Corporate Ethics
With Terri D. Egan, Ph.D.
Associate Professor, The Graziadio School of Business at Pepperdine University
Friday, Aug. 2, 2002; 11 a.m. EDT

The recent onslaught of corporate scandals has rocked the financial markets and shaken investor confidence. The scandals have included Enron, Worldcom, Tyco, ImClone, Adelphia and Kmart. It’s raised questions about accounting practices and scrutiny of brokerage houses that tout Wall Street stocks.

In the past few months, there have been corporate executives going before congressional panels to testify about their roles in questionable business practices and there have even been executives hauled away in handcuffs. In response to corporate misconduct, the Nasdaq this week toughened rules on companies listed on its exchange and President Bush signed into law a corporate reform bill that will increase penalties for accounting fraud and provide new grounds for prosecuting corporate corruption. Read the Post Business: Fall of Enron Special Report.

Join Terri D. Egan, Ph.D., associate professor of Applied Behavioral Science at The Graziadio School of Business at Pepperdine University, to discuss corporate ethics.

Dr. Egan is an associate professor at Pepperdine University's Graziadio School of Business and Management, as well as the co-founder of Saddle Sojourns, Inc., a consulting firm specializing in corporate leadership training. Her award winning research has been published in a number of academic journals.

Dr. Egan has taught business ethics, and social issues in management at the graduate and undergraduate level. She is currently on the board of the Clearinghouse for Information about Values and Ethics in Organization and Human Systems Development.

Below is the transcript.

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

Terri D. Egan, Ph.D.: I am pleased to spend some time with you today answering your questions, and engaging in an online dialogue about corporate ethics.

Orono, Maine: I'm amazed that people are acting so shocked to find out that corporations - and the people the run them - act so unethically.

News flash: It's in the NATURE of the corporation to act unethically. Heck, in many ways, our enlightened society is still dealing with the same problems that Upton Sinclair highlighted in 1906..and that Dickens and many others highlighted before him!

Ok, now that I'm off my soapbox, I'll ask this: is there any REAL hope that a more ethical corporate culture will emerge? And if so, what would such a corporation look like and how would it act?

Terri D. Egan, Ph.D.: While there have always been examples of unethical corporations, recent scandals such as Enron have refocused our attention on what is wrong with corporate America.

It also the case that there are many organizations and leaders that are acting ethically. A recent Business Ethics magazine report highlights companies such as IBM, and Herman Miller for the contributions they make to the economic, social and environmental well-being of the communities they serve.

Vienna, Va.: Dr. Egan, Do you think that ethics are emphasized enough in business schools? Have the recent corporate scandals changed curriculum and the focus on ethics classes in business schools?

Terri D. Egan, Ph.D.: Business schools have traditionally been challenged by how to best "teach" ethics. At the Graziadio School - we believe that an emphasis on ethics must be integrated throughout the entire curriculum. Our faculty in all disciplines understand and emphasize the importance of developing values-centered leaders.

One of the most powerful ways to help develop ethical leaders is too develop an awareness of their own ethical orientation, and how they can create organizational cultures that support ethical behavior in all employees.

Vienna, Va.: The equation is one-sided. Execs have all the power, employees have none. It's a function of our business model. We have a system that gives all the power, money and credit to upper management; but very little of that is applied to the rank and file.

If the internal accounting teams had been empowered to challenge Ken Lay, then perhaps Enron could have been saved. But when you have a boss screaming and yelling and threatening to fire you, what can you do?

I had the pleasure of working with a company in Quebec recently. The company's organization really empowered employees. Managers were referred to as Counselors. It was quite a shock to come back and participate in the dysfunctional business environments that have somehow evolved in the states.

With the meltdown that is occurring, I am sorry to see no attention given to the business model we are using and to the type of (mostly CYA) training we are giving our managers.

Terri D. Egan, Ph.D.: You make an important point. One of the hallmarks of an ethical culture is an unfailing commitment to truth-telling, and constructive dissent.

Orono, Maine: With all due respect, you didn't really answer my question. What's the difference between an ethical and unethically company, in terms of behavior? Would it be ethical, for instance, for a company to lay off most of its work force, while senior executives claim large bonuses and million dollar salaries?

I'd argue that as long as the profit-motive guides their behavior, companies will never act "ethically." Do you agree?

Terri D. Egan, Ph.D.: Okay ... let me try again. Ethical companies consider the impact of their actions on multiple stakeholders -- not just shareholders. Profits are not incompatible with ethical business practices. IN fact, there is good evidence to suggest that corporate social responsibility is positively associated with profitability.

