CHAPTER 4: CORPORATE CULTURE, GOVERNANCE AND ETHICAL

LEADERSHIP

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Define corporate culture
Explain how corporate culture impacts ethical decision making
Discuss the role of corporate leadership in establishing the culture
Explain the differences between effective leaders and ethical leaders
Discuss the role of mission statements and codes in creating an ethical
corporate culture
Explain how various reporting mechanisms such as ethics hotlines and
ombudsmen can help
Integrate ethics within a firm
Discuss the role of assessment, monitoring, and auditing of the culture and
ethics program
Explain how culture can be enforced via governmental regulation

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In 2012, Greg Smith, executive director and head of
Goldman Sachs’ U.S. equity derivatives business in
Europe, the Middle East and Africa, resigned his position
This resignation was unusual because it was announced
in a letter to the editor published in the New York Times
in which Smith lambasted the corporate culture and
leadership of Goldman Sachs

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After 12 years at Goldman Sachs, Smith said, “I can
honestly say that the environment now is as toxic and
destructive as I have ever seen it.”
Smith described a corporate culture in which the interests of
clients, the people Goldman Sachs was supposed to serve,
were disregarded in favor of making ever-increasing profits for
the firm
Managers asked not “What is good for the client?” but “How
much money did we make off the client?”
Employees called clients “muppets” and spoke of “ripping off”
clients with complex financial deals

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Smith faulted senior leadership, including the CEO and
president, for the “decline of the firm’s moral fiber,”
and for having lost a culture of integrity, trust, pride,
and honesty
Smith wrote that, instead, “The firm changed the way it
thought about leadership. Leadership used to be about ideas,
setting an example and doing the right thing. Today, if you
make enough money for the firm (and are not currently an ax
murderer) you will be promoted into a position of influence.”

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Smith ended his letter with the hope that his resignation
would be a “wake-up call” for the Board of Directors and
warned them that they would not survive if they
lost the trust of clients
He concluded by advising them to “Weed out the
morally bankrupt people, no matter how much money
they make for the firm. And get the culture right again,
so people want to work here for the right reasons .”

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In a press release, Goldman’s CEO and president
disputed Smith’s claims
They argued that Smith’s letter failed to represent
“how the vast majority of people at Goldman Sachs
think about the firm”
They noted that internal surveys suggest that nearly
90% of the company’s employees feel that the firm
“provides exceptional service” to clients

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As citizens we ask if business has any social
responsibility beyond the economic ones of providing
goods and services, jobs, and profits.
This chapter examines business from an internal
perspective.
The classical model described in Chapter 3 treats
ethical considerations as external constraints placed
on business.
The Goldman Sachs case demonstrates that businesses
do not always include social responsibility as an
inherent element of their business models.

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It is easy to emphasize individual responsibility for
decisions, but these decisions do not exist in a vacuum.
Decision making will be influenced, even determined, by
the corporate culture of the firm.
This chapter surveys some of the major issues around
the development and management of a corporate
culture, and the role of business leaders in creating and
maintaining ethical cultures.

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Every organization has a culture.
A culture is made by a shared pattern of beliefs, expectations,
and meanings that guide the behavior of its members.
Businesses also have unspoken yet influential standards and
expectations. Some examples are dress codes, working hours,
and also a firm’s values.
No culture is static.
Cultures change, but modifying or having any impact on culture is
like moving an iceberg. One person cannot alter its course alone,
but strong leaders can have a significant impact on a culture.

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A firm’s culture can be its sustaining value.
Culture can offer direction and stability in
challenging times, but can also constrain a firm
to the common ways of managing issues.
The stability that is a benefit at one time can be
a barrier to success at another time.

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Collins and Porras (1994) studied companies such as
IBM, Johnson & Johnson, Hewlett Packard, Procter and
Gamble, Wal-Mart, Merck, Motorola, Sony, Disney,
General Electric, and Philip Morris, looking for common
elements to explain these companies’ success.
The common element among successful companies was
their core ideology, which is made up of core values and
a clear corporate purpose. All these companies have
strong corporate cultures and clear sets of values.

