Professional Documents
Culture Documents
September-October 1961
Code of Conduct
for Executives
By Robert \V. Austin
Tn the past year we have heard much discussion of price fixing and conflicts of interest in
business and government. The ethics of many
top-le\el executives have been questioned; the
reputations of various organizations have suffered. Much of tfie argument, it seems to me,
is confused. The controversy does not seem to
he getting us any^vhere. Accordingfy, in this
article I shall propose a different way of thinfiing about the whofe problem. I fjefieve that:
C "Business ethics," "corporate morality," "corporate ethics," and similar phrases mean nothing.
The public's opinion of the ethics of business and
of the corporation is based entireh' on the actions of individual business managers.
be published in book form by McGraw-Hill Book Company, Inc., A'ew York, early in 1962).
53
54
Harvard Business
Revieiv
Starting Points
An incentive, according to the dictionary, is
"that which incites or tends to incite to determination or action." There are two kinds of
incentives external and internal. Also, there
are external and internal "disincentives." 1 define a disincentive as "that which impedes or
tends to impede determination or action."
Types of Incentive
An external incentive is a neutral or amoral
thing. The incentive, whatever it is, can incite
toward action or decisions which may be defined as either good or had, but the incentive itself is neutral. Incentives designed to
induce executives to take more effective action,
or to make better decisions to accomplish some
purpose, arc external incentives. Examples are
stock options, profit sharing, bonuses, early retirement, and threat of punishment. The purpose of using such devices is to create a more
profitable operation of the enterprises run hy
executives thus incited.
But profit is also a neutral or amoral concept.
There either is or is nt)t a difference between
ineome and outgo. If income exceeds outgo, the
venture is profitable; if outgo exceeds income,
the venture is not. But the faet of either profit
or loss is not "good" or "bad," using these words
in a moral sense. Tt is ht)w the difVerencc, or
the profit, is produced which may be moral,
immoral, or amoral. Thus it is the action the
external incentive produces that may be judged
by an ethical standard, not the external incentive itself, nor the resulting profit or loss.
Another, and very different, kind of incentive
is internal. Tt is the kind which is created by the
executive himself, which wells up from within.
It does not act like the carrot or the stick, hut is
something very different. A personal ethic or
philosophy, an overweening ambition for power
or material gain, greed, fear all these could
be internal incentives. They may themselves be
thought of as good or evil, moral or immoral,
depending on the standards by which they are
judged; and they may be gooti or evil in result
Code of Conduct
as "ethics" or "morality," For a corporation is
not a person or individual and the concept of
ethies or morals is one relating to right and
wrong actions of individuals, not of artificial
entities createtl by law.
Yet, in general discussions oF recent problems
of right and wrong in the business world, spokesmen For all classes and segments of our society
have used such terms as if they had a clear and
definable meaning. To illustrate:
c A leading industrialist, speaking before the
Minneapolis Junior Chamber of Commerce, said
that "if corporations are corrupt, then it will he
assimied that the society itself is corrupt." But a
corporation cannot he corrupt; it may employ men
who are corrupt and who act for the corporation
contrary to society's rules, but the corporation itself can neither be corrupt nor ethical. For it is not
the kind of being that ean be so judged.
I The president of one of our largest oil companies in a letter to supervisors in March said that if
his letters had titles, "perhaps the heading of this
one should be 'Business Ethics' or 'Corporate Morality.' " He then went on to talk about a corporate
policy with respect to standards of conduct for executives in the company. This latter idea makes
sense: while a corporation may itself have neither
morals nor ethics, its board of directors may adopt
a policy setting Forth standards of conduct which
will be required of its executives. When this is
done, that policy and those standards of conduct
become meaningful, for they represent standards
of right and wrong for individual conduct.
C A Kiplinger Washington Letter in April 1961
started off by saying, "Business ethics are about to
be questioned in an even bigger way," and referred to "outright frauds" in government contracts.
Here again it is unclear to talk about business
ethics. Fraud, a crime, is perpetrated by individuals, and not by "business," which is a vague and
amorphous word.
C President Kennedy in his special message to
Congress on conflict-of-interest statutes was more
precise than most. He did use the phrase "ethics
in government," which might have been thought
to indicate that a government could have ethics,
but he soon made clear that what he meant to do
was to create standards of conduct for individuals
engaged in government.
