Have we lost our moral compass?

An erosion of values threatens both business and society at large. Given the array of complex, conflicting economic and political forces, how can CEOs respond?

Since 1960, the social science data show a peculiar twist. Population has increased 41 percent; the gross domestic product has nearly tripled; and total levels of social spending by all levels of government measured in constant 1990 dollars have risen from $143 billion to $787 billion - more than a fivefold increase. But during the same period, there has been a 500 percent increase in violent crime; a tripling of the percentage of children living in single-parent homes and in the teenage suicide rate; a doubling of the divorce rate; a drop of almost 75 points in SAT scores; and a 400 percent increase in illegitimate births. tn just a few years, illegitimacy will surpass divorce as the main cause of fatherlessness in America.

What accounts for this social regression during a period of prosperity and peace? Moral capital, like tangible forms of capital is subject to depreciation. It does not last forever; it must be replenished. The source of moral breakdown is the subject of continuing controversy. In his book, "The Revolt of the Elites, "Christopher Lasch points to capitalism's identification with self-gratification, and to the elites' indifference or hostility to religion. Gertrude Himmelfarb, a City University of New York professor of history, who authored "The De-Moralization of Society: From Victorian Virtues to Modern Values," argues that we can learn a good deal from the Victorians: not only the importance of such virtues as work, temperance, self-discipline, and self-reliance, but the idea of virtue as governing both public and private affairs. A postindustrial economy, she believes, does not necessarily embrace a postmodernist culture, still less a de-moralized culture. The success of William Bennett's "The Book of Virtues, "which has sold 2 million copies and celebrates some of these values, attests to the fact that the idea of virtue or morality, in an absolute sense, is being rehabilitated. In his first State of the Union address, President Clinton expressed it this way: "Let's be honest...Our problems go way beyond the reach of government."

What does this quest for values mean? If business cannot function without a civil society, what role should its leaders play in this quest? What is at risk should this pursuit fail? This is the dilemma we put to CEOs in the following roundtable. Surveys indicate the public continues to believe that business behaves unethically, despite the fact that the Ethics Resource Center in Washington reports that 60 percent of all U.S. companies have formal ethics codes. But this is also a matter of execution and scope. Victor Rice, CEO of Varity Corp., a motor vehicle-parts maker, says his company has a global ethics code. GE employees must sign an integrity pledge contained in the company's 65-page ethics policy. Unfortunately, good intentions don't have much effect on social pathology. Presumably the pledge was accepted and signed by Kidder Peabody's Joe Jett and those who suspected the phantom trades but did nothing.

In pondering strategies to reverse the inertia, roundtable participants agree that values have declined, that probity must come from the top, and that business leaders must unequivocally state in public standards of right and wrong. Those who do not leave themselves and their companies open to lawsuits and damaged reputations that can deflate the bottom line.

VIRTUOUS REALITY

Michael Novak (American Enterprise Institute): I recently heard someone say a young student mentioned she dreaded going to business school, because she feared her values would either be lost or cause her to fail. That's a horrible thought, especially since people seem to believe that unethical behavior is becoming more frequent. America is pervaded with a dreadful suspicion that we're not as good as our grandparents were. Today's generation is probably the least well-educated in morality and religion, mainly because our schools teach that ethics is more like emotion than thinking. Thus, we still haven't learned the language of ethics.

Widespread use of the term "values" also contributes to the breakdown. Values are subjective: You choose them; they have no independent existence apart from you. And since they are creatures of your own choice, you can just as easily discard them.

Hitler, Mussolini, and others proclaimed near the beginning of this bloody century that there isn't any good or evil, truth or falsehood. There's only opinion. Intellect has no purchase on reality, they concluded, so intelligent people have to recognize that will triumphs, and whoever amasses the most power wins. It is just this sort of relativist thinking we must fight against. Truth is larger than we are. It's not something we possess, but rather as the old saying goes, "The truth makes you free."

Many young people today don't understand this concept. Many believe everything is just opinion. Thus, I think we have to stop talking about values and start referring to virtues. The notion of virtues points to certain habits - such as temperance, self-control, and discipline - that human beings need to learn and to practice if they are to live in a free society. This leads to the creation of character, which allows us to make commitments and be dependable. A free society depends on the liberty to do what one ought, not the liberty to do what one wishes.