The notion of the triple bottom line: economic, social, and environmental well-being -- is becoming more common. Organizations like The Natural Step - are working with companies to develop sustainable practices that are based on sound business principles.

Mt. Lebanon, Pa.: My knowledge of "Business America" comes from reading the recent Washington Post articles on corporate scumbaggery and tons of Dilbert cartoons. Combined, these yield a picture of employee theft, mid-level mediocrity, executive greed optimization and board-level visionary myopia. How can the little seed of personal ethics possibly grow and thrive in such barren, hostile soil? Assuming the SEC gardener remembers to water it! Thanks much.

washingtonpost.com: Post Business Special Report: Fall of Enron.

Terri D. Egan, Ph.D.: I will resist the temptation to pursue the notion of ethics as corporate fertilizer!

In the mid-90's a group of Harvard MBA graduates were asked to comment on the barriers to ethical behavior they encountered in their organizations. The majority felt that as individuals they held strong values, but that they often encountered pressure to behave unethically in their companies.

My students have raised similar issues. What I have found is that one of the first ways to encourage the "seed" of personal ethics - is to help executives understand that their business identity is NOT distinct from their personal identity. Creating awareness of one's own personal values, and how those values are enacted at work can help people make some difficult decisions.

Washington, D.C.: I think you hit the nail on the head when you mentioned "organizational culture." I own and operate a small, but growing, business, and I have really emphasized honesty among my employees. But in a very practical sense, it gets harder and harder as the business grows simply because there are more people and it is less centralized. How does a company build a culture of integrity?

Terri D. Egan, Ph.D.: As the founder, you hold the key to creating and maintaining and ethical culture. Your personal integrity is a powerful message.

With increasing size and formality - you have several opportunities to carry the message forward. In your hiring, training, and promotion practices you can communicate your organization's values. Employees pay particular attention to how an organization distributes rewards and punishments. An explicit discussion of ethical considerations should be a routine part of decision-making.

Rockville, Md.: Hello Dr. Egan - I can't see that it will ever be possible to prevent future corporate meltdowns such as Enron, especially in the field of accounting where it is so easy to manipulate your figures to reflect a more favorable bottom line for investors. But, developing ethical leaders in our business schools is a good start. I am aware that the Graziadio School at Pepperdine is ranked #1 in teaching ethics to its business students. What are some of the things you do differently in your curriculum to discourage corrupt behavior in your future business leaders?

Terri D. Egan, Ph.D.: We take an integrated approach to developing our students. Faculty from each discipline emphasize ethics in their particular course.

Some of our specific approaches include the following:

Each student at the Graziadio school begins with a personal development workshop - we believe that ethical leadership requires self-reflection and introspection. Students practice resolving ethical dilemmas in small groups. They have the opportunity to analyze their own decision-making, and get insight into how their thinking compares with others. Their is good evidence to suggest that discussing ethical dilemmas in small groups enhances one's moral reasoning capacity.

We also include some more non-traditional approaches.

Our executive MBA program students participate in a field trip to the Nellis Federal Prison Camp in Nevada, where they meet with white collar criminals.

MBA students take part in Service Leadership Projects where they provide services to non-profits, and develop a greater understanding and empathy for the communities that they serve.

Our MSOD students work with NGO's in China on environmental issues.

Washington, D.C.: Do you believe new laws are necessary to achieve, or are even capable of achieving, ethical actions on the part of corporations? After all, what was done at Enron, Worldcom, etc. was illegal, and yet the executives did it anyway. Why didn't the fear of punishment deter them?

Terri D. Egan, Ph.D.: My belief is that a sense of arrogance on the part of the executives trumped any fear of punishment. While the new laws may not completely change the climate, they will serve as a warning to many.

Laurel, Md.: Whenever I go to any sort of strategic planning meeting in my organization, our "core business" is one of the most important concepts. Reading about Skilling and Fastow's various exploits, it really does seem that they had stopped thinking in terms of trading energy and thought of themselves as high-stakes gamblers in corporate paper.

Is this a pretty fundamental concept that separates the ethical from the unethical. The latter think "I'm a mover and a shaker" while former never forget something as mundane as "We make blenders that people use in their homes."

Terri D. Egan, Ph.D.: Ethical corporations focus on their core business within a structure that is both legal and ethical. The connection between the company and its environment is critical. That is why we provide our students with an understanding of the larger system in which they operate.

