Essay 1
How to Do an Ethics Case Study
Most individuals in corporate life come to ethics issues largely unprepared. And then, when unlucky enough to encounter something unethical, people can find the deck stacked against them. They are unprepared because they have had little training and even less practice in handling the complexities ethics issues bring. They may have their personal sense of morality as a guide but not much more. If they had liberal arts training, they may have discussed philosophy or morality but not in a concrete setting in which the personal consequence may be demotion or termination of employment. Their business or law school training my have provided a low-emphasis course on corporate governance but not much on what to do when your boss orders you to work around a law.
They will find the deck stacked against them because when they first encounter an ethics problem, they usually will be dealing with someone above them in management. This person or persons will have the advantage not only of senior position, but also more experience managing decisions through the organization and past its gatekeepers.
New employees are quickly socialized by their everyday business experiences into the real world of “gray zones.” Firms don’t violate accounting principles per se but use them adroitly to present their results in the best light. People often spin or withhold information internally or from customers or partners when they perceive an advantage in doing so. Tax departments work up almost-substanceless transactions to reduce taxes. Almost everyone comes around to a belief that pressing against—even bending—the rules is part of competing and succeeding in the real world of business.
So, most everyone is partially conditioned to unethical practices when suddenly something more substantial cuts across their radar screen. The first reaction may be a flash of recognition and an impulse to push back. And then the complexity of the situation and the personal risks come to mind. If there isn’t a reliable financial control structure to look to for support, the challenge involved in resisting can seem overwhelming. For many caught in this unhappy situation, decisions to go along or avert one’s eyes can come quick and easy.
The alternative answer is to practice in advance the spotting of ethics issues and the formulation of effective resistance plans. These practice situations have to be representative, realistic, and difficult. Suggested solutions have to draw upon lessons of what has worked in real situations that involved difficult ethics issues.
Practice will instill several valuable capacities. For one, it will sharpen the ability to distinguish a serious ethics issue from the more mundane boundary pushing that constitutes an accepted part of normal business. Real career-jeopardizing resistance should be expended only on serious ethics issues. For another, it will enhance understanding of the tactical options available for resisting, the personal risks involved in resisting, and ways to manage the two. This understanding can bring several advantages:
- It can improve one’s thinking on how to win a more ethical outcome and thus bolster one’s sense that resistance is both feasible and worth the risk.
- It can also sharpen one’s sense of the varying personal risks posed by different courses of action. Not every act of resistance runs a termination risk. Much resistance can also be mounted in ways that minimize career hazards for the resister.
- Finally, practice in formulating tactical plans can help one improvise as necessary in a “live fire” situation. The more situations one has considered and the more tactical responses one has devised, the more creative will be one’s responses to real ethics dilemmas if and when they arise.
With practice on these cases, students should be able to react to a real situation with a sense that they’ve seen something like this before. Beginning resistance from that posture rather than one of shock or confusion is half the battle.
The Solution Framework: Defining the Ethics Issue
As outlined in this Essay, individuals have to formulate resistance plans that address each of five elements:
- A clear statement of the ethics issue, including why it deserves to be considered exceptional.
- Statement of a boundary condition—an achievable, ethically acceptable outcome to the concrete business situation.
- Identification of the potential personal consequences for resisting successfully or unsuccessfully. An initial assessment should be made as to whether these consequences can be accepted if worse comes to worst. Practical consideration of how to mitigate personal risk should be deferred to after one’s tactical plans have been developed.
- Conceive an alternative business approach to the questionable proposed practices. The standard here is to identify the best alternative business option that is consistent with your boundary condition.
- Develop a tactical plan of resistance. Most times, this plan will be aimed at securing a decision in favor of the ethical business plan. Other times, however, the tactical plan will be aimed at containing damage and/or positioning for a later time.
We will now look at this five-stage process in more detail, beginning with the ethics issue. When trying to define the Ethics Issue, it can be helpful to assign the problem to one of the following general categories:
- Potential violations of law or regulations with force of law.
- Potential violations of company policies.
- Actions that violate sound financial control practices.
- Actions that weaken the fabric of internal controls, potentially paving the way for specific subsequent abuses or legal violations.
- Conflicts between professional roles and a responsibility to resist illegal activities (e.g., an in-house attorney’s predicament when serving a client with potentially illegal ideas).
The cases in this book pose ethics issues that fall into all of these categories. Students can better determine which category best applies to each case by focusing on the possible consequences of allowing the questionable activity to proceed.
The next step is to conceive of an acceptable ethical outcome. Boundary condtions are difficult, and so temper one’s target outcome with realism. One may wish that a firm didn’t use any aggressive tax shelters, but a realistic solution may be stopping those likely to result in IRS penalties.
One aid to finding the right balance between realism and doing the right thing is to ask: what is the minimum outcome that could be considered ethically acceptable in this case? By defining this minimum acceptable outcome, ethics and realism will have to be reconciled. Defining this boundary doesn’t prevent one from striving for a solution well inside it. However, knowing this boundary does help clarify where no more compromises should be made.
