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Recent corporate scandals and cases of corporate espionage have focused attention on business ethics. Are these instances of a few unscrupulous individuals or are business managers less ethical? The quest for answers to questions such as this has led to internal scrutiny within the academic community about the way qualifications such as the Masters of Business Administration (MBA) are being taught in business schools.

The late Professor Sumantra Ghoshal of the Advanced Institute of Management Research (AIM) and London Business School argued that the roots of business misconduct may be traced to ideas expounded by business schools over the last three decades. He suggested that “by propagating ideologically inspired amoral theories, business schools have actively freed their students from any sense of moral responsibility”. This was because attempts to make management a science meant denying any moral or ethical considerations.

For example, Ghoshal asserted that few managers would question the economist Milton Friedman’s assertion that a business organisation’s only responsibility was to its shareholders. Yet Thomas Kochan, Professor of Management at MIT’s Sloan School of Management, attributed corporate scandals in the United States to widespread overemphasis on shareholder value at the expense of other constituencies. Ghoshal challenged the priority given to shareholder value, reasoning that other constituencies such as employees, including managers, produce the value created by a company. Furthermore, he argued that employees bear more risk, because it is generally more difficult for them to find alternative employment than for shareholders to sell their stocks.

Robert Cooke, who was the Director of the Institute of Business Ethics at DePaul University, has identified fourteen danger signs that an organization that is at risk of unethical behaviour. These are if it:

• normally emphasizes short-term revenues over long-long considerations
• routinely ignores or violates internal or professional codes of ethics
• always looks for simple solutions to ethical problems and is satisfied with ‘quick fixes’
• is unwilling to take an ethical stand when there is a financial cost to the decision
• creates an internal environment that either discourages ethical behaviour or encourages unethical behaviour
• usually sends ethical problems to the legal department
• looks at ethics solely as a public relations tool to enhance its image
• treats its employees differently than its customers
• is unfair or arbitrary in its performance-appraisal standards
• has no procedures or policies for handling ethical problems
• provides no mechanisms for internal whistle blowing
• lacks clear lines of communication within the organization
• is only sensitive to the needs and demands of the shareholders
• encourages people to leave their personal ethical values at the office door

There are signs that things are changing. Ethics are increasingly being woven into the curriculum of business schools. Recognition of the need for attention to ethics is evident in the Association of MBAs’ (AMBA) requirement that a business school’s curriculum pay attention to ethical and social issues to meet its accreditation criteria. Finally, Ghoshal concluded that the situation be rectified by encouraging a diversity of ideologies and positive perspectives on behaviour.

Find out more

An introduction to business studies

Marketing and society

Managing human resources

Take it further - sharpen up your business skills

Corporate Accountability and Ethics - a disregard for ethics can lead to trouble: remember the Enron saga

‘Danger signs of unethical behaviour: how to determine if your firm is at ethical risk’ by Robert Cooke, in the Journal of Business Ethics, volume 10, (April 1991)

'Bad management theories are destroying good management practices' by Sumantra Ghoshal, in the Academy of Management Learning & Education,  volume 4 (2005)

'Addressing the crisis in confidence in corporations: Root causes, victims and strategies for reform' by Thomas Kochan, in the Academy of Management Executive, Volume 16 (2002)

About the author

Fiona Harris is a lecturer in management in the OU Business School. Her research interests include social marketing and marketing ethics.

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Blogging about

Money Programme

Get the facts behind the big business and finance stories from around the world – and down your street, in The Money Programme.

Conrad Black may or may not have been a greedy man, but either way he stands accused of defrauding his company and its shareholders. If he is finally found guilty, how was he allowed to get away with it for so long? It’s the role of a public company’s board, and in particular its non-executive directors (NEDs), to oversee its executives and ensure they behave responsibly. The case of Conrad Black is not a one-off, as a series of corporate scandals on both sides of the Atlantic bear witness too. So, should our systems of corporate governance be put on trial?

The case for the prosecution is strong:

NEDs are meant to be independent and capable of subjecting executive decisions to objective, critical scrutiny, but too often boards appear to be a cosy club. Although shareholders may have to vote for their directors it is the board that nominates them in the first place and so the danger is they become a self-perpetuating elite. Many NEDS are current or former executives – they often have a vested interest in not rocking the boat. This is what Bob Monks a founder of shareholder activism in the US has to say:

‘Trying to make boards function is like squaring the circle. You can huff and puff all you want, but you can’t make a legitimate governing institution out of a self-perpetuating body.'

Monks should know, he has served on many corporate boards and was thrown off the board of Tyco for pointing out things that were wrong, before the CEO at the time was later indicted for his lavish perks.

Perhaps a bigger, but less noticed, scandal is that of executive earnings and share options. As a recent survey by the Guardian showed executive pay has soared in the UK, growing by 28% in the latest year. Top chief executives pay has risen from 25 times what an average staff members earns not long ago to over a 100 times. In the US it has been estimated that up to 10% of equity was transferred to directors as stock options in the 1990s. This is often justified by the myth that top pay is linked to performance, but research suggests there is little relationship between FTSE performance and directors’ pay. Clearly putting non-executive directors in charge of executive pay has done nothing to control this gravy train.

Further reading

• Corporate Accountability and Ethics – a disregard for ethics can lead to trouble: remember the Enron saga.
• RAGM.com – one of the best places to start is the Robert Monks website
• Corporate Governance by Robert A.G. Monks and Nell Minow, Blackwell Publishing

About the author

Chris Cornforth is Professor of Organisational Governance and Management at the Open University Business School. His research focuses on the governance and management of public and non-profit organisations.

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