Business ethics for unseasoned entrepreneurs: trends and concerns for professionals and stakeholders.

Boyd, Michael W.

ABSTRACT

This manuscript looks at the importance of ethical behavior and decision-making in today's business operations. It points out who is involved and some of the ramifications of unethical business dealings over time. Ethical standards are entwined throughout our companies today no matter what their size. It is imperative that young entrepreneurs understand how some of society's accepted actions have evolved over time and the problems that can arise if not checked in the early stages of start up for new businesses. To develop an organization that normally operates ethically in all of their dealings the founder needs to set the trend early in the company's life span.

INTRODUCTION

Ethics play a major role in today's "arm's length" business transactions, and in turn, those transactions play a major role in the lives of all stakeholders. Taking a closer look at today's business ethics and how each party is affected can benefit all the participants in this dynamic process. Many entrepreneurs are new or relatively new to the business world and can be somewhat naive about common business practices that have evolved over time. Questions arise such as, should a business have morality, or is that a human characteristic? Should all executives, managers, and employees answer to the same set of rules for ethical conduct? Are ethical standards the same for a person at work as they are when that person is not at work? Who is guilty if an employee performs an unethical or illegal act while working for a company? What should be done if an employee calls attention to unethical practices that are condoned by the company? Are there any correct answers or do the answers depend on the situation and circumstances? These questions and many more can be asked about ethical behavior (D'O'Brian, 1993). Recently, major unethical and/or illegal acts have been exposed in many of our corporations (Notes, 2003). This discussion will hopefully better equip our business leaders and young entrepreneurs to deal with ethical questions arising from situations in which they find themselves.

We cannot limit our discussion to "corporations" defined as large "super companies." Presently, most new businesses are created by entrepreneurs expanding into the new areas of previously unknown or undeveloped products and services. This requires that ethical standards be implemented and nurtured in all companies, regardless of size, to insure that these growing institutions--our future "super companies"--develop a corporate ethical culture compatible with valued societal ethics and the legal system in which they operate.

Budding new managers and executives should be particularly interested in business ethics and how they evolve because the honesty and integrity of the company's managerial team will directly impact its ability to successfully lead the company. Individuals and/or other companies contracting with the business for services and/or products also have a vested interest in and an impact on the ethical environment of the business. For example, a public accountant has to function independently of an organization in order to insure the integrity of findings during the audit; however, this does not mean that the auditing firm should divorce itself from a partnering association with the organization to improve ethical practices. This, in turn, enhances the audit results. In summary, management has a responsibility to the organization, the employees, the customers, and the public to operate a socially acceptable and ethical business. This is also in the best interest of all concerned. If the leadership of an organization does not practice ethical behavior and does not provide training in ethical and moral decision making for all employees, the image of the organization will be less than desirable and have less than desirable effects on its stakeholders.

WHO HAS CORPORATE ETHICS?

Ethics in business is not a new issue. In 1550 Charles V of Spain contemplated the status of the natives discovered in the New World. Should they be slaves or be assigned a higher status? Naturally, they had to be Christianized if they were going to be of any value in the known world. The ethos and mores of the Spaniards' own European society and culture did not allow them to even think about the natives as another culture of equal status. This was one of the problems discussed and argued in the 1500's, and similar problems are deliberated today with little more progress towards a solution than in the sixteenth century. Today's scholars argue about such issues as to whether or not payment should be made to third parties for the right of doing business in another country. The United States takes the stand that it is morally wrong to pay someone for the rights to trade in a foreign country or pay an individual (i.e., a purchasing agent or CEO) to award a contract to a company just because that individual has the power to do so. In the free market system, our American culture teaches us that it is not moral, ethical, or legal to bribe an employee of another company in order to gain contractual preference. However, in some societies and cultures, this type of behavior is perfectly acceptable and even expected if a company is to succeed economically. All levels of an organization must participate in ethical decision making in order to insure a truly ethical philosophy. In the current world economy with its ethnic and religious diversity and the sheer volume of daily business deals conducted among all countries, how do we establish and/or maintain an acceptable level of ethical standards? Different cultural groups across the world often have different approaches to the ethical issues generated by the world economy and its myriad transactions.

