Strategy & Ethics Bowden &

Strategy & Ethics Bowden & Smythe's article Theories on Teaching and Training in Ethics examines the ability to strengthen moral behavior through courses on ethics. This article begins with the proposition that ethics cannot be taught to adults expounds upon that concept with a review of the evidence that has been gathered on the subject. This has significant ramifications for strategic management because of the importance of ethical behavior, especially at the leadership level.

The prevailing wisdom of recent years is that ethics can be taught, but if the evidence does not support this, then companies need to reform both their hiring and their training policies with respect to ethics. Strategic Decision-Making Nohria (2004) outlines a number of the strategic decisions that companies make that contribute to corporate success. These include operational execution, maintaining a strong balance sheet, having strong corporate governance, developing superior information technologies, having a clearly communicated strategy and having a clear corporate strategy and/or critical mass.

Each of these different strategic areas has a wide range of ethical implications built in. Smith (2003) outlines the obligations that management has towards both shareholders and other stakeholders. Both of these theories argue that ethics are evaluated using a consequentialist framework, wherein the outcomes to the different groups are the arbiter of a firm's ethical policies. Even in cases of outright fraud, it was only that the fraud was detected that made the actions unethical because of the negative impacts on shareholders and/or other stakeholders.

With respect to ethics, the stakeholder view generally dovetails with the shareholder view. The commonly-cited instances where this was not the case -- Enron being one -- are cases of fraud rather than fundamental ethics. As Nohria (2004) notes, at this level corporate governance is a hygiene factor in that it needs to be present in order that the company not fail, but beyond that it offers no real value.

The entire governance debate has been sparked by a handful of powerful anecdotes, but there is no empirical evidence that shoddy governance is any more widespread now than in the past. While boards are often concerned only with shareholder outcomes, the correlation between positive shareholder outcomes and positive outcomes for other internal stakeholders is high -- when the firm is making money, everybody benefits. Ethics Training This leads to the question of the value of ethical training.

If it is taken as a given that ethics cannot be taught, and that strong corporate governance is merely a hygiene factor, then ethics training becomes irrelevant. The most important elements of ethics for a company come at the point where the board is selected, and at the point where management is selected. Good ethical management comes from selecting managers with high ethical standards.

If one is to use the primary sources of anecdotal evidence that unethical managers are bad for business, one must consider that most of those managers were not hired. Bernard Ebbers built WorldCom; Jeffrey Skilling built the energy derivatives business at Enron. These actors were well-entrenched long before their scandals broke.

It was not as though the boards of these companies hired people of questionable character to be their CEOs; the CEOs were already in place and there was no reason to question their character at the time of their hiring. Ethics training would have been irrelevant. The boards of these firms would have had to know about the fraud and turn a blind eye to it in order to have placed short-term shareholder interests ahead of other stakeholder interests. Again, ethics training would have been irrelevant.

Board Composition This takes us back to Bowden & Smythe's lessons. The frauds persisted in the headline ethics cases not because of any lack of ethics training, but because the boards were unable to recognize the fraud. In the case of WorldCom, it required six months of hard work by the internal auditing department to uncover the fraud.

The claim that a board member familiar with forensic accounting would have been able to uncover such a fraud holds little water given that it took a team of experts working in secret many months to uncover the fraud. However, the argument generally holds that better board composition, and more engaged board members, would have prevented such a fraud. Nadler (2004) argues that better boards are less important for preventing frauds as they are for driving better performance.

This then shifts the emphasis of the board away from governance and towards performance enhancement. Nadler's argument supports Nohria's claims about the relative irrelevance of strong corporate governance. No matter whether the boards take a strict shareholder approach or the expanded stakeholder approach proposed by Post et al. (2002), there are limits as the impact that they can have over a company's performance, no matter how well-composed the board is. If the boards and the executives they support have low ethical standards, then poor ethical performance will result.

No amount of ethical training will change that. If the board and its executives have strong ethical standards, good ethical performance will result. Conclusion Since the headline scandals of the early 2000s, ethics and governance have become significantly more visible issues in business literature and the training of these disciplines in business schools has improved. This is seen as an attempt to right a perceived wrong -- that business schools are not paying enough attention to the ethical implications of strategy.

Yet, strategy for the vast majority of firms is by and large ethical. The headline scandals relate to criminal activity as the core strategy of the firm. This has no meaningful implication for the ethics of strategy. Nohria is right -- most firms behave ethically and indeed strong ethics are a necessary bedrock of long-term success.

The lack of strong ethical foundations in a small number of high profile cases reflects more on the specific nature of the individuals in question than it does on the state of ethics education in business schools as a whole. Ethics can be taught, but the teaching of ethical theories and the exhortations of professors for their students to behave ethically -- sometimes twenty or thirty years down.