09/21/2012 01:35 pm ET Updated Nov 21, 2012

About Leadership: Ethics and the Corporation

Bill O'Brien, who spent many years working as a senior executive in the insurance industry, often spoke about ethics and values in companies. One of his lovely examples was of a company that boasts in its annual report about the increases in sales it has seen in the year just completed, while haranguing employees inside the company because 'the competition has been increasing sales so much faster than we are'. And of course the employees think: If they are willing to lie to the shareholders about this, what other lies might they be telling us?

The leadership of a company sets an ethical tone that pervades everything that employees in the company do. When management refuses to enter into a business transaction because they do not believe it is within the ethical standards of the Corporation, it can assume that everyone in the Company, not just the people in the meeting, know about this decision. Decisions like these become a factor in what individuals do and propose to do.

Enron is the role model for this, both positively and negatively. We might ask, although Enron created a business model and set ethical standards behind that model, why didn't other oil and gas companies follow? After all, the Enron share price performance, for several years, left other oil companies far behind.

I was at a short course for senior BP managers at Harvard Business School in early 2000, just before Enron problems started to emerge in the press, where the faculty devoted a morning to Enron, the theme being 'Why can't BP be more like Enron? These guys have invented a new way of doing business, and you are still living in the past'. There was lots of discussion, including BP trading people pointing out that we actually made more money trading than Enron did, but the defining moment for me came when someone from BP said: 'Look, we hear what you say, but we just cannot do the things that Enron does. We have certain ethical principles about how we run our business, and they don't allow us to do what those guys are doing. Maybe what they are doing is legal, that is not the point. They just are not consistent with how we do our business.'

Of course the HBS faculty thought we were dinosaurs. But they were wrong about who would become extinct soonest.

By way of contrast:

The head of Retail Marketing in BP once appeared before the quarterly review of the refining and marketing business to present a proposed retail joint venture in Japan, a new geography for BP. He had started into his presentation, showing various aspects of store format, site acquisition, projected sales, etc. when John Browne interrupted him. 'Struan', he said, 'I believe you have assessed this very well, and that you are a complete professional about marketing, so I don't really need you to prove it with this case. But tell me about our Japanese partner. What does he do? Has he ever been accused of financial irregularities? Are his standards consistent with ours?'

You can be sure that this line of inquiry by the CEO was well known throughout the business by the end of that day.

On ethics, sure it is important to have a policy, and it is necessary to communicate that policy very clearly, but actions are what make the policy live. Not the 'easy actions', like making sure that the Company does not offer or accept bribes, but the tough ones, where there is a judgement call to be made on a business transaction, and the ethical policy determines how that call is made.

So many of these ethics judgement calls occur in developing countries, and it seems appropriate, especially for large companies, to try to have the structure in country that has both a business line management and a country line management. By the country line, I mean something like the President of Corporation A in Country X. This person is not the one making the business decisions in country, but does have all the responsibility for relations with the Government. But she also has the oversight accountability for being sure that the businesses operating in her country are doing so in accordance with the global standards for the Corporation. So while it may be absolutely common practice for businesses in Country X to have karaoke parties for their customers with prostitutes supplied, it is up to the country president to say 'sorry, but we don't do this, find some other way to entertain them'. And this means that her word has to be final on such things, trumping the business unit leader.

If such a structure is not possible, or deemed too expensive, then I think every company operating globally needs to think of other structures, and assurance mechanisms behind these structures, to give itself confidence that its code of ethics is being followed.

There are both Board and executive roles in all this. The Board's job is to ensure that the ethics policies are in place, and represent standards that they as a Board stand behind. The executive must be sure that the business systems are in place to carry out these policies, in such a way that they can provide assurance to the Board on a regular basis. As with many things, but well illustrated here, the Board's role is governance, the executive role is management. But the executive must know (or it will surely find out) that if it does the management role poorly the Board will cross the line into management. When this happens the executive has failed.

About Leadership:
About Leadership is a series of 52 columns on corporate leadership -- essential skills, leading teams, managing your career, the strategic and business practices to make a company and its leader distinctive from competitors. These columns will be of interest to people leading small and medium sized companies today, many of whom have not had much formal training in management skills and techniques; for the many people in big companies who aspire to senior management; and for anyone who thinks: Give me a hint, how can I do this better?