No shades of gray.

Q: * What's your personal definition of * good ethical and moral conduct for businesses and for individuals?

Stephen Hardis, chairman and CEO of Eaton Corp.: The basic elements of ethical and moral behavior - how people conduct themselves, their respect for others, their sense of integrity - are the same in business as in daily life.

In most cases, ethical questions answer themselves when they're discussed aloud. For example, if I were asked if Eaton would facilitate an under-the-table payment in a Third World country, simply saying the question aloud provides the answer: Of course, we wouldn't.

By asking ourselves if we would be willing to do something dishonest, inconsistent with the laws either of our country or the local country with which we do business, or inconsistent with the way we want to be perceived by our customers and competitors, the question goes away. When it comes to integrity, there are no shades of gray. You're either honest or you're not.

Q: Has the public's perception of good ethical values changed?

There's a level of public cynicism that applies to almost every institution - including our elected officials and certainly business. My perception is people are quicker to assume unethical conduct or behavior has become the norm. Business is affected by that cynicism. I don't think it's warranted, but would say the general perception is more cynical than less. I think it has more to do with problems like Watergate, Irangate and campaign finance abuses. Then you hear scandals associated with religious leaders and other prominent people. After a while, the average person thinks everybody, one way or another, is for sale.

It would be too easy to blame it on the media, though. Reporters have had too many stories like Watergate and Irangate to cover. You've got a president who had a 64-percent approval rating who has faced legal actions charging him with sexual harassment and has been investigated for his personal dealings. I don't think you can blame that on the media.

I believe very much in the First Amendment and think, to the extent the media has become a watchdog, it has been effective.

Q: Does technology foster dishonesty?

There's no question, with the widespread use of information technology and movement of funds electronically, if you're inclined to be unethical, you now have tools at your disposal to spy on people, to access their databases, to steal money, to put in false entries. It gives unethical people much more power. It's like offering an assault weapon to a criminal who just has a dagger.

But I don't think technology induces people to be unethical. It just makes us more vulnerable to unethical people, because of the power of the tools in their hands.

Q: Does personal loyalty to an employer ensure higher standards - and, if so, are we losing that relationship in today's business climate?

People who feel intense loyalty toward a company will assume, other things being equal, that they will work for that company for a long time, so I think you do get different standards of behavior from them. A sense of pride in the company becomes one of the determining factors.

People don't stay with a company unless they can feel good about it. And one of the ways they can feel good is to know they work for an ethical institution. The kinds of people who stay with a firm out of loyalty apply different criteria to their lives. They're not people who think it's ethical to move because they'll get more money. Of course, there's nothing illegal or immoral about moving because you get a good opportunity, but it's a different mindset if you believe the only question you ask yourself is, "Will I be able to make more money in the next job?" as opposed to, "To what extent do I have a responsibility to help this organization accomplish its goals? To what extent do I have a responsibility to take care of the people who are working for me and are counting on me to be there? To what extent do I have a responsibility to help this company maintain its standing and reputation?" There's a link between the concept of loyalty and ethical behavior.

People who are loyal to a company and who know that the company doesn't practice trade espionage, for instance, would never take away secrets themselves. There's a difference in the attitude of ethical people who leave. Those who have felt loyalty leave with a sense of reluctance. One of their most important objectives is that people don't think badly of them when they leave.

And that applies to all levels. It would be a major mistake to think there's a different concept of integrity at different levels of business. There's more of a burden on the people on top because they're more visible, but ethics run throughout a good organization. If the top people don't constantly practice ethical behavior, they'll never get it from their employees.

Q: Do you believe some up-and-coming executives account for their unethical actions by in effect saying "the end justifies the means"?

My experience within Eaton has been that our high-potential people know nothing could be more deadly to their career aspirations than to be seen as practitioners of "the ends justify the means," or situational ethics. They could never recover from it.

We have a training program that gives people the opportunity to understand the kinds of decisions they may have to make that will involve ethical values. We believe strongly that part of our general management responsibility is to provide all of our people training on ethics so they're sensitized to these questions. But, I believe if a person hasn't been taught ethics by his parents or through the organization - by example or peer pressure - it's doubfult he will spontaneously teach himself.

Q: Do Eaton's standards of conduct vary in any way in different business locales?

Ethical values are universal. Eaton operates worldwide and we do understand that, within the law, different cultures may have different practices. We call on our local managers to figure out how they can best abide by our ethical standards, which are worldwide, but how they can make them work best in each country.

For instance, in some countries, there's something the law calls a "facilitating payment," or a tip to someone at a dock to make sure your goods get through. That's not considered unethical in that culture, although it is in ours, so we give our local managers some leeway as long as they don't violate basic ethical standards.

Having said that, you simply cannot have a form of corruption somewhere in your business. Sooner or later, it will affect your stability. It's sometimes hard, though, to convince people they should compete on the basis of product quality, value, delivery and price.

That's why our suppliers are always reminded that in dealings with Eaton they're supposed to practice ethical behavior. Our purchasing employees have the greatest responsibility for ensuring that suppliers adhere to strict rules regarding relationships with us. We don't do business with firms that use "under-the-table" funds to secure business. I believe there's enough worldwide business to be won based on the quality of products.

Speaking internationally, my feeling is the

U.S. ethical model is becoming more of the norm; U.S. executives are more sensitive today than they've ever been to ethical behavior. In fact, Eaton has a corporate responsibility committee that meets several times a year. And our board is very, very actively involved in whether we are abiding by ethical behavior.

Q: How do you think business ethics will evolve?

Over the next 10 years, I think we're going to be held to higher standards, in part because of the cynicism of the electorate. I say selfishly that that's wonderful because at Eaton we're already living with very high, self-imposed standards of integrity. I consider that a competitive advantage.

Stephen Hardis is the chairman and CEO of Eaton Corp, based in Cleveland, Ohio. He was interviewed for Financial Executive by Raymond Smiley, the retired CFO of Bearings Inc. (now Applied Industrial Technologies), a member of Financial Executive's editorial advisory board and a member of Financial Executives Institute's Ethics and Eligibility Committee.