Diane Francis at Harvard

Tuesday, August 08, 2006

Corporate Morality

CAMBRIDGE – Professor Lynn Paine holds a doctorate in moral philosophy from Oxford University and a law degree from Harvard which makes her eminently qualitied to teach ethics, leadership and corporate accountability at Harvard’s Business School.

In fact, she chairs a course into these issues launched in 2004 following the rash of corporate scandals, headed by former Harvard Business School alumnus, Jeffrey Skilling, the indicted former CEO of Enron Corporation.

That debacle and others has led to a rash of governance requirements and new laws which require more transparency, accountability and vigilance. For instance, the New York Stock Exchange requires listed companies to have codes of conduct.

“It’s important for a company to have a code. But it can be useless, just down loaded off the Internet and not implemented or read. Enron had a 64-page code of conduct that had probably never been looked at,” she said in a recent interview. “A code and laws are no panacea. Ethics must be built into the culture and incentive systems. Companies must give people a common frame of reference. If internalized, it helps a company. It becomes the corporation’s DNA.”

One of the most ethical companies is Johnson & Johnson. Its code declares that the company has a responsibility to behave ethically when dealing with constituencies beyond investors and employees to those such as customers, suppliers, society at large and local communities.

“It’s credo is deeply internalized. There are employee surveys every two years. There is constant training and it is incorporated into the language. This requires leadership and effort,” she said.

The ethics course, required for all MBAs, maintains that a sustainable, value-creating organization must have managers that meet all economic, legal and ethical responsibilities.

Students are taught through the Case Method where they deconstruct what corporations faced with dilemmas did in the past and why.

“We expose students to a mix of protagonists, levels of seniority, cultural contexts, industry contexts, positive and negative,” she said. “We look at fiduciary obligations; issues of transparency; basic fairness issues and basic citizenship questions which were dealt with by managers. We look at cases where there was a clear consensus as to the action that had to be taken and where there was little agreement.”

For instance, the Tylenol poisoning crisis was dealt with responsibly. Disclosure to the public was complete and instant, a product recall was immediate and packaging re-design protected the public, she said. Another positive case involved Xerox Corporation CEO Anne Mulcahy.

“She had to turn the company around but her dilemma was whether to declare bankruptcy which she didn’t do,” said Professor Paine. “We look at these types of ethical dilemmas, the tug and pull of competing courses of action such as a management which discovers there’s new science that finds their lead product is potentially carcinogenic. Do they do nothing? Tell? How much? Get out of business? Often companies are dealing with incomplete information and time pressures. This is an unhappy combination.”

Decisions are not merely matters of legality either.
“Student’s tend to think the law’s clear but the law is dynamic. As Oliver Wendell Holmes said `the law’s what the court says it is’,” she said.

The second half of the year-long course deals with corporate governance – external governance; internal governance and boards of directors.

“There’s the boards’ role in executive selection and compensation. How does the incentive system influence behaviour? Incentives, compliance and culture must be aligned in some fundamental way,” she said. “Sometimes companies create a set of incentives to get executives to do exactly what they shouldn’t do in some cases.”

Her interest in corporate culture has led to research into managing foreign cultures. “There are recurring dilemmas involving in managing people from other cultures such as the differing ways in which cultures view time; how they view authority; how someone in charge maintains authority; how is information handled; how much transparency is required; what’s the workplace tone and how relationships may be more important in some cultures than the institution’s requirements,” she said.

About one-third of the business school’s students are from countries outside the United States. So she asks students to role-play how to give negative feedback to an employee in ways that are sensitive to different cultures.

“How do you set up the room? Are you seated? Do you meet the person at the door or wave him in? Do you chit chat and about what? Their family or the Red Sox? How direct should you be with information. How do you help them save face. How do you make sure they understand. How much responsibility do you give the employee. How do you end the conversation. How do you follow up and how does money fit into the issue?”