Ethics and Policies: Reasons for Taking an Ethical Stance - Essay Example

Ethics and Policies The recent years have seen a number of well-publicized breaches of ethical conduct, some involving violations of law, of high profile executives that has brought tremendous attention to the way organizations manage business ethics and values. The media is rampant with stories of business scandals, fraudulent actions and ethics violations of executives and employees. Ethical decision making is a complex and subjective process involving a lot of “gray” areas. Business owners often face dilemmas, such as whether to cut corners on quality to meet a deadline or whether to lay off workers to enhance profits. The intense and dynamic nature of business pressures may not provide enough time for reflection and with the high stakes involved it may be tempting to compromise on ideals. Moreover, well-minded people often exhibit major differences in opinions about what constitutes ethical behavior and how these ethical decisions need to be made, further compounding the complex nature of the subject. A lot of evidence that we discuss in this paper shows that the advantages gained in taking an ethical stance are well worth the efforts taken in this often tricky path. This paper identifies the inherent long term benefits of actively managing the business ethics process in organizations and explores the value in ethical leadership especially in the air travel industry using relevant examples. Reasons for taking an ethical stance: Reputation and sense of “doing the right thing” The ethical issues that have afflicted companies like Enron, WorldCom and Tyco have brought the impact of ethics violations to the popular attention in the United States. Parmalat, Adecco, Ahoid and Skandia have grabbed the media focus in Europe. In all these scandals involving breach of corporate ethics, revelations have been followed by investigations, accusations, claims and counter claims. Legal wrangling involving formal investigations, testimony, evidence trials, verdicts and punishments have gained relentless media coverage. The resulting damage done to the reputation of these businesses is enormous. As a result, the employee morale becomes very low in this worrisome, suspicious and discouraging environment. May International, a management consultation firm, recently conducted a survey of businesses in US and in Italy to determine how business owners viewed corporate ethics. Concern for business and personal reputation was the reason most often (54% of respondents) stated by Italian business owners for concern about ethics. The most common reason (43%) noted by U.S. business owners for their ethics concern was the basic belief that acting ethically is the right thing to do. Frank Navran, principal consultant and director of training at the Ethics Resource Center, a nonprofit educational organization in Washington, D.C., identifies five types of imperatives that seem to drive organizational values initiatives: * moral (the one, notes Navran, that every organization will claim) * legal, or risk avoidance * reputation management * response to change * pragmatic--good ethics is good business. Advantages of an ethical stance: Good business ethics can gain competitive advantage that is two-fold. Employee benefits: Values create an organizational culture that in turn engenders a higher level of trust. That trust leads to more open communication. Increased communication enables and empowers employees, particularly managers and professionals, to make better decisions. Also companies with sound business practices and established values report improve employee morale, reduced employee turnover and increased productivity. This builds employee loyalty and reduces hiring and training costs. Business Benefits: There are three that we have identified below. 1. A Marketplace Advantage: Customers and investors take into consideration corporate practices and values as primary considerations in their decision-making. Sound company ethics maintains loyal vendor relationships and reduces loss of suppliers and unexpected cost increases. 2. Reputation Management: As discussed above, once damaged by scandal or unethical behavior, a company’s reputation takes a beating resulting in lost revenue, low employee morale and increased governmental and public scrutiny. Therefore, responsible business conduct is the best means of preserving a company’s intangible assets. 3. Powerful Legal and Financial Incentives: International regulatory developments provide strong legal and financial incentives to corporations that establish standards of conduct and provide ethics education and training to employees. Sound ethics create community good that can lead to strategic alliances and tax advantages. Ethical Pressures in Airline Industry: Bankruptcy suits and Cost Cut measures: Since 2001, the U.S. airline industry has confronted unprecedented financial losses. Internal and external challenges to the airlines industry have fundamentally changed the nature of the industry and forced airlines to restructure themselves financially. The changing demand for air travel and the growth of low cost airlines has kept fares low, forcing many competing airlines to reduce their costs. They have struggled to do so, however, especially as the cost of jet fuel has jumped. Many questions have surfaced about the quality of service provided to the customers in the light of the low-cost ventures. Also, since the employee maintenance forms a major part of the company expenditure, labor cost reductions is one of the