Ethics Resource Center

Published: October 28, 2008

Column
By Patricia J. Harned, Ph.D., President, ERC

Rule #1: It Takes More than Rules

Not that we needed it, but Wall Street has handed us its latest lesson in the importance of ethics programs and what happens when they are ignored.

The wreckage has piled up and blame is in good supply.  It will take months to see where the whole episode takes the country and the global economy.

No need to wait, though, to parse – from an ethics point of view – what’s happened and what the near future holds.

It’s a given that as soon as the 111th Congress takes shape in January, there will be hearings on the Wall Street and mortgage messes and a strong impulse to tighten oversight of financial markets and those who ply them – the good, the bad and the ugly.

When (not if) that happens, it would help if lawmakers take note of a simple rule of organizational ethics: rules alone are not enough.

Making the regulatory and legislative walls higher probably won’t hurt.  But neither should anyone assume that stacking laws upon laws makes for impregnable defenses.  Rogue traders – and mortgage lenders and even some CEOs – will find a way.  Remember, Enron had rules and a picture perfect code of conduct.

In 1995, trader Nick Leeson cost his employer, the British bank Barings, $1.3 billion in unauthorized trades in Nikkei futures.  A dozen years later, French trader Jerome Kerviel upped the ante to $7.1 billion in hidden trades at Societe Generale, a respected French financial institution.  Kerviel is awaiting sentencing.

The lesson here is not that crime doesn’t pay, but that organizations have to rely on trust, as well as rules, to safeguard their businesses, customers and stockholders.  You set rules for your teenager, but you trust them with the car keys.

Anne Mulcahy, CEO of Xerox, tells of taking the company reins in early 2000 during a rocky period when revenue and profits were falling, debt was climbing and the stock price had been cut in half.

“Fortunately,” she says, “I had not one but two aces in the hole” – loyal customers and committed employees.  Xerox had slowly built a culture of corporate ethics and responsibility. “Our past behavior was like money in the bank,” she says.

Compare that with the restraints placed on the U.S. Office of Government Ethics.  OGE’s challenge is to write the rules for federal departments and agencies and to advise officials on what, for example, constitutes a conflict of interest.  That’s fine as far as it goes, and OGE does its work well. But that narrow mandate leaves unaddressed the question of how to build an ethical culture that really goes beyond the rules.  A newly formed ethics entity on the Hill, the Office of Congressional Ethics, is facing the same issue of where the boundaries are drawn.

Here at ERC, we tell corporations seeking our advice that an ethical culture tells employees “how things are done around here.” It’s that intangible but all-important sense that unethical conduct is not tolerated – and that the board, the CEO, supervisors, managers and employees buy into that ethos.  As Anne Mulcahy says, “We all believe that we are part of an ongoing experiment to demonstrate that business success and business ethics are not mutually exclusive.”

Far from it, judging from recent headlines.  Of course, outright financial fraud by an individual employee is glaringly clear-cut, while reckless corporate strategies are more diffuse.  But they end up in the same place – a betrayal of trust that costs billions.

If the next Congress and the new administration want to engineer change that truly makes a difference, they should consider this short-hand: rules-based v. principles-based.  Positive steps that encourage ethical principles in the workplace would mean something we’ve been hearing from the presidential candidates for two years: change in Washington.

In This Issue

• ERC Urges McCain and Obama To Stress Ethics in Washington
• Guest Column by Jason M. Zuckerman The Financial Crisis:  Whistleblowers Could Have Helped Avert It
• The Policy Report By Paula J. Desio, ERC Chair on Ethics Policy:
  • More Protection for Whistleblowers? Or More Ethical Culture?
  • Ethics and the Law
• Column By Patricia J. Harned, Ph.D. President, ERC
• 8th Annual Kiplinger Lecture Explores Ethical Business And World Peace