Enron's former headquartersPAT SULLIVAN
KARL MOORE: This is Karl Moore of the Desautels Faculty of Management at McGill University, talking management for The Globe & Mail. Today, I am speaking to Tom Donaldson, who is a professor at the Wharton School [at the University of Pennsylvania]in Philadelphia.
Good afternoon, Tom.
THOMAS DONALDSON: Good afternoon.
KM: So Tom, you've studied ethics for a long time. What can large companies learn about taking a better ethical approach?
TD: My sense is that large companies today need to completely rethink the way that they're dealing with ethics. They're flying blind and the problem is they don't know they're flying blind. It's almost as if they have a picture in front of them but the picture is completely wrong.
Large companies today tend to do a number of things; most of them bureaucratic. They tend to set up hotlines. These are places where you can call if you're an employee, anonymously, and report an ethical infraction or problem. They tend to appoint ethics officers. Virtually all large companies in the United States and most in Canada have that kind of thing. And they also have ethics training. Sometimes this is pervasive, goes all the way through the organization; sometimes it potentially hits just the top management position.
What we've come to realize, though, is that those compliance approaches to ethics are very ineffective at blocking the worst kinds of ethical problems. For example, in the Enron-era scandals, each of these companies had elaborate compliance mechanisms. Each of them had hotlines and so on.
KM: Why did it fail, then?
TD: Well, you know, if you stop and think about WorldCom and Enron - at WorldCom, for example, they had a hotline. The shenanigans that happened there happened for a long time. Only one call came in over the hotline and that was gently pushed back. As a matter of fact, when we study organizations, we find that there's actually a slight positive correlation between having ethics training, ethics codes, on the one hand, and bad stuff - corporate criminal misconduct, pressure experienced by employees to compromise ethics - on the other.
We have five studies, over a 35-year period, that paint that picture. And that's a positive relationship! In other words, if you have these things, you're more inclined to get in trouble; you're more inclined to put pressure on employees.
Of course, that doesn't make any sense, and we explain that by noting that correlation doesn't mean causation. So, for example, Tyco, KPMG are big companies that had near-death experiences with ethics. They have every ethics "bell and whistle" in the world. They've got the wallet cards, Plexiglas statues, ethics training - all that kind of thing. So, as soon as a company gets in trouble, it throws this stuff in. That explains, to some extent, this small but significant aberrant correlation.
What I should say, too, is that there is something going on that traditional compliance programs are missing and that's where business needs to get on board.
KM: So what's missing? What are the things we have to add to make these companies really bond in an ethical way to the world?
TD: One of the things that we need to do to respond is to focus more on the way that we structure rewards. So, for example, we saw in the current financial crisis that outsized bonus systems that fail to reflect long-term reputational risks got companies in a lot of trouble.
This has been true in ethics for a long time and studies show that the No. 1 pressure point on executives' ethics are what they call "mismatched reward systems" - it's the way it's often addressed in the literature.
Now this doesn't eliminate stretch goals; sometimes stretch goals are important. But, when you have goals that aren't rationally related to what people can achieve or you have goals or bonuses that are set in a way that, say … nine out of 10 years they can take the risk for the company and they can make a bonus for themselves but, in that 10th year, it's going to be bad news - you've got trouble.
KM: This has been Karl Moore of the Desautels Faculty of Management at McGill University, talking management for The Globe and Mail with Tom Donaldson, a professor at the Wharton School in Philadelphia.