Springfield, Va.: I want to respond to Maine - the assertion that corporations' natures are unethical is, in my opinion, a gross generalization. People are unethical, not organizations. Leadership can either condone ethical behavior or punish it. It is up to the individual to stay in an org that is not practicing one's values.

Terri D. Egan, Ph.D.: There is a link between individual behavior and the nature of the organization's structures and processes. One of the most frightening studies was conducted at Stanford University where students were asked to take on the role of prisoners and guards. These were students who were by all definitions "normal" -- they quickly became abusive, and acted out their parts in a way that was quite unexpected.

Organizations do shape behavior. Leaders need to understand that ethical companies require employees with integrity, AND a culture and structure that supports ethical behavior and strongly sanctions unethical behavior.

Washington, D.C.: Can you teach ethics? I always thought ethics had more to do with the tiny voice inside you or the knot in your stomach. You can teach rules and regulations but can you teach "ethical behavior"? I think business school is too late, maybe it should start in grade school.

Terri D. Egan, Ph.D.: Business schools can enhance ethical reasoning, help people understand the nature of the dilemmas they will face, and give them a solid understanding of the legal and regulatory climate that they must operate within. While we can't build character in adults, we can help people bring the best of who they are to their organizations.

Arlington, Va.: I am an accountant, and used to work as an auditor, and so I've followed recent events with interest. It confirmed an opinion I have long held. Auditors for the former Big 5 (now Final Four) companies will bend to any demands of their clients, in large part because they are receiving multi-million dollar fees, while auditors from regional and local firms do not cower to a client's demands if they attempt to deviate from GAAP in their financial statements.

It's very sad that it comes down to money, although it is also part of the culture promoted and bred at the largest accounting firms.

Terri D. Egan, Ph.D.: Your point is well taken. Consultants in general are subject to competing pressures. Colluding with the client is an issue for all consultants -- not just those practicing in the financial realm.

San Francisco, Calif.: Accounting scandals from Enron to WorldCom to Qwest had two things in common: massive fraud and Arthur Andersen as their auditor. Why have other CPA firms failed to condemn Andersen's practices instead of drawing a distinction between Andersen's practices and their own standards and practices?

Terri D. Egan, Ph.D.: My guess is that CPA firms are all taking a hard look at their internal practices.

Washington, D.C.: Why isn't the use of ethics like showing up to a gunfight with a knife?

Ethical behavior that is taught must run counter to the profit motive because no one has to be taught that more is preferred to less. So what's the motivation for ethical conduct when it isn't valued or rewarded?

Terri D. Egan, Ph.D.: Ultimately, one's own motivation for ethical behavior must be internal to be effective. External motivation has a limited value -- punishment and fear is only effective in the short-run. If people believe that they are above the law, they will continue to act unethically.

Organizations that have a clear vision, and support individual integrity are attractive places of employment. Recent writing by Ian Mitroff on spirituality and the workplace suggests that people want to bring their mind, body and spirit to work.

Arlington, Va.: I work with lawyers and judges on a daily basis.
They are the most unethical group of coworkers I have ever had. I have also worked for a federal law enforcement agency. The special agents were as a whole almost as unethical and self serving as the judges and lawyers I know work with. These are the individuals who are supposed to be upholding the law. How can one hold corporate executives to a different a standard? And lets not even talk about Congress i.e. Jim Moron... I'm sorry Moran.

Terri D. Egan, Ph.D.: There are examples of unethical conduct in all professions. Defining these professions by the "bad apples" is tempting, but unfair given that the majority of individuals in these professions do act with integrity.

Washington, D.C.: Hello,

In trying to "explain" the current corporate scandals, many people are saying things like it's "inherent that corporations are unethical" and it's in the "nature" of corporations to behave unethically.

I know many corporations do act unethically, but can you (or other chatters) explain the rational behind these arguments? It seems to me that it's no more "inherent" for corporations to act unethically than people do, but maybe I'm missing something. Some are unethical, some aren't. Thanks.

Terri D. Egan, Ph.D.: I would agree with your position. The current ethical climate has raised our awareness. All large institutions have the potential to abuse their power and authority -- however they are not inherently unethical.

Reforms are important. Two of my colleagues, Steve Ferraro and Linnea McCord have recently written an article that outlines the importance of the role of corporate director. You can find the article at the Graziadio School Web site.

Terri D. Egan, Ph.D.: Thank you all for your questions.

When I feel disheartened by the current scandals, I remember that the majority of my students and clients are individuals with integrity who are working to create organizations that are financially sound, and that contribute to the well-being of their community.