Five Rules of Professional Ethics

In order to weather their ever-increasing ethical responsibilities, invincible executives with whom I have spoken (or whom I have studied) identify up to five key strategies that keep them away from ethical scandals.

1. Recognize that standards of professional ethics have become increasingly stringent over the past decades. You cannot use the ethical standards of your mentors and predecessors as guideposts for your own conduct. You can no longer get away with conduct that was once accepted and commonplace on the job—be it an office romance with a subordinate or an aggressive campaign to trash the competition.

Ed Dowd, a former U.S. attorney and currently a leading white-collar criminal defense lawyer—as well as an amateur historian—notes that virtually all of the competitive tactics used by tycoons like the Rockefellers and the Carnegies in the late nineteenth and early twentieth centuries would be illegal now. The tycoons of the Industrial Revolution conspired to monopolize their industries, exploited inside information for their personal gain, and obtained a stranglehold on the U.S. financial system. These tactics were legal when they did them, and the tycoons considered such actions to be good, aggressive business. What was tough business yesterday is bad business today.

Fast-forward almost a century. Microsoft, Enron, and Merrill Lynch executives have been caught in serious ethical and legal scandals for engaging in similar business tactics. They have respectively been accused of conspiring to damage competitors, inventing clever legal structures to manipulate their financial status, and giving advice without disclosing conflicts of interest. As a result, they have suffered bad damage to their images, with the majority of Americans considering them to be unethical companies. New age, new standards.

Similarly, the civil rights laws, environmental laws, export control laws, government contracting laws, and corporate fraud laws passed from 1960 to 2002 make all kinds of conduct illegal that was not only legal before then but ethically acceptable as well. "There is no excuse for operating a business in the year 2003 as if it were 1903, 1963, 1993, or even last year. Standards change and executives have to learn the new rules," says Dowd.

There remains a tendency of executives whose careers are on the rise to become dizzy with their success and to believe that they can get away with more now than they once could. The fact is that law and ethics hold more powerful people to a higher standard than they do less powerful people, and the standards get tighter every day. Do not fall into the "tycoon mind-set" or you risk a huge fall.

2. Win against unethical foes by finding the most ethical route and promoting it aggressively and uncompromisingly. While it is important to be the "good guy," you do not have to be the "nice guy."

A mid-level management consultant related a story to me that illustrates the point perfectly. He was at a meeting in which executives of a midsized construction company briefed their CEO on a problem between the construction company and a major steel products supplier. The steel supplier felt that the construction company had misrepresented the scope of work for a particular job and wanted more money to complete the job.

The construction company executives informed the CEO that his company had indeed expanded the scope of work. They noted that not only was the steel supplier entitled to more money, but the supplier had also conscientiously continued to perform—spending its own money pending the receipt of additional funds from the construction company. Finally, the CFO told the CEO that the supplier would likely go bankrupt without the additional money that was due to it.

The CEO asked the CFO what his options were. The CFO said, "Your only ethical options are to (a) terminate the supplier in accordance with the terms of the contract, pay his costs, pay profit on those costs, and hire another steel supplier to complete the job; or (b) modify the existing contract to reflect the increased scope of work, and pay our current supplier more money—he is entitled to it."

The CEO—known for his cutthroat tactics—looked the CFO in the eyes and asked her, "What are my unethical options?"

"What?" asked the CFO.

"You said I had two ethical options. I want to know all of my options."

"Well," she said, "it was just a phrase. I can't think of any other options."

Just then, a young prot g of the CEO chimed in smarmily. "I can think of two other options," he said. "First, you could sue them, seeking an order that they continue to perform. They could not afford to fight us and would declare bankruptcy within a week. We could pick them up cheap in bankruptcy court. Second, you could offer to renegotiate the contract, give them just enough extra cash to keep them afloat, but do so only on the condition that they not enter into future contracts with our competitors—so at least we could gain some tactical advantage by giving them the money we owe them."

The CEO looked at the CFO and said, "That is the kind of thinking I like." Ultimately, for reasons of legal and schedule risk rather than ethics, the CEO chose to modify the contract without extracting the suggested concessions. But the lesson of the conversation was clear. Unethical people always have more options than ethical people do.

