Markkula Center of Applied Ethics

The Ethics of Human Capital

By James O'Toole

The business media today are fixated on the misdoings of a gallery of rogues: messieurs Ebbers, Skilling, Lay, Scrushy, Waskal, and Kozlowski. Not since the Robber Baron era have the names of corporate leaders been so infamous. And with that infamy has come demand for increased corporate social responsibility. This reaction is understandable, but what does it mean in practice? What specific social responsibilities should businesses assume? It seems to go without saying that executives must obey the law; so the renewed call for social responsibility must mean something more than that. Yet, it can't mean that businesses are responsible for addressing all of society's ills, including those they didn't create, or those over which they have little leverage. And, morally and logically, it can't mean that corporations can compensate for cooking the books by making large philanthropic donations. So what, in fact, is meant by corporate social responsibility? "'Tis a puzzlement," As Yul Brynner used to say. Perhaps a clue to what is meant can be found in the cryptic reference in Sarbanes-Oxley to the responsibility for creating an ethical "corporate culture."

But corporate culture is as vague a concept as social responsibility. An idea that can mean almost anything is hardly a useful guide to action. However, when properly defined and understood, crating an ethical culture may be the most-responsible activity in which a corporate leader can engage. When Warren Bennis and I developed the term in Aspen in 1973, we spoke of a corporate culture as the complex whole of behaviors, values, norms, beliefs, and customs that characterize a specific organization. At the time, we were concerned with creating corporate cultures in which there was a good fit between the needs of employees and the conditions of employment. Nonetheless, given that ethics is now the focus, I believe it can be argued reasonably that the creation of an ethical corporate culture is the prime role, task, and responsibility of a virtuous leader. For that to be the case, an ethical corporate culture would be defined as one in which all the stakeholders of an organization are treated with due respect. That is, the legitimate needs of customers, owners, suppliers, host communities, and employees would be both acknowledged and addressed by an organization.

Of those constituencies, the least problematic is the customer. If customer needs are not met, a company simply will go out of business. Likewise, if the needs of shareholders aren't met, management will be replaced, or the company will go out of business. So meeting those stakeholder responsibilities, and consequences of failing to do so, are relatively clear. In contrast, and in practice, treating employees with due respect is a far more ethically complex endeavor, and the consequences of the failure to do so are much murkier. Indeed, different companies will have quite different philosophies on the matter; even companies in the same industry and located in the same city, will have quite different interpretations of their ethical responsibilities to employees. For example, there are two major manufacturers of cast iron pipe, both situated in Birmingham Alabama. One, McWare, Inc., made news when it was revealed that it had been cited for something like 800 safety and environmental violations over the last eight years, including numerous cases in which employees had been maimed, burned, made ill, and even killed. Among other ethical shortcomings, workers at McWare had not been trained to handle the flammable materials in the plant. In contrast, McWare's cross-town competitor, American Cast Iron Pipe, has been cited by Fortune as one of America's best places to work, one in which the training of its blue-collar workers is a priority, as is providing on-site medical care. Most important, American Cast Pipe's workers serve on committees that set and monitor plant safety and work rules. The point of this example is that, by definition, ethics and culture are matters of choice, and that corporate executives have more choice when it comes to how they treat their employees than they do with their other prime constituencies.

But just because an ethical issue is complex or murky doesn't mean it cannot, or should not, be addressed, or that virtuous policies cannot be identified and implemented. Moreover, thoughtful analysis reveals that creating a culture in which employees are treated with respect has identifiable, and important, consequences. Some are quite indirect and unexpected For example, in Southern California, a crazed motorist recently attempted to commit suicide by driving his car onto railroad tracks. At the last moment, he thought the better of it, abandoned the car, and ran home. Unfortunately, seconds later a full commuter train crashed into the car, leading to terrible loss of life and to severe injuries to hundreds of people. The accident occurred directly in the back of a Costco Warehouse store. Almost immediately, the blue-collar Costco employees organized themselves into an emergency brigade, and, armed with forklift trucks and fire extinguishers, set out to rescue trapped passengers, and to deliver first-aid to the wounded.

