Recent corporate wrongdoing has focused attention on punishing the "bad apples." But bad people don't have a monopoly on bad deeds, and even decent people may find themselves doing wrong unless firms integrate ethics into their organizations.Corporate governance

Lynn Sharp Paine

English

Research Papers in Economics

6 Regional Review Q4 2002
By Lynn Sharp Paine
enron’s meltdownin December 2001 and the subsequent
disclosure of legal and ethical problems at a number of other
U.S. companies have once again focused public attention on
what we can do to improve the ethical performance of U.S. busi-
nesses. To be sure, the bankruptcy of this energy-trading giant
cannot be attributed solely to ethical breaches. Investors had
begun to grow wary of Enron’s economic prospects months be-
fore they learned about the company’s misleading accounting
practices and its executives’ flagrant self-dealing. 
Revelations of ethical breakdowns, however, proved the coup
de grace. As evidence of improper accounting, questionable fi-
nancial engineering, and executive conflicts of interest came
to light, disappointment turned to indignation. Regulators and
lawmakers geared up for investigations, while angry investors,
employees, and other injured parties lined up for their day in
court. After the ailing firm failed in a last-ditch effort to find an
acquirer, a further credit downgrade triggered repayment obli-
gations that Enron could not meet. The company, which at its
peak boasted a market capitalization of $70 billion and a sev-
enth-place rank among the Fortune 500, filed for protection
from its creditors. Less than a year later, in October 2002, En-
ron Chief Financial Officer Andrew Fastow was led in hand-
cuffs to a Houston courtroom to face charges that could send
him to jail for 40 years.
In the wake of these events, much attention has focused on
punishing the “bad apples” who perpetrated the misdeeds at
Enron and elsewhere. Yet, to concentrate only on individual
wrongdoers may waste a chance to improve the performance
of business firms. Such a focus rests on a too-simple view of hu-
man behavior and neglects the powerful ways that organiza-
tions influence conduct. It assumes that bad deeds are the work
of bad people and that decent, well-intentioned people will in-
stinctively and automatically do what’s right, whatever the con-
text and circumstances. But without a serious attempt at deal-
ing with ethics at the organizational level, even decent people
who are doing their level best can find themselves acting at odds
with both their own values and the expectations of the broad-
er society.
TAKING CUES FROM OTHERS
Most of us are far more susceptible than we think to the influ-
ences and opinions of those around us, and more willing than
we may realize to leave difficult moral judgments to others. In
perspective
Bad people do not have a monopoly on bad deeds: 
taking an organizational approach to ethicsillustration by hadley hooper Regional Review Q4 2002 7
experiments undertaken by Princeton University social psy-
chologist John Darley, research subjects were working on an
assigned task in a computer room when they heard cries from
next door. Some subjects were alone, while others were work-
ing alongside a small group of strangers who were part of the
study and had been instructed not to respond. Darley found
that 80 percent of those working alone got up from their work
to check on the individual calling for help. By contrast, only 20
percent of those working next to the group did so. When in-
terviewed after the experiment, those who had not responded
explained that they had not acted because no one around them
was acting. 
This shows what we know intuitively—that even good peo-
ple are fallible, and the risk of moral error multiplies exponen-
tially in an environment of moral indifference. Lacking a pub-
licly shared set of values, individuals can easily become morally
isolated. Some may even suppress their ethical concerns out
of misguided deference to others. As one employee confided
to me, “You lose your bearings and your ability to distinguish
right from wrong.”
Yet, many companies operate on the premise that organiza-
tions are essentially amoral and that to prevent wrongdoing, all
that is necessary is to hire ethical individuals. That this premise
is mistaken was made evident when Wharton School Profes-
sor Scott Armstrong and colleagues asked groups of executives
and business students from eight countries to play the role of
an imaginary pharmaceutical company’s board of directors. In
this scenario, one of the company’s most profitable drugs was
causing an estimated 14 to 22 “unnecessary” deaths a year and
would likely be banned by regulators in the company’s home
country. A rival was offering an alternative medication with the
same benefits and at the same price, but without the side ef-
fects. What should the board do?
More than 80 percent of the “boards” decided to continue
marketing the product both domestically and overseas, and to
take legal, political, and other actions to prevent authorities
from banning it. Of the remaining 20 percent, some said they
would continue marketing the drug until a ban actually took
effect, while others said they would cut back on production or
market only to doctors who requested the medication. No
group decided to recall the product, and there were no signif-
icant differences by age or nationality.
Yet, when Armstrong asked a separate sample of business
students, managers, and faculty members for their personal as-
sessment, 97 percent said the decision to continue shipping
was “socially irresponsible.” Thus, 80 percent of the partici-
pants acting in a corporate capacity made a decision that 97
percent of those acting in a personal capacity judged to be
morally unacceptable. This suggests how powerfully—and
subtly—corporate roles can influence behavior. 
ORGANIZATION BY DESIGN
Many executives who are quick to take credit for creating cul-
tures that motivate sales or productivity are equally quick to
deny responsibility for cultures that encourage misconduct.
EVEN DECENT PEOPLE who
