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Business ethics: dealing in the gray areas.

Business ethics: dealing in the gray areas

The subject of business ethics is becoming an increasingly important challenge to the senior staffs of North American companies. Unfortunately, it is a soft issue. It's not clearly measurable. It often deals in the gray area, not in the pure black and white. So, there are no clear-cut, straightforward measures that we can apply to ourselves or our companies to determine whether we are in fact doing business in a highly ethical way.

But I believe the solution is very simple: we first must accept some very basic beliefs; support those beliefs with a series of clear, concise, and precise principals; and then, most important, live by those beliefs.

Why? Because large companies don't learn. People learn. And the people in our companies tend to change, so the only way that companies can develop and maintain a strong and consistent sense of good business ethics is to apply similar standards over and over again through their people. Even though the situations will be different and the people will have changed, this philosophy establishes a basic culture within our business lives.

Where's the fire?

Why is it that applying business ethics is becoming so important? It's because we all face pressures on a day-to-day basis.

For instance, in business today, senior executives are being pressured to take a shorter- and shorter-term view. Not too long ago, a friend of mine who is CEO of a large corporation asked me if I knew the three most important expectations of a CEO today. When I responded negatively and asked him his view, he said, "Very simply, they are profit, profit, and profit."

In this country, more than in any other place in the world, business executives and their staffs face increasing pressure for short-term results that in fact are largely measured in terms of earnings, and this heightens the prospects for poor business ethics. But I am absolutely convinced that, as we do business in a more ethical way, we improve our chances, not hinder them, to increase our earnings, and this is particularly true over the longer term.

Another reason it's difficult to maintain a high standard of business ethics is that the growth of demand for all products in all industries, in particular those in North America, has slowed. At the same time, there has been a dramatic increase in the sources of supply into North America. With our aging infrastructure, our increasing unit-cost structure, and our aging population, it may on the surface appear to be good practice and economically more efficient if we begin to cut corners in how we do business, or fix prices, or shade the quality of our products, even cheat our own people a little. And there are many companies that have moved their company culture in that direction, eschewing any more upright approach as being too pure, or too black and white, too goody goody. But in doing so they have undermined their basic corporate strength--their own people's credibility and trust base--and reduced as a consequence their chances for business success.

Companies also want to increase service to their customers, to make dramatic increases in product quality and performance. Of course, we'd like to do that at decreased cost. But that often means diminishing the morality in the way we do business, by such actions as reducing the opportunities for fair and competitive earnings for our wage earners, eliminating people without regard to skills and performance, raping the research organization, eliminating the audit department, or reducing the number of people in finance so no one has a clear measure of the way business is being performed.

In almost all cases, if you carefully study those organizations that have gone out of business or that are in the process of going out of business--and I can use my own company as an example, when we were on the verge of going out of business nearly one decade ago--these changes are seen as necessary for survival.

On top of all that, we now have the pressures of LBOs, takeovers, sellouts of entire sectors of companies or even whole companies, plus the introduction of multiple ownerships of major corporations. Again, my own company is a good example.

We are now 20 percent owned by a Japanese company and 80 percent owned by a British company. As a consequence, we have three different sets of accounting standards, three different cultures within which we operate, three different sets of objectives that have to be reckoned with, plus the markets in which we operate will often literally be located halfway around the world from our shareholders. You can see how it would be easy for a company in such circumstances to dramatically increase its chances of violating good standards of business ethics. Yet, I believe you build relationships with foreign shareholders if you do business in an ethical way, quite to the contrary of what many people would assume under such international pressures.

Look at some of the airline takeovers in recent history. We have all read of one senior executive of an airline company who had been on the management team for less than two years and, yet, if that company had been bought out by its management on an LBO basis, that young man would have made in excess of $35 million on his stock options, as reported in The Wall Street Journal. Now, is it possible, no matter what role a person plays, no matter how bright, how many degrees, or how many past honors that person has achieved, that after two years he should be able to get $35 million for his stock options? Could he have added that much value to that company? The answer, I believe, is no. Such enormous payoffs, in my view, are not ethical. Ultimately, the shareholders and we as customers of such companies are being raped by that kind of activity.

The last area that contributes to increased pressure on the way we do business is a result of the lightning speed with which technological changes are occurring. Such industries as biotechnology, computers, space, microchemistry, and medicine are changing so quickly that even those people who operate in leadership roles have difficulty understanding how to apply standards of business ethics as entirely new ethical problems are being generated.

New ground is being broken as often as every three months in some industries. How does an individual go out to sell, for example, a new computer line when he knows that in three months, or even one month, his company will already have made that computer totally obsolete? How can a scientist be certain that the new molecular structure he or she invented and is helping to promote does not, in fact, have some spin-off potential that could be deadly? Do we take the time to check through the risks? Do we objectively and openly evaluate all the risks versus the benefits? And if we do make the evaluations and we find that there are, in fact, major--maybe even deadly--risks involved, do we report them to the public?

