Chapter 6

Implementing human centered management

The ethical, social, economic and institutional perspectives presented in Chapters 2–5 are the essential dimensions of both a conceptual framework for business ethics and the practice of human centered management. And so is the holistic interrelatedness of the perspectives. These perspectives and their interrelationship are a concept that is likely to appeal to practitioners. But the real test is the implementation of a concept. Even if a concept is understood and accepted, there are often difficulties in implementing it properly, in a sustained manner and for a wide scope of activities and geographical distribution. The effort to implement the concept of human centered management may get caught up in situational ethics – a propensity to take the particular context of an act into account when evaluating it ethically, rather than judging it according to absolute moral standards. And even though a leader might know what is right in a given situation, he or she might not know how to do what is right. The following three major problems of implementation will mostly be found, irrespective of the context, be it a small business, a large corporation, a civil society organization (CSO) or a government entity:

Third is the problem of timeliness. There is no opportunity to experiment – in most situations a leader has one chance only. It very rarely happens that one will face exactly the same situation twice.

Contextualism (assessing situations from the context in which an act occurs, hence it is also called situationism) may lead to wrong judgments. This comes to the fore when implementing ethical concepts. This chapter will deal with the dilemmas that arise from placing too much emphasis on context. Also, situational ethics is sometimes considered to be the belief that “what is wrong in most situations might be considered right or acceptable if the end is defined as appropriate” (LaBeff et al. 1990, p. 191). But, rather, it is about accepting norms that are contextually grounded and for which the common view among a specific reference group has to be discovered. This would apply to the context of political culture referred to in the previous chapter with regard to diverse nature of public office in different countries or to specific business contexts such as an investment project in a foreign market.

A good example of conflicting views on what is right or wrong in a specific situation is given by Puffer and McCarthy (1995), who portray the dilemma faced by the senior American involved in Ben & Jerry’s Homemade, Inc.’s ice cream operations in the Karelia region of western Russia. When the senior Russian partner began to “borrow” company materials and equipment for use in his other businesses, the American was dismayed and viewed such behavior as unethical. The Russian manager, however, felt that this was a very reasonable way to utilize the equipment since he was a co-owner of the company.

One way out of the dilemma would be for the two partners to define what moral values they share.

In this chapter of the book, the issue of common values will be discussed first, leading to the topic of ethics codes, then to the topic of corruption. This will be followed by recommendations on how to conduct stakeholder relations responsibly. Then, another chapter will look at the relations between a moral person, a moral leader and a moral organization.

Common values are what makes a society stick together. But with growing ethnic diversity, one may come to think that social cohesion may be threatened. However, as shown by the example of the US, an effective set of social relationships can successfully deal with diversity, rather than a situation necessarily characterized by homogeneity (Harell and Stolle 2010). The next section will exhibit how that can shape a consensus on values, and American values will serve as illustration. But there is also criticism: the United Nations Millennium Declaration, signed in September 2010, listed an expansive array of common universal values, including freedom, equality, solidarity, tolerance, respect for nature and shared responsibility, of which critics say that they were never held in common by all societies at any time in history (Bok 2002). Skepticism is surely needed. But even as hatred and violence are still flourishing in many parts of the world, there are also powerful movements that have arisen in response to these threats, both through governmental and non-governmental institutions and private individuals. Aid to developing countries, caring for refugees and the needy, humanitarian or philanthropic relief, protecting the environment, empowering the underserved – all of them have a human centered foundation. And the human centered paradigm is undoubtedly based on values and beliefs.

6.1 Arriving at a consensus on values

Defining what a business leader (or a leader in any institution) understands by ethical values will always be the beginning of his or her human centered management. One simple approach is to use ethical value synonymously with goodness or virtuous behavior. Another, more operational, approach would be the one used by the Global Ethics University (https://globalethicsuniversity.com), which lists and explains the properties required for moral conduct, such as Trustworthiness, Respect, Integrity, Fairness, Caring, Teamwork and Citizenship. “Value” and “virtue” are extremely broad terms, whatever the setting – business organizations, government authorities, non-profit institutions or the military. But there are common imperatives: any organization’s core values would have to encompass all of the properties listed previously, and there are more that could be added, such as professionalism and stewardship.

The US National Defense University, in its briefing on “The Ethical Dimensions of National Security,” lists four organizational values (loyalty, duty, selfless service and integrity) and four individual values (commitment, competence, candor and courage; Johns 1998). And in a book on ethical leadership for police officers, an ethical leader is defined as being one

These types of catalogues can be found in relevant mission statements and guides to codes. As with institutions like the military or the police, businesses also have codified statements on their ethical values. We will turn to these ethics codes, as the first ingredient of human centered management in organizations, in the next section. First, we will inquire into the nature of values.

So what are values? Values define what is desirable or not and how one should behave in a given situation according to the rules of one’s society. As stable basic traits close to an individual’s personality, values play a part in the building of motives that result in behavior. Once more, we are at a nexus between societal and individual reasoning. Consequently, values have been called the “central integrative concept that could bring all social sciences together” (Mahrt 2010, p. 25; see also Schwartz 1992, p. 68; Hitlin and Piliavin 2004), that is, psychology with its approaches to personalities and individual differences, studies of social learning and socialization, comparative studies of cultures, political disciplines and theories of human development.

In addition to the comprehensive review of the sociological literature on individual behavior by Hitlin and Piliavin (2004), Kluckhohn also provided a seminal work (1951) and gave the following definition: a value is “a conception, explicit or implicit, distinctive of an individual or characteristic of a group, of the desirable which influences the selection from available modes, means, and ends of action” (p. 395). The reference to “a group” highlights that individual values are constituted through the imitation of and respect for rules of behavior and goods valued within a given society, and they are thus a product of culture. This has already been dealt with in section 3.5. With regard to the “culture” of capitalism, Porter and Kramer introduced “shared value” as a new conception of capitalism, claiming it as a powerful driver of economic growth and reconciliation between business and society (Kramer 2011).

