How an Ethical Culture Can Become an Unethical Culture

The story of Arthur Andersen, the now defunct auditing company, provides a sad example. It demonstrates how a solidly ethical culture can be transformed into an unethical culture and lead to the demise of an 88-year-old firm.

Founder Arthur Andersen created the company when he was in his twenties. As chief executive, the messages he conveyed about ethical conduct were strong, consistent, and clear. Andersen’s mantra, ‘‘Think straight—talk straight,’’ guided employee behavior in an organization where ‘‘integrity mattered more than fees.’’ Stories about the founder’s ethics quickly became part of the firm’s mythology and lore. For example, at the age of 28, Andersen confronted a railway executive who insisted that the accounting firm approve his company’s books. Andersen said, ‘‘There’s not enough money in the city of Chicago to induce me to change that report.’’ Andersen lost the railway company’s business, but when that company later went bankrupt, Arthur Andersen became known as an organization people could trust to be honest and to stand up for what was right. In the 1930s, Arthur Andersen emphasized accountants’ special responsibility to the public. The founder died in 1974; but he was followed by leaders with similar beliefs, and the strong ethical culture continued for decades. The management style Andersen initiated was a centralized, top-down approach that produced employees who were systematically trained in the ‘‘Andersen Way.’’ Customers around the world knew they could expect quality work and integrity from Andersen employees, who were all carefully socialized to speak the same language and to share ‘‘Android’’ values. Through the 1980s, people were proud to say they worked for Arthur Andersen, which would provide a good career within a respected company. In the mid-1990s, Arthur Andersen still provided formal ethical standards and ethics training. In 1995 it even established a consulting group, led by Barbara Toffler, to help other businesses manage their ethics. But Toffler quickly became concerned about the ethics of her own employer, which she chronicled in her book Final Accounting: Ambition, Greed, and the Fall of Arthur Andersen. Toffler attributes much of the change from ethical culture to unethical culture to the fact that the firm’s profits increasingly came from management consulting rather than auditing. Auditing and consulting are very different undertakings, and the cultural standards that worked so well in auditing were inconsistent with the needs of the consulting business. Under the new business realities, rather than standing for principles of honesty and integrity, consultants were encouraged to keep clients happy and to concentrate on getting return business because only revenues mattered. They were even expected to pad prices or create work to increase profits.

Even the training that had always been so important to Andersen’s culture wasn’t immune from change. Traditionally, new employees had been required to attend a three-day enculturation session, but now new consultants were told not to forgo lucrative client

work to attend the training. So Toffler and lots of other consultants never got the

cultural training. By the time Toffler arrived at Andersen, no one referred to the ethical standards, although they still existed in a big maroon binder. Toffler says, ‘‘When I brought up the subject of internal ethics, I was looked at as if I had teleported in from another world.’’ So Andersen still had ethics policies, and they still talked about ethics in formal documents, but the business had changed dramatically and the approach to ethics management had not kept pace.

Andersen was convicted of obstruction of justice for shredding documents associated with its role as Enron’s auditing firm and quickly went out of business. The Supreme Court reversed the decision in 2005, ruling that the jury had not been advised that conviction in a white-collar crime case requires evidence of criminal intent. However, the Supreme Court reversal did not clear Andersen of wrongdoing. In fact, prosecutors provided evidence of criminal intent. In the end, even if someone had wanted to, there was no firm left to resurrect.

Was Andersen’s transformation from ethical culture to unethical culture a conscious process? Did anyone ever say, ‘‘Now we’re going to create an unethical culture at Arthur Andersen’’? We doubt that. But leaders’ lack of attention to the ethical culture as the organization was undergoing a significant business transformation practically guaranteed that the messages sent by the informal culture would begin to contradict those sent by the formal culture and lead to a culture that was seriously out of alignment as well as one that increasingly sent messages suggesting only the bottom line mattered.

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Organizational Authority Structure

Ethical cultures should guide individuals to take responsibility for their own behavior, question orders to behave unethically, and report misconduct or problems. A strong ethical culture incorporates a structure that emphasizes and supports individual responsibility and accountability at every level. Employees are encouraged to take responsibility for their own actions and to question authority figures if they have concerns. And individuals are held accountable for negative consequences when they occur and for reporting problems they observe. One manager we know created the idea of ‘‘Velcro’’ to convey the importance of responsibility to her direct reports. She tells them, if you know about a problem, it’s yours until you address it. It’s stuck to you like Velcro!

Most modern organizations are bureaucratic, meaning that they have a hierarchy of authority, a division of labor or specialization, standardization of activities, and a stress on competence and efficiency. Bureaucracy provides many advantages, and large organizations require a certain amount of bureaucracy in order to function. For example, ethics and legal compliance offices in organizations signal to everyone that these are important issues worthy of resources, expertise, and staff. However, certain characteristics of bureau-cracy—such as specialization, division of labor, and hierarchy of authority—can present problems for the organization’s ethical culture.

AUTHORITY, RESPONSIBILITY, AND ETHICAL CULTURE

With bureaucracy comes the idea of legitimate authority. Look at any organizational chart. It will tell you who supervises whom—who has authority over whom. These authority figures serve important bureaucratic roles. They direct work, delegate responsibility, conduct performance appraisals, and make decisions about promotions and raises.

This natural tendency toward unquestioning obedience can be a real threat to the organization’s attempt to build individual responsibility into its ethical culture. In attempting to control employee behavior, many firms expect loyalty; and some demand unquestioning obedience from their employees. You might think that’s a good idea—that authority figures have more experience and should know what’s right, and employees should follow their orders. But even the military with its authoritarian structure expects soldiers to question unethical orders. Loyalty is generally a good thing, but you shouldn’t be expected to be loyal or obedient to an unethical boss or organization. Unquestioning obedience to authority means that employees are not expected to think for themselves, to question bad orders, or to take responsibility for problems they observe. Therefore, a ‘‘do as you’re told’’ and ‘‘don’t ask any questions’’ culture that expects unquestioning obedience from employees can become involved in serious ethical problems. Research has found that the more a firm demands unquestioning obedience to authority, the higher the unethical conduct among employees, the lower their tendency to seek advice about ethical issues, and the lower the likelihood that employees would report ethical violations or deliver ‘‘bad news’’ to management.

Some managers create a structure designed to help them avoid blame. Their greatest fear is that when it comes time to blame someone, the finger will point their way, and their job will be at risk. By delegating responsibility to those at lower levels in the organization, the authority figure can often avoid personal blame for mistakes or ethical blunders. When it comes time to blame someone, the finger of blame frequently points down. Underlings, in particular, fear becoming the scapegoat for mistakes made at higher levels. CYA memos proliferate as managers look to blame someone in a relatively powerless position who is considered to be expendable.

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