Incorporating Ethics into the Organization

Miriam Schulman is the communications director of the Markkula Center for Applied Ethics.

This article is a summary of a talk by Robert Finocchio on March 22, 2006.

Management guru Peter Drucker was famous for asking his consulting clients the basic strategic question, "What business are we in?"

To integrate ethics into the strategy, businesspeople have to add three more questions, according to Robert Finocchio, Dean's Executive Professor at Santa Clara University:

• What do we stand for?
• What is our purpose?
• What values do we have?

The former president, CEO, and chairman of Informix Corp., Finocchio offered prescriptions for incorporating ethics into the organization's strategic plan and suggestions for implementation at the March 2006 meeting of the Business and Organizational Ethics Partnership, a project of SCU's Markkula Center for Applied Ethics.

As a first principle, Finocchio argued that ethics is not integrated into strategy by proclamation. He also put it more colloquially: "Whenever someone tells me how honest or ethical he or she is, I hold on to my wallet."

While ethics should be part of the company's mission statement, long-term strategic plan, public pronouncements, and codes of conduct, unless it is also a "cornerstone of the organizational culture," it will not be effectively integrated into the business strategy, he said.

To really incorporate ethics, he presented these "prescriptions":

• Don't be in an unethical business in the first place ("In Finocchio's view some people might think tobacco, arms, and pornography may be examples of businesses that fit that description.").
• Obey the law and spirit of the law everywhere you do business.
• Articulate a complete strategy, including purpose.
• Explicitly articulate values as a key component to the strategy. Values must also be real, and must reflect actual behavior, especially among the organization's leaders.
• Don't rely on auditors, ethics officers, compliance officers, cops, regulations, manuals, and audits as the vehicle to insert ethics into the strategy.
• Emphasize principles more than rules. (This is the best way to be more demanding of the organization.)
• Individual ethical responsibility and accountability are never trumped by some corporate or organizational imperative.There is no "my company said it was ok" defense.
• Be totally transparent with your constituents, and make that part of the strategy.
• Have a framework and process for the resolution of ethical issues.
• Have the right organizational structure.
• Have rewards based on the right metrics.
• Make employee development part of strategy and make ethics training part of employee development.
• Encourage all employees to be challenging and demanding in the ethical domain (of everyone in the organization, including the bosses).

Finocchio went on to offer two practical suggestions for implementing his prescriptions: making an ethics performance evaluation part of the organization's standard end-of-year assessment and creating a strategic plan ethics checklist for the coming year.

The ethics performance evaluation would look at how the organization actually behaved, including such issues as transparency and opportunities for celebrating ethical behavior. The company would examine whether its actions over the past year had been consistent with its purpose and values.

In planning for the next year, the company would ask itself a series of questions, including:

• Is our purpose sufficiently well articulated?
• Do we face new legal requirements?
• Do we have new constituents?
• If we acquire another organization, how will it be ethically assimilated?
• Are our rewards structures appropriate?
• Is there any need to change the mechanics (constituent communication, employee training, organizational structure, issue resolution processes)?
• How will we measure our performance?
• Do we have new goals/objectives in the ethical domain?

Finocchio also looked at the issue of corporate social responsibility, acknowledging that some thinkers have argued social responsibility is not an appropriate activity of business. As an example, he quoted economist Milton Friedman: 

In [a free] society, there is one and only one social responsibility of business-to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say engages in open and free competition without deception or fraud.

On the other hand, Kenneth Andrews, sometimes called the father of corporate strategy, saw social responsibility as crucial not only for the business itself but for "human betterment." Andrews argued that government alone cannot sufficiently constrain negative individual or corporate behavior. Because they wield such vast power, corporations, he believed, must bring their power to bear on social problems if they are to be solved.

Finocchio also put John Gardner, founder of Common Cause, into the pro social responsibility camp. Gardner was interested in how leaders, including business executives, could mobilize the energy and talents of their followers to promote shared values and improve society. In his book On Leadership, he argued,
We must hope leaders keep alive values that are not so easy to be embedded in law-our feeling about individual moral responsibility, about caring for others, about honor and integrity, about tolerance and mutual respect, and about individual fulfillment within a framework of values.

In Finocchio's view, a business can be ethical whether it subscribes to Friedman's or to Andrews' and Gardner's view of social responsibility.

He offered these suggestions for those who agree with Andrews and Gardner:

• Be transparent. Make sure your constituents, especially shareholders, know what you are doing with their money.
• When in doubt, let the shareholders decide to whom and how much "to give."
• Beware of the costs of "social responsibility," especially when it involves economic inefficiency. Be sensitive to the fact that benefits may be concentrated and visible, and costs highly dispersed and invisible.
• Beware of elitism. (Because I am some big deal executive and rich, I know what's good for you.)
• Beware of fads
• There is no virtue in being charitable with other people's money, or using other people's money to promote your cause, stay in some club, or maintain social status.
• Beware of the point when "doing good" becomes self-indulgence.

For those in the Friedman camp, Finocchio advised:

• Be transparent with all your constituents.
• Be responsible with your own personal resources and personal actions.
• Test every action against the criterion.
• Maximize the long-term value of the firm.

Finocchio's presentation was part of a two-day meeting of the Business and Organizational Ethics Partnership. Other speakers at the March Partnership meeting included Dan Sweeney from the Center for Corporate Excellence on "Tone at the Top and Executive Compensation"; Stephan Rothlin, general secretary of the Center for International Business Ethics in Beijing on "Business Ethics in China" ; and Frank Daly, Markkula Center Fellow, Eric Pressler, Apple Computer, and Sam Piazza, Hewlett Packard, on "Rules-Driven and Values-Driven Ethical Approaches: Trade-offs."