If values are to be a guide to moral behavior for both an individual and a group, they need to be clearly defined and holistic. There has been a critical view on this since the negative view of Thomas Hobbes in the mid-17th century, when he theorized in Leviathan that “the same man, in diverse times, differs from himself, and at one time praises, that is, calls good, what another time he dispraises, and calls evil” (Narveson 2007, p. 10). Since then, however, societies have become more coherent, and while education was a privilege of the upper class in Hobbes’s time, people of today have a different scope of knowledge.

Modern philosophers, of whom Jürgen Habermas is one of the better-known representatives, believe that (common) values can be defined through a rational debate and from deductive reasoning. While this ethics of discourse may differ from the instrumental rationality applied in the business world, there is cognitive adequacy in Habermas’s reasoning (Fisher and Lovell 2003, p. 18), and it clearly emphasizes that the outcome intended with sincere discourse is consensus (Friberg-Fernros and Schaffer 2014). Shaping the internal culture of an organization needs discourse, and this is consistent with managerial purpose.

But is there such an archetype as “common values” throughout a modern society? If we take the heterogeneous pattern of beliefs and attitudes in the US, and if we take into account that people living in the US would consider that every individual is unique, one might think that the same list of values could never be applied to all, or even most, US citizens. But this looks very different from the outside, and Kohls (1984), in his seminal work for which he used studies over more than 30 years, devised a list of 13 commonly shared American values, discussed in the following section.

6.1.1 Values of a society: the case of American values

The maxim followed by Kohls was that actions performed by Americans that might otherwise appear strange, confusing, or unbelievable when evaluated from the perspective of a foreigner would become much more understandable to him or her if judged from their beliefs – the beliefs by which they live their daily lives. The list enumerates 13 of them (Kohls 1984):

1. 1 Personal control over the environment – Individuals in the US believe that first and foremost, each individual should look out for his or her self-interests by controlling nature and one’s environment.
2. 2 Change – In the US, change is associated with personal progress, improvement and growth.
3. 3 Time and its control – Time is one of the most valued resources in the US; time is to be used wisely on productive tasks to improve one’s personal achievement, status and esteem.
4. 4 Equality/egalitarianism – Americans believe that “all people are created equally,” and tend to disregard hierarchies in class and power.
5. 5 Individualism and privacy – Individuality and uniqueness are valued above group cohesion. Moreover, privacy is desirable and not associated with isolation and loneliness.
6. 6 Self-help concept – Sacrifice and hard work are highly valued in the US to attain personal success, as exemplified in the “self-made man/woman” ideal.
7. 7 Competition and free enterprise – Americans are driven by competition rather than cooperation to achieve one’s personal best.
8. 8 Future orientation – Americans believe that they are in control of their future and work hard to better it.
9. 9 Action/work orientation – Americans view action as superior to inaction, and value hard work over leisure because it produces greater personal success, material wealth and status.
10. 10 Informality – Americans are comparatively casual in dress and speech.
11. 11 Directness, openness, and honesty – One’s personal opinions and feelings are more valued than others, and should be expressed with confidence and assertiveness in order to gain the respect of others.
12. 12 Practicality and efficiency – Americans are philosophically pragmatic and industrious.
13. 13 Materialism/acquisitiveness – Material possessions are valued as outward products of hard work and success.

All of these values are seen by Americans as very positive ones. This may be different in other parts of the world. Change (value 2) may be seen as negative, destructive and threatening (an example is Germany, where atomic energy is seen as evil; the German word Angst represents a feeling of powerlessness towards a phenomenon that is unknown). The problem with the values of a society, even in the globalized world of today, is that they are often considered with the negative or derogatory connotation that they might have for members of another society, based on their own experience and cultural identity. Leaders in a society must be aware not only of the values shared by their peers but also of the outside view on these values.

The values by which a society lives are the primary source of the attitudes its members display in the workplace. It is the workplace where people gain life experience – and, unfortunately, they also gain negative experiences. This is the reason researchers give for high levels of cynicism found in the workforce.

A study on the US by Mirvis and Kanter (1991) reviewing the results of national surveys about people’s attitudes about life and their jobs bluntly concludes: “Loyalty and esprit de corps have given way to mistrust and looking out for oneself” (Mirvis and Kanter 1991, p. 45). Their list of answers respondents gave to questions about trust, fairness, fellow-feeling, community and time perspective is given in Exhibit 6.1.

We have seen many positive evolvements in the 25 years since the survey was undertaken, the internet being the foremost one, but there has also been an increase in mutual understanding between generations and across cultures. With the retirement of many Baby Boomers (born 1946–1964), the workplace is changing. Organizations are experiencing an influx of younger workers, many born after 1982 (and called, variously, Generation [or Gen] X, Y, or Z, Millennials, nGen, or GenMe; see Twenge 2006). Leaders who accept the challenge of these younger generations’ expectations will be successful in recruiting retaining and motivating the members of this multi-generational workplace.

Several cross-sectional studies have been made, e.g., on US information technology workers, which found that GenX scored higher in job involvement and normative commitment to the organization than Boomers, and GenX and especially GenMe scored higher than Boomers in perceiving themselves as “ambitious and career-oriented and the degree to which they prefer to work to demanding goals and targets” (Twenge 2010, p. 201). So there is hope that the cynicism of the 1990s has been overcome. But there is still a major difference between enterprises and industries; in the opinion of the public, bankers are the least trusted and Silicon Valley technicians are the most trusted (Vranka and Houdek 2015). But we have to look inside the businesses.

6.1.2 Values of business and business enterprises

For a business context, we posit that values, as they are factors that guide action, must necessarily refer to (long-term) goals. And these would be economic goals in the end. Connecting values to goals might imply that values, like goals, can be measured quantitatively. If we take the example of “trust,” an analysis carried out in 2011 by McEvily and Tortoriello shows that 129 different measures of trust have been attempted in theoretical and practical research, of which only 11 have been carefully developed and thoroughly validated. But there is no common platform, and this would apply to similar attempts for other value constituents. Nevertheless, the connecting of values to goals is highly rewarding as it signals an assessment of values according to their impact. Quantitative measures would rather serve to determine the outcome of means, through weighing their effectiveness and efficiency, and not of ends. Friendship, respect, reverence and diligence are not measurable numerically, but their impact on business relations, on performance and on fulfilling contracts can certainly be weighed. And that can also be said for any item in a list of values. We will use a list similar to that given by Global Ethics University, as laid out in section 6.1 (see Behrman 1981, p. 55), which embarks on

• What would be good to pursue in society: Justice, Charity, Stewardship, Equity, Status;
• What we should live by: Honesty, Reverence, Loyalty, Mercy, Truth, Trust, Prudence;
• What we should we employ in work: Efficiency, Diligence, Progress, Cleanliness, Orderliness.

