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Feature

Thomas Donaldson
Professor, Legal Studies and
Business Ethics Department
The Wharton School

Dangerous Currents

Here is what can prompt even ordinary people to do bad things, and what board members must watch like hawks to avoid ethical catastrophe.

By Thomas Donaldson

Editor’s Note: Among its 2009 Faculty Pioneer Awards recipients, the Aspen Institute Center for Business Education presented Thomas Donaldson with the Lifetime Achievement Award. Dubbed the “Oscars of the business school world” by the Financial Times, this annual recognition celebrates business school instructors who have demonstrated leadership and risk-taking in integrating social, environmental and ethical issues into the MBA curriculum. This year’s winners were honored on November 6 at an awards breakfast at Ernst & Young’s corporate headquarters in New York. Prof. Donaldson wrote a very popular article for Directors & Boards in 2004 titled “Dangerous Currents” – in which he analyzed six factors that contribute to “almost every major corporate ethical disaster.” The following excerpt from the article addresses two of those factors. Click here for a copy of the full article.

I think I know what causes most corporate ethical disasters, and it’s not what many business leaders believe.

First, let's establish what doesn't prompt most corporate ethical disasters, despite popular views. Most such disasters are not caused by the failure of either compliance systems or codes of ethics. When I testified in the Senate during the Sarbanes-Oxley hearings, I had to remind senators that virtually all the corporations that fell from grace — the Enrons, WorldComs, and Tycos — had sophisticated compliance programs and sophisticated codes of ethics. Jeffrey Skilling, of Enron infamy, was regarded widely as the man who beefed up compliance at Enron.

Nor are most corporate ethical disasters caused by ethical greed-heads. To attribute the recent spate of corporate scandals to a few bad apples is unconscionably naïve.

The real culprits
A growing body of research and experience in the field of business ethics suggests that the real culprits are what I choose to call "dangerous currents." Dangerous currents are what corporate leaders and members of boards must manage in order to help prevent even ordinary people from doing bad things. They are: 1) Goal Mesmerization; 2) Blind Precedents; 3) Uncommon Stress; 4) Isolated Teams or Performers; 5) Discussion Vacuum; 6) Failure to Anticipate Challenges and Develop Appropriate Principles/Stories/Examples/ Language.

These factors constitute a syndrome that can be found amid the rubble of almost every major corporate ethical disaster.

Factor: Isolated Teams or Performers
Rising stars in corporations are often given amazing discretion. This discretion can sink their companies.

The example of Nicholas Leeson of Barings Bank is well known: A young trader, making trades in Singapore, single-handedly wrecked a company so venerable that it had once helped finance the Louisiana Purchase. Less known, but still illustrative, is the securities specialist at Salomon Brothers who quietly attempted to corner the U.S. Treasuries market in the early 1990s and almost brought his company to financial ruin. Estimates of the cost of the Salomon disaster range up to a billion and a half dollars.

In the BF Goodrich brake disaster—one of the most reprinted business ethics cases of all time—a young engineer, with only seven years’ tenure, was famously left alone to misdesign a brake in an incident that nearly cost one Air Force test pilot his life. Finally, during the early 1990s, Bankers Trust Co. came to celebrate a management style that left smart people nearly unmanaged even as they sold highly leveraged derivatives to corporate clients. These smart people succeeded in cutting the stock value of Bankers Trust in half by 1995 through questionable derivatives sales to companies such as Gibson Greeting Cards and Procter & Gamble.

Factor: Discussion Vacuum
When bad things can't be talked about in a company, even worse things can happen. The most striking example is the U.S. tobacco industry, which was forced eventually to settle allegations against it for a cost of nearly $300 billion.

The allegations centered on the claim that it hid the truth about cigarette smoking from its customers. From the 1950s until nearly the end of the century, lawyers in the tobacco industry concerned about liability suits had come so firmly to dominate the culture of the industry that discussions of smoking and health were virtually impossible.

I remember a personal experience in the mid-1980s in which I spent a day conducting a workshop in Aspen, Colo., for executives of a leading U.S. tobacco company. Near the end of that day I suggested that we could no longer leave aside the question of tobacco and health. The response stunned me. After what seemed like a full minute of embarrassing silence, one participant announced, "We don't believe there is a connection between smoking and health"! That was the extent of discussion of tobacco and health that I managed that day.

I learned later that a name existed for what I had experienced—the "tobacco hush.” Fear of liability had come so fully to dominate the tobacco industry's culture that people felt forced to remain silent. Yet, arguably, the “tobacco hush” eventually cost the industry hundreds of billions of dollars.

Importance of information conduits
Do board members or executives have any control over these dangerous currents? Surely they have some control. Indeed, one of the principal challenges for corporate leaders today is managing such dangerous currents to the extent of their ability, so that even pretty good people don't end up doing tragic things.

For boards, this inevitably means developing information conduits to and from the corporation that channel relevant “readings” about dangerous currents. It means, at a minimum, that board members must secure independent and reliable information about leadership, culture, and reward systems. But then, that is another story.

Thomas Donaldson is the Mark O. Winkelman Professor at the Wharton School of the University of Pennsylvania. He has received many of Wharton’s teaching awards, including the Outstanding Teacher of the Year award in both 2005 and 1998.

He has written broadly in the area of business ethics, values, and leadership. His book, “Ties that Bind,” was the winner of the 2005 SIM Academy of Management Best Book Award.

He was chairman of the Social Issues in Management Division of the Academy of Management (2007-2008) and a founding member and past president of the Society for Business Ethics.

He has consulted and lectured at many organizations, including the Business Roundtable, Goldman Sachs, Walt Disney, the United Nations, Microsoft, the Tata Group, Exelon, Motorola, AT&T, JP Morgan, Johnson & Johnson, KPMG, Los Alamos National Laboratory, ConocoPhillips, Shell, IBM, Western Mining-Australia, Pfizer, the AMA, the IMF, Bankers Trust, and the World Bank. He has appeared on the Today Show, the NBC Nightly News, CNN, MSNBC, CNBC, PBS, and NPR.

He serves as an elected member of the National Adjudicatory Council of the Financial Industry Regulatory Authority (FINRA, formerly the NASD). In the summer of 2002, he testified in the U.S. Senate regarding the Sarbanes-Oxley corporate reform legislation.

He can be contacted at donaldst@wharton.upenn.edu.