Seven Signs of Ethical Collapse: How to Spot Moral Meltdowns
Before its Too Late
A Focus on Ethical Culture
By Marianne Jennings
Since 2001, Marianne Jennings, professor of management at the
W. P. Carey School of Business at Arizona State University,
has kept a list of companies that have succumbed to ethical
collapse, some for the second time. These are companies like
General Electric, Merrill Lynch, AT&T, Arthur Andersen,
United Health Group. There are so many, in fact, that shes
running out of room on the PowerPoint slide she uses for presentations
and had to squeeze in the final entry the stock options
These are great companies, great organizations, good
people, Jennings stressed. But theyre on this
list for one reasonthey crossed an ethical line.
The list grows almost daily. But it doesnt have to, she
In her presentation at the April 5, 2007, meeting of the Business
and Organizational Ethics Partnership entitled, Seven
Signs of Ethical Collapse: How to Spot Moral Meltdowns Before
its Too Late (based on her book by the same title),
Jennings noted common characteristics of the misguided companies.
Had they heeded the warning signs, she said, they could have
employed potent antidotes (which she also presented) to prevent
the moral meltdowns.
These were not close calls, she emphasized. These are
companies that really crossed very bright lines.
The common threads that shes found that make good people
at great companies do really dumb, unethical things include:
- Pressure to maintain numbers
- Fear and silence
- Young uns and a bigger-than-life CEO
- Weak board of directors
- Conflicts of interest overlooked or unaddressed
- Innovation like no other company
- Goodness in some areas atones for evil in others
1. Pressure to maintain numbers
In all of these companies, they had enormously high rates
of returndouble-digit growthand they said, Were
going to keep it rolling, Jennings said. Many had
so-called Monday morning beatings, where employees
had to account for not meeting their numbers. Such expectations
scream for ethical breaches, she cautioned.
Instead, focus on the long-term and realistic expectations.
For example, a grocery store chain just outside Hurricane Katrinas
path experienced a 300 percent growth in earnings after the
storm as thousands of people flooded their service area. Consequently,
huge employee incentive bonuses kicked in due to the phenomenal
and unsolicited growth in business. The biggest challenge the
CEO faced the following year was in convincing employees to
face up to the fact that there was no way they could achieve
those numbers the following year.
If youre getting those numbers because youre
better, youre smarter, and youre working harder,
more power to you, Jennings said. But managers have to
be careful not to be sending the message that higher numbers
must be achieved at any cost. Slogans like find a way,
whatever it takes, and sharpen your pencil,
emphasize short-term gain over long-term sustainability and
encourage employees to cut ethical corners.
Help employees distinguish between superior skill and
foresight, versus cheating, she advised.
2. Fear and silence
Jennings noted that front-line employees never miss an ethical
issue. To front-line employees, the line between right
and wrong is very bright. Something happens to people as they
climb up through management, she said. The bright line seems
to fade. The challenge is getting information about ethical
breeches from the front line up to the right people who will
take action. Too often, fear and silence thwart those efforts.
Jennings recently worked with a company that had quite an impressive
ethics program in place. Best practice. An ethics hotline. An
anonymous on-line reporting system. Technically, it was
beautiful, she said. But an employee revealed an issue
in talking with Jennings that the professor felt management
should know about.
Jennings suggested she use the hotline. No, the employee countered,
theyd trace the call. Use the online reporting system.
No, the employee lamented, theyd trace the IP address.
Send an anonymous letter, with no return address and mail it
from another city. No, the employee protested, theyd trace
it back to her by analyzing the DNA on the envelope.
That is profound fear, Jennings said.
Companies intentionally or unintentionally foster that fear
in a number of ways. If an employee raises an issue and nothing
is done, the whistleblower feels stupid and management signals
that theyre not listening.
If an employee raises an ethical issue and theyre terminated,
the company intensifies that fear and signals that employees
should just remain silent. And silent employees shoot
your safety record to heck. If theyre coming to work upset
about something, they start messing up, so you dont want
that, Jennings said.
Another possibility, much more insidious and more difficult
to address, is when an employee raises an ethical issue and
instead of being terminated, theyre flat-lined,
labeled a troublemaker and transferred into corporate oblivion.
The way to avoid fear and silence is to encourage open dialogue,
allow anonymous reporting without repercussions, provide swift
response and follow-up, have the issues reviewed by the board,
hand down appropriate disciplinary actions to wrongdoers, and
Key to making this work is ensuring that enforcement is absolute,
unequivocal, and egalitarian. As one of Jennings students
observed during a discussion about tolerance for a manager who
borrowed three bottles of vodka from the company
on a Friday night for a party outside of work and brought in
replacements on Monday morning, If the janitor had taken
the liquor, he would have been fired.
If its wrong for the janitor to do, its wrong for
3. Young uns and a bigger-than-life CEO
Often, Jennings pointed out, companies that get into trouble
have a CEO a full generation older than the direct reports.
The inexperienced underlings tend to lack the moxie to question
the iconic boss.
