Are We Wasting Our Time Teaching Business Ethics?

The Great Recession of 2008 had a devastating effect on the world economy. Millions of jobs were lost, trillions in financial assets evaporated, and millions of people lost their homes. Great companies such as Lehman Brothers went bankrupt and many others needed to be bailed out by the government. One would think that an important lesson learned from the carnage is that greed is not good: Our firms need to be headed by trustworthy, upright leaders.

The reality is that the corporate world, led by greedy and self-absorbed CEOs, was heading down a treacherous path for more than 30 years. One of the early signs that capitalism was morphing into something alarming and dangerous was the savings and loan disaster that occurred from 1986 to 1995, in the course of which 1,043 banks failed and whose cost to U.S. taxpayers was about $124 billion [1]. Clearly, no lesson was learned, and the next several years were replete with accounting scandals involving all kinds of underhanded uses of financial statements to deceive the public. The worst of these involved Enron, which filed for bankruptcy in late 2001. Numerous companies including Tyco International, Adelphia, Global Crossing, and WorldCom were also caught engaging in dubious accounting practices aimed at deceiving investors and enriching executives. The Sarbanes-Oxley (SOX) Act of 2002 was enacted in order to prevent future financial disasters and ensure honest accounting. Of course, SOX did not work as well as hoped and the Great Recession ensued.

Did the corporate world learn a lesson about the importance of running a business with integrity in the wake of debacles such as Enron and the Great Recession of 2008? Indeed, little has changed. The moral compass is broken at many organizations where greed and corruption still reign supreme. Thus, various financial institutions have been involved in manipulating the Libor rate, money laundering, foreign exchange rigging, illegal foreclosures, and opening unauthorized accounts. The automobile industry has seen cover-ups involving a defective ignition switch, exploding airbags, sticky gas pedals, and rigged car emission test results. Thousands of people died in the name of corporate profit when unsafe mines caved in, foreign factories manufacturing global brands collapsed on laborers, and an overloaded ferry capsized. Dubious and fraudulent accounting practices are still a problem; there have been scandals involving Tesco, Olympus, Toshiba, and Monsanto. The problem of lead in the water supply of Flint, Michigan, where 4.9% of children tested have elevated lead levels, demonstrates that government also cannot be trusted to do the ethical thing.

The Wells Fargo scandal that is currently unfolding reveals the extent of the corruption that is plaguing corporate America. Senate hearings reveal that the bank opened two million bogus customer accounts, allegedly pressuring low-level employees to open customer accounts via forged signatures and the theft of customers’ Social Security numbers in order to enrich the top Wells Fargo executives [2].

These examples indicate that many corporate leaders have no qualms about selling dangerous products, using dubious accounting, or brazenly using all manner of illegal tactics to maximize profit. Organizational leaders and boards may be paying lip service to the importance of integrity and ethics but are not practicing what they preach. It appears that the only lesson the corporate world learned from three decades of financial scandals was that “… when ethics and profitability collide the latter seems to win most of the time and secondly, that should companies decide to, or inadvertently, act unethically they have learned from the actions of western governments how to manage the ramifications” [3].

It is imperative that organizations stress the importance of ethical leadership and that boards only hire leaders who understand the importance of running a firm with integrity. If corporate boards would truly understand the dangers of heading their firms with narcissistic leaders who only care about themselves, these ethical lapses would not occur. Boards have to understand that the best leaders in today’s creative, knowledge-intensive economy are individuals who possess traits such as compassion, humility, integrity, and servant leadership [4] [5]. Even the military now understands the importance of developing ethical leaders at all levels, especially at the top of the hierarchy, in order to preclude the recurrence of serious ethical lapses such as that of Abu Ghraib. Barnes & Doty affirm: “ethical leadership trickles down from the very top of an organization all the way to the front lines” and “Ethical leadership is the bedrock for success in the military. Courage and competence win battles, but character wins wars” [6]. Ethical leadership is also the bedrock for success in the corporate world. The above examples provide ample evidence that arrogant, greedy, self-centered leaders are more likely to damage an organization than help it thrive.

ENDNOTES

[1] Curry, Timothy & Shibut, Lynn (2000). The Cost of the Savings and Loan Crisis: Truth and Consequences. FDIC Banking Review, 13(2). Retrieved from https://www.fdic.gov/bank/analytical/banking/2000dec/

[2] Rucker, Patrick & Freed, Dan (2016). Senators push Wells Fargo CEO on Pay Clawbacks After Bogus Accounts. Reuters.com. Retrieved from http://www.reuters.com/article/us-wells-fargo-accounts-ceo-idUSKCN11Q08U

[3] Shojai, Shahin & Feiger, George (2010). Economists’ Hubris – The Case of Risk Management. Journal of Financial Transformation, 28, April, 25-35. Available at SSRN: http://ssrn.com/abstract=1550622

[4] Baker, William F. & O’Malley, Michael (2008). Leading with kindness. New York: AMACOM.

[5] Karakas, Fahri & Sarigollu, Emine (2011). Benevolent Leadership: Conceptualization and Construct Development. Journal of Business Ethics, 108(4), 537–553.

[6] Barnes, Christopher M. & Doty, Joseph (2010). What does contemporary science say about ethical leadership? Military Review, 90-93.  Retrieved from http://usacac.army.mil/CAC2/MilitaryReview/Archives/English/MilitaryReview_20100930ER_art015.pdf

This post comes to us from professors Hershey H. Friedman and Miriam Gerstein of Brooklyn College. It is based on their recent article, “Are We Wasting Our Time Teaching Business Ethics? Ethical Lapses Since Enron and the Great Recession,” available here