first steps taken by the management to counter the financial pressure. For example, when two of US’s largest airlines--United Airlines and US Airways--went into bankruptcy, they terminated their pension plans and passed the unfunded liability to the Pension Benefit Guaranty Corporation (PBGC). PBGCs unfunded liability was $9.6 billion; plan participants lost $5.2 billion in benefits. (GAO, 2005). United Airlines has battled its considerable union problems since 2002, when it tried to convince employees that labor costs must fall if it was to regain profitability. At present, United is having problems with nearly half of their employees, the International Association of Machinists and Aerospace Workers, who refuse to talk about possible concessions until pending contracts are settled and ratified. Considerable debate has ensued since then over airlines use of bankruptcy protection as a means to continue operations, often for years. Many in the industry and elsewhere have maintained that airlines use of this approach is harmful to the industry, in that it allows inefficient carriers to reduce ticket prices below those of their competitors. This debate has received even sharper focus with pension defaults. Critics argue that by not having to meet their pension obligations, airlines in bankruptcy have an advantage that may encourage other companies to take the same approach. Many airlines may be tempted to go bankrupt on paper in order to avail themselves of, among other things, debt and pension-plan regulations that allow them to sidestep payments if theyre operating under bankruptcy protection. Thus we can summarize that in the light of considerable financial burdens and bankruptcy claims, the number one ethical dilemma (among many others) that the airlines management faces is the question of adequate compensation of the employees and tackling potential lay-offs. Southwest Airlines –A success story in Ethics: Loyal Employees and Loyal Customers. Southwest has been one of the few consistently profitable major airline in the U.S. since 1973. It has employee turnover rates of 4 to 5%, in an industry where double those rates are typical. It is quite remarkable and significant to our subject matter that in the notoriously cyclical airline business, Southwest has never had a layoff. With the lowest ticket prices, the company still ranks at the top in customer service and safety. Southwest Airlines has been named "one of the "Top Five Best Companies to Work for in America" by Fortune Magazine. It also has had the fewest customer complaints 18 years in a row as reported by the DOT Air Travel Consumer Report. Lorraine Grubbs-West, a senior executive for Southwest Airlines for over 15 years has written a highly informative book, “Lessons in Loyalty” which is an "insiders" view of work and life at the successful airlines. She discloses that what makes Southwest Airlines exceptional is "the strong employee and customer loyalty it has developed - a feeling of devotion, duty and attachment to Southwest". Most organizations, she says, would like to achieve this exceptional level of loyalty, yet they consistently perform actions that alienate people rather than foster loyalty. The author provides 9 Loyalty Lessons that outline the positive principles that have made the airline a winner. Some of the lessons include thought-provoking titles like "Hire Attitude - Train Skills", "People Give as Good as they Get", "Luv "Em in Tough Times", "Do Whats Right", and "Nurture the Corporate Family". Quality Service despite low costs: In an attempt to compete with low cost lines, Southwest cut costs to a minimum in order to offer low priced air travel. In doing so, Southwest realized that their offering would meet the practical, "no-frills" needs of its customers. However, the experience of the flight might be rough and somewhat undignified for the customer as it would involve no pre-assigned seating, no meals and a small aircraft to compensate for the low tariff.  Yet providing any of those services would have destroyed their core competency and their competitiveness.  So they compensated for the deprivation of dignity with warm and lively friendliness from their staff.  Southwest recognized the need to offer the best possible service that they could afford to their loyal customers in spite of rigorous cost cutting measures. So they recruited people with excellent people skills, a sense of humor, and an ability to be somewhat entertaining. The result was that many people were willing to exchange a little dignity for a lot of fun, especially when doing so also gives them much more affordable air transportation.  Southwest personnel are trained to cheer people up during what could otherwise be a discomforting and even somewhat traumatic experience. Providing the service satisfies a deeper need in customers than the need for affordable transportation and delivering the service satisfies employees need to make a difference on a deep human level.   