The list shows that those values are not unidirectional, and they may conflict. Can one have mercy with justice? If justice is done, and society accepts this to be a goal, then mercy is not necessary, but it tempers justice. The example of “justice” shows that there is a sliding transition between a goal and a value: values are being exercised in achieving a goal. They are used as one moves towards a goal. Thus “ethics is values in action,” as stated by Drucker in his book Management (1974, p. 456): “Morality does not mean preachments. Morality, to have any meaning at all, must be a principle of action … . It must be practices” (emphasis added).

A practice-orientation of business values can be found in the Baldrige Award criteria. The award, which has arguably become one of the most influential vehicles for creating quality awareness and a widely accepted model of performance excellence, was built upon a set of interrelated core values and concepts that exemplify beliefs and behaviors found in high-performing organizations (Criteria for Performance Excellence 2004). Based on these general criteria, a firm needs to choose the values that are appropriate for the practices and activities in its business environment and to build a guideline or code on that basis by which all managers and all employees have to abide. One firm might choose to confine this code of ethics, as it has come to be called, to basic values by, for example, just enumerating the principles of Covey’s conception mentioned in section 2.1: security, guidance, wisdom and power (Covey 1989, p. 20).

Other value systems that organizations might have a source in faith, for example, the Ledesma-Kolvenbach model, a humanistic management framework proposed by Jesuit business schools that commits to four main dimensions: utility, justice, humanism and dignity (Aguado and Albareda 2016). Peter-Hans Kolvenbach (1928–2016), who was Superior General of the Society of Jesus (SJ) between 1983 and 2008, referred to Diego de Ledesma, the 16th-century rector of what is now the Pontificia Universitas Gregoriana in Rome. Ledesma’s four dimensions may be taken from faith, but they are valid in any secular environment as well. Another example for the secular contextualization of spiritual values is the writings of Raymond Charles Baumhart, SJ, who served as the president of Loyola University, Chicago, from 1970 to 1993 and who was one of the first to publish on ethics in business (Baumhart 1962). Baumhart was ordained a priest in 1957 after many years of studies in theology and philosophy, and then earned a doctorate in business administration at Harvard. He indicated that top management in order to set the tone for ethical behavior must have value systems, of which the foremost feature is the appreciation of human dignity (McMahon 2004).

Last but not least, the adoption of a set of commonly shared values needs to appeal to sentiment as well as to reason. Leaders must understand human nature and attitudes towards values. There are always attitudes that are explained by drivers other than, or in addition to, economic rationality, and leaders should be able to recognize them. The issues to explore in this context cover the role of emotions, instincts and human bonds in personal and collective behavior. As quality of life depends on emotional as well as material rewards, the pursuit of emotional rewards also boosts material rewards – as in highly motivated teams.

It is a characteristic of moral leaders that they arouse an emotional response in their followers. The followers are enthused, and by assessing their own emotional response to the vision they can assess the magnitude of the emotional rewards that they will obtain. And it works the other way as well: in a high-trust society, there are significant emotional penalties for breaking commitments – disloyalty and lack of perseverance bring guilt and shame (Casson 2006).

The reference to aspects other than intellectual reasoning for value propositions is not new. In his Pensées, the French mathematician, physicist and philosopher Blaise Pascal (1623–62) says: “Le coeur a ses raisons que la raison ne connaît point” (“The heart has its reasons of which reason knows not”; Pascal 1670/1966). This line draws a wise distinction between intellectual inquiry and cognition that has its roots somewhere else. We do not know for sure why we become ethical – the motivations may be rational, they may be based on faith, and they may be grounded in emotion. With regard to business ethics, there is a growing insight that both rationality and emotion are of relevance for moral reasoning, and combining reason and emotion in business ethics is considered a basic necessity, for example, by Buchholz and Rosenthal (2005) and Homann (2015, 2016).

It is not that emotion has been ignored in business ethics when it comes to value systems, but it routinely is subordinating emotion to reason. However, the role of emotions for societal and institutional relations has been well acknowledged in contemporary business literature. For example, Voronov and Weber (2016, p. 456) postulate that emotions “are the way through which people experience institutions as real and personally meaningful and a way by which they can connect institutions to their sense of self.” But while this is a very useful sociological concept, it does not really connect to business ethics. There are two attempts to bridge this gap: a philosophical one and a physiological one. Both prove that emotion is no less important for decision-making and thus for (moral) performance than reason.

One philosophical approach is ascribed to Bauman, who challenges the reduction of business ethics to an element of a formally rational discipline. Bauman’s Postmodern Ethics (1993) can be seen as a severe critique of the assumption that the formulation of rules, codes and so forth is all that is needed to ensure moral behavior. His notion of the moral impulse or moral drive claims that this (emotional) impulse or drive may induce unpredictable behavior because it is not regulated by social convention. From there, Bauman concludes that even if society cannot override this emotional impulse, it can silence it, but it can and must harness and exploit it rather than merely suppress or outlaw it (ten Bos and Willmott 2001). It is nothing out of the ordinary that emotions need to be contained (children learn this in kindergarten), but this containment should never be used to eradicate all empathy in societal life and in business life, as Bauman suggests, to rule out business morality through “calculation” (Bauman 1993, p. 57) and to use “organization” as an impediment to morality (1993, p. 55).