It is not coincidental, I believe, that Costco's culture stresses the importance of each worker, rewards all for taking individual initiative, and trusts them to solve problems in the absence of supervision and detailed rules. Costco is among the leaders in the retail industry in terms of making heavy investments in the training and development of its workforce. Hence, if the train accident had to occur, I believe the passengers were at least fortunate that they ended up near a group of people whose skills and instincts had been so well primed to spring to their aid. Of course, we cannot know what might have happened had the accident occurred outside a store owned by one of those retail chains that has adopted the currently more-prevalent human resource strategy: viewing employees as simply factors of production the cost of which needs to be minimized, if their jobs cannot be eliminated. But I will go out on a limb: I cannot help but suspect that people who are treated as fungible, told simply to obey their supervisors, and whose development is not seen as a corporate responsibility, would be far less-prepared to respond to an emergency as quickly, effectively, and appropriately as did the Costco people.

The Costco approach of paying living wages, providing decent health care, and treating employees with dignity and respect by rewarding them for participating in self-management, was abandoned by many corporations in the 90s. Numerous companies went in the opposite direction believing, like Wal-Mart, that investing in workers is too costly, and that low-price competitors will drive them out of business if they do so. Sometimes that is true. But in many cases, I believe executives have room for choice. For example, as Fed-Ex has moved to a low-cost model for its drivers (even contracting out), in contrast, its competitor UPS has stayed with its commitment to long-term employment and high pay. For example, their drivers are paid 20% over market, their supervisors, 10% over market, and their CEO is paid way under market. Why has UPS made this choice? They believe their drivers are a key to corporate success, and that having informed and committed workers is the best way to serve customers. It is also the case that the leaders of UPS are former drivers themselves, and as such they have moral empathy with their workers. They understand that the lowliest worker in the organization is as human as they are, with much the same basic needs.

But many large corporations today have become depersonalized; not only do the executives not know their workers personally, they come from different educational backgrounds, and live in different neighborhoods. That makes moral empathy increasingly rare. For example, a few days ago I witnessed a two-hour discussion among corporate board members in which they debated what portion of their expected record high profits should go to top management, and what portion should go to shareholders, profits which could lead to a windfall of as much as a million dollars to the top people in the company. At the end of the discussion, they then reviewed the prime risks facing the company, ones that, if they were to occur, would reduce the profits to be shared by owners and executives, a major risk they identified was a possible increase in the minimum wage in China to $71 per month. Since all the company's manufacturing was in China, that event would greatly increase labor costs. The CFO then said the effect of the increase on the bottom line should be reduced by charging employees more for their room and board. That settled, the board and the executives present went on to other matters.

In case you missed what happened, in effect the board decided that the way to guarantee their large bonuses was to reduce the net take home pay of their poorest paid workers. That is, people earning something like seventy dollars a month would earn less so that the bonuses of the highest paid people might not be reduced by a few percent. If that is not an ethical issue, I don't know what is. But I believe the board did not recognize that they had failed to address a major ethical issue. Although they knew that some of their workers already were subsisting on rice, and living as many as twelve to a small room, nonetheless the only ethical they spotted concerned the fairness of the bonuses of the highly paid executives, themselves.

Unfortunately, this is probably not that extreme an example. In my frequent interactions with human resource executives from large US corporations, it is clear from what they say, and do, that the prevalent assumption is that the only part of the workforce that is indispensable, and therefore the part on which an investment in development is justified, is the few highly trained and skilled people at the top of the hierarchy. Moreover, in too few of those large corporations do managers believe they have a moral responsibility to address the needs of workers: instead, the assumption is that if workers do not like the conditions being offered, they are free to quit and look for employment elsewhere.

In examining the ethics of that assumption, let me climb back off the limb and offer an example of consequences of corporate culture that requires no speculation. Let me describe the way in which Springfield Remanufacturing [now renamed] views its responsibility to its blue-collar workforce, most of whom have high school educations, or less. For nearly two decades, CEO of the company, Jack Stack, has treated those workers as his peers, deserving of the same respect he would give to them if the were ivy-leaguers. To begin, Stack takes the time to teach all his workers everything that might be taught to a student in an MBA class. He teaches them to read balance sheets, and income and cash flow statements. He then gives them the authority to use that information, to be not only self-managing, but then to share in the financial rewards that come from having a company full of people who are taking initiative. Thus, by treating his people with respect, they have the chance to grow, and the company benefits from hiring whole humans, their brains and not just their hands. And one of the consequences is a truly ethical corporate culture: Can you imagine that anyone would try, or could get away with, cooking the books in such an environment? As the company's CFO says, "It is like having 700 internal auditors out there in every function of the company." In the words of former SAS CEO, Jan Carlzon, "An individual without information cannot take responsibility; an individual who is give information cannot help but take responsibility."