I hire them just like me: smart, poor, and want to be
rich, she quoted former Tyco CEO Dennis Kozlowski as saying.
People say GE was a mess after Jack Welch left,
she went on. Actually, they were a mess when Jack Welch
was there, but we really werent looking at the numbers.
As long as the CEO is so highly regarded, we dont ask
A bigger than life CEO need not spell trouble. Question the
icon, and help the inexperienced direct reports. Ethics
requires daily effort, reinforcement and training. Without it,
you slip, because everyone believes theyre ethical, no
matter what theyre doing, Jennings said.
Introspection is the key. Everyone in the company has
to look long and hard at what youre doing, she said.
The company is on the right track if its willing to let
anyone in the organization say, Wait a minute, is this
really something we should be doing?
4. A Weak Board of Directors
Weak boards tend to have inexperienced members, often ones
who are too young to have experienced a complete business cycle,
which was often the case with companies in the dot-com boom.
Often they have ethical conflicts of interest as well, in terms
of consulting arrangements, related party transactions, even
incestuous philanthropy in which huge donations are made to
board members favorite charities.
To counterbalance weak boards, management needs a good
mind and a strong backbone. Dig deep on conflicts. Dont
fall for governance myths of stock ownership, 10-year limits,
mandatory retirement, or nomination by shareholders. They dont
work, Jennings says.
Instead, pay attention to perks. Know industry accounting standards.
And manage by walking around. Employees will talk to you
face-to-face. Dont micromanage, but get face-to-face,
5. Culture of conflicts
A post Sarbanes-Oxley survey in 2003 by the SEC revealed that
47 percent of companies purchased or sold insiders products
or services. Thirty-nine percent made loans to executives. Thirty-five
percent purchased legal or banking services from directors.
Twenty-one percent bought, sold, or invested in companies insiders
Jennings believes that conflicts of interest affect board
members decisions, whether consciously or not. Human
nature makes you beholden.
The antidote is simple, she said. There are two ways
to handle conflicts of interest. Either dont do it or
disclose it. Thats it.
In geographies like Silicon Valley, conflicts of interest grow
rapidly over time. It is impossible to find individuals to serve
on boards who dont have some connection with the company.
In many ways, their knowledge and past relationships are an
advantage. However, it is critical that these past relationships
or activities be disclosed, and an assessment made that the
potential director can recuse himself/herself in any matter
related to them and still function as an effective advisor,
counselor, and overseer of the organizations management
and business processes.
6. Innovation like no other
Too many companies that melt down felt they were above the
fray because they were so innovative.
Consider the remark of Sanjay Kumar, former CEO of Computer
standard accounting rules [were] not
the best way to measure [CAs] results because it had changed
to a new business model offering its clients more flexibility.
He entered a guilty plea to fraud.
The dot-com companies amused her the most. I just love
thisat the height of the dot-com losses, they would always
say, You know, if we hadnt had all those expenses,
we would have made money! In their minds, they were different,
The antidotes are really very simple. She advised executives
to understand business history and economic cycles. Depend on
the basics of business: keep costs low; keep quality high; focus
on customer service.
The basics of business and accounting never change. The
innovators often fancy themselves immune from the business cycle,
but history teaches us differently, she pointed out. Also,
just knowing the story of the 29 crash or the gold rush
teaches us that the survivors are, for example, Levisthe
company that sold the gold miners their pants. Dull and certainly
not innovative, but quality and low cost keep them going.
7. Goodness in some areas atones for evil in others
Many companies will tout their culture of diversity, safety,
volunteerism, or environmentally-conscious operations as evidence
of their overall ethical goodness, despite improprieties elsewhere,
as if two rights undo a wrong.
Its more than just money. Youve got to give
back to the community that supported you, Jennings quoted
John Rigas as saying. She also pointed out that while he was
CEO of Adelphia, he gave back to his daughter and
others in business with him.
Im enormously skeptical now. When companies stand
up and go on about their ethics and social responsibility, I
start digging, because the more they say, the more I worry about
whats really going on, she said.
Remedies for the good/evil balancing act include rethinking
the popular notions of social responsibility and business and
rethinking company activities, perceptions, and realities. Be
very skeptical about doing well by doing good. Instead,
companies need to rely on virtue ethics and simplicity: truth,
honestly, fairness, and egalitarianism.
Avoiding moral meltdowns
Ultimately, Jennings summed up, leadership and example matter.
Culture is to company what character is to individuals. Culture
comes from the collective actions and responses of leaders.
Ultimately, culture depends on individuals characters.
Were dependent on individuals saying, No,
we cant do that, she stressed.
Despite history repeating itself in a seemingly unending cycle
of corporate corruption, Jennings remains optimistic. Im
not willing to give up. I believe this remains fixable. The
power of a single person. The power of a story. Just as a rotten
apple can bring down an entire company, Ive seen good
apples take it the other way.
Marianne Jennings is professor of management at the W.P.
Carey School of Business,
Arizona State University.