Corporate Morality

US President George W. Bush: “Corporate America must stop cooking the books.” Martha Stewart: “Indeed. It must sautee them instead.”

Nowadays, the words ‘corporate morality’ sit uneasily together in the same sentence. The litany of recent Wall Street scandals is hard to keep track of: WorldCom, Enron, Tyco, Merck, Bristol Meyers and even the allegations against the perfect Martha Stewart. Canada can’t claim the moral high ground either. Remember BreX, Livent, Cinar and YBM Magnex, all cases that left millions of shareholders steeped in huge losses?

These examples make the term “corporate morality” an oxymoron.

Prior to these shenanigans, many large corporations aspired to be good corporate citizens. Hoping to demonstrate care and concern for the public good as well as delivering profits to shareholders, some companies sponsored charities, others offered employees generous benefits packages and still others strove to show concern for the environment or social welfare.

So what happened?

A myriad of theories abound. The stock option structure of executive compensation packages is the target of much criticism in this post-scandal period of soul-searching as observers claim it invites greedy self-interest. Others believe the cult of the charismatic CEO promotes toadyism. Then there’s the constant pressure from shareholders for ever-increasing profits.

The tech sector meltdown, which wiped out literally trillions of dollars from capital markets and portfolios, made people desperate too. Finally, white collar crime is hard to prove, and light penalties often result. White collar criminals don’t go to the “The Big House”- they get the big house.

In our practice, we see how the structure of business can contribute to morally questionable conduct – strong leaders making sure subordinates bend to their will; accounting, legal and compensation mechanisms that reward self-interest and an increasingly competitive marketplace that seems to make moral decision making impossible.

We have also observed that business leaders make ethical decisions based on their personal level of moral development. So, morally questionable decisions can suggest a particularly low level of adult moral development in a particular leader.

According to psychologist Lawrence Kohlberg and academic Carol Gilligan, moral development begins in childhood, advances through stages and provides the basis for decisions about right and wrong over a lifetime.

Business leaders can get stuck at particular levels of moral development and that affects their ethical decision-making. Less morally developed leaders tend to make less developed moral choices.

Kohlberg pioneered six stages of moral development and Gilligan expanded our understanding of human morality. Level 1 and 2 represent infantile phases of development, many adults function at levels 3 and 4 most of the time and the most morally developed individuals consistently exhibit level 5 and 6 behaviours.

Level 1: What Can I Get Away With? Leaders at this stage make judgements about right and wrong based on the likelihood of getting caught and the severity of the punishment. These leaders are motivated solely by self-interest and are highly opportunistic. If the probability of getting caught is low and the punishment negligible, the leader reasons that the immoral act in question – cooking the books, taking an unauthorized loan or stealing a subordinate’s idea “can’t be that bad”.

Level 2: What’s In It For Me? Self-interest motivates ethical decision-making at this stage, with leaders focusing less on avoiding detection and punishment and more on maximizing personal gains. A decision is morally justified as long as it benefits the leader directly. When caught, the leader will blame the misstep on external factors such as share structures, shareholders or accounting practices. Leaders at this stage of development are pragmatic and egocentric. An exaggerated sense of entitlement leads them to sincerely believe that their interests are more important, more worthy and more urgent than those of others.

Level 3: How Will This Decision Affect My Relationships? Leaders at this level of development base moral decisions on how their choices will affect their relationships with others. Leaders who value relationships and positive bonds with others will make decisions based on a greater good at this level. Moral choices that are difficult for leaders who function at this level are ones that may require “hurting” others (e.g., firing a favoured VP; denying a bonus to an under performing team member or “withholding” insider trading details that could benefit a colleague).

Level 4: How Does This Decision Maintain Fairness, Order and Uphold the Law? Leaders at this level believe in the principle that following laws both in letter and spirit will contribute most to the common good. The reason for being lawful is driven not by fear of punishment but a belief in the benefits of rules in a civil society. The leader follows the rules, is fair and above board, even when decisions may be unpopular or against the leader’s personal interest. The belief in the importance of law for its own sake is paramount to this leader.

Leaders at this level can be rigid, conventional, legalistic and unquestioning when faced with an opportunity to re-think unhelpful rules.

Level 5: What Are My Responsibilities To Others and Society? Leaders at this stage of development accept their obligations to others as a given, and tend to consider rules, laws and dictates with a critical eye. They operate according to an internal set of principles not based on self -interest, fear of punishment or rigid beliefs about order. These leaders believe their principles, morality and the rule of law as a social contract require them to prevent harm to others and hold themselves accountable.

They address rules and laws they consider unfair, hold themselves to account over and above what is “required” of them and uphold their principles in the face of opposition.

Level 6: What Do I Believe Is the Truly Right Thing To Do? This stage of development is an extension of level 5. Leaders at this level are deeply aware of their own consciences. They are principled and have the courage of their convictions. If rules, laws or societal requirements do not jive with the leader’s conscience, he/she will heed these internal dictates.

Leaders at level 5 and 6 appear determined, kind and compassionate. They take responsibility for themselves and their decisions, tend to resist blaming others for their circumstances (e.g., the shareholders made me do it) and strive to remain aware of their most deeply held beliefs.

Luckily, moral behaviour and ethical decision-making can be learned. It is up to leaders and workers to identify their personal level of moral development and that of the organization.

By working to improve the quality of the organization’s morally based decisions and behaviour, the hard moral lessons, such as those learned in courts, in front of securities commissions and even in jail, may be avoided.

Dr. Jennifer Newman and Dr. Darryl Grigg are registered psychologists and directors of Newman & Grigg Psychological and Consulting Services Ltd., a Vancouver-based corporate training and development partnership. They can be contacted at

Identifying information in cases cited has been changed to protect confidentiality.

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