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This is the fifth of a series of essays on the history of the “responsible business movement.” Each explores a different facet of this movement. See earlier essays here. As I have written in the last four newsletters, the movement for “responsible business” has marched under many themes and banners—corporate social responsibility, employee rights and welfare, diversity and equal employment, and product responsibility and safety. All these terms imply some commitment to morality and ethics, but it was not until the late 1970s that “business ethics” emerged as a prominent term and concern of business. Prior to that, it was discussed only by a scattering of philosophers, a few Jewish and Catholic scholars, and an occasional “Christian proprietor” who linked his faith to his commercial role. In the U.S., two major business scandals in the 1970s—illegal contributions to the Nixon re-election campaign in 1972 and corporate bribery overseas in 1975-78—provoked an active debate about what had gone wrong with the ethics of America’s business leaders. These debates were particularly pronounced at Harvard, Wharton, and Stanford business schools, which produced a disproportionate share of America’s business leaders. Pressed and then funded by alumni, all three schools hired their first professors of business ethics in 1978. I was hired at Stanford and my charge from Dean Arjay Miller, a former president of Ford Motor Company, was roughly “I don’t know how we should address ethics in business, but you are now ‘it.’” Taking advantage of previous work by various pioneers, I developed courses and began to chronicle corporate thinking in the field. Three business leaders I had worked for previously were particularly helpful to my work: CEOs Walter A. Haas, Jr. of Levi Strauss and John A. Young of Hewlett Packard, and Ernest Arbuckle, Chairman of Wells Fargo Bank. But it was two other CEOs who gave me the chance to implement my ideas in corporations in the mid-1980s. In 1983, Walter V. Shipley became CEO of Chemical Bank (which he later merged with Chase Manhattan) and hired a Harvard Business School professor Barbara Toffler and me to develop a senior leadership program on business ethics for the top tier of Chemical’s executives. Shipley, whose father was a famed investment banker, imagined an elite partnership of top bank executives, informed by strong ethics, serving society and their own interests. He personally participated in each small group workshop for the next two years. We sought an ethical consensus among Shipley’s “partnership.” In 1984, Sanford McDonnell, CEO of McDonnell-Douglas, hired me to produce the first company-wide rollout of an explicit “ethics training program” for the firm’s 35,000 employees. McDonnell, troubled by the lack of character demonstrated by some of his fellow CEOs, and then serving as National President of the Boy Scouts of America, saw this training as a continuation of the type of character formation undertaken in scouting. Together we developed and “starred” in an 8-hour workshop featuring videotaped dialogue between us and each employee’s analysis of the ethical issues which he or she faced in their company role. McDonnell later made character formation in schools and society the cause of his life through his organization CharacterPlus. Simultaneously during the mid-1980s, business school adoption of courses on “business ethics” picked up speed. An existing professional organization, the Social Division of Management in the Academy of Management, became the meeting ground of business school faculty trained in business disciplines but teaching ethics. A parallel organization, the Society for Business Ethics, was launched in 1981 by faculty trained in philosophy and ethical theory, but increasingly teaching in business schools. These early developments were given a huge boost by the major scandals in the U.S. defense industry in the mid-1980s. Under President Ronald Reagan, defense spending accelerated but controls on that spending did not keep up. Scandals involving mischarging, $600 coffee pots, $400 hammers, and excessive profits dominated the headlines. Deputy Defense Secretary David Packard, on leave from Hewlett Packard, convened a special commission to study defense procurement. Just before his report was released in February 1986, he suggested to a small group of CEOs leading defense companies that “a voluntary ethics initiative” coming from the industry would help restore industry credibility. The Defense Industry Initiative on Business Ethics and Conduct (DII) was created over a weekend and launched at a press conference with Packard. The DII adopted much of the language and concerns pioneered at McDonnell Douglas and at scandal-plagued General Dynamics, where I had led a series of ethics workshops for top executives and managers with Gary Edwards, the president of the Washington-based Ethics Resource Center. One of the requirements of the DII was for the signatory companies to appoint what became known as a chief ethics officer to oversee implementation of DII commitments. A few years later, these executives created the Ethics Officers Association with the help of Michael Hoffman at Bentley College’s Center on Business Ethics. Further scandals in savings and loans, Wall Street trading, and several other industries in the late 1980s and 1990s expanded the practice of establishing ethics commitments and appointing ethics officers. Corporate ethics programs and business school courses on business ethics grew rapidly. Business ethics took an additional significant step forward with the adoption of the U.S. Sentencing Guidelines in 1992. A government commission adopted guidelines for federal judges sentencing corporations for everything from