Ultimately, the creation of an ethical culture depends on leadership. Particularly, on leaders who show respect for their people. For example, at W.L. Gore and Associates, the founder, the late Bill Gore, spent almost all his time meeting with small groups of employees, discussing his corporate philosophy, and explaining why he had divided the company's worksites so that the 5,000 Gore associates were each members of units with fewer than 150 people. He explained why the company practiced non-management, a system with no titles, no job descriptions, no bosses, and no hierarchy. When you are hired at Gore you are simply told, "Go find something useful to do." In place of rules, the company has four governing ethical principles:
1. Try to be fair with all associates, suppliers, customers.
2. Allow, help, and encourage all associates to grow in knowledge, skill, and scope of responsibility.
3. Make commitments and keep them.
4. Consult with others before making high-risk decisions that would endanger the enterprise.
Bill Gore created this culture of trust, commitment, and community because he believed that every person is capable of making a contribution, each wants to be responsible, and all should be held accountable.

There is an ancient ethical theory behind this way of leading organizations. In 400 BC, Aristotle argued that the task of a leader is to create conditions under which all followers can realize their full human potential. In this view, leadership is not about the leader's needs for wealth, power, and prestige; instead, it is about the leader's responsibility to create an environment in which followers can develop the capabilities with which they were born. Aristotle believed that the essence of being human was to grow and to develop one's innate capacities, and failure to do so was to neglect one's basic humanity. It was this point Jefferson was paraphrasing in the Declaration of Independence when he noted the goal of the new country being founded in 1776 was to provide conditions in which all citizens could pursue happiness. In Aristotle's terms, happiness means the realization of one's potential. Jefferson thought his new nation would succeed to the extent that its leaders create the opportunity and conditions under which all its people could develop their capacities.

Today, given the nature of 24/7 work conditions, and the commitment to long hours that American corporations demand of employees, the only place where most people have the opportunity to develop their capacities is at work. Hence, if corporations do not provide the opportunity for their employees to grow, in effect, they deny them their basic humanity. That is why creating a culture in which the true and basic needs of employees is addressed is the core ethical issue in corporations today.

If we translate Aristotle into these modern terms, he provides us with a set of ethical questions to determine the extent to which an organization provides an environment conducive to human growth and fulfillment. And, Aristotle would say, not only does an ethical leader create that environment but, he or she does do so consciously, and not coincidentally. Motivation is important in ethics. Miami hoteliers cannot claim credit for sunny days, and leaders in Silicon Valley get no ethical credit for providing jobs that are accidentally developmental. Just because working with computers may be an inherently a developmental task, one is not necessarily a marvelous employer for providing people with that opportunity.

Aristotle also asks the extent to which we as leaders observe decent limits on our own power in order to allow others to lead and develop. What he's saying is that leadership is inherently such a valuable thing in terms of our growth that, if leaders take all the opportunities to lead for themselves, and don't give others the chance to lead, they are denying their followers the possibility of growth. That's why he says leadership should be shared so that everybody has the ability to participate in it. He says that too many leaders turn their people into passive recipients of their moral feats, and there is nothing inherently ethical about that.

In essence, here's the questions Aristotle asks leaders to ask themselves: To what extent do I consciously make an effort to provide learning opportunities to everyone who works for me? To what extent do I encourage full participation by all my people in the decisions affecting their own work? To what extent do I allow them to lead in order to grow? To what extent do I measure my own performance as a manager or leader both in terms of my effectiveness in realizing economic goals and, equally, in terms of using my practical wisdom to create conditions in which my people can seek to fulfill their own potential in the workplace?