Sometimes an acceptable ethical outcome is not politically achievable. In such cases, resisters can target one of the following next best outcomes:
- Containing the damage by surrounding the unethical practices with compensating controls and review procedures.
- Making arguments and issuing warnings that set the stage for reversing the unethical decision later.
- Relocating the issue from inside the firm’s management structure out into the firm’s relationship with regulators and/or markets.
When making this choice, resisters will need to consider the gravity of the unethical practice and the state of the firm’s controls. For example, a decision that weakens controls but doesn’t violate the law might well be treated as a fight-another-day situation.
Finally, there is a resolve reason for defining the ethics issue and boundary condition first. It is important to see it clearly and to decide whether it is worth a fight before the matter becomes clouded by business issues and personal risks. Sherron Watkins’ story is a case in point. Early on, she arrived at a clear sense of why Enron’s Raptor accounting was fraudulent. Once word got around that she had written to Ken Lay, several people tried to convince her to give up the effort. Sherron was told that Ken Lay “gravitates to good news,” was reminded that Arthur Andersen had signed off on the accounting, and was advised that others she trusted saw the accounting as “aggressive but not over the line.” If she hadn’t defined the ethics issue first, she might well have been put off by this onslaught of counterarguments; in the full light of day, her first reading turned out to have been the right one.
Tactical Planning and Alternative Business Plans
As noted, having an alternative business plan can be indispensable to a successful tactical plan. Tactical planning will, however, vary, depending on the firm’s stage of ethics decomposition. Options available early on are usually closed in the later stages. Accordingly, tactical planning begins with determining where the firm stands in terms of ethical decomposition.
Tactical Planning in Early Stages of Ethical Decomposition
For ethics issues arising while the firm’s controls system is still intact, tactical planning should concentrate on convincing decision makers to allow the control system to work. During this stage, a variety of outcomes can be acceptable; these range from rejecting unethical proposals outright to ensuring that adequate controls surround the new aggressive course.
Students need a good grounding in the rationale for controls if they are to prevail in early stage tests of control. Those proposing expedients will typically be articulate about their benefits. Resisters will need to be well armed with potent counterarguments. Essay 3 lays out rationales for why sustaining good controls is the best economic course; several of these arguments seldom are employed in business ethics debates. These can be used both to surprise opponents and lend weight to the pro-controls course of action.
Many times, the technical details of the case hold elements that can determine the outcome. For example, the technical details may reveal that a questionable transaction is going to unnecessary lengths to achieve a business outcome. Understanding transactions in detail may also hold the key to discovering risks that may be deemed unacceptable once brought into the open. Most of the cases in this book come with a plethora of technical details about the underlying business problems/transactions. Students should practice spotting technical fixes and risks; tactical planning can then use these aspects to structure alternatives that serve the business in a more ethical way.
Once they adequately understand the ethical and business issues, students should craft an alternative business course. It is vital to show management that they are not choosing between an unethical option and a business reverse. Sound controls should be defended as a business moral imperative—something that is simply right to do, regardless of the business consequences. However, human nature and corporate politics being what they are, it is much easier for the right-thing-to-do argument to prevail when management can see another way to move the business forward.
Alternative business strategies vary widely with the particulars of the case. However, some general comments can be offered. First one should determine if the unethical course actually is critical to the desired business outcome. Many times it will be more a case of advancing someone’s personal agenda. When such is the case, resisters can lobby management with one of the following:
- Analysis showing that the true benefit is not the one advertised by transaction proponents and is less a matter of necessity than of someone’s personal preference; often, this will discredit the deal.
- Attacks arguing that the proposal fails to address business fundamentals; consequently, it will likely fail over time and may degrade business capabilities.
- A warning that whatever the true benefit, it pales in comparison to the risks involved.
When the business advantage of an unethical course is substantial, composing an alternative business course is particularly essential. Unethical transactions with big impacts are by their nature going to bring big risks. They can still be attacked using arguments 2 and 3 above. Such attacks and warnings can cause even partially compromised executives to “take a second look.”
Even when one is still talking about early stage companies, controls can and do come under pressure. Consequently, resisters still need to consider the tactical context surrounding ethics issues. Here, it matters whether the pressure is coming from mid-level executives pushing their own agendas or from a complicit senior management. Where mid-level executives are freelancing, effective resistance is easier to mount through the existing controls system.
When senior leaders are supporting a questionable course, the situation is more difficult. Clearly, it matters which senior leaders are involved. If it’s not the very top management or if this senior group is divided, resisters must focus their hopes on persuading those with the “last word” to support an ethical outcome.
Articulating a deals full slate of risks is an important tactic to consider in such cases. This warning list should be offered verbally and then documented via memorandum. Possibly this will trigger the take-a-secondlook impulse. Then, if the decision cannot be won outright, resisters may still achieve one of two other outcomes: (1) to contain the current decision ‘precedent’ and/or (2) to leave a record of warnings which may serve as a basis for reversing course should one of them prove prophetic.
