to Make an Ethics Program Work
H. Stephen Grace Jr. and John E. Haupert
APRIL 2006 - The
authors’ experience studying corporate governance,
oversight, and control has led them to the conclusion that
a strong ethics program will not, by itself, ensure ethical
behavior in organizations. It must always be supported by
a strong system of checks and balances. Together, these
two key ingredients can help produce a governance system
that managements and boards can rely upon.
authors have developed a concept for building a program
that promotes ethical behavior in an organization. This
framework encourages everyone to work ethically,
supports those inclined to work ethically, and
deters those who may be tempted to veer from the
path of ethical behavior. Named ESD, the framework builds
on an understanding of human behavior and the personal governance
systems inside each individual. The ESD framework also recognizes
and responds to one of the most significant obstacles to
building ethical behavior into an organization: unchecked
concentrations of power within the organization.
and Spiritual Issues
thousands of years, philosophers and spiritual leaders have
provided guidance on the importance of ethical behavior
and the benefits of living and working ethically. Another
side of the story of human nature, however, is not so uplifting.
Warnings abound about the temptations that cause people
to act unethically. These warnings were well captured in
the words of Ovid, who said, “The better things of
life I see and approve; the worse things of life I follow.”
These warnings have made clear the tendency to stray from
the path of ethical behavior. Numerous
examples demonstrate how greed can tempt even the very rich,
who have no need for more money, to act unethically.
search for power also tempts individuals to act unethically.
History and current events point to politicians and executives
who appear prepared to do just about anything to advance
themselves, adding to their prestige and power.
leads directly to the dangers of unchecked concentrations
of power within an organization. Lord Acton put it aptly:
“Power tends to corrupt, and absolute power corrupts
absolutely.” Acton also wrote a less-well-known essay
called “Nationality,” which brilliantly addressed
the unchecked consolidation of power. Writing in the 1860s,
Acton talked about how, when a nation is in a time of difficulty,
very bright people decide that the solution lies in the
creation of an ideal society which, in fact, is an all-powerful
state. Acton pointed out that once this state is in place
its decision-making power broadens, its tolerance for opposition
and differences of opinion disappears, and there is a forfeiture
of basic individual liberties and rights. While the efforts
of these individuals who have seized extraordinary power
have failed time and again, Acton correctly recognized the
tendency of human beings to repeat the same mistake in their
search for solutions to their problems. Acton was looking
back at history, but in doing so he foreshadowed the creation
of the Communist state, the Nazi state, and more recent
regimes, such as that of Pol Pot in Cambodia and Saddam
Hussein in Iraq.
writings of Lord Acton deal with political governance, but
the lessons apply to corporate governance and the challenge
of building ethical behavior into an organization. What
we need to prevent in any organization is the unchecked
consolidation of power.
their work in many troubled situations, the authors have
found that any organization that permits unchecked consolidations
of power is an organization in danger. When the opportunity
exists, certain individuals or small groups of individuals
will consolidate power, veil their activities, and manipulate
and intimidate individuals within and outside of the organization.
is not to say that this will happen to all individuals in
the organization. Many people will continue to be guided
by their own principles and will behave appropriately. If
the organization permits unchecked consolidations of power,
however, then inevitably someone will be tempted to take
advantage. Decent people will be corrupted out of fear of
the consequences if they do not follow along.
succeed at building ethical behavior, an organization must
have a governance process that is built on a rigorous set
of checks and balances and is characterized by transparency.
It requires much more than simply talking about ethics or
issuing guidelines for ethical behavior. It is not enough
to talk and issue rules about ethics and stress “tone
at the top.” This may well encourage employees
to behave ethically, but without more substance, ethical
platitudes mean very little.
ESD framework provides the substance: a governance process
that not only encourages, but also supports and deters.
ESD incorporates a proper set of checks and balances that
will support employees who are trying to work in
a correct fashion. Proper checks and balances help ensure
a transparent working environment and keep ethical employees
from being manipulated and intimidated by others. Furthermore,
proper checks and balances prevent individuals from concentrating
power, ignoring ethical guidelines, and veiling their activities.
Such checks and balances are the best way to ensure transparency
and subject each employee to appropriate oversight. That’s
what it takes to deter bad behavior.
organization structuring a rigorous set of checks and balances
needs an understanding of where problems might develop and
how they can be nipped in the bud. A good place to start
is a thorough risk profile developed by public accountants,
internal auditors, risk-management and legal staff, and
perhaps outside help from consultants and errors-and-omissions
carriers. Once the risk profile is created, checks and balances
to mitigate these risks can be developed. Importantly, transparency
must permeate all facets of the business. The more people
are aware of what is going on, the more difficult it is
for incorrect behavior to be overlooked.
process must start at the board level. What is needed are
board members who are informed about the business they are
in, are involved with it, have the experience and expertise
to perform their duties, and are willing to devote the time
required. They must understand their responsibilities and
be held accountable. Board members should bring an attitude
of service, not entitlement, to their positions. Board members
must always keep in mind that their job is to provide oversight
to protect shareholder value. They must seek to ensure that
every staff person, from those in the “C” suite
down to the lowest-level employee, is performing ethically.
What is needed throughout the organization is the proper
understanding of responsibilities and the proper monitoring
of how those responsibilities are addressed—a viable
set of checks and balances. Everyone in the organization
should know that tight controls are in place and that ethical
lapses will be dealt with very severely. The object, after
all, is not to catch someone guilty of malfeasance, but
to prevent it from ever happening.
must follow the lead of the board by acting ethically and
insisting that the staff do the same. Here again, words
are not enough. Management must constantly be on guard for
those areas where ethical lapses are most likely, and provide
the checks and balances to prevent them. As President Reagan
said about agreements with Cold War adversaries: “Trust
but verify.” Transparency is necessary here as well.
Management must continue to make it clear that strong checks
and balances are continually being updated and new ones
are being developed to deter unethical behavior. Staff must
also have confidence that management will fully support
those who report malfeasance by others, including their
Stephen Grace Jr., PhD, is president of Grace &
Co. Consultancy, Inc., and a former chair of Financial Executives
John E. Haupert is a member of the board
of advisors of Grace & Co. and served as treasurer of
the Port Authority of New York and New Jersey prior to retirement.
An earlier version of this article was delivered as part of
the 2005 Ethics Week program at Baruch College, CUNY.