1. © Lynn Sharp Paine, 2002 Performing at a Higher Level – Building Your Company’s Ethical Competency Professor Lynn Sharp Paine John G. McLean Professor of Business Administration Harvard Business School Leadership Forum 2002 – Ethical Challenges for Business and Government Leaders ICAC, Hong Kong, December 12th, 2002

2. © Lynn Sharp Paine, 2002 Ethics as a corporate priority  On July 9, 2002, U.S. President Bush declared that “America’s greatest economic need is higher ethical standards.”  In August 2002, the New York Stock Exchange proposed that listed companies be required to adopt and disclose codes of business ethics and conduct.  In April 2002, an advisory panel to Japan’s prime minister called on companies to adopt codes of behavior to restore consumer confidence in business.  In March 2002 the Swedish government launched an initiative to promote a higher ethical standard and greater social responsibility among Swedish companies.

3. © Lynn Sharp Paine, 2002 Ethics as a corporate priority  In 2001, European Commission green paper proposing a European framework for corporate social responsibility.  In 2000, London Stock Exchange began to require that listed companies disclose whether they have policies for managing significant risks, including legal, health, safety, environmental, reputation, and business probity risks.  In 2000, the OECD issued a revised set of ethical guidelines for multinational companies.  In 1999, the UN Secretary-General called on leading companies worldwide to adopt a set of guiding principles for corporate social responsibility.

4. © Lynn Sharp Paine, 2002 Departing from a long tradition  13 th century: Pope Innocent IV –as “fictional persons” lacking body and soul, corporations cannot be punished  17 th century: Sir Edward Coke, Chief Justice, King’s Bench –as “fictional persons” lacking a soul, corporations cannot commit treason, be outlawed, or excommunicated  18 th century: Edward Thurlow, First Baron, Lord Chancellor –as “fictional persons,” corporations have neither “pants to kick” nor a “soul to damn”  19 th century: Chief Justice John Marshall –as “artificial beings,” corporations have only those properties conferred by charter of creation  20 th century: Nobel Economist Milton Friedman –as “artificial persons,” corporations cannot have “real” responsibilities The corporation as amoral …

5. © Lynn Sharp Paine, 2002 Differing perceptions Self Perception Ethical Leader Others’ Perception Ethical Neutral Leader vs. Source: Linda Klebe Treviño, Laura Pincus Hartman, Michael Brown, California Management Review, vol. 42, no. 4 (Summer 2000).

6. © Lynn Sharp Paine, 2002 How do employees perceive management?  Do your CEO and other senior managers know what type of behavior goes on in the company?  Are your CEO and other senior managers approachable if an employee needs to deliver bad news?  Would your CEO or other senior managers authorize illegal or unethical conduct to meet business goals?  Would your CEO and other senior managers respond appropriately if they became aware of misconduct? Source: KPMG, 2000 Organizational Integrity Survey Summary (2,390 employees in selected industries).

7. © Lynn Sharp Paine, 2002 Employees’ perceptions of management  Only 43% believe their executives know what type of behavior goes on.  Only 45% believe their executives are approachable with bad news.  Only 62% believe their executives would not authorize illegal or unethical behavior.  Only 64% believe their executives would respond appropriately if they became aware of misconduct. Source: KPMG, 2000 Organizational Integrity Survey Summary (2,390 employees in selected industries).

8. © Lynn Sharp Paine, 2002 Managing corporate values – 1995 Forbes 500 Companies (237 respondents): Source: Patrick E. Murphy, “Corporate Ethics Statements: Current Status and Future Prospects,” Journal of Business Ethics 14: 727-740 (1995). Code of Ethics Values Statement Corporate Credo All Three Documents 82% 83% 81% 91% 53% 34% 49 cos. Revised in ‘90s 15.5% 8.0% 22.0% 18.5% 51.0% 41.0% Date Introduced >20 yrs.< 5 yrs.

9. © Lynn Sharp Paine, 2002 Origins of misconduct  individual wrongdoing  good people with –insufficient knowledge and awareness –inadequate job skills –lacking prudence, judgment, courage  management and organizational design –misaligned management systems –inadequate information flows –perceived management indifference  social and institutional context –inadequate legal and regulatory framework –pressures from unethical customers, competitors

10. © Lynn Sharp Paine, 2002 Points of view House member: Firestone exec: “So you looked at it from a financial point of view and not a consumer safety point of view? I’m sorry to say that I believe that is the case.” Source: Congressional Hearings, U.S. House of Representatives, September 6, 2000.

11. © Lynn Sharp Paine, 2002 The manager’s compass

12. © Lynn Sharp Paine, 2002 Performing at a higher level  Adequacy of standards and policies  Adequacy of decision models and criteria  Suitability of organizational structures, systems, processes  Suitability of performance measures and incentives  Suitability of prevailing habits and attitudes  Adequacy of leadership models and competencies Some implications: