- Recent controversy at Berkshire Hathaway demonstrates the blurred line between legitimate business and unethical decisions
- Companies headquartered in the U.S. encounter ethical dilemmas when conducting business in countries with more relaxed ethical standards
- Managers must be clear, firm, and transparent when communicating ethical policies to employees
Substantial ethical questions recently arose following the departure of Berkshire Hathaway executive David Sokol. As you may recall, he bought $10 million worth of Lubrizol stock shortly before convincing his boss, Warren Buffet, to purchase the company. The subsequent bump in the stock’s value netted Sokol $3 million in about two months.
Defining business ethics is hard because unlike laws, which are written down and usually predictable in application, ethics are norms that have evolved from our religious and cultural heritage and are interpreted endlessly.
In an excellent article he wrote for the Harvard Business Review, Sir Adrian Cadbury, former chairman of Cadbury Schweppes PLC, explained, “The possibility that ethical and commercial considerations will conflict has always faced those who run companies.” He continued: “There is no simple, universal formula for solving ethical problems. We have to choose from our own codes of conduct whichever rules are appropriate to the case in hand; the outcome of those choices makes us who we are.”
So when does an innocent stock purchase cross the line into a questionable decision that conflicts with ethical standards?
The potential conflict is more complicated when a company that is headquartered in a country with a strong ethics culture conducts business in another where ethical standards are more relaxed. The company’s U.S. management may require strict compliance with American laws and ethics. But employees working overseas are hard-put to get the license or the contract without spreading around money.
How do we establish a climate fostering ethical behavior?
- Clearly it is the duty of a leader to commit to high ethical standards. This standard should be clear and communicated to all employees. They should know that management will support employees who adhere to them. It will fire those who don’t.
- Require that payments made in support of obtaining business are disclosed to management beforehand. If the act of the employee won’t embarrass the company if disclosed, it should pass muster. But wouldn’t it embarrass the corporation if the public knew that a civil servant key to obtaining a license was given an all-expenses-paid trip to a luxurious vacation spot?
- Name a senior corporate officer — the general counsel or the general auditor — with whom employees can confer in confidence when ethical questions arise.
- Require that the ethics policy be read and acknowledged in writing by every new employee. Each employee should renew that reading and acknowledgment annually. Supplementary reading materials and online discussions are useful.
While an officer at INA Corporation (now CIGNA), I worked on a small team to develop a conflicts of interest policy, which covered ethical behavior. Here are a few key elements:
- No employee could accept a gift for himself or a family member that goes beyond common courtesies associated with business practices. (Management put a low dollar value on those gifts.)
- No employee could:
- Work for another company.
- Own a significant financial interest in another company where the employee’s independent exercise of judgment might be conflicted. (Arguably, here is where Mr. Sokol would have failed the standards of the policy.)
- Act as a director, officer, consultant, funder, or promoter for a non-INA entity.
I haven’t yet provided guidance about how to do business in a country with ethical standards different from our own. Here’s how two companies I worked for handled this situation.
At one company, there was an ironclad prohibition on paying bribes overseas. There were three reasons for this: It was against the company’s ethical policy; it was against federal law; and on a practical level, once a bribe is paid, ongoing payments are always expected. During my years at this company, several people were fired for violations.
At another company, we were setting up operations in countries where payoffs were expected. The company had the same rules as the first, but a way to get the job done was found by hiring well-connected local professionals as consultants, usually influential businessmen or attorneys. Although advised of the company policy, management never knew if they used their fees to facilitate approvals.
The United Kingdom is about to take a different approach. In soon-to-be published guidelines defining acceptable hospitality, conduct in an overseas subsidiary won’t necessarily be governed by conflicts of interest laws in the U.K. Critics say this will permit bribes. Supporters say it is a practical solution. The courts will interpret.
These issues are tough. I’ve but scratched the surface. The business writer Mark Pastin has written of “the ethical superiority of the uninvolved.” It’s easy for those not in the game to criticize those who are.
My advice is to take the high road. As a friend of mine, a retired senior IBM executive, told me that the sure way to get fired on completion of the company’s probationary period was for violation of the company’s ethics policy. What could be clearer?