Crisis and Corporate Ethics: Where Have All the Leaders Gone?
Published on February 1, 2003
Crisis in Corporate Ethics: Where Have All the Leaders Gone?
An Address by Bill George
former Chair & CEO, Medtronic
Westminster Town Hall Forum
February 13, 2003
Last week’s tragic loss of the Columbia brought back vivid memories of my teenage years when the Soviet Union launched Sputnik. Not long thereafter, the United States made a major commitment to exploring outer space. A vital young President, John F. Kennedy, had the vision and foresight to commit our nation to a challenge no one knew how to do: putting a man on the moon by 1969.
My generation was deeply inspired by the words of President Kennedy’s inaugural address, “Ask not what your country can do for you. Ask what you can do for your country.” As Kennedy said, “The torch has been passed to a new generation of Americans.” No one in my generation will ever forget where we were on that fateful day in November 1963, when we learned that the President had been assassinated, just as the younger generation will always remembers where they were when they learned that an airplane had flown into the World Trade Center .
In spite of our leader’s death, many of us idealistically took the torch that Kennedy spoke of and to set out to show what we could do for our country. I was one of them. I decided to concentrate my efforts on the world of business because the enormous capacity of the free enterprise system to organize people to make a difference in the lives of the people it serves. In those days I had a vision of becoming an ethical, values-centered leader running a major corporation, and, rather immodestly, influencing my peers to be ethical and values-centered.
Looking back at my thirty-two years in the active world of business, I realize just how fortunate I was to have the opportunity to reach my first goal in leading such a special company as Medtronic, and how little influence I had in influencing others in my generation. The complete collapse of corporate governance and the extreme greed of certain corporate leaders that has been exposed in the past year made that all too clear.
While a graduate student at Harvard, I led the Musser Seminars on “Business and Christian Ethics.” Students from the Business School , Divinity School , and the Episcopal Theological Seminary met regularly to discuss weighty ethical topics with leading scholars from around the country. One that had an influence on me was Robert Greenleaf, then an AT&T executive, who presented his ideas on “servant leadership.” Greenleaf proposed that the role of leaders was to serve their followers. At the time this was a radical idea, because we looked at leaders back then as powerful people running large organizations, often in a rather autocratic manner.
Coming out of business school in 1966, a number of us went to Washington to work in the federal government and help our country. As the Vietnam war escalated, it didn’t take long for our idealism to be shattered. Vietnam was followed in the 1970s by Watergate and in the 1980s by the takeovers and junk bond scandals. But for a business person, all of these events pale by comparison to the corporate ethical crisis we have experienced in the past year.
Thank you, Enron and Arthur Andersen.
The depth of their misconduct shocked the world and awakened us to the reality that the business world was on the wrong track, worshiping the wrong idols, and headed for self-destruction. Like the proverbial frog that dies when temperatures are gradually increased, but immediately jumps out when tossed into a boiling pot of water, it took this kind of shock therapy for us to realize that something is sorely missing in many of our corporations. What’s missing? Ethical, values-based leaders.
What began as a few executives charged with violating the law morphed into issues of corporate governance and the failure of our governance systems. As we understand the issues at a deeper level, we realize that the missing ingredients in corporations are ethical leaders committed to building authentic organizations for the long-term.
Every generation has corporate thieves who break the law to reward themselves. This time around the excesses are not limited to a few. I believe deeply that the vast majority of corporate CEOs are honest leaders dedicated to building their companies. Unfortunately, far too many got caught up by the short-term pressures of the stock market and the opportunities it brought for personal wealth. Under these pressures and the quest for personal gain, they wound up sacrificing their values and their stakeholders.
Our system of capitalism is built on trust – trust that corporate leaders and boards of directors will be good stewards of their resources, providing investors with a fair return. There can be no doubt that many leaders have violated that trust. As a result, investors lost confidence and withdrew from the market. In the process, many people got hurt, not just the perpetrators.
In the midst of the current crisis, we must ask ourselves, where have all the leaders gone? Where are today’s versions of James Burke of Johnson & Johnson, Walter Wriston of Citicorp, John Whitehead of Goldman Sachs, and David Packard of Hewlett-Packard? These people not only built great enterprises but were statesmen in the business community and leaders in addressing societal issues as well.