Board of Directors

The board of directors is the most powerful level of company Management--at least by the formal hierarchical standards of today's business world. If the board of directors is at the top of the hierarchy, it would seem logical that this is where the ethical behavior patterns for the corporation should be developed. Generally speaking, in today's society, it appears that the gain or loss of large sums of money is not thought to be as important as whether or not the player followed the currently perceived business rules of fair play. In Adam Smith's day, the issues were basic constructs like "level playing field," equal access to market intelligence, non-monopolistic competition, and other similar premises. Today, an organization can ethically pursue and maximize profit as long as it obeys the written rules of business, established customs of the work place, and traditions. Although legislative bodies establish rules and laws, the top echelons of corporate management establish the customs and traditions in the culture of that company. Within this system, a disturbing trend has developed. Many companies have a written code of ethics or conduct that all employees are supposed to follow; however, that compliance seems to stop just outside the boardroom door. Inside that boardroom one will find many of the top level managers of the company who are also acting as board members whose role is to monitor management; thus, they are monitoring themselves. These top managers are also acting on behalf of all the stakeholders (especially the stockholders) and other board members from outside the corporation when the latter are supposed to be watching after the interests of the stockholders. Also, these managers/executives are sitting on each other's corporate boards, somewhat as a clique, and approving major compensation packages for one another while downsizing and laying off thousands of workers in the company to save money. It's not difficult to arrive at the conclusion that the concept of "arm length's transaction" has been violated (Bavaria, 1991). This seems to produce a double standard in which workers and lower level management are required to operate under an established code of ethics while some board members ignore that code, lining their own pockets at the expense of other board members, the working class majority, and the stockholder who is the true owner of the corporation. John G. Bennett, Jr., founder and chair of Foundation for New Era Philanthropy, represents one of the most extreme cases of an unethical board member. His company had no legitimate purpose whatsoever and caused "incalculable harm" to many not-for-profit entities before his seemingly pious motives were questioned (Stecklow, 1997). Enron's Board of Directors appears to have fallen short in many areas. They were receiving minimal information on the extent of partnerships that were being formed and allowing management to report large earnings from these deals. They allowed Enron's code of ethics to be bypassed on numerous occasions in allowing some of the partnerships to be formed, and they did not follow through with their monitoring responsibilities in many cases. Many of the board members have been charged with insider trading since the company failed. They appear to have been puppets of Enron's management team, a situation which is in direct opposition to the Board of Directors charge and role in any properly operated corporation (Tongue et. al, 2003). The recent determination of insider trading with Martha Stewart and ImClone and Merrill Lynch is another example of unethical developments originating with the Board of Directors (Scannell and Rose, 2004).

Top Management

Top management's primary role in the company is strategic development. This concept seems simple enough; however, strategy must be aligned with the underlying ethical behavior of the company. The way a company conducts itself in day-to-day transactions is a distinct signal by and reflection on those involved in designing and carrying out the transactions. Since top management is responsible for setting policy and establishing formal (or informal) codes of conduct and ethical behavior, the course of strategy adopted is a direct reflection of management's behavior. This in turn signals the employees about the type of actions desired and expected of them and subjects management to close scrutiny (Lane, 1994). When management engages in deceptive practices, a signal is given to all concerned that profitization and self-interest are the main concerns. At the end of the past decade, the Chair of Texaco determined that "the tone of the conversation [by senior executives at Texaco] was still unacceptable" even though it was without direct racial slurs, and Texaco settled racial discrimination lawsuits at a cost of $176.1 million (Walsh, 1997). Denny's Restaurants were also in the news during the 1990's for discrimination violations in serving customers (Carlino, 1999), and they continue to have problems currently with hiring practices (FDCH, 2000). Without some action to alter the perceived corporate ethical culture in these companies, the discriminatory attitudes of members of top management are likely to be seen as acceptable. As companies and corporations become more unethical and morally corrupt, one of the effects is the erosion of and decline in our societal norms and values as the corporate environment "spills over" into the society.

