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Managing for Organizational Integrity

by Lynn Sharp Paine

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Harvard Business Review

This document is authorized for use only by Charles McElveen ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.

Copyright © 1994 by the President and Fellows of Harvard College. All rights reserved. HARVARD BUSINESS REVIEW March-April 1994

Many managers think of ethics as a question ofpersonal scruples, a confidential matter betweenindividuals and their consciences. These execu-tives are quick to describe any wrongdoing as anisolated incident, the work of a rogue employee.The thought that the company could bear any re-sponsibility for an individual’s misdeeds never en-ters their minds. Ethics, after all, has nothing to dowith management.

In fact, ethics has everything to do with manage-ment. Rarely do the character flaws of a lone actorfully explain corporate misconduct. More typically,unethical business practice involves the tacit, if notexplicit, cooperation of others and reflects the val-ues, attitudes, beliefs, language, and behavioral pat-terns that define an organization’s operating cul-ture. Ethics, then, is as much an organizational as apersonal issue. Managers who fail to provide properleadership and to institute systems that facilitateethical conduct share responsibility with thosewho conceive, execute, and knowingly benefit fromcorporate misdeeds.

Managers must acknowledge their role in shap-ing organizational ethics and seize this opportunityto create a climate that can strengthen the relation-ships and reputations on which their companies’success depends. Executives who ignore ethics runthe risk of personal and corporate liability in to-

day’s increasingly tough legal environment. In addi-tion, they deprive their organizations of the bene-fits available under new federal guidelines for sen-tencing organizations convicted of wrongdoing.These sentencing guidelines recognize for the firsttime the organizational and managerial roots of un-lawful conduct and base fines partly on the extentto which companies have taken steps to preventthat misconduct.

Prompted by the prospect of leniency, many com-panies are rushing to implement compliance-basedethics programs. Designed by corporate counsel,the goal of these programs is to prevent, detect, andpunish legal violations. But organizational ethicsmeans more than avoiding illegal practice; and pro-viding employees with a rule book will do little toaddress the problems underlying unlawful conduct.To foster a climate that encourages exemplary be-havior, corporations need a comprehensive ap-proach that goes beyond the often punitive legalcompliance stance.

An integrity-based approach to ethics manage-ment combines a concern for the law with an em-phasis on managerial responsibility for ethical be-

By supporting ethically sound behavior, managers can strengthenthe relationships and reputations their companies depend on.

Managing for Organizational Integrity

by Lynn Sharp Paine

Lynn Sharp Paine is associate professor at the HarvardBusiness School, specializing in management ethics. Hercurrent research focuses on leadership and organization-al integrity in a global environment.


DRAWINGS BY DAVID HORII 107

havior. Though integrity strategies may vary in de-sign and scope, all strive to define companies’ guid-ing values, aspirations, and patterns of thought andconduct. When integrated into the day-to-day oper-ations of an organization, such strategies can helpprevent damaging ethical lapses while tapping intopowerful human impulses for moral thought andaction. Then an ethical framework becomes nolonger a burdensome constraint within which com-panies must operate, but the governing ethos of anorganization.

How Organizations Shape Individuals’ Behavior

The once familiar picture of ethics as individ-ualistic, unchanging, and impervious to organiza-tional influences has not stood up to scrutiny in recent years. Sears Auto Centers’ and Beech-NutNutrition Corporation’s experiences illustrate therole organizations play in shaping individuals’ behav-ior – and how even sound moral fiber can fray whenstretched too thin.

In 1992, Sears, Roebuck & Company was inun-dated with complaints about its automotive servicebusiness. Consumers and attorneys general in morethan 40 states had accused the company of mislead-

ing customers and selling them unnecessary partsand services, from brake jobs to front-end align-ments. It would be a mistake, however, to see thissituation exclusively in terms of any one individu-al’s moral failings. Nor did management set out todefraud Sears customers. Instead, a number of orga-nizational factors contributed to the problematicsales practices.

In the face of declining revenues, shrinking mar-ket share, and an increasingly competitive marketfor undercar services, Sears management attempt-ed to spur the performance of its auto centers by introducing new goals and incentives for em-ployees. The company increased minimum workquotas and introduced productivity incentives formechanics. The automotive service advisers weregiven product-specific sales quotas – sell so manysprings, shock absorbers, alignments, or brake jobsper shift – and paid a commission based on sales.According to advisers, failure to meet quotas couldlead to a transfer or a reduction in work hours.Some employees spoke of the “pressure, pressure,pressure” to bring in sales.