In contrast, most of today’s leaders of our best-run corporations remain silent. Are they afraid that by speaking out they may invite scrutiny of their companies? In so doing, they give the impression that they have something to hide or are also part of the problem. Only a few CEOs, such as Henry Paulson of Goldman Sachs and Henry McKinnell of Pfizer, have been willing to condemn these practices publicly, recognizing the larger issue is one of public trust in the capitalist system. Paulson’s acts were doubly courageous, as he risked not only criticism from his peers but his customers as well. Andy Grove, chairman of Intel, commented recently, “I find myself embarrassed and ashamed to be a businessman.”
Capitalism Becomes the Victim of its Own Success
How did we get in this situation? Is this a recent phenomenon, or have these activities been going on all along?
We are witnessing the excesses of the shareholder revolution that began fifteen years ago. In its early stages, pressure from shareholders did much to improve the competitiveness of American corporations, as companies trimmed unnecessary expenses, improved profitability, and increased cash flow. However, the financial rewards from their actions, both corporate and personal, were so great that companies and shareholders alike developed an inordinate focus on short-run results. In a booming stock market, it all seemed to be working.
Then capitalism became the victim of its own success. Instead of focusing on traditional measures such as growth, cash flow, and return on investment, the criterion for success became meeting the expectations of the security analysts. Investments were cut back in order to make earnings, limiting the company’s growth potential. Driven by the speculators and security analysts, expectations kept rising, just as companies were struggling to make their numbers. Companies that met or exceeded the “magic” earnings number were handsomely rewarded with ever-rising stock prices. Those that fell short, even if they recorded substantial increases, were inordinately punished, and shareholders demanded replacement of the CEO. No wonder many CEOs went to extreme measures to satisfy shareholders!
However, revenues and earnings do not escalate forever, especially in the face of economic downturns, events like September 11, and operating problems. To offset financial problems, many executives stretched the numbers and the accounting rules well beyond their intended limits. Some of these accounting schemes, like calling operating expenses capital equipment to avoid the P&L and booking revenues before they are earned, violate even the most basic rules of accounting. Now the chickens are coming home to roost.
In the past five years stock options went from modest grants to mega-grants for top executives, especially CEOs. Because they had no cash impact and were not charged against profits, many executives and boards viewed these grants as free. The effect was to shift the CEO’s focus almost entirely to getting the stock price up – by whatever means necessary. Realizing they could not sustain their earnings, many CEOs cashed in their options for huge gains just before their stock collapsed.
The general public played a role in this tragedy as well. In idealizing the high-profile personalities that ran these companies, we made them into heroes. We equated wealth with success and image with leadership. To our dismay, we have learned that these celebrity CEOs have been filling up their personal coffers at their shareholders’ expense, while destroying the pensions and life savings of thousands of people.
The media turned these short-term earnings artists into the folk heroes of the business community. While making wealth, image, and star power the criteria for success, the media overlooked the many solid corporate leaders building quality companies for the long-term. Ken Lay, Bernie Ebbers, and Dennis Koslowski were the focus of intense media worship before their fall. Just one year before he was led off to jail in handcuffs, Business Week put Koslowski on its cover as the CEO of the top company on its Nifty Fifty list of top stock performers. These three executives alone have destroyed over $300 billion in shareholder value.
Back in 1998 I met with one of these leaders to talk about acquiring one of his companies. In our brief meeting he explained how his off-shore headquarters enabled his company to avoid U.S. taxes, how he automatically issued pink slips to twenty-five per cent of the workers on the day he acquired their company, and how he shut down every research project or investment that didn’t pay off in the first year. As I walked out of his office, I held onto my wallet and decided to cancel further talks with him. You cannot do business with people you do not trust.
The Case for New Leadership
In response to the violations, policy makers and politicians have crafted new laws and regulations to close the loopholes. While some changes in regulations are appropriate and necessary, they do not address the deeper issues at stake here. It is impossible to legislate integrity, stewardship, and sound governance.
Somewhere along the way we lost sight of the imperative of selecting ethical leaders that create healthy corporations for the long-term. The lessons of building great companies like 3M, Coca-Cola, Johnson & Johnson, General Electric, Pfizer, and Procter & Gamble were lost in the rush to get the stock price up. We forgot that those of us who are fortunate enough to lead great companies are the stewards of legacies we inherited from past leaders and the servants of our stakeholders.
The lessons from this crisis are evident: if we select people principally for their charisma and their ability to drive up their short-term stock price instead of their character, and shower them with inordinate rewards, why should we be surprised when they turn out to lack integrity? We do not need executives running corporations into the ground in search of personal gain. We do not need celebrities to lead our companies . We do not need more laws.
