July 29, 2004

By Brian Moriarty

When the Enron scandal began to dominate the headlines in October of 2001, public confidence in the marketplace began a sharp downward trend. Soon thereafter other headlines—like WorldCom Finds $3.3 Billion More in Irregularities, Reports of Shredding Intensify Global Crossing Inquiry, Lies My C.F.O. Told Me, Act XIII, and The Imperial Chief Executive is Suddenly in the Cross Hairs—followed closely in the Enron scandal’s wake.

www.corporate-ethics.org

From left: Franklin Raines, Chairman and CEO, Fannie Mae, with Ed Freeman and Bob Harris at the launch of the Business Roundtable Institute for Corporate Ethics in Washington, D.C., on Jan. 14.

By July of 2002, a USA Today/CNN/Gallup Poll revealed that only 23 percent of the American public trusted CEOs. This landmark poll showed that more Americans lacked confidence in business leaders than ever before. Something was clearly amiss and a broad spectrum of people—media, politicians and educators— attempted to diagnose the problem.

Many pointed their fingers squarely at CEOs while others questioned whether business schools were in part culpable for the misdeeds of their graduates. Some blamed unrealistic Wall Street and investor earnings growth expectations for the deceptive accounting and reporting practices undertaken by some firms.

Elis and Signe Olsson Professor of Business Administration R. Edward Freeman had a different diagnosis, one that he had been putting forth long before the recent wave of scandals. As terrible as these scandals have been, Freeman held the view that there is absolutely nothing new about any of them. “Worse, little has been fixed by Sarbanes-Oxley or the new accounting commission,” Freeman claimed in 2002, “because the real issue—the lack of ethics in our everyday business relationships—lies untouched.”

Seizing the Moment

In the summer of 2003, when Darden’s Communications department contacted the Business Roundtable—an association of chief executive officers of leading U.S. corporations with a combined workforce of more than 10 million employees in the United States—they were hoping to discover if there were opportunities for the two institutions to partner on a project. What they found was an organization that was energized toward making a lasting contribution to business ethics.

The CEOs of the Business Roundtable were outraged by the various instances of corporate wrongdoing. The success of the American free enterprise system, they believe, is built on public confidence and a merger of corporate and individual responsibility—which starts at the top.

In conversations that followed, it quickly became clear to Freeman and the Darden team—which included Ruffin Professor of Business Ethics Patricia H. Werhane, associate Professor of Business Administration Andrew C. Wicks, Dean Robert S. Harris and Communications staff—that the Business Roundtable was interested in doing something more extensive than a standard executive program or a single research project.

“The Business Roundtable CEOs wanted to have a real and enduring impact upon business practice,” Freeman says,“ something that would stretch beyond any one company.”

While there have been other notable waves of business scandals—The Teapot Dome scandal of the 1920s, the first Firestone scandal in the 1970s, The Wall Street insider trading scandals of the 1980s—Freeman holds that there has never been such widespread recognition among business leaders and the general public that laws and regulation alone were not sufficient to strike at the core of questionable business practice. “I really believe we have a unique moment here to make a lasting difference in corporate practice,” says Freeman. “This is a moment we need to seize.”

Werhane agrees with Freeman’s assessment. “I’ve been teaching business ethics for quite awhile,” she says, “and this is the first time that I have seen a very strong, large, corporate commitment to really thinking about business ethics in this way.”

Developing a One-of-a-Kind Institute

Taking advantage of the opportunity, Freeman, Werhane and Wicks quickly assembled a world-class team of business ethics experts from leading business schools from across the country. The result of these efforts is the Business Roundtable Institute for Corporate Ethics which was launched on January 14, 2004. The Institute—which is housed at Darden—uniquely brings together the best and brightest academics from the field of business ethics to work in partnership with corporate leaders to make ethics part of day-to-day business decisions.

The Institute has the direct backing and participation of the 150 CEOs of the Business Roundtable. “The interaction with and direct access to these CEOs will provide a wealth of experience that we can use to develop executive curricula and best practices for use by business and by business schools,” says Freeman. President of the Business Roundtable John Castellani says, “The Business Roundtable CEOs’ commitment to this Institute will allow us to make an enduring contribution for years to come.”

The Institute is headed by an Executive Director, Dean Krehmeyer (MBA ’99), who is responsible for its day-to-day management. Krehmeyer has extensive financial and management experience as a Certified Public Accountant and management consultant. A Shermet scholar while a student at Darden, he also holds an M.S. in Accounting and B.S in Commerce— both from the University of Virginia.