Under this new set of organizational pressuresand incentives, with few options for meeting theirsales goals legitimately, some employees’ judgmentunderstandably suffered. Management’s failure to

At Sears AutoCenters,management’sfailure to clarify theline betweenunnecessary serviceand legitimatepreventivemaintenance costthe company anestimated $60million.


clarify the line between unneces-sary service and legitimate pre-ventive maintenance, coupledwith consumer ignorance, leftemployees to chart their owncourses through a vast gray area,subject to a wide range of interpre-tations. Without active manage-ment support for ethical practiceand mechanisms to detect andcheck questionable sales methodsand poor work, it is not surprisingthat some employees may have reacted to contextual forces by re-sorting to exaggeration, careless-ness, or even misrepresentation.

Shortly after the allegationsagainst Sears became public, CEOEdward Brennan acknowledgedmanagement’s responsibility forputting in place compensationand goal-setting systems that “cre-ated an environment in whichmistakes did occur.” Althoughthe company denied any intent to deceive consumers, senior executives eliminated commis-sions for service advisers and dis-continued sales quotas for specif-ic parts. They also instituted asystem of unannounced shoppingaudits and made plans to expandthe internal monitoring of service.In settling the pending lawsuits,Sears offered coupons to cus-tomers who had bought certainauto services between 1990 and1992. The total cost of the settle-ment, including potential cus-tomer refunds, was an estimated$60 million.

Contextual forces can also in-fluence the behavior of top man-agement, as a former CEO ofBeech-Nut Nutrition Corporationdiscovered. In the early 1980s, on-ly two years after joining the com-pany, the CEO found evidencesuggesting that the apple juiceconcentrate, supplied by the com-pany’s vendors for use in Beech-Nut’s “100% pure” apple juice,contained nothing more than sug-ar water and chemicals. The CEOcould have destroyed the bogus in-

ventory and withdrawn the juicefrom grocers’ shelves, but he wasunder extraordinary pressure toturn the ailing company around.Eliminating the inventory wouldhave killed any hope of turningeven the meager $700,000 profitpromised to Beech-Nut’s then par-ent, Nestlé.

A number of people in the cor-poration, it turned out, had doubt-ed the purity of the juice for sever-al years before the CEO arrived.But the 25% price advantage of-fered by the supplier of the bogusconcentrate allowed the opera-tions head to meet cost-controlgoals. Furthermore, the companylacked an effective quality controlsystem, and a conclusive lab testfor juice purity did not yet exist.When a member of the researchdepartment voiced concerns aboutthe juice to operating manage-ment, he was accused of not be-ing a team player and of actinglike “Chicken Little.” His judg-ment, his supervisor wrote in anannual performance review, was“colored by naïveté and impracti-cal ideals.” No one else seemed tohave considered the company’sobligations to its customers or tohave thought about the potentialharm of disclosure. No one con-sidered the fact that the sale ofadulterated or misbranded juice isa legal offense, putting the compa-ny and its top management at riskof criminal liability.

An FDA investigation taughtBeech-Nut the hard way. In 1987,the company pleaded guilty toselling adulterated and misbrand-ed juice. Two years and two crimi-nal trials later, the CEO pleadedguilty to ten counts of mislabel-ing. The total cost to the compa-ny– including fines, legal expenses,and lost sales – was an estimated$25 million.

Such errors of judgment rarelyreflect an organizational cultureand management philosophy thatsets out to harm or deceive. More

ORGANIZATIONAL INTEGRITY

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HARVARD BUSINESS REVIEW March-April 1994 109

often, they reveal a culture that is insensitive or in-different to ethical considerations or one that lackseffective organizational systems. By the same to-ken, exemplary conduct usually reflects an organi-zational culture and philosophy that is infusedwith a sense of responsibility.

For example, Johnson & Johnson’s handling ofthe Tylenol crisis is sometimes attributed to thesingular personality of then-CEOJames Burke. However, the decisionto do a nationwide recall of Tylenolcapsules in order to avoid furtherloss of life from product tamperingwas in reality not one decision butthousands of decisions made by indi-viduals at all levels of the organiza-tion. The “Tylenol decision,” then,is best understood not as an isolatedincident, the achievement of a loneindividual, but as the reflection of an organization’sculture. Without a shared set of values and guidingprinciples deeply ingrained throughout the organi-zation, it is doubtful that Johnson & Johnson’s re-sponse would have been as rapid, cohesive, and eth-ically sound.

Many people resist acknowledging the influenceof organizational factors on individual behavior –especially on misconduct – for fear of diluting peo-ple’s sense of personal moral responsibility. But thisfear is based on a false dichotomy between holdingindividual transgressors accountable and holding“the system” accountable. Acknowledging the im-portance of organizational context need not implyexculpating individual wrongdoers. To understandall is not to forgive all.