We need a new kind of leader.
We need authentic leaders, people of the highest integrity, committed to building enduring organizations. We need leaders who have a deep sense of purpose and are true to their core values. We need leaders with the courage to build their companies to meet the needs of all their stakeholders, and who recognize the importance of their service to society.
The Temptations of Leadership
Leading an organization, large or small, is no easy task. It can be lonely at times. Meeting the varied needs of the people you serve is a continuing struggle. Leaders are pulled in many different directions, yet must keep a clear vision of where they and their organizations are headed.
Congressman Amory Houghton, one of the most thoughtful members of the U.S. Congress, tells the story of his predecessor’s advice as he was taking over as CEO of Corning Glass. “Think of your decisions being based on two concentric circles. In the outer circle are all the laws, regulations, and ethical standards to which the company must comply. In the inner circle are your core values. Just be darn sure that your decisions as CEO stay within your inner circle.”
We are all painfully aware of corporate leaders that pushed beyond the outer circle and got caught, either by the law or by the financial failures of their companies. More worrisome are the leaders of companies who moved outside their inner circles and engaged in marginal practices, albeit legal ones. Examples include cutting back your company’s long-term investments just to make the short-term numbers, bending compensation rules to pay executives in spite of marginal performance, using accounting tricks to meet the quarterly expectations of security analysts, shipping products of marginal quality, compromising security analysts by giving them a cut on investment banking deals, and booking revenues before they are shipped in order to pump up revenue growth. The list goes on and on.
All of us who sit in the leader’s chair feel the pressure to perform. As CEO, I felt it every day as problems mounted or sales lagged. I knew that the livelihood of tens of thousands of employees, the health of millions of patients, and the financial fortunes of millions of investors rested on my shoulders and those of our executive team. At the same time I was well aware of the penalties for not performing, even for a single quarter. No CEO wants to appear on CNBC to explain why his company missed the earnings projections, even by a penny.
Little by little, step by step, the pressures to succeed can pull us away from our core values, just as we are reinforced by our “success” in the market. The irony is the more successful we are, the more we are tempted to take shortcuts to keep it going. The rewards – compensation increases, stock option gains, a myriad of executive perquisites, positive stories in the media, admiring comments from our peers – reinforce our actions and drive us to keep it going.
In a recent interview with Fortune magazine, Novartis CEO Daniel Vasella talked about these pressures: “Once you get under the domination of making the quarter – even unwittingly – you start to compromise in the gray areas of your business, that cut across the wide swath of terrain between the top and the bottom. Perhaps you’ll begin to sacrifice things that are important and may be vital for your company over the long-term. . . The culprit that drives this cycle isn’t the fear of failure so much as it is the craving for success. For the tyranny of quarterly earnings is a tyranny that is imposed from within. . . For many of us the idea of being a successful manager is an intoxicating one. It is a pattern of celebration leading to belief, leading to distortion. When you achieve good results, you are typically celebrated, and you begin to believe that the figure at the center of all that champagne toasting is yourself. You are idealized by the outside world, and there is a natural tendency to believe that what is written is true.”
Like Vasella, who is one of the finest leaders I know, all leaders have to resist these pressures while continuing to perform, especially when things aren’t going well. The test I used with our team at Medtronic is whether we would feel comfortable having the entire story appear on the front page of the New York Times . If we didn’t, we went back to the drawing boards and re-examined our decision.
Developing Solid Values
Leaders are defined by their values and their character. The values of the ethical leader are shaped by one’s personal beliefs, developed through study, introspection, consultation with others – and a lifetime of experience. These values define the leader’s moral compass. Ethical leaders know the “true north” of their compass, the difference between right and wrong and the deep sense of the right thing to do. Without a moral compass, leaders can wind up like the executives who are facing possible prison sentences.
This doesn’t just happen by listing your values. You have to test your values in the crucible of life’s experiences. Only in the crucible will you learn how to cope with pressures to compromise your values and deal with potential conflicts between them. You have to put yourself in situations in which your values are challenged and make difficult decisions in the context of your values. This is not easy when the outcome is uncertain and there is a lot at stake. It is in these situations that you find the “true north” of your moral compass.
While the development of fundamental values is crucial, integrity is the one value that is required in every leader. Integrity is not just the absence of lying, but telling the whole truth, as painful as it may be. Without complete integrity in your interactions, no one can trust you. If they cannot trust you, why would they ever follow you?