"Business ethics" is a poor phrase to use, but
properly interpreted it ean only mean the standards of eonduet of individual businessmen, not
the standards of business as a whole. Tt is in
this sense that T approach the subject in this
55
Priee-Fixing Cases
The electrical manufacturers' price-fixing suit
makes an interesting case study showing how
codes of conduct act as incentives or as tlisincentives. What were the codes of conduct of
the exeeutives involved both externally and
internally imposed?
Antitrust Laws
The antitrust laws, externally imposed, are a
code of conduct stating that (a) competing businessmen should not agree as to the prices at
whieh their produets are to he sold, (b) competing businessmen should not agree to allocate
shares of the market between themselves, and
(c) businessmen must not monopolize a market.
These statutory codes of conduct are stated as
"Thou shalt not"s and earry sanctions for failure to conform fine or imprisonment.
For the exeeutives in the electrical firms the
codes were either external incentives to compete vigorously or external disincentives to conspire, insofar as agreements in restraint of trade
were concerned. However, where monopolization was eoneerned, in the case of the large companies they were either external ineentives to
hold the umbrella over smaller companies in the
industry or external disincentives to compete.
As the widely publicized experience with the
so-called "white sales" showed, if General Electric and Westinghouse really set prices at competitive levels, their pereentage share oF the
market rose, and thus they ran an increasing
danger of being charged with monopolization.
Here, then, was a situation where external codes
of conduct imposed by the same statute were,
or certainly seemed to be, contradictory. Whether the codes were incentives or disincentives,
they created conflicts and problems of judgment
in the minds of the individuals involved.
Company Directive
General Electric's Directive 20.5 created a
stantlard of conduct For individual employees
insofar as the antitrust laws were concerned. It
was distributed to all decision-making executives once a year; each was expected to sign it
56
Harvard Business
Revieiu
Code of Conduct
These are laudable motives based on an internal ineentive to make - in one's daily work
a significant contribution to a significant goal.
If an executive's internal ineentive can convince him that by his actions he is benefiting
workers for whose employment he is responsible,
serving tbe society in which he lives, and protecting his company from unscrupulous and
fraudulent competition, and iF the internal incentive competes with the externally imposed
and conFusing incentives and disineentives of a
"bad" law, can we blame him For deciding to
Follow his own code oF good conduct? I should
think not unless, once again, there is some
affirmative, internal "Thou shalt," rather than
an external "Thou shalt not," which will carry
him iinscathetl to the best decision.
Tn this case there were external and internal
codes oF conduct acting both as incentives and
disincentives. The requirements were confused,
contradictory, and primarily oF the "Thou shalt
nt)t" character rather than the "Thou shalt"
negative rather than affirmative, requiring fallible individual judgments as to proper conduct.
Conflicts of Interest
Another interesting series of case studies lies
in the area of so-called "conflicts of interest."
In recent years. For instance, we have had cases
concerning an executive assistant to the President of the United States, a Seeretary of the Air
Force, and the president oF a large corporation.
57
Thou shalt not mislead the public in a statement of Facts describing a company prior to an
offer of securities to the public.
Thou shalt not fail to reveal the stock ownership of directors and large stockholders in a proxy
statement sent to stockholders.
Thou shalt not fail to reveal when a nominee
for the office of director does business with the
corporation For whose board he is a candidate.
Thou shalt not profit from inside knowledge
hy purchase and sale oF stock of a company of
which you are a tlirector.
Thou shalt not be guilty of false or misleading advertising.
Thou shalt not be guilty of adulteration or
misbranding.
Governing Codes
I shall return to the specifics of these situations presently. First, however, let us consider
the more general question: What codes of conduet apply to men involved in cases of this sort?
There are at least Four variations:
58
I'orce.
Code of Conduct
that they would receive favored treatment in
thoir dealings with his branch of the government. Onee more the external code was not
effective as an incentive or disincentive, since,
in the Secretary's judgment, it was not applicable
to the situation.
The Case of the President of a Large Corporation. The president had substantial equity interests in suppliers of his company. In his fiduciary capacity he would and did agree that he
should not profit at the expense of his employer,
but he failed either to see or agree that his ownership might result in that supplier being favored
over other suppliers to the possible detriment
of his employer. Thus he failed to reveal his
interest to his board of directors. So, again, the
application of the code was a matter of his individual judgment, and since in the president's
judgment it did not apply to the case at hand,
it was neither an incentive nor a disincentive
for him to act.
