Ethical Challenges of the New Economy and the Information Age

by Rabbi Pinchas Rosenstein

Long gone is the time when one person could impose an ethical culture on a major enterprise by sheer force of will and conviction. The globally spread companies that control much of the world’s commerce nowadays require formal ethics programs. Hi-Tech companies riding today’s “new economy” need special codes that address their specific needs and concerns.

A landmark survey of US employees conducted in 1993 by the Ethics Resource Center (ERC) in Washington uncovered certain problematic trends in regard to ethical performance in industry.

An increasing number of companies are adopting ethical codes and programs, however the ERC survey found a considerable gulf between the perspectives of senior and front-line management regarding the ethical performance of their respective companies. The survey shows that senior management were most likely to believe that their companies fulfill their ethical obligations to stakeholders “exceptionally”. They were also least likely to believe that their companies actively encourage or passively ignore unethical conduct in order to meet their business objectives.

However, these positive perceptions declined along with the respondent’s level in the organization. Front-line supervisors, who reported feeling the most pressure to engage in misconduct, were most likely to believe that their companies encourage or ignore unethical conduct from employees in order to achieve business objectives.

It is necessary to attempt to explain this phenomenon. Much attention is paid by ethics practitioners and trainers to the “tone at the top” – that ethical standards must come from the top leadership of an organization. Justification for this suggestion is self-evident, however this is not enough. The ERC survey indicates that in many companies only lip service is paid to ethics at the top and that the programs have little effect on the front-line, the place where they are most needed.

Transmission of Ethical Standards – Early 20th Century Experiences

Longstanding companies, traditionally known for their high ethical standards, such as IBM and Johnson & Johnson in the USA or Marks & Spencer in the UK, were in general established or led for significant periods of time by individuals with strong views and convictions. These companies did not always boast the formal ethics programs or codes of ethics that we find in many modern corporations. Yet, the ethical standards were transmitted from generation to generation through a process similar to osmosis. As the companies developed and grew, so their specific ethical corporate cultures developed and spread throughout the organizations, whilst adapting, in order to cope with new challenges.

It is particularly worthwhile to examine the development of the J.C. Penney approach to business ethics, because this company had one of the earliest ethics codes and programs.

J.C. Penney’s earliest business experiences as a clerk in various retail stores allowed him to observe various questionable practices. Penney subsequently examined good and bad business practices and developed a respect for the philosophy of leading businessmen John Wanamaker and Marshall Field who were changing the character of retailing in the United States and who also found it profitable to develop an image of honesty and integrity. Wanamaker instituted the money back guarantee and Field believed that the misrepresentation of merchandise was suicidal to any business and admonished his employees not to ever make a promise that could not be fulfilled.

Penney began his own empire in 1902 and in 1913, with 34 stores and 325 employees, he presented his first written code of ethics – “The Penney Idea”.

The Penney Idea

  1. To serve the public, as nearly as we can, to its complete satisfaction
  2. To expect for the service we render a fair remuneration and not all the profit the traffic will bear
  3. To do all in our power to pack the customer’s dollar full of value, quality and satisfaction
  4. To continue to train ourselves and our associates so that the service we give will be more and more intelligently performed
  5. To improve constantly the human factor in our business
  6. To reward men and women in our organization through participation in what the business produces
  7. To test our every policy, method and act in this wise: “Does it square with what is right and just?”

Penney’s managers were all part-owners and therefore at the first national meeting in 1913 where the code was adopted, the “partners” were asked to participate in an “Obligation Ceremony” and to pledge a personal commitment to a life of honesty, integrity and moral leadership both within and outside the company

(JC Penney Archives, quoted by Oliverio).

Earl C. Sams, one of Penney’s most senior associates observed in 1927 that:

“…Every man who joined our group – in those early days – was personally selected by Mr. Penney. And in the formation of the original (company), the type and kind of associates sought for and obtained were:

  • Men of character and ability
  • Men of unselfish aims
  • Men who, in seeking the opportunity, know full well that dividends would be paid to them only as the result of a demonstration of worthiness
  • Men who, in their business and social conduct, would not swerve from a line of procedure and personal action, which was planned to represent that which was right and fair to all, and a living example to others.”