I do not pretend that it is easy for leaders to create ethical cultures. Tough sacrifices and trade-offs are demanded. For starters, leaders must learn to recognize that they have ethical responsibilities relating to employees, and then must behave courageously and consistently in terms of meeting those responsibilities. For example, during the extended 2001-04 recession, when hundreds of thousands of American workers were loosing their jobs, most corporate leaders assumed they had no other choice but to lay off workers. Nonetheless, out in Silicon Valley, the CEO of Xilinx, Inc, Wim Roelandts, believed there had to be an alternative to laying off workers, even when his company's profits plummeted by 50% in 2001. Even his own board and some of his top executives argued that the only way he could stem the flow of red ink was to lay off workers. But driven by his stated communitarian values of respect for employees, and the concomitant responsibility for providing for their development as human beings, he charged a task force of managers with finding alternatives to layoffs. They come up with a dozen programs that were put into place, including funding educational sabbaticals for workers and paying them modest stipends for volunteering in non-profit organizations. By the way, a year later, the company came roaring back, with all its employees imbued with deep commitment to making it a financial success. Significantly, Roelandts is a self-described "geek" engineer who discovered the importance of ethical analysis. He learned that leadership requires moral imagination, which begins with spotting ethical issues, asking oneself tough questions about the consequences of one's actions, and the creation of better alternatives when all those available have unacceptable consequences.

Of course, this runs against prevalent assumptions not only about corporate finance, but also about leadership. In the dominant philosophy, called situational or contingency leadership, there is only one dimension: A leader is simply measured in terms of her effectiveness at achieving a goal, whether that goal be profits or personal power. Jack Welch proudly proclaimed that he should be judged solely by the criterion of how much wealth he created for shareholders. The leadership philosophy of Wim Roelandts and Jack Stack stands in stark contrast. While they are as concerned as Welch with their effectiveness at producing results, they complicate the task of leadership by also asking to be evaluated on a moral dimension. In addition to effectiveness, they believe they must be judged by the extent to which they create a corporate culture in which the ethical principle of respect for people is never violated.

Very few CEOs today set such high standards for themselves. Indeed, many successful and admired corporate leaders consciously reject such ethical measures of performance as inappropriate, impractical, and irrelevant to the task their boards have hired them to do, which is to create wealth. They say their responsibility is to their shareholders, not their employees, and if the social responsibility of employee development interferes with profit making then workers needs must be sacrificed. Aristotle would answer that virtuous leaders have responsibilities to both their owners and their workers, and, if there's a conflict between the two, it is the leaders' duty to create conditions in which those interests can be made the same.

It almost goes without saying that this two-dimensional standard of leadership is doubly hard to meet, particularly because it entails practicing what one preaches, that is consistency between word and act. That constituency is known as integrity, and it leads to the most important element in creating an ethical corporate culture: trust. Unfortunately, it is in the realm of integrity that too many corporate executives are failing today. For example, at one of the nation's fastest growing financial services companies, the CEO speaks enthusiastically and proudly about his "values-based leadership," the value of his people being at the top of his list of things he says the company holds dear. The bank is a success. It has basically doubled its sales and doubled its profits over the last couple of years. While doing so, it has halved its workforce through domestic outsourcing and by selling off divisions and then contracting for the services of its former employees at lower rates. In essence, the policy of the company is to find ways to pay people less for doing the same work, and now with fewer benefits. What is interesting is that no one in top management, as far as I can discern, sees this as an ethical issue. It is simply considered what a company must do in order to succeed in business. And what is the effect on employee trust, morale, and the senses of community and commitment? I don't know, but I can't help but wonder how its employees would respond if a train were to crash behind the bank's headquarters.

Creating an ethical corporate culture turns out to be a lot more difficult task than the authors of Sarbanes-Oxley anticipated. As smart as Aristotle was, even he couldn't provide a clear moral principle for the just distribution of enterprise-created wealth. He admits it's harder to distribute wealth fairly than it is to make it. Nonetheless, here are some Aristotelian questions virtuous leaders might ask themselves, particularly before giving themselves large bonuses at they same time they are outsourcing jobs to contractors who don't pay health benefits:

  • Am I taking more in my share of rewards than my contributions warrant?
  • Does the distribution of goods in the organization preserve the happiness of the community; does it have a negative effect on morale?
  • Would everyone in the organization enter into the employment contract under the current terms if they truly had other choices?
  • Would we come to a different principle of allocation if all of the parties concerned were represented at the table?

We will all answers such questions differently, and that is to be expected. The only hard and fast principle is that an ethical culture is most likely to arise out of a process of rational and moral deliberation among all participating parties. Prescriptively, all Aristotle says is that virtue will certainly elude leaders who fail to engage in rigorous ethical analysis of their actions. The bottom line is that creating an ethical culture starts with asking ourselves tough questions.

Copyright 2005
Much of this material is found in James O'Toole
Creating the Good Life, Rodale 2005