The Limits of a Legal Compliance Program

The consequences of an ethical lapse can be seri-ous and far-reaching. Organizations can quickly be-come entangled in an all-consuming web of legalproceedings. The risk of litigation and liability hasincreased in the past decade as lawmakers have leg-islated new civil and criminal offenses, stepped uppenalties, and improved support for law enforce-ment. Equally – if not more – important is the dam-age an ethical lapse can do to an organization’s reputation and relationships. Both Sears and Beech-Nut, for instance, struggled to regain consumertrust and market share long after legal proceedingshad ended.

As more managers have become alerted to theimportance of organizational ethics, many haveasked their lawyers to develop corporate ethics pro-

grams to detect and prevent violations of the law.The 1991 Federal Sentencing Guidelines offer acompelling rationale. Sanctions such as fines andprobation for organizations convicted of wrongdo-ing can vary dramatically depending both on the de-gree of management cooperation in reporting andinvestigating corporate misdeeds and on whether ornot the company has implemented a legal compli-

ance program. (See the insert “Corporate Fines Un-der the Federal Sentencing Guidelines.”)

Such programs tend to emphasize the preventionof unlawful conduct, primarily by increasing sur-veillance and control and by imposing penalties forwrongdoers. While plans vary, the basic frameworkis outlined in the sentencing guidelines. Managersmust establish compliance standards and procedures;designate high-level personnel to oversee compli-ance; avoid delegating discretionary authority tothose likely to act unlawfully; effectively commu-nicate the company’s standards and proceduresthrough training or publications; take reasonablesteps to achieve compliance through audits, mon-itoring processes, and a system for employees to report criminal misconduct without fear of retri-bution; consistently enforce standards through ap-propriate disciplinary measures; respond appropri-ately when offenses are detected; and, finally, takereasonable steps to prevent the occurrence of simi-lar offenses in the future.

There is no question of the necessity of a sound,well-articulated strategy for legal compliance in anorganization. After all, employees can be frustratedand frightened by the complexity of today’s legalenvironment. And even managers who claim to usethe law as a guide to ethical behavior often lackmore than a rudimentary understanding of com-plex legal issues.

Managers would be mistaken, however, to regardlegal compliance as an adequate means for address-ing the full range of ethical issues that arise everyday. “If it’s legal, it’s ethical,” is a frequently heardslogan. But conduct that is lawful may be highlyproblematic from an ethical point of view. Considerthe sale in some countries of hazardous products

Acknowledging the importanceof organizational context in

ethics does not imply forgivingindividual wrongdoers.


110 HARVARD BUSINESS REVIEW March-April 1994

without appropriate warnings or the purchase ofgoods from suppliers who operate inhumane sweat-shops in developing countries. Companies engagedin international business often discover that con-duct that infringes on recognized standards of hu-man rights and decency is legally permissible insome jurisdictions.

Legal clearance does not certify the absence ofethical problems in the United States either, as a1991 case at Salomon Brothers illustrates. Four top-level executives failed to take appropriate actionwhen learning of unlawful activities on the govern-ment trading desk. Company lawyers found no lawobligating the executives to disclose the impropri-eties. Nevertheless, the executives’ delay in dis-closing and failure to reveal their prior knowledge

prompted a serious crisis of confidence among em-ployees, creditors, shareholders, and customers.The executives were forced to resign, having lostthe moral authority to lead. Their ethical lapsecompounded the trading desk’s legal offenses, andthe company ended up suffering losses – includinglegal costs, increased funding costs, and lost busi-ness – estimated at nearly $1 billion.

A compliance approach to ethics also overem-phasizes the threat of detection and punishment inorder to channel behavior in lawful directions. Theunderlying model for this approach is deterrencetheory, which envisions people as rational maxi-mizers of self-interest, responsive to the personalcosts and benefits of their choices, yet indifferent tothe moral legitimacy of those choices. But a recent

Corporate Fines Under the Federal Sentencing Guidelines

What size fine is a corporation likely to pay if con-victed of a crime? It depends on a number of factors,some of which are beyond a CEO’s control, such as theexistence of a prior record of similar misconduct. Butit also depends on more controllable factors. The mostimportant of these are reporting and accepting respon-sibility for the crime, cooperating with authorities,and having an effective program in place to preventand detect unlawful behavior.

The following example, based on a case studied bythe United States Sentencing Commission, showshow the 1991 Federal Sentencing Guidelines have af-fected overall fine levels and how managers’ actionsinfluence organizational fines.

