as I do, that Friedman is just wrong. All that said, I tend to agree with you that inspiration is a more interesting question than deterrance, though I think both have value. Have you read Dov Seidman’s book, “How”? I underestimated it based on my first, brief read through and my recent, more careful reading changed that view. Even though it’s a popular book (as opposed to a technical book of philosophy), Seidman has a background in philosophy and does a nice job of differentiating between the ethics of deterrence and the ethics of aspiration.
Leslie Levy  Hi, James. It’s almost midnight, but I’ll do my best — but tackling Wittgenstein at this hour is beyond my ability. I’ll find time tomorrow or the next day. For now, I’d say only that understanding Wittgenstein is, in my opinion, absolutely essential to understanding language, including the language of ethics. But enough of that for the moment. On to your other points. First, I thought (perhaps incorrectly) that Friedman said corporations were supposed to maximize profit, not shareholder value. Do you regard those as identical? Or do I have incorrect ideas about Friedman? I went through business school with a group of followers of the theory of economic man, and I don’t think they believed that “…everyone has always known that there’s a difference between ethical and non-ethical behaviour in the corporate setting….” Frankly, I found deplorable some of their behavior that they justified by economic-man theory; that is, they acted in what they said was their own interest, justified their behavior by reference to economic-man theory, and to me seemed motivated all too often by unadulterated selfishness. I haven’t read “How,” but will try to get it. I think popular books often say more or more useful things than academic tomes, so I’m glad to hear that, if I follow your suggestion, I won’t be in for boredom!

The one thing that troubles me after all this is that I seem to have to keep explaining Wittgenstein’s impact on business theory to so many business audiences, over and over, and I wonder why we don’t just make it a required part of the MBA curriculum. The closest I know to it (and a lot easier and more fun) is Fritz Roethlisberger’s “The Elusive Phenomena.” (It’s out of print, hard to get, and costly, but worth every penny.) Roethlisberger’s recitation of how he learned to think is a pretty good way to stumble one’s way to Wittgenstein, though I think Roethlisberger’s chapter on conceptual frameworks is slightly off, with consequences that could be more than slightly important.

And finally, yes, let’s think about how to “incentivize” desirable behavior. Lord knows, compensation committees would be glad to have this knowledge.

James Meacham  I find Wittgenstein a challenge at 10 in the morning with a full night sleep and 2 cups of coffee, so no worries. I do think his point that language acquires meaning through use is a good place to start when talking about definitions, but beyond that, I’m not sure I’ve found a lot applicability of his philosophy in business. As I begin my doctoral program (focusing on business ethics) next month, I may change my mind, but until then…

I guess I do considering maximising shareholder value as equivalent to maximising profit since thats where profit accrues in a corporate system. I think Friedman (and those who support the “economic man” theory) is just wrong on the evidence. There are two kinds of ethical misbehaviour (at least): actions that are clearly wrong in any context (these are the sorts of things I was talking about) and those actions and attitudes that you are referring to, things like greed, lack of empathy, etc. The economic man theory tends to justify the latter, you are right. There are a ton of problems with that theory (as behavioural economics and history have borne out) and I think it’s been mostly discredited except among the libertarian zealots. One attraction to the economic man theory is how simple and consistent it is. One thing I think those of us who disagree that (selfishness + selfishness == good for everyone) is to come up with a compelling alternative theory. That’s why aspirational business ethics is so important, I think.

I hope that made some sense…now it’s late here, too. 🙂

Leslie Levy  So, what you learn in school doesn’t affect your practice? Hmmm. If not, there certainly is a disconnect that should not exist. Good teaching should clearly connect the two.

I like some of what LaDon Berndt-Kuncewicz said. I think it’s especially important, when a senior manager is fired for ethical misconduct, whether or not the company has a code, that what he or she did wrong should be crystal clear to employees and also to the outside world. I don’t think that’s the case at HP. I suspect there’s still a lot more to that story.