Followers of Bauman have mitigated the argument by bridging the opposition between emotional receptivity or lived experience, on the one hand, and ethics as active reason or universalizable duty, on the other, through a conception of (business) ethics as a process of struggle in which emotions that reflect upon conduct can facilitate a process of moral learning (Holian 2006). But it seems that this construction of an opposition between emotions and intellectual reasoning does not lead any further. There is no opposition, not even dualism, but holism, as demonstrated by the physiological approach.

The physiological approach is based on the results of neuroscientific and brain research. Each individual, it states, is a holistic entity, including his or her spiritual and moral skills. There are always several regions of the brain that are simultaneously active. One is the mesolimbic level, which is the center of subconscious emotional conditioning. This is the seat of emotions such as fear, anxiety, pleasure and joy. The mesolimbic system has been implicated in incentive reward motivation, remaining selfish and self-centered throughout life. Its subconscious question is “What do I get?” (Davidson and Irwin 1999, using this question as a book title). By contrast, the upper limbic levels develop cognition, with the inner part in control of social behavior, empathy, cooperation, social and moral standards and assessment of the consequences of one’s own actions, that is, the conscious emotional life, and the outer part controlling memory, intellect, rational reasoning, and language and communication skills.

Brain sections interact all the time, and therefore subconscious emotional motives and conscious objectives will always determine decisions (including decisions about which value system to adopt). What counts is how the brain (in total) assesses the benefits of the decision, and one important ingredient is if reward experience (from a value system) justifies expectation of future rewards. Therefore, any leaders who want their personal value system to be shared by their followers at least partly will connect it to reward (Homann (2015). One good example is the value of efficiency, which will be contrasted with the values of integrity in the next section. Efficiency can be coupled easily with rewards, but can integrity?

6.1.3 Two prominent values exemplified: integrity and efficiency

Integrity is one of the values that is fundamental in organizational life and in executive decision-making. The definition of integrity is broad: Adler and Bird (1988) link integrity with emphasis on congruence, consistency, morality, universality and concern for others. Covey (1992) describes integrity as honesty, matching words and feelings with thoughts and actions for the good of others. Srivastva and Cooperrider (1988) highlight a way forward that is very wide-ranging: “Executive integrity is dialogical. Executive integrity is more than the presence of morality or the appropriation of values: integrity involves the process of seeing or creating values … [it] represents the ‘insightful assent’ to the construction of human values” (p. 7).

Integrity, in the comprehensive meaning that encompasses dialogue and reflection, will transform the mere interaction between leaders and followers into participation, communication and mutual empathy. A leader who displays moral integrity and performs accordingly will motivate the organization to achieve its objectives. When a leader’s integrity is in doubt, then all attempts by the leader to influence followers – however noble, well crafted and articulate – will fail.

Discourse about integrity involves two fundamental intuitions: first, integrity is equal to acting morally, and second, integrity is a formal relation one has to oneself or between parts or aspects of one’s self (Cox, La Caze, and Levine 2005). So for leaders to gain legitimacy and credibility from their followers they must not only tell the truth, keep promises, distribute to each follower what is due and employ valid incentives and sanctions, they must also integrate various parts of their personality into a harmonious, intact whole. Integrity, then, is a matter of keeping one’s self intact and uncorrupted. This is a very human aspect; therefore, for a good explanation we can turn to moral philosophy, in particular, Henry Frankfurt.

According to Frankfurt, as every individual is subject to many conflicting desires, if one simply acts at each moment out of the strongest current desire, with no deliberation or discrimination between more or less worthwhile desires, then one clearly acts without integrity. Integrity, thus, is bringing the various levels of desire into harmony and fully identifying with them. Having integrity, then, is equal to being and acting without ambivalence (that is, based on unresolved desires for a thing and against it) or inconsistency (that is, unresolved desire for incompatible things). Frankfurt calls this “wholeheartedness” (Frankfurt 1987).

And how about rewards for integrity? Leviton and Bass (2004, pp. 10–11) present a case from the academic world that speaks for itself:

Integrity, as the example shows, pays off!

With regard to efficiency, what first comes up is the question of why this is a moral value. It is not helpful to simply define efficiency as the least costly input for arriving at a given output (which output is sometimes described, mistakenly, to be the maximum possible: you can only have either minimum input for a given output or maximum output with a given input). But from the outset, what makes a person or an organization efficient includes thoughtfulness and productivity; avoiding mistakes or, if they occur, recognizing and learning from them; and watching for signs of stress and taking timely measures to right the balance. In essence, it is about reaching one’s full potential.

There are authors who closely link ethics and efficiency, either from the viewpoint of new institutional economics, emphasizing social arrangements that improve efficiency (van de Klundert 1999); or from the discussion on shareholder primacy, the view that managers’ fiduciary duties require them to maximize the shareholders’ wealth and preclude them from giving independent consideration to the interests of other constituencies (Lee 2006); or from public service accountabilities (Wolf 2000); or from the general standpoint that fair dealing of firms with their constituencies is the essence of business efficiency (Chorafas 2015). The overarching idea is that doing good requires the full effort of a person and that taking on accountability always rests on producing the best possible outcome.

Efficiency encompasses a creative attitude towards failure. Failure is intrinsic to being human, and leaders must think about failure the right way. They must accept that people commit errors, and they should take advantage of experiences with errors. But they should not believe that learning from failure is simple and straightforward. It does not suffice to ask people to reflect on what they did wrong and exhort them to avoid similar mistakes in the future or to assign a team to review and write a report on what happened and then make it public. Effectively detecting and analyzing failure requires specific attitudes and activities. Harvard professor Amy E. Edmondson states, “The wisdom of learning from failure is incontrovertible. Yet organizations that do it well are extraordinarily rare” (Edmondson 2011). She provides a practical categorization of failures and good guidance on how to make it safe to speak up, which she calls “blameless reporting,” and how leaders can set boundaries that make good use of the evidence, and also determine where the limits are.

Sometimes, a failure detection and analysis strategy works indeed. Procter & Gamble, when holding performance review meetings, encourages the participants to talk about their failures and how they were overcome; Eli Lilly has “failure parties”; and Tata awards an annual prize for the best failed idea (see Cannon and Edmondson 2005).