I once had a colleague who would never lie to me, but often he shared only positive parts of the story, sheltering me from the ugly side. Finally, I told him that real integrity meant giving me the whole story so that together we could make sound decisions. Rather than thinking less of him, I would have a higher opinion of his courage and integrity.
When asked about their ethics, most leaders espouse solid values. Many of them meet regularly with their employees and implore them to practice these values or risk losing their jobs. Under pressure, these same leaders may behave in an entirely different manner. There is nothing worse than leaders who preach good values but fail to follow their own advice, or who set double standards for their employees and themselves. If you want to see employees become cynical, just watch what happens when the top executives behave in ways inconsistent with company values. For one example, look at Dennis Koslowski, former CEO of Tyco, who set up an endowed chair in corporate governance at Cambridge University in the U.K., just as he was demolishing any semblance of sound governance on his own board.
Many business schools and academic institutions do not teach values as part of leadership development. Some offer ethics courses, often in a theoretical context, but shy away from discussing values. Others assume erroneously their students already have well solidified values. What they fail to realize is the impact that your environment has in shaping your values and the importance of solidifying your values through study and dialogue.
As Enron was collapsing in the fall of 2001, the Boston Globe published an article by a classmate of Enron CEO Jeff Skilling. The author described how Skilling would argue in class that the role of the business leader was to take advantage of loopholes in regulations and push beyond the laws wherever he could to make money. As Skilling saw the world, it was the job of the regulators to try and catch him. Sound familiar? Twenty-five years later, Skilling’s philosophy caught up with him, as his company tumbled into bankruptcy.
Max DePree, the former CEO of furniture maker Herman Miller is a superb example of an ethical, values-centered leader. DePree is a modest man guided by a deep concern for serving others who is true to his values in every aspect of his life. His humanity and values can be seen through the exemplary way in which his company conducts itself. DePree describes his philosophy of values-centered leadership in his classic book, Leadership Is an Art . DePree also subscribes to Greenleaf’s ideas on servant leadership, and expands them by offering his own advice, “The leader’s first job is to define reality. The last is to say thank you. In between the leader must become a servant and a debtor.”
DePree believes that a corporation should be “a community of people,” all of whom have value and share in the fruits of their collective labor. DePree practices what he preaches. While CEO, his salary was capped at twenty times that of an hourly worker. In his view tying the CEO’s salary to his workers helps cement trust in leadership. Contrast that with today’s CEOs, who are earning – on average – four to five hundred times their hourly workers. As DePree said recently, “When leaders indulge themselves with lavish perks and the trappings of power, they are damaging their standing as leaders.”
Leading With Heart
Over the last several decades, businesses have evolved from maximizing the physical output of their workers to engaging the minds of their employees. To excel in the 21 st century, great companies will go one step further by engaging the hearts of their employees through a sense of purpose. When employees believe has their work has a deeper purpose, their results will vastly exceed those who use only their minds and their bodies. This will become the company’s competitive advantage.
Sometimes we refer to people as being “big hearted.” What we really mean is that they are open and willing to share themselves fully with us, and are genuinely interested in us. Leaders who do that, like Sam Walton, founder of WalMart, and Earl Bakken, founder of Medtronic, have the ability to ignite the souls of their employees to achieve greatness far beyond what anyone imagined possible.
One of the most heartfelt leaders I know is Marilyn Nelson, chair and CEO of the Carlson Companies, the privately held hospitality and travel services giant. When she became CEO several years ago, she inherited an organization that was driven for growth but not known for empathy for customers and employees. Shortly after taking over as CEO, Nelson had her “epiphany.” She was meeting with the group of MBA students that had been studying the company’s culture. In asking the students for feedback, Nelson got a stony silence from the group. Finally, a young woman raised her hand and said, “We hear from employees that Carlson is a sweatshop that doesn’t care.”
That incident sent Nelson into high gear. She immediately set out to change the environment, using her passion, motivational skills, and sincere interest in her employees and her customers. She created a motivational program called “Carlson Cares,” as she became the company’s role model for caring and empathy. She took the lead on customer sales calls and interacted every day with employees in Carlson operations. Her positive energy has transformed the company’s culture, built its customer relationships, accelerated its growth, and strengthened its bottom line.