Animals instinctively behave according to the law of their own nature. Human beings, on the other hand, do not just behave, they act. They can look at the past, repent of it, and change direction. We do not always obey the law of our own nature. We have to discover it first - and even then, sometimes we don't follow it: We know what we ought to do, but we fail to do it.

So far, we have not been very self-critical about "the moral ecology" of liberty we're creating for our children. Business-people can play an important role here. Business is the main source of wealth and possibility outside the government. It funds universities, research institutes, the opera, and PBS. And corporate advertising supports most of the messages delivered by the popular media on TV shows, talk shows, radio programs, movies, the Internet, etc. Thus, business has economic power to help shape the moral sphere.

That's why sins against morality in the business world are so damaging. They weaken our institutional framework. Generations ago, U.S. business leaders were held up as models of probity, decency, and concern for others. Their portraits hang in universities.

Charles R. LaMantia (Arthur D. Little): Yet many of those folks' business practices would land them in the federal penitentiary today, rather than garnering society's approbation.

Arnold B. Pollard (CE): Where do you draw the line between acting in a commercial way that optimizes your performance and pandering to the baser instinct to make money?

Novak: It's not a dilemma. Some political systems - communism, for one - simply ban economic acts between consenting adults. Capitalist activities can't even occur without particular political structures and even moral cultural structures. Businesses that don't pay attention to the soil they depend on are suicidal.

Rev. Theodore M. Hesburgh (University of Notre Dame): Business constantly faces monetary temptation to act unethically. I'm on the board of overseers at Harvard University, which has an ethics department. One of the department's case studies featured a gentleman who had an S&L; he's now in jail. But he wasn't the only guilty one. The law firm handling the business for this S&L knew that documents were post-dated, that the qualifications of the banking industry were not being followed, and that the bank was making insane loans. But it was making money. In addition, the accounting firms knew standard procedures weren't being followed, but both the lawyers and the accountants were making nice fees from that bank. And if somebody blew the whistle, they would lose a big contract. Thus, the price of morality was simply too high.

CHARTING A MORAL DIRECTION

J.P. DonIon (CE): What can business leaders do to recover their moral compasses?

Gary C. Wendt (GE Capital Services): Your question assumes that we've lost our moral compass. I don't agree. I believe what's in the hearts and minds of men today is the same as it was 500 or 1,000 years ago.

Novak: This is a matter of fact; it can be settled by observation. According to a teacher survey in 1940, the top moral issues in schools at that time were chewing gum in school, running in the hallways, and talking in class. Forty years later, they included bringing guns to school, selling drugs, and committing violence in the bathrooms. Again, when I went to Harvard, there weren't metal detectors at every library door.

Wendt: But if you knew those threats existed back in those days, you might have had metal detectors.

Novak: Those threats simply didn't exist then.

David R. Holmes (Reynolds and Reynolds Co.): I think our moral compass has been jarred by the bumps we've rolled over. These bumps arose because the business world has become faster, more sophisticated, and more technologically advanced. Ethical issues likewise have become more complex. Just as we develop our skills in technology and science, we have to keep pace in our ethical development by providing our employees with training, nurturing, and guidance.

John W. Teets (The Dial Corp): Society has broken down this country's basic family value system and its school system. For example, we now allow sex on 8 p.m. TV shows.

Leo Liebowitz (Getty Petroleum): Businesspeople should not support or pay for commercials that air at 8 p.m. during shows that depict sex. We need to elevate our standards. For example, I think dress-down days are symbolic of an erosion of what business stands for.

Teets: Business leaders now must establish moral structures and standards for their companies. The 20-year-old kids entering the work force today came through a different school system than we did. It's very complicated for CEOs to recognize the lack of values, set standards, and lay down a code of conduct. But we're in a crisis mode, and no one else - including the schools or churches - is going to do it for us. For one thing, people don't attend church every Sunday like they did in the past, so that institution has lost some of its value as a teacher of morality.