The opposite of efficiency, from a moral standpoint, is deliberate indifference. It is well known that doing nothing impacts performance, and it is a leader’s reaction that changes lack of action. “Doing nothing does something” (von Bergen and Bressler 2014), and if leaders do not respond to undesirable employee performance, future behavior will change for the worse. Just as some managers seem incapable of expressing their appreciation to employees who perform well, some hesitate to challenge employees needing corrective counseling. Both practices can substantially hurt a firm or any other organization; they provoke heavy moral damage. It may lead employees to believe their performance is acceptable, and if a leader neglects deliberate indifference he or she will lose credibility with followers. Deliberate indifference is often ignored in procedural manuals or in ethics codes. In this area, businesses can learn from law enforcement practice or clinical treatment practice, where the term is explicitly used in codes and regulations.

6.2 Ethics codes

There are strong advantages to having a formal ethics code and many organizations have had them for decades. The counterargument is that the promulgation of a code seems a trivial approach because one should expect people to be responsible for themselves. But as we have seen when discussing the “moral manager–moral market” juxtaposition, it is the lack of personal responsibility, for oneself and for one’s relationship to others, that constitutes the need for codes. “Human centered” must encompass not just the bright side of human character and human relations; there is, unfortunately, a dark side, too. There is always, to say the least, a willingness to deceive or lie if this provides a personal benefit; in the business world, this would be reinforced by deception in advertising and misrepresentation of product qualities, of which the Volkswagen emissions scandal is the most recent and probably the most far-reaching example (EPA 2015).

Volkswagen not only has an ethics code, but the company is also a signatory of various voluntary commitments such as the Forum for Sustainable Development of German Business (http://econsense.de/en), the German Code of Corporate Governance (www.dcgk.de/en/home.html) and the Wittenberg Center Code of Responsible Conduct for Business (http://wcge.org/html/en/529.htm). So is Volkswagen’s ethics code just a piece of paper? And how about the ethics of the company’s engineering and manufacturing professionals?

While the ethics of a profession are best understood not by examining the worst conduct of its members but by attending to the conduct that is commonly expected and generally found, the opposite approach shall be used here, because the Volkswagen scandal provides a striking example of what happens if the human centered paradigm is inexcusably neglected in a business. There was certainly a “human factor”: in any engineering team, there are members who uphold moral standards, and there will have been such people in the engineering teams that developed a device that cheated emissions tests to be installed in Volkswagen’s diesel cars. But their voice was obviously suppressed.

It will never become public which was a specific “command line” at Volkswagen that motivated the installation of a cheating device, but at least some revelations may come out, as various executives have been and are going to be charged in the US and elsewhere for giving false statements (see, e.g., Reitze 2016). One general motive can certainly be found in the corporatist approach to governance in Germany with its far-reaching co-determination. It is only from the outside that one is led to believe that co-determination places an emphasis on the interests of individual employees and gives them a voice; in fact, the co-determination approach to a large extent serves the interest of employee representatives. With decision-making tightly ruled by far-reaching agreements between these representatives and the employer, the individual and his or her argumentation are likely to be overlooked (Elson, Ferrere, and Goossen 2015). A brief discussion on the pros and cons of co-determination will be held in section 7.1. Here we first look at professional ethics codes and then at those of enterprises and institutions.

6.2.1 Professional ethics codes

Any profession, from the tradespeople on building sites to high-tech surgery and sophisticated legal advice, provides a service to people. In providing services to others, the foremost question is “What are my responsibilities to others?” The internalization of responsibility to others also extends to observing the professional conduct of other professionals, and it will encourage conduct that both reflects the ideals and core principles of the profession and truthfully reports misconduct.

Professional ethics, as opposed to personal, sets the standards for practice, and it should be an essential part of professional education because it helps to deal with issues that practitioners will face in professional practice.

There are numerous calls for ethical conduct in the financial profession, for which the reader is referred to John R. Boatright’s seminal publication Ethics in Finance (Boatright 2013). It would be redundant to repeat all this here, and because there has so much been written about misconduct in the financial sector, we would rather choose examples in other professions. They are engineering and public relations. The engineering profession’s emphasis on ethics dates back to the 19th century when large-scale production raised awareness of increased responsibility to the general public. In 1946, the US National Society of Professional Engineers (NSPE) released its Canons of Ethics for Engineers and Rules of Professional Conduct, which evolved to the current Code of Ethics, adopted in 1964 (www.nspe.org/resources/ethics/code-ethics). The code’s “Fundamental Canons” read as follows (National Society of Professional Engineers 1993, p. 14):

This introductory statement is followed by a set of rules for practical application, then the code spells out the obligations of an engineer, with explicit encouragement to adhere to the principles of sustainable development; it ends with a note on the human perspective:

The NSPE has established a Board of Ethical Review that serves as the profession’s guide through ethical dilemmas. Its purpose is to render impartial opinions pertaining to the interpretation of the NSPE Code of Ethics, develop materials and conduct studies relating to ethics of the engineering profession.

The other example is the Professional Charter of the UK Public Relations Consultants Association, which sets honesty, safeguarding of confidences of clients and prohibition of conflicts of interest of competing clients at the forefront. While the charter points out that the professional should act in the interests of a client by any means, it also points to the risk of resorting to financial inducements and prohibits the offer of these inducements to persons holding public office. It sets rules about conduct towards the public, the media and colleagues in the profession. Like the engineering profession, public relations consultants also have an Arbitration and Disciplinary Procedure and a Professional Practices Committee (see www.prca.org.uk/about-us/pr-standards/professional-chartr-and-codes-conduct).

6.2.2 Corporate ethics codes

Voluntarily adopted corporate codes of ethics have existed for decades in the US, in Europe and in most countries which adhere to the OECD Guidelines for Multinational Enterprises (www.oecd.org/corporate/mne), which may also be deemed an ethics code. Historically, a new wave of code writing developed in response to highly publicized scandals and major legal developments in the US such as the Sarbanes-Oxley Act 2002 (see section 6.3). This is from where the major criticism comes, which sometimes says they only ask for cosmetic compliance and are just a reaction to public pressure (Krawiec 2003).