Acme Corporation was chargedand convicted of mail fraud.The company systematicallycharged customers who dam-aged rented automobiles morethan the actual cost of repairs.Acme also billed some cus-tomers for the cost of repairs tovehicles for which they werenot responsible. Prior to thecriminal adjudication, Acmepaid $13.7 million in restitutionto the customers who had beenovercharged.

Deciding before the enact-ment of the sentencing guide-lines, the judge in the criminalcase imposed a fine of $6.85million, roughly half the pecu-niary loss suffered by Acme’s

customers. Under the sentencing guidelines, however,the results could have been dramatically different.Acme could have been fined anywhere from 5% to200% the loss suffered by customers, depending onwhether or not it had an effective program to preventand detect violations of law and on whether or not itreported the crime, cooperated with authorities, andaccepted responsibility for the unlawful conduct. If ahigh ranking official at Acme were found to have beeninvolved, the maximum fine could have been as largeas $54,800,000 or four times the loss to Acme cus-tomers. The following chart shows a possible range offines for each situation:

What Fine Can Acme Expect?

Maximum Minimum

Program, reporting,cooperation, responsibility

Program only

No program, no reportingno cooperation, no responsibility

$2,740,000

10,960,000

27,400,000

$685,000

5,480,000

13,700,000

Based on Case No.: 88-266, United States Sentencing Commission, Supplementary Report on Sentencing Guidelines for Organizations.

No program, no reportingno cooperation, no responsibility, involvement of high-level personnel

54,800,000 27,400,000




study reported in Why People Obey the Law byTom R. Tyler shows that obedience to the law isstrongly influenced by a belief in its legitimacy andits moral correctness. People generally feel thatthey have a strong obligation to obey the law. Edu-cation about the legal standards and a supportiveenvironment may be all that’s required to insurecompliance.

Discipline is, of course, a necessary part of anyethical system. Justified penalties for the infringe-ment of legitimate norms are fair and appropriate. Some people do needthe threat of sanctions. However, anoveremphasis on potential sanctionscan be superfluous and even counter-productive. Employees may rebelagainst programs that stress penal-ties, particularly if they are designedand imposed without employee in-volvement or if the standards arevague or unrealistic. Managementmay talk of mutual trust when unveiling a compli-ance plan, but employees often receive the messageas a warning from on high. Indeed, the more skepti-cal among them may view compliance programs asnothing more than liability insurance for seniormanagement. This is not an unreasonable conclu-sion, considering that compliance programs rarelyaddress the root causes of misconduct.

Even in the best cases, legal compliance is un-likely to unleash much moral imagination or com-mitment. The law does not generally seek to in-spire human excellence or distinction. It is no guidefor exemplary behavior – or even good practice.Those managers who define ethics as legal compli-ance are implicitly endorsing a code of moral medi-ocrity for their organizations. As Richard Breeden,former chairman of the Securities and ExchangeCommission, noted, “It is not an adequate ethicalstandard to aspire to get through the day withoutbeing indicted.”

Integrity as a Governing EthicA strategy based on integrity holds organizations

to a more robust standard. While compliance isrooted in avoiding legal sanctions, organizationalintegrity is based on the concept of self-governancein accordance with a set of guiding principles. Fromthe perspective of integrity, the task of ethics man-agement is to define and give life to an organiza-tion’s guiding values, to create an environment thatsupports ethically sound behavior, and to instill asense of shared accountability among employees.The need to obey the law is viewed as a positive as-

pect of organizational life, rather than an unwel-come constraint imposed by external authorities.

An integrity strategy is characterized by a con-ception of ethics as a driving force of an enterprise.Ethical values shape the search for opportunities,the design of organizational systems, and the de-cision-making process used by individuals andgroups. They provide a common frame of referenceand serve as a unifying force across different func-tions, lines of business, and employee groups. Orga-

nizational ethics helps define what a company isand what it stands for.

Many integrity initiatives have structural fea-tures common to compliance-based initiatives: acode of conduct, training in relevant areas of law,mechanisms for reporting and investigating poten-tial misconduct, and audits and controls to insurethat laws and company standards are being met. Inaddition, if suitably designed, an integrity-basedinitiative can establish a foundation for seeking thelegal benefits that are available under the sentenc-ing guidelines should criminal wrongdoing occur.(See the insert “The Hallmarks of an Effective In-tegrity Strategy.”)

But an integrity strategy is broader, deeper, andmore demanding than a legal compliance initiative.Broader in that it seeks to enable responsible con-duct. Deeper in that it cuts to the ethos and operat-ing systems of the organization and its members,their guiding values and patterns of thought and ac-tion. And more demanding in that it requires an active effort to define the responsibilities and aspi-rations that constitute an organization’s ethicalcompass. Above all, organizational ethics is seen asthe work of management. Corporate counsel mayplay a role in the design and implementation of in-tegrity strategies, but managers at all levels andacross all functions are involved in the process. (Seethe chart, “Strategies for Ethics Management.”)