The difference between conscience and consciousness is another confusing issue in corporate ethics. Patrick Primeaux defines these terms as follows: consciousness refers to the whole of our knowing, and conscience refers to our understanding the difference between right and wrong. When top management supports financial misrepresentation by lobbying and coercing regulators to write loose and flexible rules that allow the former to finesse and manipulate income, this signals loose ethical behavior in terms of conscience AND consciousness. Enron and others have recently come under investigation and indictment for using these loose interpretations in instances of creative accounting that are particularly convenient to income smoothing or "big bath" losses. They are more or less free to call attention to these actions or not call attention to them in the financial statements (conscience and consciousness), which again is borderline ethical behavior (Zucca and Cambell, 1992). The options of reporting or not reporting and acting or not acting in certain situations is based upon personal needs and desires for personal gain, despite the fact that top management is supposed to be a steward for the owners (stockholders) of the company. The actions of managers and board members are the basis for the evolution of corporate ethics in any company, regardless of written or unwritten rules. The people at the top of the organization set the pattern for the employees to follow and influence the corporate conscience, consciousness, and ultimately, culpability. The current upsurge in entrepreneurship is a serious reason to look at our past and present business society, and to be concerned about the role models to whom the new entrepreneurs turn for example and direction.

Middle Management

Middle management has an obligation to follow the standards and strategy established by top management. The impact of unethical behavior at this level is not quite as profound since it remains more isolated in the particular manager's section or department. However, in some cases, middle management can affect overall company behavior through indirect methods or informal cultural power that is already established within the company. (Look at the trends that Denny's Restaurant Managers have set for the chain nationwide). In most cases, they affect only their subordinates, in which case they may override the positive ethical trend running throughout the organization in general. However, in a classic case of fraud at the middle management level, H. J. Heinz reported overstated income for five years before a janitor ignored orders to burn documents and instead handed them over to the company's auditors. The pressure of meeting corporate growth targets had led managers to accelerate recognition of revenue and to juggle profits. The Wall Street Journal summarized the managers' position: "An employee often confronts a hard choice - to risk being branded incompetent by telling superiors that they ask too much or to begin taking unethical or illegal shortcuts" (Getschow, 1979). The recent, highly publicized Martha Stewart case is a good depiction of the inner dealings and friendly relations between top and middle managers in several industries who have come under investigation, been indicted and/or convicted for numerous fraudulent and unethical acts in their respective companies.

Employees

Employees' attitudes and behaviors are molded by the actions, beliefs, and values, and the moral and ethical behavior reflected by management. However, employees have attitudes and values that allow them to act independently of what may be asked or even required of them by their superiors. If the employee has a high ethical standard and resists the unethical practices of others within the company, this also can have an overall effect on the organization. If they resist, it is possible to improve the situation for others in the future. In essence they ask, "Why should a few individuals, i.e., management, be able to destroy the moral and ethical beliefs and values of an entire organization?" If an organization evolves from the people within it and their ethical values are absorbed by the corporation, the employee also has an obligation toward the corporation to maintain acceptable levels of conduct. However, in the past few decades, the problem seems to be that the level of conduct acceptable to society has moved downward. Ethical erosion in the United States was reflected in the 1970's by foreign political payoffs, price-fixing schemes, and Watergate; in the 1980's there were problems with insider trading, defense scandals, and leveraged buyouts. In the 1990s Blue Shield fell victim to document falsification by "a few misguided employees" that cost it $2.16 million in fines, and Wells Fargo Bank became associated with insurance fraud when its clerks conspired to avoid reporting cash transactions over $10,000 (Olmos, 1997). These activities, in combination with a mentality of "profit is king" and "one must do whatever is required to maintain growing industries and profits," provide the framework for declining values in the American business population. How can this course of action be stopped? Some believe that training is the answer.

HOW DO BUSINESS ETHICS AFFECT CURRENT MANAGEMENT AND ASPIRING ENTREPRENEURS?