Just three steps to get you started

When I was studying business, there was no course in our MBA program dealing with business ethics. Today, there are no schools that can afford not to have such a course on their agenda. Unfortunately, many of our modern students come to school less equipped to understand the notion of business ethics than those of us who entered school 20 or 30 years ago.

The fundamentals of establishing a basis for good business ethics are simple. First, state in a clear, concise, and precise way what you believe. Businesses, as collections of people, can "believe" things. We do in our company. Nearly 10 years ago, we at LOF wrote a business philosophy. That statement discusses our mission, our charter, our fundamental objective, and our beliefs. It says, and I quote, "We believe..." and then it goes on to say just how we expect to implement those beliefs.

One of the items states that, "We must conduct all of our business affairs to the highest level of legal and ethical standards." Now that's not soft, or warm, or fuzzy. Rather, it is a very clear, very precise statement of beliefs. When you are faced with a very fuzzy, gray situation and you wonder what you should do, if you look at a statement of philosophy like the one LOF has adopted, the answer will be easy.

Learning how to apply basic principles of good business ethics takes time. The most important way to reinforce good, ethical practices is to write down what you believe. Don't write down something that sounds good or something you think others would like to hear. Write down what you believe--and what you expect all your people to fully enforce.

It's a very basic step, but few companies have ever done it. Almost all companies write their mission statement, but almost no companies write down what they believe or how they intend to implement what they believe. There's a critical difference here. The mission statement says what you will attempt to do. Ethics talks about how you intend to do it. And unless you address that second notion of how you will implement, you will never draw a connection between mission and good ethical practice.

The second step is to apply clear standards of conduct. Again, you can't write down the standards just to have something to pass around and then place in a notebook on the shelf. Rather, the standards should support and make easier and more precise those things that we say we believe. Standards of conduct should put substance around our general business approach. At my company, we break down these standards according to several issues.

As examples, we have one section on corporate integrity and another one that deals with conflict of interest. Then there's a separate section on bribery. In the old days, if there was a problem with business ethics, such as bribery, somebody was on the take. What we find in today's world, however, is that almost every person who is doing business in an unethical manner is out to "help the company." In reality, however, he or she is undermining that company and sapping its strength.

Other sections of LOF's book on ethical standards deal with corporate records, political activity, confidential information, compliance with antitrust and other laws, and treatment of our human resources.

Having achieved these first two steps takes you about 90 percent of the way toward being a company with good ethical practices. The final step is actually even simpler to implement: live your beliefs, from the top down. When you make a mistake, own up to it. Point it out to others, so everyone can recognize that we're all human, that we can all make mistakes, that we are all frail in some way, and that individual human greed and the increasing competitive pressures around us are going to get to us from time to time.

When someone does fall out of line, within reasonable bounds, remind him or her what it is that you believe as a company, and then move the person back in line with the practices the company espouses. Treat the episode as a lesson to that individual.

In cases where a violation of your code of ethics is severe, you must excise the violator from your company. If you don't, then what you will have implicitly said is that you condone the action. By definition, you have taught your people that that behavior is okay. This is the tough part--being willing to deal with the issue head on in a timely and forceful way.

Truth beats fiction again

Look at this example from my own company. Roughly five years ago, we started developing a new glass for the automotive industry. In the early stages of development, we invented a glass product that was blue in color and had properties substantially better than the properties of our existing product at that time. We showed the glass to a large customer of ours--to its designers, senior engineers, senior purchasing people. Within weeks we learned that our competitor had not only obtained samples of our new product, but that a full measure of our confidential information had been shared with the competition.

If that weren't bad enough, we next learned that this competitor launched a major technical program to develop a comparable product. Four years later, that competitor began to market its "new" product. We continued to develop and refine our basic technology in this field, which we hoped would ultimately yield an even better product. Our competitor, armed with the early and easy access to our technical capabilities, began to introduce its product into the marketplace. However, before that marketing effort was fully implemented, our own technologies had developed a product substantially better than that we had offered earlier, the one that had been almost exactly duplicated by our competitor. At that point, we began to trace the properties of the product that our competitor was marketing, putting the values of those properties on a chart and measuring in our own laboratory the absolute performance of the offering versus the competitor's quoted achievements in specification.

What we found was that the information the competitor was quoting was substantially exaggerated from the product's actual performance. Worse, we learned our competition was promising the marketplace that it would further improve the product--a promise that we knew through our research could not be kept without infringing on our patent application. Now, how did we deal with these issues?