There is only one way to gain a tactical advantage over a person like this CEO—a person who has more options because he or she is not bound by any sense of ethics: pick one option—the most ethical one—and present it as the only option. "You seize the high ground and never give it up," says former Senator John Danforth. That means you determine the most ethical path, you make it clear to those who want to follow a lesser path that there will be negative ramifications to their proposed course of conduct, and you refuse to compromise.

When it comes to seizing the high ground, Senator Danforth practices what he preaches. When he became the Waco Special Counsel, he gathered his staff together and told them the following: "All of the independent counsel investigations from Iran-Contra to Ken Starr were marred by covert leaks to the press—a questionable tactic that hurt the rights of those being investigated and marred the credibility of the investigators. Our rule is no leaks. Not one person says one thing to one member of the press until after we are done. One strike and you are out."

Senator Danforth found the high ground in the battle of the leaks and laid down the law. The result was, for the first time ever in a major federal investigation, there were no leaks—not one during the entire fourteen months of his investigation. Neither he nor his staff responded even when patently false statements about his investigation appeared in the press. No compromises. Danforth's no-leak approach even earned the grudging respect of the media. There were articles marveling at how quiet everyone kept during his investigation. Seize the high ground and you may suffer some criticism, but, as long as you refuse to compromise, you will prevail.

3. Learn the technical or legal limits on your professional conduct. As I mentioned earlier, a lot of businesspeople feel that legal and technical issues gum up the smooth operation of an organization. Recently, a very senior aerospace executive, Stephanie, shared with me on condition of anonymity an e-mail from the CEO of another aerospace executive. The two companies were joint venturers on a major defense contract. Stephanie had requested a thorough legal review of some information that the joint venturers were sending to the government customer as a contract "data deliverable." Her counterpart sent her an e-mail to the following effect: "Stephanie. Why are you mucking up our deal with a bunch of legal crap? We are supposed to be senior executives, here. We know how to do a deal and all the lawyers do is try to take things over and shut things down. What are you made of?"

This man will never be an invincible executive. In fact, his company is teetering on the edge of financial disaster as I write this chapter—in large part due to staggering legal payouts from mistakes made by his "hard-charging" executives, who routinely ignore or circumvent the company legal staff.

There are many situations where law runs contrary to intuition. Consequently, you need to have constant coaching on where the legal lines are. The result of failing to do so is finding yourself accused of unethical conduct even when your intentions were good. Here are some examples:

• Contracting with the government. In the commercial world, you guard with your life information that goes into pricing your goods or services. You never let anyone know what your product really costs you. In many government procurements, however, you are legally obligated to disclose all information that goes into setting your price—including your confidential cost data. There are literally hundreds of people who have served time in prison and thousands more whose careers were ruined when they kept relevant pricing information from the government because disclosing it simply ran contrary to the way that they were used to doing business in the commercial world. Good legal advice would have avoided these career catastrophes.

• Exporting. Joe Hepworth, a Boeing lawyer and a man of tremendous integrity, tells the story of a an executive who hurt her career a few years ago when she gave a PowerPoint presentation to a potential customer in a foreign country. She did not know that the viewgraphs she had stored on her computer and taken overseas constituted the "exporting of technical data" under the Arms Export Control Act. By failing to get an export license for her presentation, she had literally committed a federal exporting violation.

• Sexual harassment. Many people think that harassment involves directing offensive conduct at a particular individual. Supreme Court cases, however, have established that even a few dirty jokes, not directed at anyone in particular, can create a "hostile work environment" to all women, giving them all a lawsuit against your company.

  Invincible executives do not engage in relationships with subordinate coworkers. That is an obvious one. But they go much further. They do not make sexually explicit jokes on the job; they do not view sexually explicit material on the job; and they do not turn a blind eye to subordinates who do these things. Rather, they respond decisively and forcefully against e-mails, comments, or innuendos on the job that female workers might find offensive. Keep in mind, also, that federal civil rights violations can occur when women harass men and in situations of same-sex harassment as well.

• Environmental law. You may be responsible for cleaning up chemicals that you did not even put on your premises. You can in rare circumstances even be liable for not doing anything about a toxic chemical problem that you did not cause. Prosecutors in environmental cases have tremendous power and can put your company through hell even for what might seem to you to be minor infractions. Never consider an environmental issue to be too minor to warrant your full attention.

