Ethics deal with what makes something morally right or wrong.

Almost any sizeable company nowadays has a code of ethics. The main catalysts for these were the corporate scandals in the early 2000s (Enron, Worldcom, Tyco, and others). Also, in the last couple of years having a sense of purpose has become pretty much en vogue.

As a result, every year millions of employees now dutifully complete e-learning modules and sign declarations (‘To the best of my knowledge…’).

If you think about this on a philosophical level, it is actually quite sad. Apparently, companies need to invest millions of dollars each year because a shared understanding of what is morally right or wrong to do on behalf of the company, is not a given.

Obviously, from a pragmatic point of view, companies have no choice but to invest in this type of training. First of all, it helps individuals to avoid taking decisions that can create reputational and compliance-related problems for the company. The second reason is the need to demonstrate institutional compliance to governments, regulatory bodies and other stakeholders.

Limitations of codes of ethics

The difficulty is that corporate codes of ethics are ‘duty-centered ethics’, i.e. ethics people need to formally adhere to given their role or position in society. Classical examples include people in medical professions and government officials. However, nowadays many companies ask all their employees to formally comply with codified ethics. 

Individuals in such positions have no choice. Not formally subscribing to the code of ethics of their organization or professional body, would automatically lead to their dismissal.

The real test for the way ethics are adhered to in organizations is therefore not the formal compliance with the code of ethics (e.g. proving all employees completed their mandatory e-learning), but what happens in the daily reality of business life.

This means that the value of codes of ethics can only be proven in practice. 

To quote former German General von Moltke: “No plan survives contact with the enemy”, or, to use the more eloquent language of heavyweight boxer Mike Tyson: “Everyone has a plan until they get punched in the mouth”.

Limitations of institutionalized ethics

In a number of companies, there is a formal code of ethics, and there is the daily reality of doing business. There are codes of ethics that are written on HQ level, and there are targets that need to be realized on a day-by-day basis by employees who could be based thousands of miles away in local offices.

A prime example of this is the challenge private bankers face. Operating in an industry where the margins are severely under pressure, they are on the one hand firmly evaluated on the basis of their financial results, and, on the other hand, expected to adhere to strict rules and regulations (‘Know Your Client’!), that can stand in the way of achieving these financial results.

In other words, a number of people regularly face real choices between job security and sticking to a code of ethics.

Short term versus long term

For companies, operating in an ethical manner might mean foregoing short-term profits. This requires companies to take a long-term perspective. The problem here is that on a corporate level, long-term results are important, but on the tactical and operational levels of organizations, people are often evaluated on the basis of their short-term (annual) results.

Results they achieve with one, ethical or non-ethical, decision at the time…

Should we really pay his full pension?

In this context, I will never forget a formative event very early in my career. 

I had only recently joined a company when I had to weigh in on a difficult decision regarding the pension the company needed to pay to an employee. The employee had not added significant value to the company in his tenure, on the contrary, the individual had a long history of sub-optimal performance and strained relationships. Actually, the employee should have been asked to leave the company years ago. 

Essentially we had to choose between two options.

Option A:  limit his generous pension using a legal technicality. This was legally correct, would save the company a significant amount of money and not cause any reputational damage. However, from a moral perspective, it did not feel right with us as decision-makers. 

Option B: paying his full pension. This would cost the company a significant amount of money, was not strictly required from a legal point of view, but morally felt much better to us. 

Over time, we discussed the issue in a number of meetings. Unfortunately, however, we could not land on a final decision. That is, until the moment one of my colleagues said: ‘We are <company X>, and we need to do the right thing’. Suddenly we unanimously agreed: ‘Yes. we are <company X>, and therefore we need to do the right thing’.

My immediate sense after taking this decision was a sense of relief. The second feeling I experienced was a tremendous sense of pride to work for company X.

The role for senior leadership

For leaders, ensuring the right thing happens goes beyond ‘setting the tone from the top’. It means making a long-term investment in their direct reports. A long-term investment in a relationship characterized by trust. A relationship in which ethical behavior is rewarded, even at the costs of short-term results. 

If only because ethics can only be implemented one decision at a time…