By doing so, they have erected impenetrable barriers to competition as the combination of competitive pricing and irreplaceable brand, low cost and differentiation, makes the competitive space virtually unassailable. Value in Employees’ Trust: Sherwin(1983) in his book “The ethical roots of the business system” , maintained that to act ethically a manager must ensure that the owners, employees and customers all share fairly in the business gain. Employees who work for Southwest are shown in every possible way that they are trusted and valued , right from hiring the right person, training, adequate compensation (Southwest employees own approximately 13 percent of the companys shares) and even personalized cards from the CEO. Feeling engaged and empowered on the job is important to employee loyalty and Southwest has accomplished that by building trust by their ethical treatment of their employees. ”I’ve been here 28 years, and from the beginning we’ve felt that employees are our greatest assets” said Donna Conover, executive vice president of customer service. (Business Ethics Online, 2005). Unlike other airlines, Southwest has never dictated pay cuts to their employees at the first sign of financial trouble. Yet amazingly, due to the immense trust that they have built with their employees, the employees themselves took the initiative to voluntarily reduce their pay under the “Fuel from the Heart “ program, launched by the employees during the Gulf War of 1991-1992,when fuel costs sky-rocketed. After 9/11, employees again took voluntary cuts so the airline did not have to cut back on its flying schedule, as did other airlines. Their loyalty was rewarded by the management as Conover said “In the last three years, we’ve negotiated five union contracts and fresh pay raises for all of our employees”. (Business Ethics Online, 2005). This shows that all members of the firm i.e. the employees and the management have significant roles to play in the effective management of ethics .Proper ethics is necessary for build of trust between management and employees, which in the case of Southwest was instrumental in accruing benefits to the firm, the work force and the stakeholders. Delta Airlines Vs Southwest: A comparison to illustrate importance of Employee loyalty through good business ethics. While Southwest is basking in the glory of the trust and faith that its employees have put in its management, Atlanta based Delta Airlines are not doing so well in that department thanks to their past history. Incidentally Delta ‘s problems got so bad that it filed for bankruptcy on September 14th 2005. A classic example of Delta’s clash between professional ethics and personal agenda of the management which did not sit well with their employees occurred in 2001.Since September 11, 2001; Delta had lost well over one billion dollars. The company had to layoff, furlough, or offer voluntary leaves to thousands of its employees. Delta Air Lines’ then Chairman and CEO Leo Mullin was a leading advocate for the federal government providing billions of dollars in aid for the airline industry, playing a leading role in lobbying both immediately after 9/11 .While in the process of speaking of hard times for the industry in Atlanta and Washington, Mullin and other senior Delta executives were simultaneously granting themselves millions in cash bonuses that same year. Delta’s top five executives received $4.8 million in bonuses, with Leo Mullin alone receiving a $1,401,188 annual bonus. Other top executives received bonuses ranging from $542,850 to $1,233,750. (Airwhiners.com). In addition, these executives requested and received from the Delta Board of Directors individual trust funds that would protect the executives’ pensions in the event the company had to file for bankruptcy. The irony of this request was that while management was seeking to protect its pensions, the company imposed sweeping pension changes that greatly reduced the money received by the employees upon retirement. A Question of ethics: The ethical business question in the above situation is : Were the executives unethical in granting themselves large compensation packages , or should they have foregone the bonuses in recognition of the lay-offs and pay-cuts that the rank-and-file were forced to accept since late 2001?Again it must be noted that what the executives did was not illegal. So, as in any question of business ethics there is no clear cut answer. How ever, when we compare the Delta situation to the employee sensitive and generous nature of Southwest policies, a reasonable argument could be made that the Delta executives would have placed themselves and the company in a better position over the long-term by choosing an alternative solution based on their conscience. Had the executives given more thought to the unfairness of the situation, they might have realized that the $4.8 million in bonuses were not well deserved by a management team that was losing more money than previous Delta management had ever lost in the company’s history. Management might also have realized that the bonus money could have been used to maintain or recall hundreds of front-line employees at airports that were severely understaffed. As the Delta Air Lines case demonstrates, a fair code of ethics is extremely important to a successful enterprise, and corporate greed will only stifle the very success that they sought to create in the first place. Findings and Lessons: A valuable lesson from the above comparison of Southwest vs. Delta is that good business ethics is instrumental to bonding with the employees which can be crucial to making or breaking a business. To support an ethical business behavior, organizations must provide not only the means for the employees to act ethically, but also an atmosphere that encourages them to do so. In Delta’s case, the management took the lead to teach by example the values in an ethical practice. This inspired the employees who followed the lead of the management and went as far as making financial sacrifices for the betterment of the company. The same principle goes for the loyal Southwest customers who were not made to feel anyway less due to