Freeman hailed Krehmeyer’s arrival as an important moment for the Institute. “We are thrilled to have Dean back at Darden,” said Freeman. “Getting the right person to be the Institute’s initial Executive Director was crucial.”

According to Krehmeyer, the opportunity to make a significant impact on business practice was one which he simply could not decline. “This is a very exciting undertaking,” he says. “We have all the key groups very much engaged with this issue—CEOs, leading academics, MBA students, and the media—and there is a call from all parties to make this a joint effort.”

Krehmeyer believes that the Institute’s work will not only affect business practice, but will help transform MBA curricula.“ The CEOs are not only seeking guidance from the academics, they also want to draw on their own experience and knowledge to improve business education,” says Krehmeyer.“ The CEOs are very concerned about the next generation of business leaders, so we expect the interaction between business leaders and academics to be genuine—this is not going to be a one-way conversation.”

Krehmeyer works closely with the Institute’s 10-member Advisory Council which serves as the “Board of Directors.” The Advisory Council—which consists of five Business Roundtable CEOs, three academics, an opinion leader, and the Business Roundtable President—is responsible for endorsing the selection of research and project proposals for funding and for approving the annual budget for the Institute and its activities.

Assembling a World Class Team

“This all-star lineup of academics is the ‘secret sauce’ that is going to make the Institute successful,” says Freeman. “These are all leading scholars whose understanding of business as a morally rich environment is going to be of great value to the business leaders with whom we partner.” The Institute’s 18
Academic Advisors are faculty at some of the world’s leading business schools.

As people with a deep and long-term commitment to combining business and ethics, the Academic Advisors were excited to join the Institute. “It has been two years since the Enron scandal unfolded and I think a lot of us were waiting for business executives to take a really proactive stance and come forward,” says Penn State University Professor of Organizational Behavior and Academic Advisor Linda Treviño.“ I think this Institute is that kind of bold action that we’ve been waiting for.”

In this age of branded business schools, projects involving faculty from a large number of competing schools are extremely rare. “Most schools have very strict rules regarding faculty involvement with other organizations,” says Freeman.
“So in order to get the right people on board, it was critical that this Institute not be the ‘property’ of any one school." While the Institute is housed at Darden and named for the Business Roundtable, it maintains a certain independence from both. “If this were strictly a Darden thing, we would not have the all-star lineup of academics,” says Freeman, “and if we were not independent from the Business Roundtable, our academic freedom and research might be questioned and we
would lack credibility.”

Freeman says the Institute would not exist in its current form without the leadership and vision of Dean Robert S. Harris. “In agreeing to let the Institute function independently, Dean Harris realized that this issue was bigger than any one school,” says Freeman. “He viewed this as an opportunity to further Darden’s mission to better society by developing leaders on a broad scale and in partnership with other schools.”

Envisioning a Shared Mission

“In our society, we don’t see business and ethics as going together,” says Freeman, “we usually see them as separate.” According to Freeman, the problem is all in the joke: “Tell someone you teach Business Ethics and they’ll say: ‘Isn’t that an oxymoron, like jumbo shrimp?’ Or they say:‘ Ah … business ethics, it must be a short course.’”

For Freeman, the jokes reveal that we have set our expectations for ethical business practice far below where they ought to be. “The mission of the Institute is to try and put business and ethics together so that we no longer see them as separate,” he says. Werhane concurs: “We would look at any business that does not do marketing or is not concerned with production as a very strange business—we should think of ethics in the same way.”

The CEOs who serve on the Institute’s Advisory Council share this vision of combining business and ethics. Says Franklin Raines, CEO of Fannie Mae and co-Chair of the Institute’s Advisory Council: “This Institute will bring together the best educators in the field of ethics, active business leaders and business school students to forge a new and lasting link between ethical behavior and business practices.”

Hank McKinnell, Chairman and CEO of Pfizer Inc. and Institute Advisory Council member, notes that business leaders need to embrace the responsibility for implementing ethical business practices within their organizations. “Business Roundtable CEOs recognize that setting and maintaining the highest ethical standards starts with us,” says McKinnell.

Although the Institute’s mission—putting business and ethics together—is clear, the drivers that lead to unethical behavior are complex. “We do not expect a silver bullet answer,” says Harvard Business School Professor and Institute Advisory Council member and Academic Advisor Laura Nash.

“What you see here with this group of people is a real commitment to understanding and testing different hypotheses, different knowledge bases, on why we see the kind of wrongdoing that’s making us all scratch our heads.”