I also like James Meacham’s attack on economic man. When I took my MBA and doctorate, economic man was still almost universally respected. People like me who said, “Whoa, lots of people don’t act like economic man,” were considered dim. I’m delighted that current research seems to have debunked economic man. However, note that the only rewards doled out by Compensation Committees (with rare exceptions) are dollars. That suggests that those attracted to the top of our corporations will be the ones who most love dollars, and these people are as close as you can get to economic man. Peter Goldman tells us that managers in “the real world” must produce “‘hard’ results.” Well, what about producing soft results? Doesn’t that also matter.

And so we turn back to ethics. Is ethics concerned exclusively with producing hard results, or do soft ones matter, too? And if soft ones also matter, precisely how are they to be taken into account in evaluating behavior? Should (and do) we evaluate differently within corporations?

Roy Snell  I agree that a code alone is of little help. A code of ethics can be a very helpful tool, but there is a catch. It’s all about enforcement to me. Having a code is easy, but finding someone with the ability to enforce it is tough. Few people who are really into ethics like to talk about the stick; they feel the carrot is more effective. Ironically, all talk and no action might hurt your efforts to create an ethical environment. If you have a code that no one enforces, some will not follow it. If people don’t see it being enforced, some will follow the lead of those who don’t follow it. Some will become bitter. The culture could be negatively impacted. If you enforce the code equally amongst all employees, more people will follow it, few will become bitter, and the culture will be more positive. It may be possible that an unenforced code does more damage than no code at all.

James Meacham  I’m currently doing some research for a client on specific topic (cross-sell in financial services companies). The funny thing is, I’ve done this same research for other companies in the past because *all* financial services companies want to do this well. But very few do, in spite of saying they want to. There are a couple that do actually do cross-sell well, but they make a point of mentioning it in every meeting, every investor call, ever piece of internal collateral. For at least a decade, the companies that are good at it have been making it a priority. The reason I bring it up is because it the same is true in the ethics context. All the companies that said they wanted to do cross-sell but didn’t are like the companies that did a code of ethics and stuck it on a shelf–they are no closer to being ethical than they were before and, as Roy suggested, not following through may engender some unintended consequences.

To be an ethical company in a system (market capitalism) that militates against ethical behaviour takes an extended, concerted effort that doesn’t stop. It has to be top of mind, or close to it, for it to be something your company is known for excelling at (like cross-sell). Clearly, as we’ve seen in the discussion above, there are levels of effort which will correspond roughly with the outcome. There’s a continuum, I think, that goes something like this, one’s place on the continuum is suggested but what paradigm of ethical behaviour you follow:

1) Ethical Leader Paradigm: Where there is a code of ethics that is talked about, kept at top of mind, reinforced through both aspirational statements and enforcement. A supererogatory view of ethics.

2) Evil Avoidance Paradigm: Where there’s a code of ethics but it is not at top of mind. It is reinforced primarily through enforcement and compliance, but the efforts in this area are universal, consistent, and well-understood. A deontological view of ethics.

3) Legal Avoidance Paradigm: There’s a code of ethics but it mostly shelf-ware.You might have to do your “yearly compliance training” but the language is always in terms of compliance and compliance is seen as something that is imposed from without. A pragmatic view of ethics.

4) Compliance-only Paradigm (I need a better more descriptive name for this one). This is the company that probably doesn’t have a code of ethics because they are silly, fluffy, and add no value. If it does it’s only because they have to. It’s never talked about again. Compliance is seen as a burden and this company wouldn’t think about it if it weren’t for the Sentencing Guidelines. In the marketplace, it views whatever it can get away with as ok. A lassiez-faire, relativist or Nietzschean view of ethics.

My point is that while you can get into trouble with a code of ethics, I don’t imagine a company that falls on the exemplary end of the spectrum without one. Indeed, you can even be an evil- or law-breaking-avoidant company without one. Again, I think it’s necessary but not sufficient. Enforcement, to Roy and others’ point, is necessary but not sufficient either. And to really be an ethically great company, you need both, while if you want to be an ethically mediocre company, you can try it with enforcement alone.

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