Mother Theresa is a compelling example of a leader who led with her heart. Many think of her as simply a nun who reached out to the poor, yet by 1990 she had created an organization of four thousand missionaries operating in one hundred countries. Her organization, Missionaries of Charity, began in Calcutta and spread to 450 centers around the world. Its mission was “to reach out to the destitute on the streets, offering wholehearted service to the poorest of the poor.” I doubt that any of us will ever be like Mother Theresa, but her life is indeed an inspiration.
IN THE CRUCIBLE
In his recent book, Geeks and Geezers, author Warren Bennis observes that most of his interviewees passed through a crucible that tested them to the depths of their being and empowered the successes they realized later in life. At some time in your journey you, too, may find yourself in a crucible that really tests your values. In this crucible you learn who you are and what you want to become. Without it, you cannot be certain how you will respond under extreme pressure and whether you will be true to your values. Having survived the crucible, you will know that indeed you can take on any challenge and come out of it a better person for the experience.
My wife Penny experienced her crucible in 1996 when she was diagnosed with breast cancer. She went through a modified radical mastectomy, seven months of chemotherapy, five years of hormonal therapy, and a lifetime of not knowing whether the cancer would recur. At first, she was convinced she was going to die. Gradually, she took back control of her life by creating her own healing path.
One of the steps on her journey was to participate in a Vision Quest in southwestern Utah . A Vision Quest is an experience based on the rituals of indigenous people in which participants seek to understand their purpose in the world. Fasting alone for four days and nights in the desert, Penny found a new power within her and a renewed sense of purpose for her life. Several months afterward, she gave up her practice of psychology and devoted herself to the cause of integrative medicine, using the mind, body, heart and spirit on one’s healing journey. With passion and purpose, she is now working with medical leaders throughout the U.S. to change the way medicine is taught and practiced. Her inner power is enabling her to take on leadership roles she never believed she was capable of.
Four-time Tour de France winner Lance Armstrong makes a dramatic – almost unbelievable – statement in his book, It’s Not About the Bike, about his battle with life-threatening cancer. “The truth is, if you asked me to choose between winning the Tour de France and cancer, I would choose cancer.” He goes on to explain, “Odd as it sounds, I would rather have the title of cancer survivor than winner of the Tour, because of what it has done for me as a human being, a man, a husband, a son, and a father.”
Last fall I had the opportunity to bike with Lance up to the Maroon Bells near Aspen and to ask him about his views on cancer. He explained how his battle with cancer had transformed him as a person and opened up his opportunities for marriage, fatherhood and, yes, giving him the focus and discipline to win the Tour four times in a row. He told me he wrote the book not to glorify his achievements – “those will soon be forgotten” – but to give hope to millions of cancer sufferers.
Shooting Stars and Golden Boys
Some rising leaders avoid challenging experiences that really test them. I refer to them as Shooting Stars and Golden Boys. The Shooting Stars move up so rapidly they never take time to learn from their mistakes or look themselves in the mirror. A year or two into any job, they are ready to move on, long before they have to pass the test of living with their decisions. When they see an experience like the crucible coming, their anxiety rises and so does the urgency to move on. If their employer doesn’t move them upward, they are off to the next company. Then some day they find themselves at the top, confronted with ethical challenges and an overwhelming set of problems. Without the wisdom of the crucible, they cannot cope and are prone to do bizarre things on their way to self-destruction.
The Golden Boy follows a similar path to success, using his charm, style and good looks to get ahead. He always sets the bar of performance low enough to insure that he can exceed it. To outsiders and board members, he always appears in control. Insiders observe that he never gets his hands dirty wrestling with problems. When he reaches the top, he is unprepared for the real-world challenges he will encounter. When faced with them, he is vulnerable to making major mistakes and putting his company at risk.
“Hitting The Wall”: My Time In The Crucible
My most agonizing time in the career crucible also came when I least expected it. I call this “hitting the wall,” something that happens to most leaders at least once in their careers. As painful as it was, this experience provided the basis for growth and change that transformed my career. It caused me to look inside myself, acknowledge my shortcomings, and realize I was on the wrong path.
In the mid-1980s I was on my way to the top of Honeywell. What began as a huge promotion turned into a decision to reassess my career and to move in an entirely new direction. By 1988 I had been promoted several times, each time taking over more responsibility for Honeywell’s most challenging businesses. At the time I was responsible for three groups, nine divisions, 18,000 employees, and a raft of problems.