John Margaritis (Ogilvy Adams & Rinehart): Besides which, the credibility of those institutions has been sorely damaged. Today, all you hear about is corruption in churches and priests who are committing unspeakable acts.

David L. Chandler (Johnston Industries): Our families instilled in us moral values that helped us to develop personal integrity, which we also apply to our business dealings. We live in a very fragile world that is marked by disparities between religions, wealth strata, and race. Business leaders should challenge and support their churches and school systems to do a better job and to talk about ethics and morality.

Walter J. McNerney (Northwestern University/American Health Properties): Business schools also often come under fire for not stressing ethics or producing ethical graduates, but teaching about ethical problems in business is a frustrating experience. The discussion falls on deaf ears, because many students are bereft of a family or role model who would make them receptive to behavioral change. As executives, we have to catch these people earlier. That means getting interested in the independent sector, through which counseling and other programs - not necessarily government-sponsored - can help families.

Josh S. Weston (Automatic Data Processing): Executives use the "we" pronoun a lot. It's important to ensure we really mean "we" and not "they." It's too easy to abdicate our moral responsibilities to the next guy.

In addition, we must recognize that while there is no instant solution to the problem, it's worthwhile to do something as opposed to nothing. Leaders of society must reinforce the fact that you're not a patsy if you try to do the right thing.

David T. McLaughlin (The Aspen Institute): Leadership is about identifying and communicating strong ideas. In a civic society, there seems to be a compelling need to have shared values, ideas, and virtues. Today, business leaders are in the best position to formulate and promote them both to employees and society.

Michael D. Burke (Tesoro Petroleum): I'd like to see us all spend more time in the trenches instead of sitting in our ivory towers. We don't spend enough time seeing firsthand exactly what's going on as opposed to listening to statistics. I recently met a 24-year-old grandmother in the newborn center of a San Antonio charity hospital. What chance does her granddaughter have? We must get more emotionally wrapped up in societal problems. We must have more courage to act instead of intellectually talking about the situation.

Roy Serpa (enviro-Guard): That's true. I've become much more aware of the "I" aspect, trying to identify what I can do. A CEO's example can be very powerful. His or her habits, on and off the job, can be more powerful than a sermon from the pope. Those habits have a tremendous effect on every human being a CEO interacts with.

THE RIGHT THING TO DO

Hesburgh: I've known hundreds of CEOs. Most of them have high standards and are clear on right and wrong - some may fudge it at times, but, in general, I think most of them could pass an exam on morality. Most of them work at it pretty hard. The crux may be, how can you have a bigger impact than you're having now?

When I became a CEO, I asked my predecessor, Father John Cavanaugh, how I could be a good executive. He said it's just a question of making decisions and going with them because it's the right thing to do, not because it's the easy thing to do, the cheap thing to do, or the one that will make everybody love you.

I've tried to operate that way, but I've had some tough moments. For example, Notre Dame's bookstore once was plagued by pilfering. I informed everyone on campus that the next person caught stealing as little as a pencil would be kicked out for the rest of the semester. The first one caught was the son of one of our wealthiest alumni. He could have bought the bookstore, but he had to test my resolve on this one. We gave him the heave-ho within the hour.

At midnight, I got a call from the youngster's father, who I'd been working on to get a multimillion-dollar dormitory. He hopped into his jet, flew several hundred miles, and knocked on my door two hours later. He said he would give me a considerable amount of money to build a residence hall if his son were back in school by 9 the next morning. I told him, "If your kid steals something, the right thing to do is heave him out of school, so he'll remember it for the rest of his life."

He told me to forget the dormitory. I told him I wasn't for sale, and neither was the university. That was a tough decision, but the pilfering stopped in the bookstore. Ten or 15 years later, he did something greater for the university, and his son eventually came back and graduated.

Business faces ethical dilemmas almost every day. I served on David Rockefeller's board for six years as what he called the "company's conscience." Every time a moral problem arose, Rockefeller laid it before his board. After outlining the situation and the moral principles involved, we tried to apply them to this set of facts. I offered my opinion. David asked if anybody wanted to argue with me. Silence usually ensued. Then David banged the gavel, and that was it.