their low cost tickets. The customers felt valued and therefore were willing to forego many physical comforts to loyally support Southwest’s low budget ventures. This demonstrates the benefits in a sound ethical infrastructure in business. The crux of the distinction in Delta’s insensitive practices and Southwest’s fair trade in profits is that even though it is not in the company’s place to tell you what the values ought to be, the company should take the responsibility to set behavioral standards and has the obligation to train employees in what these standards are. The Ethics Recourse center in Washington D.C believes that people’s personal values are as important as the ethics prescribed by the organization. The four points that they recommend to help the management tackle the “grey” areas in ethical issues are: Compliance with external laws and regulations Compliance with organizational policies and procedures Guidance from organizational values Guidance from individual values. It is apparent from Delta’s failure that it was sorely lacking in ethical leadership. Ethical leadership as in the case of Southwest involves creating an expectation in others that you will act ethically and expect the same actions from everyone else in the organization. In a working paper by Linda Trevino, Laura Hartman, and Michael Brown, "Moral Person and Moral Manager: Developing a Reputation for Ethical Leadership." the authors identify these types of leaders: * Unethical: Leaders who believe that ethics has no business in the workplace. Their decisions arent guided by ethical principles. * Ethical: Those who are personally ethical in word, thought, and deed and who conduct their decision making openly so that theyre perceived as ethical even from a distance. * Ethically Neutral: Those who are personally ethical in word, thought, and deed but arent open about it. Such leaders may not be perceived as ethical from a distance and are often viewed as not paying adequate attention to the ethical component of their decisions. * Hypocritical: Leaders who deliberately choose to act unethically. We can deduct based on discussion a little earlier on in this paper that Southwest leaders belong to the ethical category and Delta’s past leaders unfortunately fell in the hypocritical category, as per the divisions stated in the above quoted paper. Recommendations: As we have established that a sound ethics is not only morally fulfilling but also financially beneficial, it becomes imperative to take proper measures to preserve the ethical balance in businesses. Some of them are: The 1987 Treadway Commission on fraudulent financial reporting made several recommendations concerning ethics. The first was, Public companies should develop and enforce written codes of corporate conduct. Treadway points out that a written code of corporate conduct strengthens a companys ethical climate by signaling to all employees standards for conducting the companys affairs(COSO,1987). Ethical decisions are made by employees who make an organization and not by the organization itself. Therefore proper training through informative programs and workshops of grass root employees is essential to prepare them for morally sound judgment calls on the job. There is clear benefit in setting the example at the top level for ethical practices. Without setting an example at the top, it is often difficult, if not impossible, to convince the employees that they too should be ethical in their business dealings. Conclusion: A well-defined ethics policy along with an outline of related standards of conduct provides the framework for ethical, moral behavior within the company. Even though ideally, higher profits should not be the motivating factor in defining the ethics policies, one cannot deny important benefits to developing such a policy such as higher employee morale and commitment which in most cases leads to higher profits as demonstrated by Southwest Airlines. The path towards achieving a sound ethics system is difficult and tricky especially in the airlines industry that is plagued by bankruptcies, ruthless competition, technical problems and huge overhead costs. Some may argue that in today’s world of downsizing and increasing change, these lofty ideals are unrealistic. However, it is important to note that most of the opponents of good ethics focus on short-term gains like the Delta Airlines. Many organizations again like Delta which have participated in merciless downsizing have traded long-term employee morale and productivity for short-term profit margins. Therefore good ethics should be the corporate philosophy and needs to be instilled by example and by training through all levels of the organization. References Airwhiners.net.(2004). Ethics In The Airline Business A Case Study of Delta Air Lines. Retrieved April 2006 from http://www.airwhiners.net/jetblast/20030410.htm. Business Ethics Online.(2005).Hundred Best Corporate Citizens for 2005.Retrieved April 2006 from http://www.business-ethics.com/whats_new/100best.html#Article. CMO,(2005).Employee Retention.Staying Power.Retrieved April 2006 from http://www.cmomagazine.com/read/100105/staying_power.html. COSO.(1987). Report of the National Commission onFraudulent Financial Reporting. Retrieved March 2006 from http://www.coso.org/publications/NCFFR_Part_1.htm. Douglas,S.(1983).ACP The Ethical Roots of the Business System. South-Western College Pub. 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Lessons in Loyalty: How Southwest Airlines Does It - An Insiders View. CornerStone Leadership Institute. Read More