Madsen and Shafritz (1990, pp. 219–220) have categorized the subject content of corporate ethics codes in clusters. They are:

Madsen and Shafritz, like many others, are critical of the impact of ethics codes on important business decisions. And from the example of the Volkswagen emissions scandal, it might look as if they are right. But as said before, it is not the bad examples that should guide judgment. The business community worldwide has made great efforts since the 1990s not only to introduce codes but also to monitor and enforce compliance. Kaptein and Schwartz (2008) investigated the impact of codes on behavior, and they indicate that only 33% of the studies they surveyed yielded significant impact. While one study even finds that a code has a negative impact on behavior, the result, carefully worded, is that business professionals employed at firms with ethical codes of conduct are significantly less accepting of ethically questionable behavior (McKinney, Emerson, and Neubert 2010).

There is much more involved with ethics codes. One critical success factor is the process for launching a code. Compliance not only depends on the contents of the code, but it is also heavily influenced by the interaction of various stakeholders in its formulation and implementation: clear commitment by corporate leaders and managers at all levels, participation by employee representatives and advice by legal professionals. Beyond the content of the code, corporate leaders need to specify the purpose, objectives and procedures as well. If the processes of setting up, disseminating and administering such a code are carefully conducted, the result is a “Living Code” (Kaptein 2008).

Making an ethics code work often also depends on a good compliance officer. Organizations often locate this function within the legal department, although the core activities of the officer are separate from legal compliance. The officer’s responsibility is certainly related to legislation, but the main duties revolve around devising and implementing voluntary codes, policies and a workplace culture that inform employees of the law and their organization’s position in relation to the legislation. In the US, an Ethics & Compliance Officer Association (ECOA) was founded in 1992 to represent the interests of this profession. It is estimated 85% of the Fortune 500 companies had officers who joined ECOA by 2010 (Chandler 2011).

In addition to US-based organizations, members of ECOA are based in Belgium, Canada, Germany, Greece, Hong Kong, India, Japan, the Netherlands, Switzerland and the UK. ECOA publishes a National Business Ethics Survey each second year, which contains a measurement of program effectiveness of ethics codes based on the following indicators, which are taken from employee surveys (Lawney and Brooks 2015):

• Supervisor provides positive feedback
• Can approach management without fear of retaliation
• Prepared to handle moral dilemmas
• Company gives recognition for following ethics standards
• Company does not reward questionable practices.

One interesting result shown in the 2013 survey is given in Table 6.1.

The four outcome improvements that are listed in Table 6.1 are attributed, according to the survey, to the effectiveness of the ethics program established in an institution through a code and a compliance officer on the one hand, and through the cultural coherence within the institution on the other. The column at the far right indicates the effects attributed to cultural coherence, such as good working climate and transparency; the other column lists effects attributed to an effective compliance and ethics program. The percentage points specify the extent of improvements over the last survey; for example, the number of respondents from firms where corporate culture is strong and who said they felt pressure to compromise ethical standards went down by 36%; likewise, there were 20% fewer responses from firms with an effective ethics program on this issue.

Table 6.1 Ethics program outcomes

Ethics outcomes	Percentage point (ppt) improvement when …
	… program is effective	… culture is strong
Felt pressure to compromise standards	−20 ppts	−36 ppts
Observed misconduct in previous 12 months	−29 ppts	−47 ppts
Reported misconduct when observed	+55 ppts	+18 ppts
Reporters who experienced retaliation	−55 ppts	−50 ppts

Source: Adapted from Lawney and Brooks (2015)

Similar research is conducted by the British counterpart of the ECOA, the Institute of Business Ethics, with triennial surveys into employees’ views of ethics at work in the UK. Its latest report indicates that employee awareness of corporate ethics programs raises moral consciousness and perceptions of morality in a firm’s culture (Johnson 2015). But we also find the contrary: auditors Ernst & Young surveyed nearly 400 chief financial officers between November 2011 and February 2012 (Stucke 2013) with findings of which three are very disturbing (see Stucke 2013, p. 791):

• When presented with a list of possibly questionable actions that may help the business survive, 47% of CFOs felt one or more could be justified in an economic downturn.
• Worryingly, 15% of CFOs surveyed would be willing to make cash payments to win or retain business, and 4% view misstating a company’s financial performance as justifiable to help a business survive.
• While 46% of total respondents agree that company management is likely to cut corners to meet targets, CFOs have an even more pessimistic view (52%).

One reason for the disparity between the employees’ opinions on moral attitudes and the executives’ statements on dubious activities may be that the view of employees is somehow biased from positive experiences, while, on the upper levels, as deplored by an article in the Journal of Corporate Law (Stucke 2013), many business executives take a “check the box” approach to their programs, rather than satisfying the full intent of the ethics code. But one cannot deny that there is much left to be done. Peter Drucker (1974, p. 325) once said that “the axe needs to fall quickly” when misconduct occurs in order to warn off other offenders. There is some hope, after the economic crisis, that leaders’ ethical insight on their obligations and strict law enforcement will induce companies to boost moral behavior.

Apart from the public opinion on ethics codes, one critical view comes from agency theory: as even top managers serve as agents for the stockholders of a business, the ethics codes they design and to which all members of the firm need to adhere must be regarded as a duty of loyalty. And this is generally a negative duty, that is, the duty is defined by proscriptions on the agent’s behavior which are designed to protect the principal’s interests (Kurland 1995). A positive duty approach would be to commit to a higher level of moral reasoning. A common example of higher moral reasoning which transcends a corporate ethics code is that of Johnson & Johnson, which ranks responsibility to the community (of customers, the medical profession and patients) on equal terms with the responsibility to stockholders. During its handling of the criminal contamination of its highly profitable Tylenol capsules, instead of just seeking to prosecute the criminals and contain the actual damage, Johnson & Johnson placed public interest above self-interest and replaced all Tylenol capsules worldwide with caplets (Husted 2005; Shaw and Barry 1998).

Codes are, at any rate, voluntary agreements. They cannot substitute code law which is enforceable – even though moral appeal, voluntary commitment and ethical obligation may at times force execution of an inter-industry agreement as well. From the outside, this would be achieved by peer pressure; from the inside it is ethical obligation.