We didn't have a single moral scandal during those years. As head of the third largest bank in America, Rockefeller was willing to identify the problems and attempt to get as close as he could to the right answer. He felt that if it cost a hundred million bucks, it cost a hundred million bucks, but at least we maintained the bank's reputation and the shareholders' confidence.

No matter how you slice it, morality for each one of us is our own conscience and our own judgment of right and wrong, not what's popular or easy. And I think that if we had convened some CEOs 50 years ago to discuss ethics, we would have found most of them aren't all that much better than you are.

David H. Swanson (Premiere Agri Technologies): Fifty years ago, business wouldn't have been sitting around a table discussing these issues and accepting responsibility for society's failures. This is a new phenomenon.

Fred J. Rowan II (William Carter Co.): As CEOs in a position of power, we have a moral responsibility to teach right and wrong. Unfortunately, most CEOs are not great teachers. I have a lot more faith in young people than most. I think we're the problem, for the most part, because we don't teach them our heritage. We don't teach them that it's right to do this, and wrong to do that. And we often don't reward good behavior.

Robert W. Lear (CE/Columbia Business School): We ask so much of CEOs today that some protest it's grossly unfair to expect them to set standards of conduct for employees and family, and to stand in for the schools, the churches, and the Boy Scouts. Now I hear that I have to train my affiliates, my distributors, my dealers, my customers, my suppliers, and my community in ethics, too. This is a hell of a big job for me. [Laughter.]

Robert J. Callander (Columbia Business School/former Chemical Banking Corp. vice chairman): I believe it's within CEOs' power to get things done. I teach a session at Columbia University's Graduate Business School on ethics in financial institutions. Banks are and always have been different from other industries. Money is a powerful tool, and the power to give money and the power to withhold it become the optical fibers of how we transmit our values or virtues. An institution is known by the company it keeps. It will succeed even if it takes short-term profit hits while adhering to its principles.

The whole personal compensation issue has become a negative force in financial services because of its excesses. Greed and individuality often drive institutions to the ethical wall. How do we reconcile excessive compensation at the top with increased profitability coming from down-sizing in the lower levels?

The pope recently commented that many public officials claim they have no right to impose their values on others. This is what's nagging all of us in business: Can we apply our values to business issues, do we have the right to turn them into corporate policies?

Stephen A. Schwarzman (The Blackstone Group): I came to this roundtable because financial services is about as pilloried as PR in terms of moral reputation. All of us have trouble controlling people's behavior; the key is laying out what is right and wrong and telling employees in person what behavior is expected and what will not be tolerated.

Our firm doesn't do hostile tender offers, a practice that has caused us to lose some business. Opportunities to make profits abound, but if they smell of unethical conduct, you have to let them pass by. I find it useful to share those kind of decisions with employees. Let people know why you didn't take on a certain client or type of business.

Pollard: What do you do when choosing the high road, so to speak, could mean losing not just the odd piece of business, but the whole enterprise?

Schwarzman: Exit that business if you can. There are some cesspools you just don't want to be in. Certain businesses attract a high-risk element of that type. If you have the luxury in your business affairs to not be involved with it, you either stop it or get out. If it's your entire enterprise, I don't know what the heck you do. There's no way out.

SWIMMING UPSTREAM

Donlon: What can CEOs do to make a difference?

Holmes: Get actively involved in setting the standards by which we conduct business. We have built that into our company values, and try to spread it through personal example to the community in which we live and work.

McNerney: You have to reach outside the organization and become deeply involved in shaping the community's political and moral structures.

Liebowitz: I advocate setting a personal example, even to the point of sacrificing profit. You have to act morally at all times.

Teets: Our responsibility at Dial is to be good corporate citizens, contributing to the community and ensuring that all our employees are involved in this effort.

Donlon: Does this mean supporting or not supporting certain advertisements?

Teets: Yes. We choose carefully what we support on TV. If a program goes against our values, we will not advertise on that show. There are so many ways to advertise today, there's no reason to support programs that are not only objectionable, but obscene.