Management may be affected in several ways by business ethics and needs to be aware of ethical expectations and the ramifications that a lack of ethics can cause. Flory et. al. (1991) performed research to determine what caused or influenced ethical behavior. If ethical behavior can be predicted in individuals, then a corporation can identify people who are more susceptible to unethical decision making. The study used moral equity, relativism, and contractualism as constructs for ethical judgments. Moral equity is described as being concerned with many forms of belief about right and wrong human behavior. Normative beliefs are expressed in general terms as 'good', 'bad', 'virtuous', and 'praiseworthy'. Relativism is concerned with guidelines, requirements, and parameters inherent within the social and cultural system rather than within the individual. Contractualism deals with the unwritten agreements supposedly held between business and society. These areas were identified as the roots for our ethical behavior, and Flory developed a scenario based instrument that could be used to measure the ethical level of specific individuals. Pre-employment screening with psychological assessments, paper and pencil honesty tests, and the evaluation of past behavior represent an attempt to predict on-job behavior (Jayne, 1994). While this research needs more development, it is a step in the direction of helping management make decisions on personnel's attitudes and reactions to specific types of situations.

Management may also be affected by ethics through legal liability issues. For example, there has been a major gap between what an auditor, retained by management, sees as reasonable in a set of financial reports and what the public and the judicial system sees as reasonable. An additional repercussion for the auditor is that anytime a corporation falls into bankruptcy, the auditor comes under suspicion first and remains there until proven innocent. The recent failure of some of our leading accounting firms stands as proof that law and accepted practice have not been within the bounds of public acceptability. Accounting firms, along with many other service and manufacturing organizations, have taken the brunt of consumer losses because of the consumer's poor judgement. It appears that American business has been singled out by juries as an easy target on which to affix blame and from whose "deep pockets" to let the public have restitution.

The ethical issues facing management were primarily in the accounting area and ultimately focused on legal liability. The accounting profession, unfortunately, bought in on management's justifications and ultimately caused the downfall of several major corporations including ones in the accounting industry. Accounting firms are particularly under tight scrutiny by both government and public stakeholders because of the recent failures of several public companies. For accounting firms to remain self regulated and retain the respect of the public for their services, they must refrain from being identified with actions or behaviors that appear to be unethical in the public's perception. There is still a fine line to walk in the gray areas that have been established by the standard setters from over the years (Lomax, 2003) even though the SEC has become more aggressive in ethical codes and the Sarbanes-Oxley Act has also stiffened the actions for unethical behavior (Notes, 2003). Legal choices do not always equal ethical choices. The standard setters left flexibility in the rules to benefit the public with the results of financial reporting--not to benefit management or self. The combination of a bull market for a number of years, which inflated company values, linked to executive pay and bonuses and a board of trustees unwilling to check the actions of management to guarantee bonuses culminated in disaster for workers and stockholders alike (Lomax, 2003).

Accounting for employee stock options encouraged but did not require the accrual of expense/liability. While this choice allowed companies to meet "best practices," many companies lobbied hard to avoid recognition of the effects of employee stock options and to only provide the minimum required disclosures (Baliga, 1995). That was changed by the Sarbanes-Oxley Act of 2002. Major companies are now required to expense stock options at the time they are issued; however, the calculations are not standardized. Other suggestions for avoiding future unethical decisions by management are 1) revising 401(k) plans to restrict the number of company shares; 2) restructuring compensation committees to include only outside personnel; 3) maximizing all types of checks and balances; 4) tying pay to performance; 5) protecting whistle-blowers; 6) re-creating the rules for checking past performance of potential employees; 7) restructuring the board of directors, and 8) taking a closer look at what the public allows to slip by under the pretense of freedom and instant gratification--particularly in the area of higher stock prices. The public must look beyond its own pocketbook in order to curtail the unethical behavior in the public domain (Lomax, 2003).

The public plays a dual role in corporate ethics much like an accountant plays a dual role in the sanctioning of flexible financial reporting standards. The public--or at least the shareholders--will benefit from profit maximization through higher stock prices and dividends, and they will lose through overly generous compensation plans for management. Stockholders can also benefit by devious or "loose" reporting standards which circumvent loan and bond restrictions. Many times the bond holders lose on these deals also. Supposedly, the auditor protects the public; in many cases, the public demand for higher stock prices and dividends is the driving force for management to represent the corporation with "loose" financial reporting and pressure the accounting firm to attest to its validity. The question of ethics becomes very difficult to deal with when society's perception of what is fair and legal in business has become questionable. It doesn't have to be that way. When Coca Cola's Robert Goizueta died, his legacy was seen not only in the increase in shareholder value he created for his company, but in the trees planted, free manned clinics established, parks built, museums funded, and college buildings built by Coca Cola shareholders who used the wealth created in Coca Cola shares to benefit their community (Keller, 1997).