I had developed a reputation as “Mr. Fixit,” the guy who could get Honeywell’s troubled businesses turned around. I knew how to turn businesses around, but it never excited me. During this period I started questioning whether Honeywell was really the place for me. I felt out of sync with Honeywell’s slow-moving, change-resistant culture. I was becoming more concerned with appearances and my attire than just being myself. Reluctantly, I faced the reality that Honeywell was changing me more than I was changing Honeywell.
I had “hit the wall,” but was too proud to face it. I felt in a trap from which I couldn’t escape. On a beautiful fall afternoon when the maple trees were blazing red, I had a daydream driving around the lake near my home. But this dream was not pretty. I saw myself staying at Honeywell for a few more years, becoming increasingly frustrated, and then deciding to accept a CEO position at a large company in some other city. This would mean uprooting my family, Penny giving up her job, our sons changing schools, and all of us leaving the community we loved. Why would I do that? Just to satisfy my ego? I had a lot of self-explanation to do.
My experience that day enabled me to realize that I needed to overcome my fixation on being CEO of a very large corporation. I realized I was letting my ego get in the way of my values. If indeed I was in a trap, it was a trap of my own making. When we are in this position, it is difficult to see things clearly, and we may miss the opportunity staring us in the face.
Over the years I had three opportunities to join Medtronic, dating back to 1978. I turned them all down, mostly because I didn’t feel Medtronic was a large enough company for me. Yet the opportunity kept nagging at me. Had I done the right thing? It finally dawned on me that I was so caught up in my drive to run a major corporation that I was in danger of losing my soul. In the process I realized I had sold Medtronic short, and maybe myself as well. That evening Penny and I had a long talk about our lives and our careers. We recognized that my lack of fulfillment in my job was having a negative impact on all of us. She encouraged me to take another look at Medtronic.
I kept thinking about the vision I had in my teenage years: leading a mission-driven, values-centered company where I was passionate about the opportunity to serve others. What better place to do that than Medtronic? I called Medtronic CEO Win Wallin and reopened the door. Five months later I walked through Medtronic’s door as the new president. Rarely in life do we get the opportunity four times.
Throughout my life I have had a passion to make a difference in the world. At Medtronic I was able to lead a company that changes people’s lives. I feel a deep sense of good fortune in finding a confluence of interests between my personal desires and the needs of Medtronic. The Medtronic mission to restore people to fuller health inspired me from the moment Medtronic Founder Earl Bakken described it to me. Fourteen years later, it inspires me even more.
Ethical Dilemmas: When in Rome, Don’t Follow the Romans
Many leaders believe ethics is a topic that is discussed in business schools but not a part of everyday business. In fact, ethical dilemmas and pitfalls surround most significant decisions that a business leader makes. Sometimes these issues are moral, sometimes legal, and sometimes personal. Often the most significant challenge in dealing with ethical dilemmas is recognizing them to begin with and then confronting them in business decisions.
Most companies have clear statements of values and ethical codes of conduct that their employees must sign. In spite of these declarations, neither the organization’s nor its leaders’ ethical practices are established until they are tested under difficult conditions in the market. How leaders respond to these challenges, as painful as they may be, sets the ethical tone for the entire organization and establishes the company’s true values, much more than written statements, compliance documents, and training sessions.
Late in my time at Litton Industries the corporate board visited our microwave oven division to understand the reasons for our exceptional growth record. As I was presenting our international expansion strategy and our worldwide standard of ethics, I noticed the independent directors were nodding in agreement, but the new CEO was scowling as though he wished I would move to another topic. At the coffee break I found out why, as I overheard a conversation the CEO was having with the head of the company’s oil exploration business. “Charlie, the audit committee is very upset about your audit report,” he said. “I know you have to do what you have to do to get the business, but if you ever put it writing again, you’re fired!” The message was clear as a bell: it’s okay to make payoffs, but just don’t get caught. That incident convinced me I working for the wrong company.
Confronting a Public Crisis
Sometimes excellent companies fail to respond to an ethical crisis because they do not grasp its depth or severity, or their leaders choose not to get personally involved. When failures of Firestone tires led to several deaths of people driving the Ford Explorer, the leaders of the two companies choose to blame each other rather than addressing the loss of human life. When the Exxon Valdez ran aground off the coast of Alaska , causing a major oil spill that killed millions of fish and literally wiped out the livelihood of hundreds of fisherman, Exxon’s top management isolated itself in its New York offices and failed to go the scene of the problem. Later a jury assessed $5 billion in damages against Exxon, in part due to its lack of sensitivity to the impact of the tragedy. Even a great company like Intel was slow to recognize its users’ reactions to the flaw in the Pentium chip. Once it did, however, Intel’s positive response preserved its reputation.