During the past decade, a number of companieshave undertaken integrity initiatives. They vary ac-cording to the ethical values focused on and the im-plementation approaches used. Some companiesfocus on the core values of integrity that reflect ba-

Management may talk of mutualtrust when unveiling a

compliance plan, but employeesoften see a warning from on high.



sic social obligations, such as respect for the rightsof others, honesty, fair dealing, and obedience to thelaw. Other companies emphasize aspirations – val-ues that are ethically desirable but not necessarilymorally obligatory – such as good service to cus-tomers, a commitment to diversity, and involve-ment in the community.

When it comes to implementation, some com-panies begin with behavior. Following Aristotle’sview that one becomes courageous by acting as acourageous person, such companies develop codesof conduct specifying appropriate behavior, alongwith a system of incentives, audits, and controls.Other companies focus less on specific actions andmore on developing attitudes, decision-makingprocesses, and ways of thinking that reflect theirvalues. The assumption is that personal commit-ment and appropriate decision processes will leadto right action.

Martin Marietta, NovaCare, and Wetherill Asso-ciates have implemented and lived with quite dif-

ferent integrity strategies. In each case, manage-ment has found that the initiative has made impor-tant and often unexpected contributions to compet-itiveness, work environment, and key relationshipson which the company depends.

Martin Marietta: Emphasizing Core Values

Martin Marietta Corporation, the U.S. aerospaceand defense contractor, opted for an integrity-basedethics program in 1985. At the time, the defense in-dustry was under attack for fraud and mismanage-ment, and Martin Marietta was under investigationfor improper travel billings. Managers knew theyneeded a better form of self-governance but wereskeptical that an ethics program could influencebehavior. “Back then people asked, ‘Do you reallyneed an ethics program to be ethical?’” recalls cur-rent President Thomas Young. “Ethics was some-thing personal. Either you had it, or you didn’t.”

The Hallmarks of an Effective Integrity Strategy

There is no one right integrity strategy. Factors suchas management personality, company history, culture,lines of business, and industry regulations must betaken into account when shaping an appropriate set ofvalues and designing an implementation program.Still, several features are common to efforts that haveachieved some success:� The guiding values and commitments make senseand are clearly communicated. They reflect impor-tant organizational obligations and widely shared as-pirations that appeal to the organization’s members.Employees at all levels take them seriously, feel com-fortable discussing them, and have a concrete under-standing of their practical importance. This does notsignal the absence of ambiguity and conflict but a will-ingness to seek solutions compatible with the frame-work of values.� Company leaders are personally committed, credi-ble, and willing to take action on the values they es-pouse. They are not mere mouthpieces. They are will-ing to scrutinize their own decisions. Consistency onthe part of leadership is key. Waffling on values willlead to employee cynicism and a rejection of the pro-gram. At the same time, managers must assume re-sponsibility for making tough calls when ethical obli-gations conflict.� The espoused values are integrated into the normalchannels of management decision making and are re-flected in the organization’s critical activities: the de-

velopment of plans, the setting of goals, the search foropportunities, the allocation of resources, the gather-ing and communication of information, the measure-ment of performance, and the promotion and advance-ment of personnel. � The company’s systems and structures support andreinforce its values. Information systems, for exam-ple, are designed to provide timely and accurate infor-mation. Reporting relationships are structured tobuild in checks and balances to promote objectivejudgment. Performance appraisal is sensitive to meansas well as ends.� Managers throughout the company have the deci-sion-making skills, knowledge, and competenciesneeded to make ethically sound decisions on a day-to-day basis. Ethical thinking and awareness must bepart of every managers’ mental equipment. Ethics ed-ucation is usually part of the process.

Success in creating a climate for responsible andethically sound behavior requires continuing effortand a considerable investment of time and resources.A glossy code of conduct, a high-ranking ethics officer,a training program, an annual ethics audit – these trap-pings of an ethics program do not necessarily add up to a responsible, law-abiding organization whose es-poused values match its actions. A formal ethics pro-gram can serve as a catalyst and a support system, butorganizational integrity depends on the integration ofthe company’s values into its driving systems.




The corporate general counsel played a pivotalrole in promoting the program, and legal compli-ance was a critical objective. But it was conceivedof and implemented from the start as a company-wide management initiative aimed at creating andmaintaining a “do-it-right” climate. In its originalconception, the program emphasized core values,such as honesty and fair play. Over time, it expand-ed to encompass quality and environmental respon-sibility as well.