6.3 Ethical obligations and the law

Much of what needs to be said about ethical obligations and the law corresponds to the rationale of Plato, as quoted in Parsons (2004, p. 67): “Good people do not need laws to tell them to act responsibly, while bad people will find a way around the laws.” Common values and a written agreement on which values to pursue and in what manner may suffice within a societal group that is self-sufficient and not connected to others. Historically, this is how prescriptive systems developed that addressed a tightly knit and closed society, such as the Ten Commandments for the biblical society of the Jews. Using another biblical theme, when the Jews came under the reign of the Roman Empire with its sophisticated legal system, adherence to the Ten Commandments and subsequent scriptures was no longer sufficient; Jewish society in interacting with all the other societies needed to abide by the Roman legal system, even though the biblical code required more of them than any reasonable body of laws. Legality and illegality came to be defined by criminal and civil law – as within the modern societies of today.

But ethics calls on us to do more than simply observe criminal or civil law and also to do more than just respect others’ rights. Good and evil, legal and illegal are four categories that are both different from each other and overlapping. Four combinations can be formed:

1. 1 Actions that are good and legal but not a legal obligation.
   • An action, although it is good and legal, may still cause ethical concern because as it is not a legal requirement people do not take the action. An example is the widespread resistance against installing surveillance cameras in public areas.
2. 2 Actions that are evil and illegal.
   1. Often, an action that is both evil and illegal may not be placed by some people in this category. An example would be traffic offenses by cyclists being tolerated because “they are the weaker ones.”
3. 3 Actions that are legal but evil.
   1. Many of the moral and ethical issues that affect business leaders fall into this category, from marketing methods that disguise product properties to accounting techniques that conceal losses that should be disclosed in a financial statement.
4. 4 Actions that are good but illegal.
   1. People, and leaders, are often placed in situations where they need to defy a legal rule. A recurring example in Europe is where asylum seekers who have been denied immigration status are hidden in churches or locations of charitable organizations.

But if moral appeal, voluntary commitment and promulgation of good practice do not achieve the objective, legal commitment must step in. Most pertinent is the US Sarbanes-Oxley Act (SOX) (2002), which aimed at cleaning up corporate corruption and improving corporate accountability and ethics. SOX grew from a collective frustration on the part of shareholders and the public in general on the lack of accountability and ethicality on the part of corporate leaders. At the heart of SOX are three main issues. First, the question of independent internal auditor functions. Second, punitive accountability for key executives, including financial and criminal consequences based on accuracy and moral behavior. Third, its extraordinarily detailed requirements on internal financial controls and demands that the controls be tested and validated with little tolerance.

SOX requires a public company to disclose whether it has adopted a code of ethics for the company’s principal executive officer and senior financial officers. The act encourages – indeed, it mandates – that management power when it is inclined to bad behavior be challenged by the other professions, such as auditors and public relations officers, and by professional agencies. This may be perceived as public “whistle-blowing,” but it is indeed a moral motivation; stories abound of Enron managers who recognized the ethical implications of Enron’s financial practices but did not act to stop them. Recorded conversations revealed that some of Enron’s employees and executives knew they were performing illegal and immoral acts, but they valued power, control or job security over ethics (Schminke, Arnaud, and Kuenzi 2007).

Placing job security above other values, in order to keep providing for one’s family, to maintain one’s livelihood and to support an acquired standard of living may be viewed as excusable when a person gets into a moral dilemma. The attitude is not outright immoral. But, hard as it may sound, a leader’s obligation is to be fair to all sides – to all stakeholders of the organization. And it may often be that, from the outset, a first step is needed to free oneself from the dilemma. This may also be the case in the much worse temptation of corruption and free riding.

6.4 Fighting corruption and free riding

Corruption is utter disregard for morality. From whichever angle we look at corruption (“the misuse of public office for private gain” or “inducing a responsible office holder by monetary or other rewards to take actions which favor whoever provides the reward”), we end up with a person “perverting the judgment of another person who holds a position of trust to perverter” (Nye 2002, p. 966). This is at the individual level. At the societal level, corruption is an outcome of a country’s legal, economic, cultural and political institutions. Corruption can be a response to non-existent, too benevolent or harmful rules (e.g., paying bribes to avoid penalties) or to inefficient institutions (e.g., paying bribes to get around a ruling). The majority of studies related to corruption cover this societal level. There is one level in between this macro-level and the business level, which is the meso-level of trade and industry associations with influence markets, cartels and business clans.

This book gives only a brief glance at the huge topic of corruption as an outcome of a country’s legal, economic, cultural and political institutions. The best source to look at the topic is the annual Corruption Perceptions Index (CPI) produced by Transparency International (www.transparency.org). The survey obtains opinions from expert groups in 168 countries on how they perceive the status of the country they observe. Surveys of businesspeople and assessments by country analysts from independent institutions enter the CPI. All sources employ a homogeneous definition of “extent of corruption.” The assessments are gathered from experienced respondents and give an understanding of real levels of corruption (Saisana and Saltelli 2012). The scores have been relatively stable throughout the years, with Scandinavia at the top with the least perceived corruption; Germany, Luxembourg and the UK sharing rank 10; and the US at rank 16. The lowest ranks are Sudan, North Korea and Somalia. Changes in the rankings are mostly due to improvements in the effectiveness of institutions in a given country.

Apart from publishing the annual Corruption Perceptions Index, Transparency International co-authors the Business Principles for Countering Bribery, for which it joined forces with Social Accountability International in 2003. Social Accountability International is a non-governmental organization that was set up in 1997 and whose mission is to advance the human rights of workers around the world. The Business Principles were developed with the cooperation of specialists from business, academia, trade unions and other non-governmental bodies. The Business Principles have influenced a wide range of anti-bribery standards and initiatives of governments and corporations (see www.transparency.org/whatwedo/publication/business_principles_for_countering_bribery).

