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THE ETHICAL EXECUTIVE

Stanford University Press

Chapter One

In the winter of 2001, Enron, the seventh largest company in the Fortune 500, went bankrupt. It was the second largest bankruptcy in the history of the United States. The Justice Department began an investigation after Enron admitted to fraudulent accounting that had overstated its income by $586 million. With the meltdown of the company, the loss to investors exceeded $60 billion.

In the spring of 2002, Adelphia communications, one of the largest cable companies in America, filed bankruptcy after restating its profits. The founder of the company, John Rigas, and his three sons had already been indicted. It was alleged that the Rigas family had used assets of their company as collateral to acquire personal loans of $3.1 billion. Recently, John Rigas was sentenced to fifteen years in prison, and his son Timothy Rigas was sentenced to twenty years in prison. They were convicted on charges of looting company funds to the tune of $2.3 billion. In the summer of 2002, the CEO of Tyco international, Dennis Kozlowski, was indicted for evading sales tax totaling $1 million. After continued investigations by the district attorney, Kozlowski and two other executives were accused of siphoning off $600 million of company money into their own pockets.

BothKozlowski and Mark Swartz, CFO of Tyco, received prison sentences of eight to twenty-five years for looting $150 million in company funds.

Without a doubt, the executives involved in these scandals had to be evil! They must have been psychopaths, leaders who would stop at nothing, leaders with criminal minds.

Perhaps in a few instances leaders who were responsible for scandals such as these were psychopaths. Robert Hare, who developed the Psychopathy Checklist, an instrument used by psychologists to diagnose psychopaths, estimates that 1 percent of people in business could be classified as being psychopathic. Yet the truth can often be disconcerting. Far more likely, these leaders are no different than you or us. "impossible!" you say. "I could never scam shareholders out of $60 billion!"

It's much more tidy and reassuring to blame one or two "evil" people. Myths of good and evil permeate our culture-there are the good guys and the bad guys.

One concept that Sigmund Freud pioneered and got right is that our behavior is multi-determined. There are multiple causes for our actions. the way we act is the result of a complex weave of situational factors, history, and personality. With the advent of social psychology, which is the behavior of individuals in groups, we have learned that the influence of the situation often overpowers the influence of personality. Even if we have good ethical values to begin with, given certain situational pressures, every one of us can become unethical.

From the ages of ten to eighteen the primary author of this book, Robert Hoyk, had one passion-magic. He performed for birthday parties, community functions, schools, colleges-he even performed one time at the Magic Castle, a private club for magicians in Hollywood.

Imagine that you're watching one of his favorite close-up tricks. Hoyk borrows a quarter from you. He picks up an empty drinking glass and drops the quarter into the glass. It clatters to the bottom. You're standing only a few feet away from him. He makes several magic passes with his hand and, suddenly, the quarter in the glass moves! It begins to levitate! The quarter slowly crawls up the inside of the glass almost to the rim. Abruptly, the coin drops to the bottom of the glass with a clink. Hoyk gives the coin back to you and you turn it over looking for any signs of tampering. None are evident.

How was the trick done? Hoyk used a long, fine, human hair. At each end was a small pellet of wax. One end was attached to his belt with the wax; the other end was lightly stuck to his thumb. When he borrowed the coin he stuck the pellet of wax to one side of the coin-the side opposite your view. With the coin at the bottom of the glass, all he needed to do was very slowly move the glass away from his body and the coin rose in the glass. Really, the coin didn't move-it was the glass that moved. But the coin looked like it was floating up the inside of the glass.

When you know how the trick is done, you clearly see the fine hair attached to the coin. You see the hair running up the inside of the glass, over the rim, and horizontally to Hoyk's belt. Once you're aware of the hair, it's hard to believe that you didn't see it before. You can see it plain as day once you know it's there. With awareness, illusions are just magic tricks that seem obvious. Without awareness, life's illusions trap us and distort our perception.

In this book, we will describe forty-five traps that every one of us falls prey to. Some of these traps distort our perception of right and wrong-so we actually believe our unethical behavior is right. The traps are psychological in nature, and if we're not aware of them they are like illusions-webs of deception. Once we see them, like the human hair in the magic trick, they lose much of their power to deceive us and we can more easily navigate around them.

In all likelihood, the traps we'll describe in this book helped to deceive ordinary people and sway them to torture and murder millions of human beings in Hitler's Germany. They probably influenced ordinary people to commit mass suicide and murder their children in Jonestown. In our analysis, these traps significantly contributed to the disasters of Enron, Adelphia, and Tyco.

Let's look at a company that had a tradition of high moral conduct that became trapped. In 2001 and again in 2002, Johnson & Johnson was ranked as the number one company Americans respected and admired. The company's credo states that its foremost responsibility is to the people who use its products. It's obligatory for all employees of this international company to be familiar with its credo. The credo was developed after the well-known Tylenol case in 1982. Johnson & Johnson recalled from stores thirty-one million containers of Tylenol following the death of eight people. Tylenol capsules had been opened and the ingredients mixed with cyanide. The company was not to blame for the deadly altering of the ingredients. Nonetheless, Johnson & Johnson redesigned the packaging so that the Tylenol capsules could not be tampered with. The recall cost the company close to $2.5 billion in revenues. This case has often been used in textbooks as a prime example of ethical conduct.

Sixteen years after the Tylenol case, LifeScan, a division of Johnson & Johnson, was raided by federal agents. LifeScan manufactured SureStep, a device that diagnosed diabetes. The company had withheld information from the F.D.A. concerning a defect in the software for SureStep. Johnson & Johnson was indicted for criminal charges and pleaded guilty. The company paid $60 million in fines. Ralph Larsen, CEO of the company, stated that the executives at LifeScan "cared deeply about the company's credo." Were these executives evil? More than likely, they were normal people. Probably, they got caught in a trap called minimizing, which we'll describe later.

The vast majority of people care about ethics, but are vulnerable to the traps described in this book. Good intentions are not enough to combat these forty-five traps. One of the most important ways to guard against corruption is to understand and be aware of these traps that distort our perceptions.

Knowledge of these forty-five traps will help the individual stay away from corruption. Voyagers who know the location of quicksand navigate around it. When we clearly identify danger, we can prepare for it and avoid it. Knowledge of these forty-five traps can give people the awareness that will enable them to make a difference; it will help individuals recognize and stop corruption at its roots-corruption within themselves and their organizations. Moreover, knowledge of these traps will aid individuals at all levels of an organization-from volunteers in nonprofit organizations to CEOs of large companies.

Corruption is widespread. A 2000 survey conducted by an accounting firm established that 49 percent of employees thought that if the misconduct within their business was made known, their organization would "significantly lose public trust." We all work for or belong to organizations. The traps described in this book can erupt in any organization environment.

Three years ago Bernard Ebbers, the CEO of Worldcom, was convicted in a federal court of an $11 billion dollar accounting fraud. He was given a prison sentence of twenty-five years! Worldcom was the largest bankruptcy in the history of the United States. Given the fact that our society is based on organizational systems and that trillions of dollars flow through Wall Street, there will always be a need for awareness of the traps described in this book.

(Continues...)

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Excerpted from THE ETHICAL EXECUTIVE by ROBERT HOYK PAUL HERSEY Copyright © 2008 by Robert Hoyk and Paul Hersey . Excerpted by permission.
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