Marc Smith is acting editor of Families in Business.
Corporate scandals such as Parmalat not only changed the way business is conducted, but also forced business ethics into the mainstream. Marc Smith assesses whether teaching ethics could help future generations avoid the mistakes of the past
Few corporate scandals can compete with family-owned Italian dairy company Parmalat Finanziaria for the magnitude of unethical behaviour. Founder Carlos Tanzi, once heralded as an archetypal rags-to-riches entrepreneur, today remains in prison nearly four years after his firm was discovered to have an €8 billion hole in its accounts.
Tanzi and his co-defendents are charged with financial fraud and money laundering for, amongst other indiscretions: inventing financial transactions to pad the balance sheet; transferring liabilities to off-book susidiaries; and claiming the existance of a fictitious bank account worth $3.95 billion. On being confronted about the firm's debt by the then CFO, Tanzi is alleged to have said: "8 billion, 11 billion, 14 billion – it's all the same."
Parmalat's negligence has been matched by other corporate scandals in the US such as Enron and WorldCom, and the fallout has had some far-reaching effects. While the much-maligned Sarbanes-Oxley Act of 2002 has attempted to clean up American company auditing, another development has seen business schools from both continents attempt to prevent unethical behaviour at the source – by educating the business leaders of the future.
Starting from scratch
Professor Rosa Chun, from the UK's Manchester Business School, has observed this change first hand. "This is going to become one of the most important issues to incorporate into MBA, masters and other course curriculums," she says. "And the push is coming from the major corporations – the Enron leaders all had MBAs from top business schools, which made us wonder whether we were providing the right sort of education."
Business ethics can cover a wide variety of sins, but according to Geoff Moore, founding member of the UK Association of European Business Ethics Network and professor of business ethics at the UK's Durham Business School, they are the recognition that there are ethical considerations in the conduct of business. "These apply as much to 'how we do our core business' as to relationships with the community through volunteering or philanthropy," says Moore. "Handling environmental issues is also a core part of this, where businesses should now be aiming to become carbon neutral as quickly as possible."
Stateside, there are also concerns. "Personally, I place great emphasis on the ethics of business practices," says professor John Davis, senior lecturer of business administration at Harvard Business School, and founder of a faculty to cope with the specific requirements of family businesses. "In case discussions of family business situations, we frequently address the ethics of an action or approach."
Research published by the Journal of Business Ethics demonstrated just how important the topic has become. Of the 50 business schools surveyed, the past eight years has seen enrolment in business ethics courses increase five-fold, with a quarter of all schools requiring students to take such a course. Eighty four percent of the schools require at least one of ethics, CSR and sustainability to be covered in the MBA curriculum, while a third require all three topics to be covered.
Back in Durham, Moore and his colleagues decided to introduce business ethics courses into the curriculum because, he believes, "it is rapidly becoming a core issue and is included in subject benchmark statements". Their full-time MBA has a core session in induction on CSR/sustainability and this feeds into consideration of CSR in other core modules. Their distance learning MBA also offers an elective on business ethics.
But, it's not just the academics who are concerned. "In my experience it's also the students who have been pushing for us to have an elective element on corporate social responsibility," says Chun. "If it had just been the directors and me asking for it then it would have taken ages to get through; the powerful student push meant it has happened quickly." The end result, it is hoped, will be students who graduate with an idea of how they're pushing for profit and its effect on others as well as what most people would call business acumen.
Leading by example
But how are family businesses incorporating ethics into their workplaces? The all-conquering Indian industrial giant Tata Group's fourth chairman, JRD Tata, was famously meticulous when it came to financial ethics – he was reported to be uninterested in tax avoidance and instead preferred to follow a strategy of tax compliance. On celebrating the centenary of his birth in 2004, the Group paid hommage to him by celebrating an "ethics month", which involved each employee taking an "ethics pledge". Today, the CEO is also known as "chief ethics officer", and nominates an "ethics counsellor" who manages a process known as the Management of Business Ethics to ensure that Tata enterprises and employees adhere to the highest ethical standards.
US-based McGraw-Hill, the family-owned media firm behind ratings agency Standard & Poor's, has "a global reputation for the highest standards of excellence, quality and for respect, honesty and fairness in dealings with customers, investors, business partners, vendors, colleagues and other constituents," says chairman, president and CEO Harold McGraw III in the firm's Code of Business Ethics for Employees. "Our continued success and future growth depend on the preservation of these standards."
Employees must read and reaffirm the code annually, which stipulates that employees should look to be good citizens in the communities in which they work, while the company promises to remain "sensitive to the economic role we play in those communities". The company is further committed to making contributions to a wide range of community and educational institutions and "encourages employees to do so by matching their gifts". To ensure the code is adhered to, a Corporate Compliance and Ethics Steering Committee was created.
L'Oréal, the family-owned cosmetics giant, has a particular focus on ethics in relation to the environment. The firm's Ethics Charter Document states that L'Oréal "has implemented a policy of reduction in water and eneregy consumption, and recycling of waste material in all its activities". In addition, the company encourages its employees to "participate in innovative action for the protection of the environment".
The Kamprad family behind the IKEA retail chain, famous for its wooden flat-pack furniture, is also keen on environmental ethics; it insists that the wood it uses comes from responsibly-managed forests. To ensure this policy is adhered to, suppliers are required to supply tracing information, which the firm's purchasing teams follow up before recommending a risk assessment.
An ethical future
Ethics within family businesses tend to start with the firm's internal culture, which is in turn influenced by the family, and particularly the founder's, philosophy. Once a firm goes multinational and there are successors over many years, the founder's vision will be inherited. The trick is to inculcate the ethics and responsibility at the founding stage – like any new method of working, it can be a lot harder to impose ethics on people who are not brought up with it.
Given the current scrutiny from a wide range of sources – government, financial authorities, shareholders and the public – it is essential for all businesses to examine and evaluate their processes to ensure they don't repeat the mistakes of Parmalat et al. It is no surprise, therefore, that business schools on both sides of the Atlantic appear determined to start producing graduates with an awareness of business ethics and their importance to the 21st century company.