· Reputation,legal,Ethics

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

So far I have focused mostly on the relationship between law and outrage. Where does ethics fit?

Other people’s ethical standards are vital contributors to both law and outrage. When some people’s ethical standards are violated, they often get outraged. And when enough people’s ethical standards are violated, their outrage can drive the effort to make new laws.

Your own ethical standards are moot if they cover things already covered by law and/or outrage. If something is illegal, that’s reason enough not to do it – and it’s weird to hear you attribute your legally obligatory behavior to your own high ethical standards, as if you were obeying the law only because you happen to agree with it. And if something outrages your stakeholders, that’s reason enough not to do it – and it’s insulting to hear you take ethical credit for giving in to stakeholders’ outraged demands, as if you were giving in only because you happen to think they’re right.

The latter point is worth emphasizing. “We’re being responsive, doing what you think is right” is a much better message in mid-controversy than “We’re being responsible, doing what we think is right.” When a company caves in to stakeholder demands, it is in fact being responsive, not responsible (except to its shareholders). Because it’s the truth, the responsiveness claim is far likelier to be credible, and a whole lot less likely to be offensive. It is a huge and all-too-common mistake to respond appropriately to stakeholders’ outrage and then claim you’re adhering to your own values rather than deferring to theirs, thereby undermining your credibility and stealing their credit. For more on this, see my 2006 column on “Giving Away the Credit: Managing Risk Controversies by Claiming You’re Responsive (though maybe not responsible)” or myvideo or audio on the same topic.

But sometimes your ethics are the only standard in play. There’s no relevant law and no likely outrage, and you are genuinely guided exclusively by your own sense of right and wrong. That’s why ethics belongs in the LEADS mnemonic, to remind us all that weshould be guided by our sense of right and wrong even when there’s no relevant law and no likely outrage. I doubt it’s useful to do a lot of messaging about it, though; just do the right thing.

There’s one final possibility: when your ethical standards tell you to do one thing but the prevailing law or your stakeholders’ outrage tells you to do something else entirely. Obeying the law or deferring to outrage will force you to violate your own ethics. Adhering to your ethical standards will force you to break the law or outrage your stakeholders. This dilemma doesn’t come up all the time. But it does come up, particularly in cross-cultural and cross-national settings.

And it can be excruciating. Consider these two examples (or, more likely, consider just one of them, the one that honors your own ethical principles):

  1. Your ethics tell you that gay marriage should be legal – that it’s a horrible injustice to deprive gay people of the legitimacy that marriage bestows. But you’re doing business in a time and place that considers gay marriage unthinkable (most of Africa, Asia, and the Middle East today, for instance). Should you take a stand of conscience against the prevailing law and values?
  2. Your ethics tell you that gay marriage should be illegal – that blessing what you consider the sin of homosexuality with the sacrament of marriage is itself a sin. But you’re doing business in a time and place that considers opposition to gay marriage unacceptable (much of Europe and the United States today, for instance). Should you take a stand of conscience against the prevailing law and values?

I don’t have an easy answer to this dilemma. A piece of the answer depends on how fundamental you think the ethical issue is. Another piece of the answer depends on whether it’s feasible to stay out of the conflict or you have to take a stand one way or the other. We all hope that if we had been 17th century ship captains we would have refused to traffic in slaves, and that if we had been 20th century German chemical company executives we would have refused to manufacture gas for the concentration camps. But we see lesser injustices and feel entitled to “mind our own business” rather than undermining our businesses by speaking out.

If you want to read more along these lines, see my 1999 correspondence with John Elkington and Chris Marsden, “Responsible or Responsive?

As a sort of summary, let me return to where we started: Enron and Andrew Fastow.

Fastow now gives ethics lectures to business executives and business schools. One of the key points he makes over and over is the same one you made in your comment, that he was imprisoned not for breaking the law but for abusing the principle of law. In other words, he was imprisoned for being unethical.

As CFO of Enron, Fastow found profitable legal loopholes. For a while, he was lionized in business circles for finding profitable legal loopholes. But when everything went sour and some $40 billion in market value disappeared overnight, the whole society became outraged, and Fastow transitioned instantly from famous to infamous. So everyone looked again, more critically, at Fastow’s loopholes. The universal outrage motivated prosecutors, judges, and juries to decide that at least some of the loopholes weren’t loopholes after all; they were actually illegal all the time. So Fastow and his colleagues went to prison.

The moral of Fastow’s story: Loopholes aren’t reliable. If things go sour, stakeholder outrage will cause “just barely legal” to morph into “illegal” before your eyes, and you’ll go to prison. Your only protection, Fastow says, is ethics. You need to create a corporate culture that doesn’t seek out just-barely-legal loopholes in the first place.

Consider this excerpt from a 2015 article – one of dozens of articles on Fastow’s many speeches – entitled “Here’s a Simple Lesson on Business Ethics From the Former CFO of Enron”:

The point he makes, perhaps unsurprisingly, is that business ethics can be a tricky thing. Practices that are perfectly legal and widespread can be unethical. While the off-balance sheet transactions that triggered Enron’s collapse were approved by the company’s lawyers, accountants and management, Fastow said, he nevertheless deserved to go to jail for misleading investors.

As Fastow said at the event on Wednesday: “I wasn’t the chief finance officer at Enron, I was the chief loophole officer.”

To illustrate his point, the former CFO now-turned business consultant outlined a few accounting scenarios that one may or may not think are misleading. He points out that many of them are in wide use and are perfectly legal under current regulations.

I’m not sure I agree with Fastow that ethics is the only protection. Understanding how outrage affects the way law gets interpreted might help too. Both together would be best

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