In addition, we issue a code of conduct every year detailing what the corporation stands for and defining its standards. Every employee - myself included - must sign and return this document. That has worked well in that we've communicated our position and the disciplinary actions we will take if the code is violated.

Edward A. Kangas (Deloitte Touche Tohmatsu International): That's a good idea. I also believe in publicizing decisions that are made in relation to that code of conduct, such as accepting or rejecting customers, so employees have reinforcement of the corporate ethical policy.

LaMantia: Once you have set the ethical tone, you must continue to practice what you preach and act decisively when there are moral and ethical lapses in the organization.

Burke: We don't do a good enough job of firing people and communicating why we did so. We tend to minimize the reason, even though it's a superb opportunity to set an example by telling the world, "We fired this person because his/her behavior was inappropriate and unethical."

Novak: Business has to lead the way for all the institutions that aren't fulfilling their moral responsibilities. We're not getting much help from most mainstream church leaders, poets, or movie stars. However, we can't mass-produce good morals; it must begin with "I." One business leader after another must decide to implement ethical codes. If enough CEOs do so, it will be difficult for the remainder to swim against the stream. Then we'll all be going in the right direction.

RELATED ARTICLE: CHARTING A MORAL COURSE

A moral compass is exactly what C. William Pollard hopes ServiceMaster's 35,000 employees will find when they walk through the doors of the company's Downers Grove, IL, headquarters. "To Honor God In All We Do" is etched in stone in the building's lobby. It is one of the four objectives of ServiceMaster, founded in 1947 by evangelical Christians.

"We are constantly working at the discussion of values with our employees," says Pollard, chairman of the $3 billion company, which performs specialized commercial and residential services. Managers are evaluated in part on their conception of right and wrong, and they are expected to set a personal example. "We hold them responsible for leadership and service," says CEO Carlos Cantu.

If maintaining a moral standard at ServiceMaster seems like a no-brainer, other companies, and their CEOs, are joining the fold. Among the leaders in business ethics: Nynex' Ivan G. Seidenberg, Pitney Bowes' George B. Harvey, Northrop Grumman's Kent Kresa, Texas Instruments' Jerry R. Junkins, and Sears' Arthur C. Martinez. And they are not alone. Tougher federal guidelines, scandal-hungry media, and more attention in business school curricula have made ethics a hot-button in boardrooms.

Perhaps the most compelling reason for a corporate ethics policy: Examples abound of companies that have been financially damaged - if not brought down entirely - by unscrupulous employees. "Ethics is an asset that belongs on the balance sheet, but not on the income statement," says Prof. Kenneth Goodpaster of the University of St. Thomas in Minneapolis. Trust is hard to regain once it's been lost, he says.

Another motivation: getting caught by the press with fingers in the pie. "Most companies that are aggressively pursuing an ethics process have perhaps had the misfortune of having a few employees behave unethically," says Jacquelyn B. Gates, Nynex vice president of ethics.

Addressing such issues as sexual harassment, conflicts of interest, gifts and gratuities, insider trading and securities violations, and the unauthorized use of company equipment, corporate ethics programs typically embrace the entire corporate hierarchy and cross functional lines. At Nynex, for example, awareness training is given to all 25,000 managers; and a confidential, 800 telephone line is available for staffers to report misconduct or ask ethics-related questions.

Determining what "values" are is tricky in a diverse and morally disparate corporate world. At Pitney Bowes, the company's managers write the code themselves, revising it regularly. "Values will overlay everything you else you do in your job," says David Nassef, Pitney Bowes' corporate ombudsman.

Just having a corporate ethics policy isn't always enough, experts say. Edward Petry of the Waltham, MA-based Center for Business Ethics at Bentley College estimates that about 95 percent of Fortune 500 companies have a written code of ethics, "but for the vast majority it's meaningless," because it's not reinforced with training and communication. More telling is a company's "hidden language of ethics," says Goodpaster. "It is the accumulated, informal knowledge about what is rewarded and what is punished. It is not always in sync with what's said publicly, but it's far closer to reality."