Today the initiative consists of a code of conduct,an ethics training program, and procedures for re-porting and investigating ethical concerns withinthe company. It also includes a system for disclos-

ing violations of federal procurement law to thegovernment. A corporate ethics office manages theprogram, and ethics representatives are stationed atmajor facilities. An ethics steering committee,made up of Martin Marietta’s president, senior ex-ecutives, and two rotating members selected fromfield operations, oversees the ethics office. The au-dit and ethics committee of the board of directorsoversees the steering committee.

The ethics office is responsible for responding toquestions and concerns from the company’s em-ployees. Its network of representatives serves as asounding board, a source of guidance, and a channelfor raising a range of issues, from allegations of

Strategies for Ethics Management

conformity with externally imposed standards

prevent criminal misconduct

lawyer driven

education, reduced discretion, auditing and controls, penalties

autonomous beings guided by material self-interest

Ethos

Objective

Leadership

Methods

BehavioralAssumptions

self-governance according to chosen standards

enable responsible conduct

management driven with aid of lawyers, HR, others

education, leadership, accountability, organizational systems and decision processes, auditing and controls, penalties

social beings guided by material self-interest, values, ideals, peers

Ethos

Objective

Leadership

Methods

BehavioralAssumptions

Characteristics of Compliance Strategy Characteristics of Integrity Strategy

criminal and regulatory law

lawyers

develop compliance standardstrain and communicatehandle reports of misconductconduct investigationsoversee compliance auditsenforce standards

compliance standards and system

Standards

Staffing

Activities

Education

company values and aspirationssocial obligations, including law

executives and managers with lawyers, others

lead development of company values and standards train and communicateintegrate into company systemsprovide guidance and consultationassess values performanceidentify and resolve problemsoversee compliance activities

decision making and valuescompliance standards and system

Standards

Staffing

Activities

Education

Implementation of Compliance Strategy Implementation of Integrity Strategy




wrongdoing to complaints about poor manage-ment, unfair supervision, and company policies andpractices. Martin Marietta’s ethics network, whichaccepts anonymous complaints, logged over 9,000calls in 1991, when the company had about 60,000employees. In 1992, it investigated 684 cases. Theethics office also works closely with the human re-sources, legal, audit, communications, and securityfunctions to respond to employee concerns.

Shortly after establishing the program, the com-pany began its first round of ethics training for theentire workforce, starting with the CEO and seniorexecutives. Now in its third round, training for se-nior executives focuses on decision making, thechallenges of balancing multiple responsibilities,and compliance with laws and regulations criticalto the company. The incentive compensation planfor executives makes responsibility for promotingethical conduct an explicit requirement for rewardeligibility and requires that business and personalgoals be achieved in accordance with the compa-ny’s policy on ethics. Ethical conduct and supportfor the ethics program are also criteria in regularperformance reviews.

Today top-level managers say the ethics programhas helped the company avoid serious problemsand become more responsive to its more than90,000 employees. The ethics network, whichtracks the number and types of cases and com-plaints, has served as an early warning system forpoor management, quality and safety defects, racialand gender discrimination, environmental con-cerns, inaccurate and false records, and personnelgrievances regarding salaries, promotions, and lay-offs. By providing an alternative channel for raisingsuch concerns, Martin Marietta is able to take cor-rective action more quickly and with a lot less pain.In many cases, potentially embarrassing problemshave been identified and dealt with before becom-ing a management crisis, a lawsuit, or a criminal investigation. Among employees who brought com-plaints in 1993, 75% were satisfied with the results.

Company executives are also convinced that theprogram has helped reduce the incidence of mis-conduct. When allegations of misconduct do sur-face, the company says it deals with them moreopenly. On several occasions, for instance, MartinMarietta has voluntarily disclosed and made resti-tution to the government for misconduct involvingpotential violations of federal procurement laws. Inaddition, when an employee alleged that the com-pany had retaliated against him for voicing safetyconcerns about his plant on CBS news, top manage-ment commissioned an investigation by an outsidelaw firm. Although failing to support the allega-

Martin Marietta’sethics trainingprogram teachessenior executiveshow to balanceresponsibilities.



tions, the investigation found that employees at theplant feared retaliation when raising health, safety,or environmental complaints. The company redou-bled its efforts to identify and discipline those em-ployees taking retaliatory action and stressed thedesirability of an open work environment in itsethics training and company communications.

Although the ethics program helps Martin Mari-etta avoid certain types of litigation, it has occa-sionally led to other kinds of legal action. In a fewcases, employees dismissed for violating the code ofethics sued Martin Marietta, arguing that the com-pany had violated its own code by imposing unfairand excessive discipline.