Recently I was discussing the Enron/Arthur Andersen debacle with my MBA students at IMD in Switzerland . I described the tragedy of Arthur Andersen, saying that “you can spend fifty years in establishing your reputation and values and lose it all in a day.” One of the Dutch students responded by saying, “No, Bill, Andersen didn’t lose it all in a day. They sold their soul to their clients over the last five to ten years by compromising their values more and more, just to make money. What looks to you like a giant step in destroying documents was to them just another step in sacrificing values for greed.”
For a classic case study of how to handle these kinds of crises, look at how the leadership of James Burke, then-CEO of Johnson & Johnson, enabled his company to respond quickly and responsibly to the deaths of several people from terrorists lacing its Tylenol caplets with arsenic. Although J&J bore no responsibility for the incidents, Burke’s very open public response to pull all the product off the market until new packaging could be designed not only saved the brand, it wound up enhancing J&J’s reputation as a responsible company.
An Ethical Challenge in Europe
To my surprise, I faced a severe ethical test during my first year with Medtronic. As part of my first reorganization, I appointed a new president of Medtronic Europe, who had previously been president of Medtronic’s Dutch pacemaker subsidiary.
Shortly after taking over, he proposed the acquisition of the subsidiary’s Italian distributor. The price for the business was very high, but he insisted we had to buy it or risk losing the business. During due diligence, Medtronic’s auditors uncovered inappropriate accounting for a sham contract for Italian marketing services. When the controller was asked what the account was for, he refused to answer, saying that it was integral to doing business in Italy .
After General Counsel Ron Lund brought the issue to me, we hired a special legal investigator. His preliminary report indicated that the funds were traced to a secret Swiss bank account, set up on behalf of the Italian distributor. There the trail stopped. Although he could not prove it, the investigator believed the funds were being used to pay off Italian physicians. At this point we informed the Medtronic board and asked them to set up a special committee to oversee the investigation.
I called our European president and told him to come to Minneapolis immediately. When asked about the promotion account, he replied, “You don’t want to know about that fund.” I told him that indeed we did. At this point he got very defensive, even hostile, saying, “That’s the trouble you Americans. You’re always trying to impose your values on Europeans. Business is done differently in Europe .” Finally, I said, “These are not American values. They are Medtronic values that apply worldwide. You violated them, and you must resign immediately.”
At this point we notified all concerned government bodies of our findings. We also put out a press release disclosing them and making it clear that these actions were completely contrary to Medtronic policy. The announcements caused an upheaval among the employees of the Dutch subsidiary. Many felt the terminations were a political action by Medtronic management designed to eliminate their autonomy. After a few weeks, things settled down. For the last twelve years the subsidiary has been an outstanding performer.
This affair was difficult for me to handle because I had appointed the new European president. I had to acknowledge that I made a huge mistake in not checking out his values beforehand . Correcting someone else’s mistakes is a lot easier than facing your own. It is then that you have to look yourself in the mirror and recognize that you blew it, not someone else.
When in Rome? Ethical Dilemmas and Global Standards
As a student at Harvard Business School , I got into heated debates with classmates about whether U.S. ethical standards should be applied internationally. In the cases we studied it was clear that many non-U.S. companies used a different set of ethical standards in doing business around the globe. So did some U.S. companies. We referred to this as, “When in Rome , do as the Romans do.” In these debates I was a vigorous proponent of a common worldwide ethics standard, arguing that a company would lose business in certain cases, but also gain from having a clean reputation. Looking back, I realize my views haven’t really changed.
One thing that has strengthened my advocacy for a single worldwide standard of ethics is the global nature of business today. Your company’s reputation for integrity, or the lack thereof, travels with you wherever you do business. Having a clear set of standards is easier for international employees to follow than is a flexible standard that adapts to local market conditions. With ultimate responsibility for the actions of employees throughout the world, leaders can sleep a lot better if they know that employees are adhering to a common ethical standard.
Nevertheless, the temptations to stretch the rules to meet competitive practices are always there, especially in the developing countries. We learned the hard way that upholding an ethical standard takes a lot more than written statements and clear verbal messages. It requires a detailed system of compliance, enforcement, and punishments for improper actions. To make such a system work, employees need to be trained on the standards, using real world examples. Otherwise, there will be misunderstandings or rationalizations about what is acceptable practice.