The clash between short-term goals and long-term reputation is what trips up most companies - and what CEOs must reconcile. "The problem is, when you're in a crisis, it seems as if having values will short-change you," says Lewis M. Andrews, chairman of The Englehart Corp., a $65 million investment company, and author of books on values and competition. For those tempted to cross the line, Andrews advises: "While it may appear that you might be able to get away with [something], you aren't."

Concurs Service Master's Pollard: "You bet there's tension between values and competitiveness. People reconcile these two sides every day."

Tenet Healthcare employs an ethics officer with board experience, says CEO Jeffrey Barbakow (see article on page 58). But others say such specialization goes only part way, that every officer should be an ethics officer.

The proof, however, is in the pudding. "We ask our customers about ethics and how they view us," says Nynex Vice Chairman Ivan G. Seidenberg. "[We've found] our continuing reputation as an ethical business is always a positive influence for Nynex."

Frances Nuelle

RELATED ARTICLE: THE DEVIL MADE ME DO IT

"You have sold your souls," Sen. Robert Dole (R-KS) thundered in a recent speech, prepared for delivery in Los Angeles. "Must you debase our nation and threaten our children as well?"

Dole was sending a message to Time Warner CEO Gerald Levin, who has steadfastly defended his company's right to publish the work of recording artists deemed by many to be coarse, violent, or sexist - and the public's right to purchase it. But the senator might just as well have been talking to Michael Eisner of Disney, which recently released the sexually graphic movie "Priest" through its Miramax subsidiary, drawing fire from the Catholic Church. Or, for that matter, to CEOs of tobacco, biotechnology, advertising, or other companies providing products and services that generate public controversy.

In attempting to determine the extent of unethical behavior by CEOs, Chief Executive collided with an even more basic dilemma: how to define it. Is it unethical to cut a hard deal with a company that is on the ropes? How about the CEO who rides a golden parachute to a soft landing while a company goes down in flames? Should the CEO be held directly accountable for all decisions by his or her company and its business units?

The short answer is: There is no answer. It depends on prevailing social norms, and on who you ask. About the only thing that's certain is companies that cross a fine and shifting line, engendering perceptions of impropriety, take it in the chops. Reputation is golden, making significant - though frequently intangible - contributions to the bottom line.

Columbia Business School Professor James W. Kuhn lets Time Warner off the hook, claiming the company's support of hard-core rap music merely went against "some people's sense of morality rather than being totally unethical." His colleague, Columbia Professor of Finance Donald Beim, disagrees, saying: "It is absolutely right to put pressure on Time Warner. Gerry Levin was caught flat-footed. The CEO is totally responsible for setting the company's moral tone."

Northwestern University Professor Donald N. Frey concurs and cites former Morrison Knudsen CEO Bill Agee as one who broke that unwritten rule. "He lived well with plenty of perks while the company went broke," Frey says. "Agee had a complete airplane system to enable him to live in one city and work in another."

Then there's Nike CEO Philip Knight, who put up $25,000 of company money to help skater Tonya "the Terminator" Harding fight the U.S. Olympic Committee when it was deciding whether to ban her from the Winter Olympics for implication in an assault on rival Nancy Kerrigan.

By spending shareholder money on a matter that had nothing to do with Nike's commercial interests, Knight sent a message to young people that he and his company effectively condoned Harding's behavior in the scandal. Frey says, "CEOs must ask, 'Will this decision damage my reputation? Can I explain it to my wife, my kids, my friends?'"

The Haft clan, owners of Dart Group, is embroiled in a scandal of its own as father, mother, and two sons cripple the Landover, MD, publishing and auto-parts company with vicious inter-family lawsuits. "The Hafts are about as exploitive as business gets," Beim says. "Aside from their personal quarrels and power plays, they are experts at terrorizing managements in other companies while deal-making."

Whatever their moral inclinations, experts agree that generally CEOs are forced to be more ethical than their predecessors because of media and regulatory scrutiny. And few dispute that ethics leadership starts at the top. Ultimately, the true measure of ethical behavior may be contained in cliche: One man's ceiling is another man's floor. On a more cerebral note, in the words of H.G. Wells: "Moral indignation is jealousy with a halo."

Lorri Grube