Making an Impact

The Institute will make an impact via a broad program that includes: ground-breaking research on issues related to ethics that contributes to the advancement of the field; best corporate practices to be shared among Business Roundtable members and non-members; executive education for current CEOs and future corporate leaders; model curriculum packages on ethics to help shape curriculum design at graduate schools of business; and information to be disseminated to a broad spectrum of concerned stakeholders, including business schools.

According to Krehmeyer, the Institute has been very productive in its first few months of existence and the immediate agenda is well-formed. “We have completed a survey of Business Roundtable CEOs to identify the most pressing ethical issues they face,” he says, “and we are using this information to build the curriculum for our first CEO seminar that will take place in June.” Planning is underway for the Institute’s first Senior Leadership Team (SLT) seminar, geared toward leaders at the “executive suite” level. The first SLT seminar will be held this coming October.

Also, the Institute recently completed a beta-version of a multimedia ethics simulation in partnership with the Olsson Center for Applied Ethics and Darden Business Publishing.“We ran a test of the product with current MBA students,” says Krehmeyer, “and we think this is going to be a valuable addition to the MBA curriculum as well as a complement to company training programs." Freeman says, “Bobby Parmar from the Olsson Center and Fred Telegdy from Instructional Technology have really done a tremendous job with this product.” The Institute has also assembled MBA student focus groups to help determine the value students might add to—and receive from—the Institute.

One project the Institute is currently planning is an innovative survey that will benchmark the state of business ethics from various stakeholder perspectives (i.e., that of managers, suppliers, employees, regulators, share holders, the media, etc.). The first survey will be completed by early 2005 and will be conducted every two years.

Defining Success

According to Freeman and his colleagues, the absence of business scandals from the headlines is not a sufficient signal of success. One lesson to be gleaned from the past scandals is that they eventually disappear from the headlines and from public awareness… until the next wave hits. If Freeman is right, these lulls do not indicate that anything meaningful has been repaired: rather, they are simply a sign that the public—falsely believing the problem has been resolved—is no longer engaged with these issues.

Freeman believes that the Institute needs to remain vigilant, actively working to bring business and ethics together even after the current wave of business scandals disappears from the front pages. “Ultimately, for the Institute, success means having a positive impact on everyday business practice,” says Freeman. “Ethics needs to be a front brain activity within business—to change practice we need to change our mindset.”

Elmer L. Andersen Chair in Corporate Responsibility at the University of Minnesota and Academic Advisor Norman E. Bowie echoes this thought with a different turn of phrase. “I have my own kind of criterion for success,” he says, “and my criterion is that I want this initiative to ultimately be a bigger story than Andy Fastow and an even bigger story than Enron.”

From Left: Hank McKinnell (Pfizer), Franklin Treviño (Smeal College of Business, Pennsylvania of Minnesota), and Bob Harris (Darden)

ADVISORY COUNCIL

John J. Castellani
President, Business Roundtable

Thomas W. Dunfee
The Wharton School of the University of Pennsylvania

R. Edward Freeman
Darden Graduate School of Business Administration,
University of Virginia

William H. Gray, III
President and CEO, United Negro College Fund

Hank McKinnell
Chairman and CEO, Pfizer, Inc.

Anne M. Mulcahy
Chairman and CEO, Xerox Corporation

Laura Nash
Harvard Business School, Harvard University

Steve Odland
Chairman, CEO and President, AutoZone, Inc.

Charles O. Prince
CEO, Citigroup Inc.

Franklin D. Raines
Chairman and CEO, Fannie Mae

ACADEMIC ADVISORS

Norman E. Bowie, Carlson School of Management,
The University of Minnesota

George Brenkert, McDonough School of Business,
Georgetown University

Thomas Donaldson, The Wharton School of the
University of Pennsylvania

Thomas W. Dunfee, The Wharton School of the
University of Pennsylvania

Timothy Fort, University of Michigan Business School
R. Edward Freeman, Darden Graduate School of Business
Administration, University of Virginia

Edwin Hartman, Rutgers Business School,
Rutgers, The State University of New Jersey

Thomas Jones, University of Washington Business School

Joshua Margolis, Harvard Business School, Harvard University

David Messick, Kellogg School of Management,
Northwestern University

Patrick Murphy, Mendoza College of Business,
University of Notre Dame

Laura Nash, Harvard Business School, Harvard University

Thomas Piper, Harvard Business School, Harvard University

Diana C. Robertson, Goizueta Business School,
Emory University

Robert Solomon, The McCombs School of Business,
University of Texas at Austin

Linda Treviño, Smeal College of Business,
The Pennsylvania State University

Patricia Werhane, Darden Graduate School of Business
Administration, University of Virginia

Andrew C. Wicks, Darden Graduate School of Business
Administration, University of Virginia