Building Sustainable Ethical Companies

"HR is the most pivotal part of developing a sustainable ethical culture," says Michael Josephson, founder and president of a nonprofit organization that has led more than 1,000 ethics programs for business and public-sector leaders, in this Q&A.

Wednesday, May 16, 2007
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Michael Josephson is the founder and president of the Joseph and Edna Josephson Institute of Ethics in Los Angeles. He established the nonprofit organization after successful careers as a law professor and a publishing executive.

The Institute has led more than 1,000 ethics programs for business and public sector leaders, including Johnson & Johnson, Proctor & Gamble and 3M Corporation. Josephson also has launched two national youth initiatives, "Character Counts" and the "Pursuing Victory with Honor" sportsmanship campaign.

Human Resource Executive® contributing writer Richard Stolz recently discussed business ethics issues with Josephson. Highlights of that conversation follow:

I understand you've been doing a lot of work with big companies lately. What's causing the boom in ethics consulting?

It's a risk-management strategy for most. We wish it was motivated by virtue. But for most, the risks of conduct that is, or perceived to be, unethical are huge. There have been longer prison sentences [than] ever in our history given to executives and sometimes subordinates. Stock prices have collapsed. The impact on morale has been enormous.

There is little doubt that people can get your company into incredible trouble [by exercising] bad judgment. Sometimes it can be people pretty low in the organization.

Where does the human resources function fit into the equation?

HR is the most pivotal part of developing a sustainable ethical culture. It also deals with how you hire, how you recruit them. Performance reviews, who you promote. How you incent. Those determine everything.

So it's not just about wayward CEOs ... ?

Even when the CEO gets in trouble, it would be the low-level folks who are usually the executors [of] all the stuff the CEO has designed. There had to be hundreds of employees looking the other way.

And when you look at most of the liability cases, whether it's dealing with product defects, failure to report, noncompliance -- these almost always happen on lower levels. They may be management, but often middle or low-level management.

Much of the recent focus on ethics had had to do with backdating of options. Is that practice necessarily illegal?

It probably is illegal, because if you backdate anything, it's fraud. You say it happened on this date, and it didn't. But that one is less of an HR issue than most, because most happened at the highest level -- the attorneys, the compensation committees.

Is there a common characteristic at companies where these kinds of things happen?

I use a simple metaphor: In a healthy body, if you get an infection, antibodies are formed, and they surround the infection and in most cases they defeat it. In most cases you don't even know you have an infection because it's so efficient.

In an organization, you need the same thing. You can't prevent bad acts, necessarily. We have what we call the "law of big numbers:" In any large group of employees, a certain number of them are going to be crooks and psychopaths.

The question is, does the organization surround them -- do they have antibodies to say, "You can't do that," or report it? Or, if your immune system is gone ... what, after all, is AIDS -- it's not a disease, it kills your immune system so you die of other things.

The greatest challenge in companies today is there are just too many people looking the other way. So a core group of employees making bad decisions get away with it, and it expands, and becomes systemic to the organization.

Why do you suppose many organizations seem to have fewer ethics "antibodies" today?

There's almost a culture of live and let live. Looking out for No. 1. I'm not sure that 20 years ago, employees were more likely to report misconduct, but I think there was less misconduct, which is why we need more employee surveillance. We need a company to protect its own culture in a meaningful way.

For some organizations, like police departments, that's a requirement. In the federal government, you're supposed to report waste, fraud and abuse. They usually don't, but it's clear that from the beginning, they thought that was a duty of employees.

What if more people at Enron has simply raised the flag and said, "There's something wrong here"?

The other question is, who gets promoted? We're in a culture now that's exemplified by these TV survival shows. The basic theme is last man standing -- you have to find a way of shafting your competitors. There's this notion that it's everyone for themselves.

In that kind of environment, people are looking out more for themselves than asking themselves, "What' right?"

Where does company loyalty fit into this picture?

You don't have all that much loyalty to the company, because the company hasn't been all that loyal to employees.

How about globalization and companies with operations all around the planet?

Yes, this also raises new risks. If you're doing business in Mexico or some Asian countries, temptations [for unethical behavior] are rampant. Does the company set the same standard for its U.S. employees as its employees in Singapore?

One manifestation of globalization is a hyper-competitive business environment. Does that cause ethical problems?

Yes, in terms of the huge, huge emphasis on performance. We measure more things, and we measure more frequently than we ever did before. It used to be that yearly reports were sufficient. Then it was quarterly. Now it's virtually daily. Almost every manager can get a daily performance report, so there's a constant focus on numbers. I'm dealing with a big public company right now that's so preoccupied with continuing to grow at a certain rate that they're not necessarily paying attention to how their people are achieving those numbers.

So how do you get the attention of executives in that kind of an environment?

The issue is what motivates them to [think about ethics]. And the incentive that resonates is risk management. We can show a company that if you're even accused of ethical violations, you're in big trouble.