Still, the company believes that itsattention to ethics has been worth it.The ethics program has led to betterrelationships with the government,as well as to new business oppor-tunities. Along with prices and tech-nology, Martin Marietta’s record ofintegrity, quality, and reliability ofestimates plays a role in the award-ing of defense contracts, which ac-count for some 75% of the company’s revenues. Ex-ecutives believe that the reputation they’ve earnedthrough their ethics program has helped them buildtrust with government auditors, as well. By open-ing up communications, the company has reducedthe time spent on redundant audits.

The program has also helped change employees’perceptions and priorities. Some managers comparetheir new ways of thinking about ethics to the waythey understand quality. They consider more care-fully how situations will be perceived by others, thepossible long-term consequences of short-termthinking, and the need for continuous improve-ment. CEO Norman Augustine notes, “Ten yearsago, people would have said that there were no ethi-cal issues in business. Today employees think theirnumber-one objective is to be thought of as decentpeople doing quality work.”

NovaCare: Building Shared Aspirations

NovaCare Inc., one of the largest providers of rehabilitation services to nursing homes and hos-pitals in the United States, has oriented its ethicseffort toward building a common core of shared aspirations. But in 1988, when the company wascalled InSpeech, the only sentiment shared wasmutual mistrust.

Senior executives built the company from a se-ries of aggressive acquisitions over a brief period of

time to take advantage of the expanding market for therapeutic services. However, in 1988, the vi-ability of the company was in question. Turnoveramong its frontline employees – the clinicians andtherapists who care for patients in nursing homesand hospitals – escalated to 57% per year. The com-pany’s inability to retain therapists caused cus-tomers to defect and the stock price to languish inan extended slump.

After months of soul-searching, InSpeech execu-tives realized that the turnover rate was a symptomof a more basic problem: the lack of a common setof values and aspirations. There was, as one execu-

tive put it, a “huge disconnect” between the valuesof the therapists and clinicians and those of themanagers who ran the company. The therapists andclinicians evaluated the company’s success interms of its delivery of high-quality health care. In-Speech management, led by executives with finan-cial services and venture capital backgrounds, mea-sured the company’s worth exclusively in terms offinancial success. Management’s single-mindedemphasis on increasing hours of reimbursable careturned clinicians off. They took management’s per-formance orientation for indifference to patientcare and left the company in droves.

CEO John Foster recognized the need for a com-mon frame of reference and a common language tounify the diverse groups. So he brought in consul-tants to conduct interviews and focus groups withthe company’s health care professionals, managers,and customers. Based on the results, an employeetask force drafted a proposed vision statement forthe company, and another 250 employees suggestedrevisions. Then Foster and several senior managersdeveloped a succinct statement of the company’sguiding purpose and fundamental beliefs that couldbe used as a framework for making decisions andsetting goals, policies, and practices.

Unlike a code of conduct, which articulates spe-cific behavioral standards, the statement of vision,purposes, and beliefs lays out in very simple termsthe company’s central purpose and core values. Thepurpose – meeting the rehabilitation needs of pa-

At NovaCare, executives definedorganizational values and

introduced structural changes to support those values.



tients through clinical leadership – is supported byfour key beliefs: respect for the individual, serviceto the customer, pursuit of excellence, and commit-ment to personal integrity. Each value is discussedwith examples of how it is manifested in the day-to-day activities and policies of the company, suchas how to measure the quality of care.

To support the newly defined values, the compa-ny changed its name to NovaCare and introduced anumber of structural and operational changes. Fieldmanagers and clinicians were given greater deci-sion-making authority; clinicians were providedwith additional resources to assist in the delivery ofeffective therapy; and a new management structureintegrated the various therapies offered by the com-pany. The hiring of new corporate personnel withhealth care backgrounds reinforced the company’snew clinical focus.

The introduction of the vision, purpose, and be-liefs met with varied reactions from employees,ranging from cool skepticism to open enthusiasm.One employee remembered thinking the talk aboutvalues “much ado about nothing.” Another re-called, “It was really wonderful. It gave us a goalthat everyone aspired to, no matter what their placein the company.” At first, some were baffled abouthow the vision, purpose, and beliefs were to be

used. But, over time, managers became more adeptat explaining and using them as a guide. When acustomer tried to hire away a valued employee, forexample, managers considered raiding the custom-er’s company for employees. After reviewing thebeliefs, the managers abandoned the idea.