Businesses have to tackle the issue of corrupt institutions whenever they approach countries with low moral standards, as mirrored in the Corruption Perceptions Index. Transparency International has earned its name here. Much less transparency is to be found at the meso-level: the terms “influence markets,” “elite cartels,” “oligarchs” and “clans,” and “official moguls” may sound exotic, but we can find the influence of pressure groups and cartels in the US (associations of big industry), Japan (keiretsu), and Germany (together with corporatist structures where trade associations join forces with employers) and elite clusters of manufacturers in Italy and South Korea. This is a long way from blunt corruption, but there is a give-and-take mentality in all these. We find oligarchs and clans in Russia, the Philippines and Mexico, with attitudes often close to the immoral, and there are powerful moguls in Indonesia dominated by intensive integrated production combines, and close ties between makers and marketers, all fostered by a benevolent state policy (Gitlow 2005; Johnston 2014).

At the business level, firms in the US have often accused European tax authorities of not prosecuting bribery when it occurred outside their jurisdiction. Germany was the last country in Europe to remove this regulatory gap when it changed its tax code in 1996. The criticism was that this practice had favored some industries in corrupting a client’s executives to become instrumental in selling a product or service. The US Foreign Corrupt Practices Act (FCPA), the UK Anti-Bribery Statute and the OECD Anti-Bribery Recommendation have all helped to prevent misconduct, but while until 1998 there were few prosecutions under the FCPA, prosecutions have increased many times over with a peak number of cases filed in 2007. There were 27 cases (16 against individuals) with many prominent firms in the roster, including Walmart, Halliburton, IBM, Johnson & Johnson, Daimler, Monsanto, BAE Systems, Avon, Alcatel-Lucent, General Electric, Chevron and Lockheed. The economic crisis of 2011 produced a growth in the list, and as of March 2012, 81 companies were under investigation. Generally, the offending companies tend to settle their cases by paying fines and implementing strong anti-bribery controls. The largest penalty was paid by Siemens for violating anti-bribery rules in the US and in its home country of Germany (Choudhary 2013). In 2016, the number of enforcement actions on the FCPA filed by the US Securities and Exchange Commission and the US Department of Justice was 54 (Stanford Law School 2017).

There is a problematic collateral effect of international anti-bribery legislation: in countries where bribery is perceived to be relatively common, the enforcement of this legislation ultimately deters investment and functions as de facto economic sanctions. This is contrary to the legislation’s purpose, which is to build economic and political alliances by promoting ethical overseas investment. There are two formal responses that might possibly complement international anti-bribery norms without impeding economic development:

• One response is to extend the existing regulation that is focused on the supply side (seeking to punish the briber) to the demand side, which is the solicitation or receipt of bribes. Some accords in this direction have been ratified by the Organization of American States and the African Union (Spalding 2010).
• There is another avenue to avoid disproportionate punishment of bribery destroying growth opportunities in developing countries. This would mean repealing or at least mitigating the common law doctrine of respondeat superior (“May the supervisor answer”), by which employers are held liable for the conduct of their employees. US or European corporations with ventures in countries where bribery has long been regarded as a customary and even necessary way of doing business with a government will be penalized if a lower-level employee in such a country closes a deal by paying a bribe. This creates a risk that large international companies feel they cannot afford to take, and they withdraw from higher-risk markets where their investment would otherwise be beneficial to the underserved population (Cassin 2009). There is an imperative human perspective in this – again, a moral dilemma!

Corruption is the worst scenario of immorality in business. But it is only a small step to corruption from another immoral activity, and this is free riding (to which the term “free loading” is applied as well). Free riders accept the advantages of the cooperative behavior of others but fail to cooperate themselves. The immorality in this may be elucidated by a statement from moral philosopher John Rawls (see Bowie 1999, p. 18). Rawls sets out from considering that an individual who voluntary participates in a social institution would thereby accept its rules. Presumably, these rules work to the benefit of all participants – otherwise they would not voluntarily participate in this institution. Now, those who accept those benefits from others following the rules but do not play by the rules themselves are unfair. They do not make a contribution to the institution that relies on the contributions of those who participate.

The individual who makes profits by means that the community does not agree are acceptable destroys the business system – once more we see how the perspectives of morality, the social and economic spheres and the societal institutions are closely intertwined. The “agreement of the community” will not tolerate profit being made just for the sake of profit and free riders are profit seekers on their own, abusing the free market. But an agreement in the society is easily reached when profit is defined as the result, not the goal of economic activity. The goal is to provide value, and destroying the business system is destroying value.

Destroying a business system may start, on a person-to-person level, with the sharing of MP3 files. Are people who share music files on the internet acting like free riders? A defense might be that some downloaders do not have the means to buy some of the music they download, for example, students or people living in poor regions. They would never be able to buy CDs, and thus they cannot be considered as unfair free riders – there is, some argue, a “public good” aspect of information goods (Demuijnck 2008). But one cannot say that there are some cases of piracy that are not morally condemnable and are others that are. The counter-argument must be that fairness and refraining from theft are also public goods, and they definitely rank higher.

The MP3 files example leads to the general question of how networks can be protected against free riding – if they wish to be protected. If a business association found that divulging its services to non-members had positive externalities on the achievement of the goals of the association, it would not feel betrayed if a non-member made use of those services. But networks that wish to be protected may find ways to secure access. However, there are many other areas where a good that is provided by some businesses is widely open for free riding, such as scientific research and development results presented to a specific knowledge community, roads maintained by a private firm, programs to eliminate waste.

A very high potential for free riding by manufacturing firms and energy producers is in the carbon dioxide emission reduction program. The program, which is basically emissions trading, is motivated by the idea that pollution reductions may be achieved at lower cost (both to firms and society) through a market mechanism than through governmental regulation. Given that participation is voluntary, and industry members cannot be forced to participate, there will be firms that elect not to participate, enjoying the fruits of the labor of self-regulatory participants while avoiding the costs. Low enrollment in the program might make it fall apart, and the fear of such failure might cause firms to participate (Lenox 2008). In the end, it pays to be a stakeholder and fulfill obligations to other stakeholders rather than being a free rider. Conducting stakeholder relations responsibly is at the center of human centered management, and the next chapter will delineate this extensively.