In conclusion, the early stages company’s controls permit ethical resisters to wage a conventional internal struggle. Typically they can work through channels, find allies, fight to win decisions at higher levels, and fight again to reverse losses. The most common mistakes at this stage involve the failure to offer alternate business courses and a well-formulated slate of warnings. Mistakes of this sort characterize controlers/audit organizations too willing to divorce themselves from the business and insensitive to the need to nurture the political support that preserves their function.
Advanced Stages of Ethical Decomposition
Once a self-serving or corrupt environment takes hold, resisters can no longer think in terms of conventional corporate processes. Tactical planning now becomes an exercise in creating political options within the firm or of deciding whether to take issues outside the company.
This assessment begins with a question: Is anyone in senior management still concerned enough about controls to overrule some expedient course? Determining this will help indicate the possibilities for working an ethics issue inside the firm.
The executive pool just below the CEO/COO level is a place to look for potential champions to restore ethical behavior. Some executives may yet be untainted; others may be receptive to the argument that, should they advance to a top job, they will not want to preside over scandals created by others.
Because of the nature of their functional expertise, senior finance officers should be the most oriented towards reversing ethical decomposition. If a firm has become impaired, the top finance officer likely has been compromised. However, that person’s rivals and replacements may include candidates eager to reverse practices obnoxious to the core principles of their function.
Assuming that potential allies can be found in the senior ranks, how can they be enlisted? By the later stages, firms have accumulated vulnerabilities or even violations. Sound remedial action usually means disclosing uncomfortable, even incriminating, information. Senior managers will be loath to consider courses of action they are not sure they can survive.
Here, the alternative business course can provide a valuable context within which past mistakes can be corrected. Senior managers can become champions of restructuring and reform. Suspect transactions can be unwound because they are declared bad for business. Needed control improvements can be embedded within process redesign. This approach works best when the ethics problems reside in a particular organizational unit, one that can be isolated and fixed.
The important thing is to bring forward major control issues within a broader business restructuring that allows senior managers scope for damage control. This assumes that management is still open to such proposals. Advocates of ethical business should not dismiss this possibility, however. Although it was too little and too late, Ken Lay’s message to employees on returning as Enron’s CEO is instructive; even as Lay told them that Enron was in great shape, he also commented that Enron’s “values had slipped” and needed to be restored.
The threat of outside discovery serves as a key weapon for late stage resisters. One of the great lessons of Enron’s story is that it is difficult for a public company to prevent a series of unethical transactions from becoming public. Even though the gatekeepers had been neutralized, public disclosures still provided clues about Enron’s questionable transactions. By summer 2001, Enron’s accounting was fooling fewer and fewer investors. Enron’s history of eventually being ‘found out’ is a warning to other senior managers, and may be one of the few positive legacies from Enron’s sad story.
That leaves the matter of deciding when and how to go to outside agents. Here, resisters enjoy more options than they may at first perceive. It is clear that investigative reporters, such as Bethany McLean and John Emshwiller, received tips from within Enron. Even more interesting is the role played by short sellers James Chanos and Richard Grubman. They asked Enron executives tough questions and bet millions against the stock, thereby helping expose the weaknesses underlying Enron’s glowing financial reports.
It is also worth noting that such information passing can be done anonymously and still be effective. This is not to say that anonymous disclosure does not involve potential costs or ethics issues. Rather, Enron’s story documents that this has become a potent, if not dangerous and morally complex option for resisters.
Personal Considerations
Nothing chills the impulse to resist like the sense that one may be “betting one’s career.” Then, the perception can take hold that resistance amounts to self-sacrifice. For this reason, resisters should defer detailed consideration of their personal risks until the end of their tactical planning. At this point, however, it is essential to address these concerns.
The opportunities to manage personal risks are often underestimated. For those who can proceed deliberately, a planned approach to personal risk often reveals possibilities that make effective resistance possible; this important element has evolved dramatically in the wake of the Enron and financial crisis scandals. We shall return to the tactical possibilities for managing personal risk in Essay 7. In the final analysis, however, resisters must gauge the level of resistance they can mount without suffering unacceptable retaliation. If that level is insufficient to accomplish much, thought should be given to leaving the firm. Once safely lodged in a new location, consideration can then be given to pursuing the matter with oversight agents.
A Final Word About Financial Control
Most of this discussion is necessitated by the fact that when ethics situations arise, employees inclined to do the right thing often discover that they cannot count on support from the financial-control system.
When sound financial controls are in place, employees have recourse to professionals experienced in handling ethics issues. Procedures for working ethics cases are clear. Employees raising concerns are protected. Guidelines and precedents exist for determining appropriate discipline for violators. In short, when sound control structures are in place, an employee raising concerns has far less need to improvise political support for doing the right thing. Much of the preceding discussion of tactical planning seeks to address circumstances that don’t offer employees this more straightforward path.
Sustaining a sound financial-control structure is thus critical to the maintenance of an ethical business culture. Employees interested in having an ethical workplace must see that they have a personal stake in preserving good controls. It is to this subject that the Enron cases now turn.