The key is having open lines of communications with people on the firing line at the country level. They need to know that top management will support them when they adhere to the standard and lose a contract or a customer. There also has to be a vehicle such as a hot line for employees to inform management confidentially of deviations without fear of retribution.
When I arrived at Medtronic, I was unprepared for the business conduct problems we encountered early in my tenure. Confronted with them, we took an aggressive, pro-active approach and got them corrected permanently. It took several years to get 100% compliance with our standards for business conduct. These efforts enhanced Medtronic’s reputation around the world and made it easier, not harder, to do business and gain share.
In retrospect, these ethical problems provided an excellent opportunity to establish clear standards for employees throughout the world. In addressing them before Medtronic’s growth spurt, we were able to expand Medtronic’s global operations with the confidence that the business being generated was sound and all employees were on the same page in terms of ethical standards.
If Not Me, Then Who? If Not Now, When?
T.S. Eliot once wrote the lines,
“We shall not cease from exploration,
And the end of all our exploring,
Will be to arrive where we started,
And know the place for the first time.”
(from “Four Quartets”)
In May 1992 my father died in peace at the age of 93 and my older son graduated from high school, all in the same week. For me it was the passing of a generation. As a close friend told me, “Bill, you just moved up to the front pew.”
It won’t be long until you are asked to move to the front pew and take charge – or perhaps you already have been. My advice is, don’t wait to be asked. Don’t wait until you get the top job.
In thinking about whether to step up and lead, ask yourself these two simple questions:
If not me, then who? If not now, when?
The world needs your leadership today .
Being an ethical person in today’s world is not sufficient in itself. As a leader, you have to have the moral courage to step up and take a position, and then be prepared to suffer the wrath of those who disagree or lack to courage to stand-alone against the tide.
Just as President Kennedy said forty years ago, the torch of leadership is again being passed to a new generation. To your generation, the trumpet has sounded. If you listen carefully, you will hear the clarion call to lead in a different way than many in my generation have:
To be motivated by your mission, not your money.
To tap into your values, not your ego.
To connect with others through your heart, not your persona.
To live your life with such discipline that you would be proud to read about your behavior on the front page of the New York Times .
Recently, a young leader complained that his generation seemed to lack any causes to be passionate about. I suggested that he open his eyes and observe the world around him. Seeing the human needs out there doesn’t take a magnifying glass. You don’t have to look far to see:
The pain and suffering caused by poverty, abuse and discrimination.
The need for healing, in body and in spirit.
The desire for healthy families.
The decline in our environment and our natural resources.
The hunger for security and a sense of well being.
Do any of these challenges strike a resonance deep within you? Can you find your passion and couple it with your ability to make a difference in the world?
Reducing poverty . . .
Eliminating abuse . . .
Stopping discrimination . . .
Helping others heal . . .
Restoring our environment . . .
Building organizations dedicated to service . . .
Feeling safe and secure . . .
Helping people develop themselves . . .
Improving quality of life for others . . .
Bringing joy to the world?
Consider these challenges society faces as you think about where to devote your passions:
We live in a world of enormous wealth, yet three-quarters of the world’s population has barely enough to survive.
With our greater affluence has come increased mental and physical abuse of the helpless and vulnerable.
Forty years after the civil rights movement began, discrimination is still rampant at all levels of our society.
We have the greatest medical technology in history, yet the rate of disease continues to grow.
We abuse our natural resources and ignore the growing contamination of our rivers, our open spaces, our cities, and our environment.
We no longer feel safe or secure in our cities after dark.
We stand idly by as our leaders focus more on serving themselves than their customers.
We merge companies to create ever-larger organizations and then treat the people who made them successful like robots.
We treat quality of life as if it were a distraction from the real work of people.
We ignore the deeper meanings of life and the source of all joy.
As an ethical, values-centered leader, you can change these things. You only need to be your own person, lead with purpose and passion, be true to your values, and lead with your heart.
As much as we want happy, secure futures for our families and ourselves, we have learned the hard way that money alone is insufficient to provide either security or happiness.
But making a difference in the lives of others can bring unlimited joy.
Leading a life of significant service can bring unlimited fulfillment.
Sharing yourself with others authentically can bring unlimited love.
What is more important than joy, fulfillment, and love?
When we experience them, we will arrive where we started and know the place for the first time.