Ethical behaviour and the CEO

Stefan Stern reports on the risks involved when CEOs cross the moral line

Sometimes that personal computer on your desk might not be quite as personal as you would like. Ask Harry Stonecipher. In March, Stonecipher was forced to resign as chief executive of Boeing when his extra-marital affair with another Boeing colleague was discovered. 'Inappropriate' e-mails exchanged between him and a 'vice president of operations and commercial activities' were produced, bringing an end to his 15-month tenure.

Ironically, Stonecipher had been appointed chief executive in December 2003 precisely to raise the moral tone. His predecessor, Phil Condit, had resigned after defence contracting scandals saw two Boeing executives go to jail.

Not that the affair had directly affected Boeing's finances in any way. 'Our investigation determined the relationship was consensual and had no effect on the conduct of the company's business,' said chairman Lew Platt. But 'the board concluded that the facts reflected poorly on Harry's judgement and would impair his ability to lead the company'.

Stonecipher had crossed a moral line drawn by the company in its own code of conduct. 'How can he get up in front of employees and say ethics is Job 1?' a company source observed. 'Here you have a chief executive who couldn't really play this role.'

Investors, on the other hand, did not seem too bothered by all this. Boeing's share price fell just a little on the day of Stonecipher's resignation, but has since remained near its three-year high. As one US broker put it: 'It's more of a public image problem for Boeing than a financial one.'

According to Stephen Mader, vice chairman of San Francisco based headhunters Christian Timbers: 'Today's chief executives are like political figures or entertainers. If their laundry is out there to dry, it had better be pretty clean.' Richard Koppes, a corporate governance expert and former general counsel at Calpers - the Californian state employees' pension fund - told the New York Times: 'In today's world, Harry Stonecipher ought to know better. Given what Boeing has gone through, it doesn't need this. The board did the right thing.'

But how far can we now expect CEOs' private lives to be taken into account when considering the future fortunes of companies? Does what they get up to in their own time really matter at all? 'This is a very difficult one,' says Philippa Foster Back, director of the London based Institute of Business Ethics. 'You bring your whole personality to work but, of course, you have a private life as well. If you bring the company into disrepute by your actions, or if you misuse company assets, then you can expect trouble.' Recently, the great Jack Welch had to repay his former employer GE when some of his excessive perks and benefits became known - also, incidentally, in the wake of an affair which ended his first marriage.

Foster Back argues that a code of values or business principles may be a useful first step in establishing clearly that 'this is the way we do business round here'. She recommends a three step test to any business leader who is about to take a decision: 'First, do I mind anybody else knowing what I've decided to do? Does the thought of being 'found out' give me butterflies in the stomach? Secondly, who does my decision affect? Have I thought through the consequences? And third, is it fair?'

But, as far as the investment community is concerned, Foster Back says, concerns over ethical behaviour may be limited to the immediate impact on business confidence. 'If someone makes a poor decision in their personal life there may be a 'read-across'; might they make a poor decision in business? What's this person really like? Can we trust them?' she says. For the financial community, it seems, the personal morality of business leaders has more to do with reputation and business confidence than any pained discussion on ethics.

But bosses must beware. 'Nothing remains secret for very long,' Foster Back warns. 'In the past it took weeks for something to become known - today it might only take half an hour. And leaders do need to think much harder about the examples they set. If their immoral behaviour is apparently acceptable, how do they expect colleagues to behave? It is said that relationships and behaviour at Enron were almost as complicated as the off-balance sheet vehicles the firm used to create its illusory profits,' she adds.

Purge the excess

The truth is that over-paid chief executives have only themselves to blame if an intrusive media and more active shareholder base have started to shine a bright light on the murkier dealings of their private lives. Regulators such as New York Attorney-General, Eliot Spitzer, supported by the new Sarbanes-Oxley legislation, are on the rampage, looking to purge executive excess from the system. No e-mail will be left unread, as Boeing's Stonecipher can confirm.

Indeed, we are still living through the post-boom hangover, still in detox from the out of control days of the late 1990s. Don't forget what business gurus were writing, in all seriousness, only a few years ago. Harvard professor Lester Thurow published his book Building Wealth in 1999, in which he famously wrote: 'Wealth has always been important in the personal pecking order, but it's become increasingly the only dimension by which personal worth is measured. It's the only game to play if you want to prove your mettle. It's the big league. If you don't play there by definition you are second rate.' When Harvard professors tell you that you ought to be getting as rich as you can, as fast as you can, no wonder CEOs were tempted to transgress in various ways, public and private.

Business school orthodoxy needs to change fast to catch up with the changing rules of the game, and to produce future business leaders who know the difference between right and wrong. Some - like Stanford's Jeffrey Pfeffer, and McGill's Henry Mintzberg - have been arguing this point for many years. Others are now catching up.

Stanford's Pfeffer, together with Christina Fong of Washington University, recently argued that CEOs' troubles with moral questions stem directly from the inadequate training they received as MBA students. 'Some evidence would suggest that business schools are sending the implicit message that unethical behaviour is acceptable,' they wrote. Business school students may even cheat more than their counterparts on other courses, Pfeffer and Fong alleged.

Thomas K Lindsay, provost of the University of Dallas, wrote in the LA Times: 'It's becoming a regular feature on the news to see handcuffed executives being carted off to face criminal charges. Why, we wonder, was no one along the chain of command at Enron, WorldCom, Global Crossing, Tyco, Arthur Andersen or any of the others able to muster the moral courage to say 'Stop'?

'Aristotle taught that genuine leadership consisted in the ability to identify and serve the common good. To do so requires much more than technical training. It requires an education in moral reasoning, which must include history, philosophy, literature, theology and logic; that is, a liberal arts education' we hope that if, somewhere down the road, one of our graduates finds herself in the midst of a potential Enron, she remembers her Aristotle and cries 'Stop'. '

Stefan Stern is a regular contributor to the specialist press and writer on work, management and industrial issues.