Why is it that certain individuals engage in unethical behavior in the business world, whereas others behave ethically? Several individuals through their unethical actions helped to contribute to the downfall of their firms, with the more classic examples including Jeffrey Skilling, Andrew Fastow, Bernie Ebbers, Nick Leeson, and Bernie Madoff. Jeffrey Skilling, the former Enron Chief Executive Officer, and Andrew Fastow, the former Enron Chief Financial Officer, engaged in practices that clearly deceived shareholders, leading to the bankruptcy of a firm that once topped the quality of management category in Fortune magazine's survey of most admired companies.1 Former WorldCom Chief Executive Officer Bernie Ebbers helped bankrupt a firm that had become the second largest long distance US telecommunications company by improperly reporting $3.8 billion in expenses.2 Ebbers was sentenced to 25 years in jail for securities fraud, conspiracy, and filing false reports.3 Ebbers, who apparently once stated that a code of ethics for his firm would be a ācolossal waste of timeā,4 tried to defend himself by claiming he āhad no idea what was going on.ā5 Nick Leeson, unbeknownst to his superiors and while sitting in the Singapore branch office, bet the entire equity of Barings Bank on the Japanese Nikkei stock index leading to the 233-year-old bank's collapse.6 Bernie Madoff, the founder of Bernard L. Madoff Investment Securities, stole billions from his clients through a fraudulent Ponzi scheme, which became the largest financial scandal of all time. Madoff was sentenced to 150 years in prison.7
Other high-profile individuals also caused significant harm to others or reputational damage to their firms through their unethical activity. JĆ©rĆ“me Kerviel brought his French bank SociĆ©tĆ© GĆ©nĆ©rale to the brink of financial collapse through covert trading leading to billions in losses.8 Raj Rajaratnam, who once had an estimated net worth of over $1 billion, helped orchestrate one of the largest insider trading scandals in Wall Street history and was sentenced to 11 years in prison.9 Former UBS and Citigroup trader Tom Hayes was sentenced to 14 years in prison after being found guilty of conspiracy to manipulate the benchmark Libor rate. As the UK-based āringmasterā of a global network, Hayes would apparently bully, bribe, and reward other traders and brokers for their help in skewing the Libor rate, used to price more than $350 trillion of financial contracts from credit cards to mortgages.10 Former CEO Martin Shkreli of Turing Pharmaceuticals, after being criticized for raising the price of a single pill of a drug used to treat HIV patients from $13.50 to $750, was later arrested for securities fraud.11
But it's not just white collar crime that involves unethical activity. Employees call in sick even when they are healthy, use employee discounts to buy clothes for their friends, steal supplies from the office supply cabinet, and overly embellish their skills and qualifications during job interviews. Managers accept expensive gifts and entertainment from suppliers and abuse business expense accounts. Executives hire relatives or friends for positions even when there are more qualified candidates. In order to win contracts, salespeople promise potential customers that their product specification demands and deadlines will be met, despite knowledge that this will not take place. Why does all of this misconduct take place? Are all of these individuals just ābad applesā? Doesn't each of these corporate agents realize that what they are doing is wrong? And why do people engage in unethical behavior even when they realize it is clearly wrong to do so?
To address these questions, let's start by thinking about our own assumptions as to why unethical activity takes place. For example, when you read in the news about managers or employees who have engaged in misconduct, such as bribery, fraud, or insider trading, what are your initial assumptions? Do you assume that the primary reason for the misconduct is because of the person's weak moral character, in other words, their level of greediness versus possessing stronger moral values? Or do you believe that the situational context is equally important to predicting ethical or unethical behavior? Does the decision maker's perceived personal financial situation, the lack of sanctions, or the opportunity to engage in the misconduct without getting caught mainly drive their actions? And if the situational context is most important, does this mean that different people with varying degrees of moral character will tend to act the same way when faced with the same situational context?
Rather than focusing on only one reason or the other, this chapter assumes that both individual and situational reasons are equally important when it comes to explaining ethical decision making.12 To explain this āpersonāsituationā approach, we will first explore the impact of individual moral character, followed by the situational context including the particular issue, organizational factors, as well as personal constraints that drive behavior. Let's now begin by taking a closer look at the importance of an individual's moral character on ethical decision making.
