American business took a beating in recent years as a rash of high-profile court cases unwound operations at once-vaunted firms and sent key executives to an ignoble future of lengthy prison terms.
As news stories mined the details of shady accounting and management greed, the nation’s business schools vowed to step up efforts to better instruct the next generation of managers of the fundamental importance of ethical corporate behavior.
Bala Shetty of Texas A&M University concluded that the lack of ethical guideposts among now-fallen industry majors is a sign that many (although not all) businesses no longer value the once-unquestioned tenet of practicing corporate responsibility.
Smart Business spoke with Shetty about corporate ethics and how Texas A&M University is poised to address the way shareholder wealth is really created: through the practice of integrity.
What lessons can MBA students glean from these recent cases so that they can positively affect corporate practices?
There’s an increasing awareness since Enron and other high-profile firms sank into ignominy, that more instruction about ethical behavior is needed. As the economist Milton Friedman has said, a company’s ultimate goal is to increase shareholder wealth through profit maximization.
At the end of the day, unethical behavior destroys wealth and causes a firm to lose significant value. It’s not profit maximization if you don’t act ethically. The two are not mutually exclusive. Long-term value creation results from the ethical behavior of your executives, and if they don’t behave ethically, investors lose trust and will not invest in the company. It makes good business sense to operate with a moral compass.
Do these recent stories reflect a general diminishment of ethical behavior in corporate America, or are they aberrations from the norm?
Many things happened in the ‘80s and the ‘90s that gave rise to infectious greed and served as the catalyst for what happened. Between 1998 and 2002, there were 658 accounting restatements by public companies. Before that, there were only 92 in 1997 and 3 in 1983.
The business climate with its unprecedented economic growth and investors’ demand for immediate returns on investments were responsible for many corporate boards realigning management incentives to meet short-term expectations of their investors. As a result, there was an astronomical increase in CEO compensation in 1990s. For example, in 1980, the ratio between a CEO’s compensation and the average worker was 42 to 1. By 2000, that number was, on average, 600 to 1.
Although there are many honest, decent and hard-working people in the upper echelons of many firms, our excessive focus as a society on maximizing wealth gave young graduates the wrong message about corporate stewardship.
Should more be done in MBA programs that address corporate ethics?
Yes. Graduate programs should emphasize the values of integrity and corporate responsibility as vital for adding long-term value to a corporation, and this should be done throughout the curriculum.
Social projects should be emphasized as a way for students to connect with ethical principles. By their involvement in such projects while in school, they will be less susceptible to irresponsible corporate behavior later.
MBA students should engage in several fund-raising events during the year for local charities. Students who help elevate standards of business practice should be given credit hours and scholarships.
There are so many great stories about what ordinary citizens in every corner of this nation are doing to make lives better for others. Unfortunately, our kids read and hear very few of those in the mass media. As a society, we need to rethink our priorities.
Can American business recover from these recent scandals and regain the trust of workers and the public alike?
Yes, if we as a society — teachers, parents and institutions, take to heart the old adage that dishonesty does not pay. We can rebound from recent excesses if we work with legislators, the media and the legal system to stop corporate malfeasance. Sure, no executive in any of these cases killed anyone, but they hurt the most vulnerable among us. There needs to be more severe punishment, and we need to make sure those indicted do not profit from their crimes through books or publicity.
Also, the AACSB (The Association to Advance Collegiate Schools of Business) needs to develop more vigorous criteria for teaching ethics in business school curricula. It needs to put in place an assessment mechanism to ensure the schools are teaching the right things to our students.
BALA SHETTY, Ph.D., is the Jenna & Calvin R. Guest Professor and associate dean for Graduate Programs at the Mays Business School at Texas A&M University. Reach him at (979) 845-0361 or at [email protected].