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Illegal versus unethical versus unacceptable

· Reputation,legal,Ethics

Outrage and Risk Communications expert Dr. Peter Sandman comments in part II of our review of Enron and discussion on laws versus their principles.

I read your June 3, 2016 LinkedIn article on Fastow, “Financials hidden in plain sight – Ask ‘Why?’” At the end of that piece, you briefly mention the LEADS mnemonic developed by Mike Love:

  1. Is it Legal? (Both locally and internationally)
  2. Is it Ethical? (Is it regarded as unethical behavior by stakeholders even if legal?)
  3. Is it Acceptable? (Is it criticized by some, but regarded as acceptable by most who matter most?)
  4. Is it Defensible? (Could we defend our action if this became front page news?)
  5. Is it Sensible? (Even if it failed all or some of the EAD criteria, does it still make good business sense?)

Love’s complaint is that too many decision-makers ask only the first question and the last, neglecting to consider whether their intentions are ethical, acceptable, or defensible. No quarrel there. But I want to tinker a bit with Love’s definitions. Here is my version of LEADS:

  1. Is it Legal? (Both locally and internationally)
  2. Is it Ethical? (Even if it’s legal, does it pass muster according to your own ethical standards?)
  3. Is it Acceptable? (Even if it’s legal and you consider it ethical, will stakeholders, especially those you do or should care most about, be outraged that you did it?)
  4. Is it Defensible? (If it provokes outrage in some stakeholders, could you defend it against their public opposition to the satisfaction of most stakeholders, especially those you do or should care most about?)
  5. Is it Sensible? (Even if it passes all of the LEAD criteria, it might still be dumb. And even if it fails some of them, it might still be smart. Does it make good business sense?)

As your comments about Fastow suggest, it is hard to be sure that he and Enron’s other top managers broke clear laws they knew they were breaking, and thus deserved to be imprisoned. The principal alternative possibility is that they exploited loopholes, misbehaving in ways that were clearly unethical but weren’t clearly illegal (though probably they should have been) – in which case they merited shaming rather than imprisoning. Some of what they did might even have been considered ethical if it hadn’t turned out so badly, though some of it, at least, was clearly unethical.

But was it actually illegal? Answering that question would take a thorough knowledge of the details of Enron’s byzantine financial manipulations and an equally thorough knowledge of the relevant laws at the time. Even then, I suspect a fair analyst would end up concluding that there was a case to be made that Fastow and his colleagues broke the law and a contrary case that they cleverly, if unethically, evaded the law. It’s relevant to note that a major change in U.S. law, the multi-pronged Sarbanes-Oxley Act, resulted directly from the Enron scandal. The fact that Congress responded to Enron with a slew of new prohibitions at least suggests that maybe much of what Enron did wasn’t so clearly illegal at the time Enron was doing it.

Here’s what we know for sure. Enron’s collapse aroused widespread public outrage. When public outrage is high, officials look for people to blame – especially if the officials fear being blamed themselves (for legislating unwisely, failing to regulate properly, under-reacting to warning signs, etc.). The most effective way for officials to outsource blame is to find a law that somebody can be prosecuted and convicted for violating. And laws are vague enough that it is usually possible to accomplish this task, all the more so when juries and even judges are experiencing the same outrage as the general public.

Prudent corporate managers know that the boundaries are porous between “legal” and “ethical” and between “ethical” and “acceptable” in the LEADS mnemonic. Unacceptable outcomes arouse outrage, which causes the public to judge that somebody must have behaved unethically, which causes officials to look for a legal basis for punishing the miscreant or miscreants.

I suspect that society is more and more inclined to ignore the distinctions among unacceptable, unethical, and illegal. In the U.S., at least, we used to complain wryly that “there oughta be a law” to right every possible wrong, but we didn’t actually think there was one. Now we insist on it. In a society that distinguishes less and less between outrage-inducing and illegal (think “hate speech,” for example), arousing public outrage is more legally dangerous than it used to be.

Criminal prosecution isn’t the only legal risk increased by stakeholder outrage. Like prosecutors, regulators, too, are greatly influenced by community outrage. An infraction that arouses widespread controversy is far likelier to get regulatory attention than one that nobody notices or nobody minds. It’s also far likelier to get a tough penalty. It leads to more aggressive future oversight. Absent the controversy, in fact, the regulator might not have considered it an infraction at all.

Outrage has non-legal costs as well, of course. Corporate reputation is an asset; it is both a significant component of a company’s valuation and a significant contributor to the company’s profitability. That too is truer than it used to be. For a variety of reasons, customers, neighbors, shareholders, prospective investors, and other stakeholders are all increasingly responsive to a company’s reputation.

To a company’s reputations, rather. It has at least two: its good reputation (how loved it is) and its bad reputation (how hated it is). Seeing these two as opposite extremes on a single spectrum is a conceptual error. It is possible to be both much-loved and much-hated. Moreover, the public steps companies can take to burnish their positive reputation (philanthropy, for example) are entirely different than the steps they can take to ameliorate their negative reputation (apologizing, for example). Often the two are in direct competition: The things you do to calm your critics may irritate your supporters, while what you do to rally your supporters may enrage your critics.

There are other things companies can do that should please allies and opponents alike, such as improving working conditions or reducing dangerous emissions. But much of the time they have to choose whom to please. For a detailed argument that ameliorating negatives matters more than burnishing positives, see my 2010 column on “Two Kinds of Reputation Management.”

Enron neglected to look after its negative reputation. This is one way to view the company’s demise and the conviction of some of its senior managers: as outcomes of its failure to anticipate and manage stakeholder outrage.

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