Our first approach was to suggest to our customers that they fully check our marketing claims to make sure that what we were saying was true and to do the same in evaluating our competitor's claims. That didn't spark action. So we sought an outside laboratory, one that could be considered impartial, to fully explore the competitive claims. Then we made that report available to our customers. At least one customer immediately questioned the validity of the outside data. However, the report did spark the customer to hire its own outside laboratory--which is what we wanted in the first place. And that laboratory, in turn, corroborated the facts that we had offered.

Two other examples look at the ethical decisions involved with the possession and use of confidential information, another fuzzy area if you allow it to be.

In our industry one of the most important inventions in the last 50 years has been the float glass production system, developed by our new owner, the Pilkington Group. The system was introduced in this country in 1963 by PPG and in 1964 by LOF. For the next 20 years, it became the worldwide process for making glass, and the technology is still very closely controlled.

One LOF executive who came to know the float technology through our firm, and who signed an appropriate confidentiality agreement, eventually retired from LOF and was subsequently hired by a foreign government to help design, develop, and construct a float facility for it. Wasn't there something unethical about this?

We thought so. So we made it clear to that executive, in a letter, that if he persisted we would take positive action that might ultimately put him in jail. And we would eliminate his benefits, since they were dependent on his meeting his agreements with LOF. And we made it clear that we would make his actions known to the public. It took about two days to get a formal response to our letter, and, as far as I know, that person has completely dropped his efforts on the float system project.

Some companies aren't willing to take on their former senior executives, to battle them publicly in court. They would prefer to let the unethical behavior continue uncorrected, rather than to launch an appropriate action. One senior automotive company executive, for example, enjoyed a new car about every six months as a perk. As with most automotive corporations, at the end of that period the executive was permitted to purchase the automobile at a substantial discount. That particular executive was buying his used cars and then selling them for a premium above the market to executives of another company that happened to do business through him with his firm--all this in the framework of "a friendly gesture." And this practice persisted for a number of years.

Now, who was more unethical--the automotive executive for selling his cars in a manner clearly to his advantage via his powerful position as one who could influence purchase decisions, the "receiving" company for ignoring that it was being done to and through one of its employees, or the "receiving" friendly executive? In my view, all of the above!

What about corporate records? During the past five years, LOF hired a very bright, highly educated person as a senior executive. He came with a variety of credentials. He also came with reams of internal corporate intelligence from his previous employer: booklets, job lists, productivity information, cost information. When we learned of it, we made it clear that he was to put it away or, better, to destroy it, and that never again should it be allowed in our company.

We've learned that when an individual is willing to operate in one way that is unethical, he or she is normally willing to operate in other ways that are unethical. We had another case in which a senior executive was hired away from us to a higher position in another firm. For whatever reason, he didn't make it in the new company and wound up as a partner in a consulting firm. Well, the former employee wrote a letter to me recently in which he indicated his desire to do consulting for us. But what did he enclose as evidence that he could make a significant contribution to our company? A document from our company that he'd worked on.

We did two things: we responded that we weren't interested in his help, and we warned him that we were studying very carefully what could be done from a legal standpoint about his distributing our corporate internal documents.

Finally, we look at ethics as they apply to human resource issues, in particular the not-so-traditional cases, the fuzzy ones. As you know, all progressive companies develop succession plans. Why? So they get the absolute best people up front, so that everybody can get to know them, and so they've established a "pecking order" if someone moves out of a position, dies, or leaves the firm.

Not long ago, I audited one such succession plan for another company. What did we find? That about 80 percent of the time a decision other than that prescribed in the plan was made. The company wanted a succession plan, but it didn't want to abide by it. Not only is that a sham, it is unethical, because it creates the notion among employees that they have opportunities for growth and that they will be considered on merit and performance, when in fact that isn't true. Companies have a clear ethical responsibility to attempt to give the highest chances of growth to those who have the highest skills and potential and the best track records. Yet, many firms persist in promoting on the basis of political support or personal loyalty to the company.

Take a look at equal opportunity as a concept and see how it really applies in your firm. How many blacks do you have in your senior management ranks? How many women are in key roles? When I ask those questions of CEOs, I usually encounter a great silence. Yet you will find in every brochure, and on every wall in every hallway, signs that boast, "We are an equal opportunity employer." What does that mean? And do you attempt to support it?

Your people count

Yes, business ethics is becoming a much more important issue--a difficult one at times, but one that can be handled in a very simple way by following the three steps. If we make an honest effort to do business ethically, I believe we will be a lot more profitable. Why? Because the morale of our people will be higher and they'll make a deeper and more lasting commitment to our own firm's goals. They will become even more highly motivated. They will believe us and trust us when we tell them that our most important asset is, in fact, our people.

Ronald W. Skeddle Dr. Skeddle is president and CEO of Libbey-Owens-Ford Co. His remarks here have been excerpted from a speech be gave to FEI's Toledo Chapter.
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Author:Skeddle, Ronald W.
Publication:Financial Executive
Date:May 1, 1990
Words:3453
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