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In situations where the law is an incomplete guide for ethical
decision making, the corporate culture is likely to be the
determining factor.
An ethical culture is one in which employees are empowered
and expected to act in ethically responsible ways even when
the law does not require it.
A corporate culture sets the norms and expectations that will
determine which decisions get made.
An example of how cultures encourage some behaviors and
discourage others is the two organizational approaches to relief
efforts after Hurricane Katrina in September 2005.

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FEMA and the Coast Guard responded
differently following Hurricane Katrina.
Because of its bureaucratic hierarchical
procedures, FEMA was unable to respond in a
timely manner when the situation did not fit
their usual rules.
FEMA Director Michael Brown was eventually
removed and replaced with a Coast Guard
admiral.
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The U.S. Coast Guard has a reputation for being less
bureaucratic. Their unofficial motto is “rescue first,
and get permission later.” The Coast Guard
empowers front-line individuals to solve problems
without waiting for authorization.
While FEMA and the Coast Guard are similar
organizations with similar missions, rules, and legal
regulations, their cultures are very different, and their
respective decisions reflect these cultures.

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The cultivation of one’s habits, including the
cultivation of ethical virtue, is greatly shaped by the
culture in which one lives.
We are often as likely, or more likely, to act out of
habit and based on our character, as to act based on
careful deliberation.
Business institutions provide an environment in which
habits are formed and virtues are created. Such an
environment is an ethical corporate culture.

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Besides abstract considerations, an ethical
culture can also have a direct practical impact on
the bottom line.

Responsibility for creating and sustaining ethical

corporate cultures lies with business leaders.

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Corporate cultures have great power to shape
the individuals who work within them.
See Collins and Porras’ book, Built to Last:
Successful Habits of Visionary Companies.
The person that you become, in your attitudes,
values, expectations, mind-set, and habits, will
be significantly determined by the organization
in which you work.

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Corporate leaders must both advocate and
model ethical behavior.

Leadership sets the tone not only via personal

behavior, but also via allocating corporate
resources to support and promote ethical
behavior.

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It is important in ethical leadership to be
perceived as a people-oriented leader.
Even traditional leadership duties are perceived
as being done within the context of an ethics
agenda.
Ethical traits and behavior must be socially
visible and understood (“walking the talk”) to
have influence.

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Being a good or effective leader does not
necessarily mean being an ethical leader.

Ken Lay and Jeffrey Skilling of Enron were

good and effective business leaders, and were
also unethical leaders.

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One key difference between effective leaders
and ethical leaders is the motivators used to
achieve goals.

Threats, intimidation, harassment, and coercion

can be used effectively, but modeling,
persuasion, and use of one’s role in the company
are ethical as well as effective.

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An ethical style or method of leading, while
central, is not sufficient to establishing ethical
leadership.

The other element involves the goal or end

toward which the leader leads.

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There cannot be leaders or followers without a
goal or direction.

Productivity, efficiency, and profitability are

minimal goals.

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An executive who makes a business productive,
efficient, and profitable, and respects and empowers
subordinates, may seem to be both effective and
ethical at first glance.
But what if this executive’s business has unethical
products – i.e., publishing child pornography,
polluting the environment, or selling weapons to
terrorists?
Socially responsible goals may be necessary for a
leader to be fully ethical.

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Before impacting the culture via a code of
conduct or statement of values, a firm must first
determine its mission.

The Johnson & Johnson credo is an excellent

example of a clear ethical mission statement.

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After developing a mission statement, a code
of conduct then can delineate this foundation
more specifically.
The code of conduct can enhance corporate
reputation.
The code can give concrete guidance for
internal decision making, thus creating a built-
in system for risk management.

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After establishing corporate codes of conduct
and mission statements, the second step in
developing guiding principles for a firm is
articulating a clear vision statement.
In addition to showing the firm’s direction, the
vision shows how its members apply their
values to their daily business practices.