Penney constantly re-inforced his basic ethical position through conventions, letter and bulletins. One manager states the following in 1917: “The J.C. Penney Company enjoys the reputation of being a character and man builder as well as a builder of profits. It is because there has always been and always will be that energetic spirit of efficient honesty, directing and developing its affairs, not because honesty is the best policy, but because honesty is right and always has been and always will be until the end of time.” (Beatley, Dynamo, September 1917, quoted by Oliverio)

Observers argue as to whether Penney faced a general level of ethical behavior better or worse than what we experience today and it is pertinent to note a contemporary observer: “A large part of modern prosperity is bottomed on the overproduction of fraud and sham. The crisis is acute. A feeling of distrust is growing throughout the country. Many branches of finance and business have in one way or another been seized by the unscrupulous for the purpose of deceiving the unwary.”

(James Dill, Reported in The New York Times, 29 June 1905)

We shall return, later in the paper, to examine some of the modern-day implications of Penney’s policies.

These various processes, which brought us “ethical” companies appear very much to be a feature of the past. The late 20th Century has provided a very different commercial environment, culminating in the “new economy”. In modern, often multinational enterprises it is unusual for one or even a few individuals to be able to provide the same level of “ethical” direction for an organization as was possible in the past.

Two Case-Studies: Beech Nut and Johnson & Johnson

Two case-studies are worth examining in this context:

In the 1980s the Beech Nut company was investigated by the FDA and was found guilty of selling adulterated and misbranded baby juice. As the story emerged, it was discovered that Beech Nut executives at all levels had turned a blind eye to the almost obvious fact that a vendor was supplying apple concentrate that contained only sugar and chemicals. Under extreme pressure to turn an ailing company around, the executives focused on the 25% price advantage presented by the supplier of the

bogus concentrate and failed to carry out any QA or laboratory tests. When a member of the research department raised concerns about the concentrate he was accused of not acting like a team player. In his annual performacreview his supervisor wrote that his judgement was “colored by naivete and impractical ideas”. The total cost to the company including fines, legal expenses and lost sales was estimated at $25 million.

The Tylenol crisis faced by & Johnson also in the early 1980s presented a different story. The decision to recall all Tylenol capsules, after several were found to have been maliciously contaminated, to avoid further loss of life, was reflection of the organization’s culture. Robert Wood Johnson, Johnson & Johnson’s CEO from 1932 to 1963 wrote a credo for his company. This credo states that that the company’s first responsibility is to the people who use its products and services;

the second responsibility is to its employees; the third to the community and its environment and the fourth to the stockholders. Johnson claimed that if the credo’s first three responsibilities are met, then the stockholders will be well served. The cost of the recall was $150 million just for 1982, and at the time of the recall there was a fear that the future of Johnson & Johnson and not just Tylenol was being risked. In the end, despite the various doomsday scenarios, Johnson & Johnson gained Widespread praise for its courageous decision and regained its previous market share for Tylenol within one year.

Without a shared set of values and deeply entrenched guiding principles, it is unlikely that Johnson & Johnson’s response would not have been so prompt, effective and so ethically sound. We can conclude from the diverse results of the two case-studies that business ethics becomes an issue of both leadership and management.

“Ethics has everything to do with management… Managers who fail to provide proper leadership and to institute systems that facilitate ethical conduct share responsibility with those who conceive, execute, and knowingly benefit from corporate misdeeds” (Pain)

Ethics in the “New Economy”

The most challenging aspects of the new economy are the pace and the speed of change. These often prevent adequate reflection on the part of management with regard to ethical implications relating to their commercial decisions. In practical terms, the rapid commercial growth among hi-tech companies makes it difficult to initiate and develop effective corporate cultures of ethics and corporate governance in parallel with rapid commercial growth.

The conditions for introducing effective ethics programs have become more difficult. It is therefore ironic that such programs have become more commercially crucial. Never before have companies faced such an intense level of scrutiny. Media, government agencies, politicians and NGOs are all eager to expose wrongdoings and the unwillingness of some corporations to act in a socially responsible manner. In the age of the global village, companies also have to internalize the fact that ethical lapses on the part of individual employees have the capability of causing major and sometimes incalculable damage to the company as a whole.