NovaCare managers acknowledge and companysurveys indicate that there is plenty of room for im-provement. While the values are used as a firm ref-erence point for decision making and evaluation insome areas of the company, they are still viewedwith reservation in others. Some managers do not“walk the talk,” employees complain. And recentlyacquired companies have yet to be fully integratedinto the program. Nevertheless, many NovaCareemployees say the values initiative played a criticalrole in the company’s 1990 turnaround.

The values reorientation also helped the com-pany deal with its most serious problem: turnoveramong health care providers. In 1990, the turnoverrate stood at 32%, still above target but a signifi-cant improvement over the 1988 rate of 57%. By1993, turnover had dropped to 27%. Moreover, re-cruiting new clinicians became easier. Barely ableto hire 25 new clinicians each month in 1988, thecompany added 776 in 1990 and 2,546 in 1993. In-deed, one employee who left during the 1988 tur-

At NovaCare,clinicians tookmanagement’sperformanceorientation forindifference topatient care and leftthe company indroves.




moil said that her decision to return in 1990 hingedon the company’s adoption of the vision, purpose,and beliefs.

Wetherill Associates: Defining Right Action

Wetherill Associates, Inc. – a small, privatelyheld supplier of electrical parts to the automotivemarket – has neither a conventional code of con-duct nor a statement of values. Instead, WAI has aQuality Assurance Manual – a combination of phi-losophy text, conduct guide, technical manual, andcompany profile – that describes the company’scommitment to honesty and its guiding principle of right action.

WAI doesn’t have a corporate eth-ics officer who reports to top man-agement, because at WAI, the com-pany’s corporate ethics officer is topmanagement. Marie Bothe, WAI’schief executive officer, sees her main function as keeping the 350-employee company on the path ofright action and looking for oppor-tunities to help the community. Shedelegates the “technical” aspects ofthe business – marketing, finance, personnel, opera-tions – to other members of the organization.

Right action, the basis for all of WAI’s decisions,is a well-developed approach that challenges mostconventional management thinking. The companyexplicitly rejects the usual conceptual boundariesthat separate morality and self-interest. Instead,they define right behavior as logically, expediently,and morally right. Managers teach employees tolook at the needs of the customers, suppliers, andthe community – in addition to those of the compa-ny and its employees – when making decisions.

WAI also has a unique approach to competition.One employee explains, “We are not ‘in competi-tion’ with anybody. We just do what we have to doto serve the customer.” Indeed, when occasionallyunable to fill orders, WAI salespeople refer cus-tomers to competitors. Artificial incentives, suchas sales contests, are never used to spur individualperformance. Nor are sales results used in deter-mining compensation. Instead, the focus is onteamwork and customer service. Managers tell allnew recruits that absolute honesty, mutual cour-tesy, and respect are standard operating procedure.

Newcomers generally react positively to compa-ny philosophy, but not all are prepared for such aradical departure from the practices they haveknown elsewhere. Recalling her initial interview,

one recruit described her response to being told thatlying was not allowed, “What do you mean? No ly-ing? I’m a buyer. I lie for a living!” Today she is per-suaded that the policy makes sound business sense.WAI is known for informing suppliers of overship-ments as well as undershipments and for scrupu-lous honesty in the sale of parts, even when decep-tion cannot be readily detected.

Since its entry into the distribution business 13years ago, WAI has seen its revenues climb steadilyfrom just under $1 million to nearly $98 million in1993, and this in an industry with little growth.Once seen as an upstart beset by naysayers and in-dustry skeptics, WAI is now credited with enteringand professionalizing an industry in which kick-backs, bribes, and “gratuities” were commonplace.

Employees – equal numbers of men and womenranging in age from 17 to 92 – praise the work envi-ronment as both productive and supportive.

WAI’s approach could be difficult to introduce ina larger, more traditional organization. WAI is asmall company founded by 34 people who shared abelief in right action; its ethical values were natu-rally built into the organization from the start.Those values are so deeply ingrained in the compa-ny’s culture and operating systems that they havebeen largely self-sustaining. Still, the company hasdeveloped its own training program and takes spe-cial care to hire people willing to support right ac-tion. Ethics and job skills are considered equallyimportant in determining an individual’s compe-tence and suitability for employment. For WAI, thechallenge will be to sustain its vision as the compa-ny grows and taps into markets overseas.

At WAI, as at Martin Marietta and NovaCare, a management-led commitment to ethical valueshas contributed to competitiveness, positive work-force morale, as well as solid sustainable relation-ships with the company’s key constituencies. Inthe end, creating a climate that encourages exem-plary conduct may be the best way to discouragedamaging misconduct. Only in such an environ-ment do rogues really act alone.Reprint 94207

Creating an organization thatencourages exemplary conductmay be the best way to prevent

damaging misconduct.


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