are doing their level best can
find themselves acting at
odds with both their own
values and the expectations
of society.8 Regional Review Q4 2002
But companies do not spontaneously arrange themselves in a
way that makes it easy or even feasible to discourage illegal ac-
tions and foster ethical decision making. They must be orga-
nized, managed, and led in a way that makes this possible. 
A company’s ability to conform its activities to a set of ethi-
cal principles, to make sound judgments when values conflict,
or to engage in self-scrutiny and self-correction all presuppose
a suitably designed and effectively functioning infrastructure
that allows and encourages the company to operate in an ethi-
cally responsible way. By infrastructure, I refer to the whole
array of structures, systems, and processes that guide a com-
pany’s functioning both day to day and long term.
Consider an auto mechanic whose job includes inspecting
cars, recommending repairs, and performing repair work. Man-
agement instructs its mechanics to sell a certain number of re-
pair jobs during every shift. If mechanics fail to meet these quo-
tas, they can be transferred or have their work hours cut back.
In addition, for every hour of repair work beyond a specified
minimum, the mechanics earn incentive pay. One mechanic
suspects that coworkers are recommending and performing
unnecessary repairs. He knows for a fact that some have told
customers that their cars’ struts are “blown out and leaking”
when they aren’t.
When I’ve asked business executives to consider this situa-
tion from an ethical point of view, virtually all of them say that
it would be unacceptable for the mechanic to do what the oth-
ers are doing. However, when asked to predict what the me-
chanic is likely to do, most predict that he will lie. Most cite
the organization’s quota and incentive system—not the me-
chanic’s character. 
SORTING THE ISSUES TAKES PRACTICE
Many managers also could benefit from training in identifying
and evaluating ethical issues when they arise and practice in
thinking through how to handle them. Otherwise, even prob-
lems that seem obvious in retrospect can go unrecognized or
mishandled until after the damage is done. 
One such example is the firestorm that resulted when soft-
ware maker Lotus Development Corporation and credit re-
porting agency Equifax, Inc., announced their jointly devel-
oped software product Lotus Marketplace. Intended to help
small businesses identify prospective customers, Marketplace
contained information on 80 million U.S. households gleaned
from public sources and from Equifax’s own credit reports. The
companies’ new product announcement unleashed a barrage of
unexpected criticism about possible violations of individuals’
privacy as well as the database’s potential misuse. Taken by sur-
prise, the development team proposed several changes, but the
changes were too little, too late. Privacy advocates, buoyed by
the prospect of Congressional action, had already begun a co-
ordinated effort to oppose Marketplace. One email addressed
to the CEO of Lotus put it bluntly: “If you market this prod-
uct, it is my sincere hope that you are sued by every person for
whom your data is false, with the eventual hope that your com-
pany goes bankrupt.” In the end, plans to ship the product were
canceled; later that year, Equifax discontinued sales of direct-
marketing lists generated from its credit data. 
The product design team’s failure to recognize the potential
ethical issues with Marketplace illustrates the dangers of rely-
ing solely on instinct for ethical guidance. Few people, even ex-
perienced managers of impeccable character, have such well-
honed instincts that they can single-handedly grasp the moral
questions raised by a new technology or a complex financing
scheme. And neither ethics codes nor values statements are
much help when it comes to difficult or novel matters like these.
What’s needed is a defined method for integrating ethical analy-
sis and assessment into the organization’s decision processes. 
A ROLE FOR LEADERSHIP 
Calls for greater corporate responsibility have far-reaching im-
plications not just for corporate governance, but for virtually
every aspect of management—from the frameworks used to an-
alyze and make decisions to the measurement and reporting of
performance, and even the choice of strategy and structure. 
This is not to say that an ethical business climate can be cul-
tivated solely through the efforts of individual organizations.
Political and economic choice, free-flowing information, and
an educated public are also essential. Moreover, an effective le-
gal and regulatory system is necessary to provide the incentives
that promote and enforce basic ethical norms. At least in the
United States, the legal system has played a crucial role in cor-
recting social indifference, misconduct, and overreaching by
business. Antitrust laws, food and safety laws, equal protection
laws, and workplace safety standards are just a few examples. 
This is also not to deny the existence of good and bad peo-
ple or the importance of punishing wrongdoers. However, it is
a mistake to believe that bad people have a monopoly on bad
deeds. In the absence of an active effort to build and maintain
a positive set of organizational values, the values of individuals
are left to the corrosive forces of indifference. S
Lynn Sharp Paine is John G. McLean Professor
of Business Administration at Harvard Business
School. This article is based on her book, Value
Shift: Why Companies Must Merge Social and 
Financial Imperatives to Achieve Superior Per-
formance, published in October 2002 by Mc-
Graw-Hill.
Companies do not spontaneously arrange themselves in ways that
foster ethical decisions, but must be organized to make this possible

Perspective: bad people do not have a monopoly on bad deeds: taking an organizational approach to ethics

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Perspective: bad people do not have a monopoly on bad deeds: taking an organizational approach to ethics

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