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After the mission statement and code of
conduct, and the vision statement, the third
step in the process is to identify how the
cultural shift will occur.
You can’t simply “print, post and pray” (--
Stuart Gilman, President, Ethics Resource
Center).
Implementation and follow-through are
critical.
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The final step in having an effective code that
will influence the culture is a company-wide
belief that this culture is attainable.
If conflicts prevent certain parts from being
realized, or if key leadership is not on board, no
one will have faith in the proposed changes.

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Critical to the success of any cultural shift are
the following:
Integrating an ethical culture throughout the
firm
Providing means for enforcement
Means for enforcement includes allowing
employees to come forward with questions,
concerns, and information about unethical
behavior.
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A key element of integration is communication.
Without communication, there is no clarity of
purpose, priorities, or process.
The Ethics & Policy Integration Centre claims
that communication patterns describe the
company better than organization charts do.

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Reporting ethically suspect behavior is
difficult.
“Whistleblowing” can expose and end
unethical activities.
Whistleblowing can also seem disloyal, harm
the business, and harm the whistleblower.
Because reporting to external groups can be so
harmful, internal reporting mechanisms are
preferable.
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Internal mechanisms for reporting wrongdoing,
while preferable, must:
Be effective
Allow anonymity
Protect the rights of the accused
Allow employees to report wrongdoing
Create procedures for follow-up and
enforcement
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Internal mechanisms for reporting wrongdoing
which have been created by many firms:
Responsibilities of ethics officers
Responsibilities of compliance officers
Ethics ombudsmen
Ethics hotlines

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If we cannot measure, assess, and monitor culture, it
declines in importance.
Ongoing ethics audits allow companies to uncover
silent vulnerabilities that could later pose challenges.
Ongoing audits serve as a vital element in risk
assessment and prevention.
A firm’s management of its internal and external
relationships is critical evidence of its values.

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The United States Sentencing Commission
(USSC) is an independent agency in the U. S.
Judiciary.
The USSC was formed in 1984 to regulate
sentencing policy in the federal court system.
Congress has been able to resolve disparity in
sentencing via the USSC.

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In 1987, the USSC prescribed Federal
Sentencing Guidelines.
The guidelines apply to individual and
organizational defendants in the federal
system, bringing more uniformity and fairness
to the system.
The USSC strived in its guidelines to create both
a legal and an ethical corporate culture.

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In recognition of the enormous impact of
corporate culture on ethical decision making,
the USSC updated its guidelines in 2004 to
include not only references to compliance
programs but to “ethics and compliance”
programs.
The guidelines identify specific acts of a firm
that serve as due diligence in preventing crime
and the minimal requirements for an effective
compliance and ethics program.
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USSC’S Eight Minimum Requirements for an Effective
Compliance and Ethics Program:
1.Establish compliance standards and procedures
2. Establish a governing body or board
3.Assign a specific high-level person to oversee
compliance, be responsible for day-to-day program
operations, and report directly to the board
4.Use due care not to delegate important
responsibilities to known high-risk persons
(cont’d.)

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Summary of USSC’S Eight Minimum Requirements for an
Effective Compliance and Ethics Program (cont’d.):
5.Communicate the program effectively to all employees and
agents
6.Monitor and audit program operation for effectiveness;
establish a safe way for employees and agents to report
violations or seek guidance
7.Create an incentive and disincentive structure to encourage
compliance and consistently discipline for violations
8.Respond promptly and appropriately to offenses and
remedy program deficiencies

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The concept of due diligence is a restless and flexible
standard.
The standard reflects changes in daily events and
changes in the ideas of potential wrongdoers.
A firm must learn from its mistakes and take steps to
prevent recurrences.
A 1997 survey found that 47% of ethics officers reported
the USSC’s guidelines to be influential on their firm’s
commitment to ethics.
Another commission study found that the guidelines
influenced 44.5% of ethics officers to enhance their
existing compliance programs.
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