Take Wal-Mart, for example. They're constantly accused of things. But they haven't lost any major lawsuits that are really significant. But the accusations have damaged their reputation. There are communities that don't even want to admit them, all because people have the impression that they're unethical, that they're not treating their employees right.

Once you can convince management that perception is the reality they have to deal with, you can say, 'What are the kinds of things that will make people think you're not ethical?'

People have found ways to avoid liability on the central issue, because they had clever lawyers. But in the last analysis, what they did was wrong. In some cases they'll get a conviction because they'll find a way to get you. Remember that Al Capone went to jail for tax evasion, not for killing someone.

Has the public's standard for ethical conduct changed over the years?

I think the target is getting smaller. There was a time when people believed that if something's legal, it's ethical. They were assumed to be parallel. That has clearly changed. There's a different standard. You have to be beyond reproach. You have to think of how this is going to look in the eyes of stakeholders.

Let's say you have a very critical need for a person for the next two months, and you hire him, but you don't tell him that at the end of two months, the office is going to close. That's legal, yet it is totally unseemly. The standard today is not whether you're going to win in court, but whether you're going to be in any way damaged by negative publicity. There are so many more routes to publicity now than there used to be.

Let's bring this back to the specific role of HR in maintaining a high ethical standard.

OK, what are HR's basic functions? Bringing people into the organization. Training. Reviewing them and promoting them. Disciplining them. At every single phase, you can either increase or decrease the ethical quality of an organization. At an organization like Enron, they didn't seem to care about people's ethics, and the only question they were asking when they hired them was, 'Will you do this?' or 'Can you do that?'

There are things that can be done that reinforce meaningful values. Most companies have decent value statements. The challenge is alignment. To what extent are those value statements factors that are really driving the recruiting, hiring, training, promotion and review?

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If you decide to infuse these value considerations -- along with the others -- you still want competence -- you can have an enormous impact on the culture of your organization. If, on the other hand, you promote people who walk the line just because they produce results, you get what you get.

How can companies realistically use an ethics screen at the hiring stage?

It's not easy to screen on this basis, primarily because of another HR policy -- to give no references. Which is, by the way, counter to the real law. There's this mythology that you can't say anything negative about a person because your legal counsel tells you not to. When in fact, three-quarters of the states ...specifically authorize you to give references. And even if you're wrong, you're free from suit. But the mythology is so strong that most companies won't give references.

We recommend to our clients that they make applicants sign wavers. We also recommend that you do background checks.

Asking, 'Is the employee eligible for re-hire?' just gives you an ambiguous answer. You don't know if it was for lateness or drug use. And it doesn't lead to fair decisions. You want real information.

OK, if you're hiring with limited information, what happens if you get a queasy feeling after you've got someone on board, but you haven't found a "smoking gun"?

You must use the probation process better. You should be weeding out at least 20 percent during probation. The way we come to that reasoning is simple. Since you're hiring most people in the blind, since in reality you have very little information on background, you've got to ask yourself, after this person has been working for you, would you hire him again? If you decide to keep this person, it should be the same decision as deciding to hire him. In most organizations, the retention rate during probation is in the mid-90 percent range. That's preposterous.

If you have concerns about a probationary employee's ethics, do you need to state those concerns if you decide not to keep the person?

That's the beauty of probation. When you're on probation, I can just say, "I don't like the chemistry." But once you pass probation, it's way harder. 

Is this a "teachable moment" for the rest of the workforce? What do you communicate if you fire someone out of concern for his ethics?

You can say, "It's hard to stay with this company. We have high standards both ethically and competence-wise."

We found that will increase morale, because people don't like to work with slugs.

And this applies to actions involving long-standing employees. We recommend that in your employee newsletter, you have a summary of disciplinary actions, and you sanitize them. You don't identify the employee. You say, "an employee was suspended three days because he had a conflict of interest," and you describe the conflict.

Your disciplinary process should be educational.

Sometimes the employees figure out who it is. Tough nuggies. You can't cripple a company from sending a message about its values.

Are your clients comfortable with taking this approach?

HR always refers me to legal counsel. They say, 'We can't do it because of legal counsel." But because my background is as a lawyer and a law professor, I can beat up on legal counsel.

But even if a company's legal exposure for this, or for giving out bad references, is limited, isn't the prospect of litigation still a concern?

Remember, all these cases are contingency cases. That means unless the plaintiff's attorney thinks he's going to win, he'll shake the saber for a while, and try to get a settlement, but then run like a dog. Because he can't win these cases in court. I could not find one case in the U.S. where a company lost a lawsuit for giving a negative reference, unless there was some showing of malice or a violation of law.

But isn't it still a hassle you'd rather avoid?

Maybe. But it's also a hassle to have sub-standard employees. Companies are paying a big price for that. You want to be a destination employer, a company people really want to work for. To do that, you have to have high ethical standards, and high standards of excellence. You will be known for it because you are going to let people go. You can't have those standards, and not let people go. Or make clear that we're not just going to look the other way.

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