Business ethics examines ethical principles and how to apply those principles when addressing moral or ethical problems that arise in a business environment. It applies to all aspects of business conduct and the behavior of individuals and entire organizations.

We read about it and hear it on the news.

Corporate corruption is widespread: fraud, exploitation, cheating, stealing.

It rarely is organized from the top however. A few leaders are crooks no doubt. And managers can become involved in institutionalized breaking of rules and ethical standards in order to meet aggressive targets and goals in order to keep their jobs. The motivations can be fear of loss or downright greed and sociopathic insanity.

But that is the exception.

The intention of the majority of managers and leaders is to run ethical organizations and make a beneficial impact on customers and society.

Sometimes individual incentives are not aligned with those lofty goals. Usually employees end up bending or breaking ethics rules for personal gain and because those in charge are blind to unethical behavior and may even unknowingly encourage it. Move fast and break things. If controls are loose, temptation can be overwhelming.

In many cases ethics is not even taken into consideration in business situations. Companies are in business to maximize profits and create shareholder value. Ethical considerations are not embedded in Corporate Bylaws and Articles in Incorporation.

Correcting mistakes takes time and resources and that translates into additional costs. This type of scenario cascades into lost revenues and reduced profits and that could mean losing one’s job and the security it offers.

Admitting problems and attempting to remedy them can also hurt a brand’s reputation and erode market share. These are all business issues that incentivize not dealing with problems from a strictly ethical standpoint. Delaying or covering up issues may seem like the expedient way to deal with a problem. Kick the can down the road and hope for a miracle.

We need an ethical framework to rely on when tough situations arise. Its easy to behave well when things are going well. Everybody’s good when they’re good. A person isn’t judged under such circumstances. It’s how we act when things aren’t good that tells us who we really are. It’s best to be prepared so we don’t fail the test.

Live one day at a time emphasizing ethics rather than rules.

Wayne Dyer

Consider the Pinto

Consider how the Ford Motor Company dealt with the infamous case of the Ford Pinto. The Pinto was a compact car produced during the 1970s. It gained notoriety for its tendency to leak fuel and explode into flames if rear-ended. Not a feature drivers look for in a car.

Close to thirty people were killed or injured in exploding Pinto before Ford issued a recall. Subsequent investigations into the decision process behind the company’s “damn the torpedoes” launch revealed incredibly poor judgment. Ford at the time was under intense competition from Volkswagen and other small-car manufacturers. Under a sense of competitive urgency, Ford had rushed the Pinto into production.

Engineers discovered the potential danger of ruptured fuel tanks in preproduction crash tests, but the assembly line was already completed, and the company’s leaders decided to move forward.

When this all came to light, people were shocked and viewed the decision as evidence of the callousness, carelessness and greed of Ford’s leaders. Now we can look at this and other cases through a more nuanced lens. Behavioral economics has given us a growing body of research and literature and a better understanding of cognitive biases and how they pervert the application of ethical criteria in decision-making.

Now the thinking goes that its doubtful any of the executives involved in the Pinto decision believed that they were making an unethical choice. The reason behind this thinking is that they thought of it as purely a business decision rather than an ethical one.

In business school, one is trained to make rational decisions based on numbers. One of the tools is cost-benefit analysis to see if the potential revenues are bigger than the costs. In the case of the Pinto they calculated costs for redesign, lawsuits, and even lost lives. They determined it would be cheaper to pay off lawsuits from deaths than to recall and make the repair.

That methodology abstracted the situation and influenced how they viewed and made the subsequent decisions. The ethical dimension was not part of the calculus. This is called “ethical fading”. Ethical fading is a self-deceptive, unconscious psychological mechanism by which even the morally competent are lead to disregard the ethical consequences of a particular choice.

It is a phenomenon that results in taking ethics out of consideration and increases the tendency for unaware unethical behavior.

Lee Iacocca was then a Ford executive. Iacocca is an iconic American automobile executive. He is best known for spearheading the development of Ford Mustang while at Ford in the 1960s, and then later for reviving the Chrysler Corporation as its CEO during the 1980s. Check out his autobiography here in my list of the best business biographies.

Lee was closely involved in the Pinto launch. When the potentially dangerous design flaw was first discovered, no one dared tell him. In a 1977 article in Mother Jones magazine a company official who worked on the Pinto recounted why. “That person would have been fired. Safety wasn’t a popular subject around Ford in those days. With Lee it was taboo. Whenever a problem was raised that meant a delay on the Pinto, Lee would chomp on his cigar, look out the window and say ‘Read the product objectives and get back to work.’”

The pressure to perform from shareholders, analysts, investors, and senior management can be intense. No one’s job is secure in the face of perceived failure.

Iacocca and the team in charge of the Pinto were probably not consciously unethical. They didn’t intentionally perform or explicitly sanctioned unethical behavior. Psychological and organizational factors distracted attention from the ethical dimensions of the problem.

The same delusional forces today influence executives and few understand how cognitive biases and incentive systems conspire to impact behavior in less than virtuous ways.

By recognizing and understanding these influences leaders can create the ethical organizations they aspire to run.

It takes twenty years to build a reputation and five minutes to ruin it. If you think about that you’ll do things differently.

Warren Buffett