toxic spills to bribery and fraud. The guidelines gave “credit” to companies, reducing their fines and other penalties, if the company had a pre-existing ethics program. Suddenly every corporate general counsel wanted his or her company to have an ethics program to mitigate risk in case the company had a scandal or malfeasance by a rogue employee—or by their CEO! The era of corporate ethics had arrived! While the structure of an ethics program robust enough to get this “credit” was only generally defined in 1992, subsequent revisions (particularly in 2004) of the guidelines defined an adequate program in more detail. As this process occurred, corporate efforts increasingly focused on complying with these detailed guidelines. It became apparent many if not most companies were became engaged in a “check the boxes” exercise—complying with the guidelines but caring much less about embedding ethical thinking and ethical practices. An increasing number of companies appointed lawyers to be chief ethics officers, renaming the programs “ethics and compliance.” Critics, including me, believe ethics was squeezed out of most programs in favor of legal compliance. In 2005, the Ethics Officers Association (EOA) was renamed the Ethics and Compliance Officers Association (ECOA), and in 2014 the Ethics Resource Center in Washington DC, merged with the ECOA and became the Ethics and Compliance Initiative (ECI). A complementary organization, the Society for Corporate Compliance and Ethics, was launched in 2004 and gave higher billing to compliance from its beginnings. The role of the U.S. Sentencing Guidelines was strengthened further when in 2003 the Deputy Attorney General of the U.S., Larry Thompson, published guidance for federal prosecutors, establishing the principle that prosecutors could charge companies less severely if the company had a good ethics and compliance program when misbehavior or scandal occurred. The presumption was that it was more likely that misbehavior was the work of one or more bad actors rather than due to a corrupt culture. Companies redoubled their efforts to comply with the similar guidelines established in the Thompson Memo, and succeeding versions written by later Deputy Attorneys General. The most recent version, by Deputy AG Sally Yates in 2022, requires companies to have programs that are “proven effective” in reducing misbehavior. This has led to a burst of efforts to evaluate and measure the impact of programs, generally a good thing but adding to the pressure to reduce ethics to a series of boxes to be checked. Two major scandals, in 2002 and 2008, dramatized the continuing importance of ethics in business, though they did not slow the move toward compliance. In 2002, the Enron, WorldCom, Adelphia, and HealthSouth scandals led to the passage of the Sarbanes-Oxley Act which established heightened legal exposure for CEOs, CFOs, and corporate legal staff in the case of scandals. The 2008 financial industry scandals and resulting “Great Recession” led to the passage of the Dodd Frank Act which overhauled the entire financial industry regulatory regime and launched the Consumer Financial Protection Bureau. Arguably, both scandals led to even more of a “compliance orientation” in company programs. The teaching of ethics in business schools continued, but at times seemed less and less connected to the practice of ethics in companies. In fact, despite the increase in compliance activities in the late 2010s and early 2020s, several scandals in prominent companies discouraged those who taught and believed in the importance of business ethics. In 2015, Volkswagen was found to have “faked” the emission tests for some of its new cars. Wells Fargo Bank was embroiled in several scandals, including the manipulation of thousands of customer accounts which damaged consumers’ credit ratings and led to repossession of cars and homes. And in 2019, Boeing was accused of criminal negligence in the crash of two 737 Max aircraft and the death of all aboard. None of this has reduced public debate over the ethics of business and its leaders. However, the debate has embraced other terms which are even less defined than business ethics, terms such as corporate purpose and stakeholder management. Stakeholder management, a popular term since the late 1980s, has suffered from little consensus regarding how to balance obligations to a company’s various stakeholders, including the shareholders. Corporate purpose, embraced in a 2019 statement from the Business Roundtable, was never adequately defined, falling back on addressing the concerns of all “legitimate” stakeholders. The difficulty is that there is a persistent ideological divide between those business leaders who favor a neo-classical economic philosophy that the social responsibility of business is to satisfy its shareholders and increase its profits, and those that think there is a role for virtue, ethics and social concern in managing companies. Attempts to formulate a theory of responsible or ethical business have been largely unsuccessful. An increasing number of commentators, and even business leaders themselves, embrace Nobel Laureate Joseph Stiglitz’ view that companies cannot be relied on to be ethical, and that only well-structured public policy and a robust regulatory regime can ensure that business serves the public good. What is your view? Does ethics have a role to play in guiding companies to serve society, or should we cease trying to instill ethics in a system that will always default to profit-maximizing, or even fraudulent behavior? What role should “business ethics” play in the future of U.S. business? Send me a short (or long) note by replying to this newsletter. I will share selected comments later.
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