Enterprise Ethics Planning (EEP)

No less important than Enterprise Resource Planning (ERP) must therefore be Enterprise Ethics Planning (EEP). By this we mean that companies must develop properly planned, unified, consistent and comprehensive ethics programs. Many companies have developed outstanding ethics programs, ironically one of the best frameworks for ethics programs can be found in what is essentially a punitative system – the USA Federal Sentencing Guidelines (FSG). These guidelines are a rare example of how laws can be enacted to improve ethical behavior. They take a carrot and stick approach by directing judges to considerably increase or decrease fines on corporations convicted of carrying out illegal acts, depending on whether or not the company made a genuine effort to develop and run a comprehensive and effective ethics program. The FSG’s seven element ethics program includes the development of a company code of ethics, the appointment of high level personnel to run the ethics compliance program and the establishment of an effective training program.

We can note that J.C. Penney’s code and program appear to comply with these regulations to a large degree. The main difference being that modern codes are expected to also deal with realistic examples of ethical dilemmas relevant to the company and not to rely on generalities.

Hi-tech corporate ethical codes must deal with standard ethics issues such as conflicts of interest, bribery, misuse of company property etc. However, boilerplate codes are not adequate for such companies. In light of the special nature of the hi-tech company and in particular the emerging new organizational structures, they must place a specific emphasis on such issues as intellectual property, confidentiality, changing employer-employee relationships, reciprocal loyalty and head-hunting.

Employee Loyalty in Hi-Tech

The last few years have seen an unprecedented number of hi-tech jobs being created by Internet and New Economy companies, and we are witnesses to an unemployment rate at an all-time low throughout much of the developed world. Due to these factors, hi-tech companies are increasingly experiencing difficulty in finding and retaining good workers. As a result, hi-tech employee loyalty is dropping sharply, as employees jump from one company to another to pursue higher pay, stock options and other benefits. Surprisingly, despite the recent bad times for technology stocks on the Nasdaq, hi-tech companies are still having turnover and loyalty Problems.

In traditional enterprises, critical technology and trade secrets can generally be limited to a small number of select employees. In hi-tech, by its very nature, there are few blue-collar workers. Critical technology and trade secrets are spread widely through the company. High employee turnover greatly exposes a company, low employee loyalty makes obtaining a competitor’s sensitive information easier.

J.C. Penney’s approach appears to be particularly relevant for modern hi-tech companies. When a company’s secrets are widely exposed and spread throughout much of the workforce, choosing managers for for both ability and character appears to be particularly prudent. Instilling ethical values throughout the firm appears critical.

A Possible Approach

Corporate ethical codes and programs can be written in different styles: Inspirational, Regulatory, Presenting Guidelines or Presenting Market Ethos. Each style has both advantages and drawbacks. Regulatory style codes can never cover every possible situation, market ethos can appear distant to the average employee and guidelines can be vague and lack context.

The issues discussed in this paper lead us to believe that codes and programs for the hi-tech sector must be inspirational in nature and that they must emphasize the importance of the development of the professional integrity of the person under contract. Enlightened self-interest would also suggest that hi-tech companies must examine their hiring policies and procedures and give serious attention to the integrity of the individual as well as to his or her professional qualifications.

This paper has attempted to address one small element of a complex rapidly evolving issue. Corporations must accept that it is in their interests to carefully plan and develop comprehensive ethics initiatives (Enterprise Ethics Planning). Corporate codes of ethics and ethics training programs must relate to the new realities when there are changes in the manner in which commerce is conducted – The hi-tech market is an obvious example of this.

References

  • Paine, L.S. (1994) Managing for Organizational Integrity. Harvard Business Review, March-April 1994
  • Oliverio, M.E. (1989) The Implementation of a Code of Ethics: The Early Efforts of an Entrepreneur., Journal of Business Ethics Vol. 8, 1989
  • Ethics Resource Center. (1994) Ethics in American Business: Policies, Programs and Perceptions – Report of a Landmark Survey of US Employees

 

Rabbi Pinchas Rosenstein is the director of the Center for Business Ethics and Social Responsibility.