• Antitrust and unfair competition. The rules on what you can do to trash the competition are becoming increasingly tough. Chances are that the moment you turn your attention away from making your product the best and start trying to bring down the competition, you are running afoul of some federal or state law that protects competition.

• Insider trading. You no doubt read about Martha Stewart and the mega-rich ImClone executives and allegations of their insider trading. Do not be fooled into thinking that insider trading is a problem reserved for the rich and famous. The biggest insider trading scandal of the past several years occurred at IBM when a secretary passed on confidential information to her husband, who in turn passed it on to a teacher, pizza parlor owner, doctor, and several others. They all made a few thousand dollars and were all indicted for insider trading. There is no such thing as someone "too small or too remote" to be nabbed for insider trading.

As the examples above indicate—and they are just a few of many counterintuitive areas of the law—a lot of well-meaning people find that their careers end because they did not understand where the ethical line was. While ethics goes far beyond technical legality, it is important for every top executive to remain well-briefed on significant changes in ethical standards that might affect his or her conduct, and it is important that top executives let people at all levels know that they expect all executives in the organization to remain well-advised of legal standards. Everyone from Sheryl Crow, the singer, to Pat Finneran, former marine, recognizes and emphasizes the importance of sound professional guidance to long-term success. They flatly reject the "lawyers will mess things up" attitude that has ruined so many careers.

4. Remember that ethical standards are subjective. "In 95 percent of the cases where you accuse someone of being unethical, they legitimately believe that you are the unethical one," an Anheuser-Busch executive once told me. That is because there are legitimate different interpretations of the ethical line. You need always to anticipate what others will say about your conduct, not only what you yourself think about it. Then, be well prepared to counter their claims

Where possible, act in a manner that even your foes cannot turn against you. For example, while the law establishes that a single dirty joke probably does not create a "hostile work environment" under civil rights laws, it is unclear just how many jokes will take you across the line. The truly ethical person, therefore, tells no such jokes. That is always safe; that is always ethical.

And never think that an ethical transgression is too trivial to be of significance. Jim DeVita, the New York assistant U.S. attorney who prosecuted New York hotel queen Leona Helmsley for tax fraud, told me that Ms. Helmsley kept saying that she could not be a tax cheat because she paid hundreds of millions in taxes and was only accused of withholding about $1.2 million. To her, a mere $1.2 million may have been trivial. Others saw the situation a little differently. Companies have fired employees for overstating expense accounts by twenty-five dollars. Do not decide that your ethical transgression may be too minor to be a problem. The decision maker may disagree.

5. Convey the ethics message to those who work for you in a substantive, repetitive manner that neither trivializes nor commercializes ethics. Companies from Silicon Valley to Wall Street plaster "Ethics First" or some variation of that slogan in their cafeterias and hallways and in their company newsletters. They spend millions of dollars on T-shirts, coffee mugs, and Post-its that proclaim the importance of organizational ethics. A couple of years ago, a financial service executive showed me some of his ethics trinkets, stating sarcastically, "We do not have a culture of ethics, we have a cult of ethics." Even his key chain had an ethics slogan on it. The next year, however, this man's company paid a fine in excess of $50 million to the government for fraudulent sales practices.

In a similar vein, I recently toured a United States military facility and saw a poster on the walls that emphasized the importance of ethical conduct. Less than two months later, a squadron commander who worked at the facility was court-martialed for directing subordinates to falsify aircraft maintenance records.

Consistently, my research reveals that the vast majority of large companies that have been convicted of white-collar criminal acts over the past ten years had highly touted codes of ethics. Merrill Lynch, which had frequently proclaimed its commitment to ethics, paid $100 million to settle charges of conflicts of interest. Both Arthur Andersen and Enron had codes of ethics.

Too often companies pay only superficial deference to ethics—lots of glitz and no substance—or they devote a lot of time and money to developing real ethics policies and then fail to communicate them to the employees—the policies just sit on a shelf gathering dust. Invincible executives recognize that the unethical acts of their subordinates will be imputed to them, so they take ethics training very seriously.