WHERE DO WE GO FROM HERE?

The trends in corporate ethics over the past few decades have not been encouraging in the U.S. It seems that large corporations are taking more and more advantage of the system for several reasons. They are trying to maximize profit in any way that gives them an advantage; whether the conduct is ethical or legal is not an issue as long as they do not get caught. Profit maximization is being intensely stressed by management to increase their compensation and by stockholders to increase their wealth through dividends and increased stock value. Neither party is directly concerned with the overall future health of the firm because both feel they have other alternatives if the corporation begins to falter. The emphasis is on self in both cases.

Schweikart (1992) outlines three levels of ethics that can be used to describe business attitudes today. They are listed below hierarchically starting with the lowest level:

1) All decisions are governed by legally binding rules and statutes.

2) Decisions are made in the context of an ethical code of conduct but are not totally bound by that code.

3) Decisions are made in a highly defined sense of right and wrong, which is developed through moral and philosophical deduction.

Even though we have entered the 21st century, these levels still hold true for our society. Most business continues to be conducted on level one even after all the scandals from Enron, WorldCom, Tyco International, and the list goes on. To raise the level of ethics to the higher level dealing with moral and philosophical deduction is the challenge confronting American business and the newly developing international trade arena. To be successful in this endeavor we must concentrate on the individual more than the corporation as a whole. As stated earlier, the corporation is simply an extension of the collectivity of its people. Primeaux (1992) states:

A company which claims to be ethical, but which has not promoted good ethical practices either within the organization or among its suppliers, customers, or shareholders will lose credibility in the long and short term as the chickens come home to roost.

He claims that a corporation will evolve in much the same way as an individual in relation to ethics. Therefore, if poor ethical conditions are created during the formation of the corporation, it stands to reason they will be difficult to change in the future. This is a primary reason for insuring that our new generation of entrepreneurs understands the decline that our nation's ethics have experienced in order for the new super companies of the future to regain a standard of which we, as Americans, can be proud.

Can training within the company correct all of the unethical behavior that pervades today's corporate world? Most people think that ethical behavior is formed in an individual at an early age and cannot be changed once a person has reached maturity. In fact, Peter Arlow (1991) suggests that age may be the most important factor in the role of Machiavellian tendencies (unscrupulous uses of political power). If so, training at this late date will not correct all of the occurrences of unethical behavior in business transactions in today's business world. However, not all employees are ethically unsound. Perhaps exposure to hypothetical situations of unethical behavior and suggestions on how to react would be helpful to those who are unaccustomed to dealing with these types of situations. The Treadway Commission has encouraged universities to incorporate ethical behavior training into their courses. Sometimes though, even "immersion" in ethical thought does not prevent disaster: Arthur Anderson developed educational materials on accounting ethics, held conferences and seminars that dealt with ethical behavior, and then became entangled with the Enron scandal (Loeb, 1991). Although training may not be able to change a person's ethics, it will make ethical people aware of situations where ethics are important.

In closing, consider what managers need to observe about a company prior to assuming a new position. The organization should have an established control system to deter unethical practices. The manager should be concerned with more than the financial health of the company. The underlying organizational culture should be of great importance to any employee whether worker or management. The new employee should check risk assessment in regard to management's attitude towards integrity and ethical behaviors and employee commitment to that attitude. The employee should watch specifically for areas that might be vulnerable to unethical manipulation such as accounting records, purchasing, environmental and safety issues, lobbying activities, human resources, and discretionary product information. If the corporation is truly conscientious, it will have a training program that includes a segment on ethical behavior for those situations that are not clearly defined as right or wrong (Sears, 1993). Trends in good ethical behavior have declined in business in the past few decades; to rectify the situation will require a concerted effort to reestablish personal beliefs and values that can once again look past self interest. Our current generation of entrepreneurs should understand the importance of the values and ethics of our founding fathers when creating new entities and how these values and ethics are the cornerstones of a successful present and future business environment and society.

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Michael W. Boyd, University of Tennessee at Martin