59
Proposed Solution
But business leaders must face and solve the
problem, else they will no dt)ubt find "Thou
shalt not"s imposetl by sticicty.
M'hat can we do? Over the years we have
read more and more about business management
as a profession. More often than not we hear
executives characterized as "professional managers." Is there a clue hero?
60
Harvard Bitsiness
Review
Resolving Conspiracy
A^''hat might have happened in the electrical
manufacturers' conspiracy oases if this standard
of conduct had been operable in that situation?
Tho externally imposed codes of conduct
that is, the prohibitions contained in the antitrust laws and in Cenoral Llectric's Directive
20.5 may have led the individual executive
(as I have already pointed out) into trying to
resolve conflicts between external and internal
incentives, between his judgment as to what his
company policy was and how ho best could
carry it out in the light of his own personal incentives and the profit purpose of bis company.
Those codos placed on fallible individuals the
pressures of conflicting incentives and disincentives and resulted in unhappy conseqtiences for
both tho individuals and their company antl,
indeed, for the society in which the company
operated.
On tbe other hand, the code of conduct I
have suggested would bave lod tho indivitlual
Code of Conduct
executive to go up the ladder to reveal the facts
to the president of the company. Then more
than one fallible man would have been involved
in looking at the external codes and at the company's and individual's positions with respeet
thereto. When the facts were revealed to the
president and he recognized the eonflict between
(a) the antitrust law's prohibitions against restraints of trade and (b) the same law's prohibitions against monopolization, it would have been
his duty under the proposed code to reveal, in
turn, the facts to his board of directors. I am
sure that at this point the decision would havo
been made to compete vigorously in spite of any
dangers apparently inherent in so doing, i.e., the
threat of being charged with monopolization.
Thus, the problem of the individuals involved
would have been solved and their affirmative
code of conduct would have carried them all
through a difficult time. On the other hand,
having matle the correct decision to comply with
the law, the board of direetors of Ceneral Electric Company, with the facts in their possessitm
and complying with this suggested cotle, would
have hatl a responsibility, and a clear one, to
reveal the truth and the facts about the problem
faced by companies of this kind to the society
in which they operated.
How would that have been done? There were
several alternative courses of action open. One
\vould have been to develop a presentatitm of
the facts about the dilemma in which companies
of this character were (and still are) placed by
the prohibitions of Sections r and 2 of the Sherman Act, and then to reveal these facts to the
Department of Justice. Another possible course
of action would have been to prepare a presentation to place tm the record of a Congressional
Committee investigating monopoly. T'he third
possibility would have been to bring to the attention of the public through institutional advertising the fact that the problem existed not
only for the giants in the electrical industry, hut
for those in many other Industries as well.
I have often wondered about the wisdom of
the policy adopted by so many leaders of largo
businoss enterprises, of affirming time and time
61
again that they agree with and support the antitrust laws when, in fact, those statutes create
problems for them which are well-nigh insuperable in terms of corporate policy. Let me also
add that I sometimes wonder about well-publieized members of the United States Congress
demanding strict enforcement of the antitrust
laws when it is elear that the knowledge they
have acquired over years of public hearings
must have convinced them that the industrial
society in which we now live no longer fits the
theoretical society for which the original concepts of pure competition and pure monopoly
were developed.
Clarifying Interests
What of the many different kinds of conflictof-interest cases about which we hear so much?
What would this code of conduct have meant
In such situations? To go back to our three
examples:
The Seeretary of the Air Force, since his personal interests wore clearly involved, woultl have
revealed the facts to bis superior, and have been
told whether or not the external eode of eonduct
applied to him.
[ The Presidential Assistant would bave gone
to the President of the United States, or to the
Attorney General, and revealed the facts.
c The president who had an equity interest in
bis eorporation's suppliers would have revealed his
interest to the boartl of direetors of bis eompany
and asked whether or not that interest conflicted
with the interests of bis company.
In each case the individual would not have
relied on his o^vn judgment in a difficult situation, would have avoidetl future trouble, and
would have enhanced his standing in his jt)b.
In essence, then, the simple code of contluct
I propose affirms that business managers have
overriding obligations to others, and that they
have a duty to reveal the facts where their personal interests arc involved. In contrast to statutes and corporate pt>licies, this code would be
an internal incentive to sound dooision making.