Corporate Governance: 10 Steps of Ethical Decision Making

A couple of years ago, a university in Moscow approached me with an invitation to design and teach a course to their students. They wanted a well-recognized and distinguished CFO to teach their students financial management or real estate development, but I believed other professors already covered those extensively. Instead, I decided to focus on addressing overlooked topics and uncomfortable conversations that not many professors want to have with their students. I wanted to talk to them about ethics and responsibility. I viewed this as a crucial discussion for the future leaders who would eventually helm companies and governmental organizations.

Nowadays, ethical considerations permeate discussions of corporate strategy, business projects, and marketing activities of a company. After the global financial crisis of 2008, which uncovered a lot of ethical issues in the financial industry, businesses began to experience much more serious pressure regarding their corporate governance practices, as well as their social and environmental responsibility. The ethics of entrepreneurship has become almost a new factor of production, along with the usual and traditional land, labor, capital, entrepreneurship, and information.

After six months of preparation, I delivered a comprehensive curriculum centered around sustainable business practices and ethical decision-making. I wanted to leave my students with a practical tool that would allow them to understand how to go about situations where they face moral dilemmas. While finance, marketing, HR directors, and other managers possess numerous decision-making techniques taught by textbooks or business schools, these methods typically focus on professional and functional aspects and do not factor in ethical dilemmas. I took a decision-making model proposed by Linda Trevino and Katherine Nelson, adjusted it based on my personal experience and thoughts, and supplied it with numerous illustrations from real business practice. The positive response from students and fellow professors reassured me that this approach could be shared with a wider audience and used in practice.

But before getting to the ten steps of ethical decision-making, the manager must understand that the problem he is facing has an ethical dimension. His "ethical light bulb" should turn on. If a manager realizes from the very beginning that he is facing an ethical dilemma, then he will think quite differently and will use ethical constructs and not just standard business logic. Research shows that people are more likely to recognize the ethical nature of the issue if:

• they believe that their colleagues will also consider this issue as one having an ethical dimension,
• the decision is believed to have potential serious consequences for others (in particular, there is a possibility of harming someone or violating someone's rights),
• ethical terminology is used during the presentation of the question to the decision-maker.

Each of these factors is important, but while the first two are quite obvious, it's particularly worth emphasizing the last one, which relates to the use of vocabulary associated with morality and ethics. The business world commonly employs neutral language, deliberately avoiding words from the ethical lexicon such as honesty, justice, deception, lies, theft, and so on. This practice helps to mask unethical behavior, makes it seem less problematic, and often eliminates the ethical context altogether. There are many such examples of language substitution—the military calls civilian casualties during military operations "collateral damage"; the special services, in turn, call the torture of prisoners "enhanced interrogation techniques," and those who were caught cheating call their lies "mistakes or misunderstandings." All this is done to remove moral vocabulary from the discussion and, therefore, reduce the moral intensity of the problem.

Once the ethical component is recognized, the 10-step approach can be used to decide.

Step 1

Collect the facts. You will be surprised, but a lot of people come to conclusions without having all the necessary data at hand. Ask yourself: What's really going on? What should I know about the situation? What facts do I already know? What else do you need to know? Be curious and observant-imagine that this is your company, and your own money is at stake in this particular situation. What else would you try to find out before making a decision? Consider it a manifestation of personal responsibility in business-treat the company as if it were your own, and you'll likely want to gather more data and better understand the situation before deciding. Making decisions can be challenging when information is either unavailable or not obvious. Sometimes, it stems from negligence or intellectual laziness.

During the financial crisis of 2008, many bankers and analysts not only failed to obtain sufficient information about the financial instruments they bought or sold, but they also avoided identifying and analyzing certain facts. For instance, mortgage bankers issued loans to the unemployed, received origination fees, and sold these loans on the secondary market, bundled with other mortgage loans, to investors. Unfortunately, there was a collective reluctance to contemplate the risks underlying these transactions. Responsible managers and leaders of major banks and corporations often delegated the rational aspects of their work to rating agencies, competitors, and the press, telling themselves essentially the following: "Everyone is doing it, so everything is fine, and there's no need to worry." This phenomenon is often referred to as FOMO, which stands for "fear of missing out"—an irrational fear that grips a person when the pursuit of profit and an elevated level of adrenaline almost drown out their rational thinking.

Step 2

Identify and formulate ethical issues. If it becomes apparent at the outset that there is an ethical component in the situation, collecting all possible facts helps in understanding potential value conflicts. There may be several conflicts, and not all of them may be immediately obvious. Before attempting to solve the problem, it's essential to understand and name the issue with clear, single-task formulations.

Step 3

Identify all stakeholders. The main ethical schools, such as consequentialists and deontologists, emphasize the importance of identifying everyone who will be affected by a decision when addressing ethical dilemmas. Key questions to answer at this stage include: Who will benefit? Who will be harmed? Who will be most affected, and how acceptable is the damage they may incur? Whose rights will be violated? Who bears the responsibility to act in a certain way in this situation? The ability to see the situation through the eyes of others is a crucial skill in solving ethical issues. Empathy plays a vital role in ethical decision-making, involving the capacity to place oneself in another's position and be sensitive to their perspective, interests, and needs.

Step 4

Identify all your options. Think creatively. People often limit themselves to the two most obvious options and choose between them. But is it always the case that there are only two options? In fact, it is not that easy to recall a situation where the choice was strictly between A and B. There is almost always a C, and often a couple more variations that may not be immediately apparent.

Consider a standard and relatively simple ethical situation in business: an important business partner anticipates a favorable decision on your side and offers you a gift. It's easy to reduce the situation to A or B—accept the gift and violate the company's code of ethics or refuse and risk harming relations with the partner. However, are there other potential solutions? Perhaps accepting the gift, but not for personal use. It could be placed in a public area in the company's office or made available for everyone to use. This decision should be discussed within the company, and its reason should be made public.

Step 5

Determine the consequences. After identifying all stakeholders and exploring potential options, it's crucial to understand the consequences of each option for everyone involved. Neglecting the most negative consequences, even if their probability seems low, can be the riskiest approach at this stage. Our brain tends to downplay the likelihood of such negative outcomes simply because they appear too severe. Consider who will be adversely affected by a particular decision and which option will result in the least harm and the greatest benefit for everyone. Additionally, consider both short-term and long-term consequences. Are you confident that the decision will be perceived as ethical in the long run, even if circumstances change? Will this solution still seem wise a year from now? This can be particularly challenging in the current environment where large public companies focus on quarterly reporting and analyst recommendations, often sacrificing long-term business interests, leading to eventual downfall. Numerous examples in the business world, such as Kodak, IBM, General Electric, Nokia, and others, illustrate the repercussions of neglecting long-term considerations. 

Step 6

Determine the obligations of each participant in the situation. Identify what is expected of you and what is expected of others, including unspoken agreements based on ethical and cultural expectations rather than just legal obligations. For instance, trust in the financial system relies, to some extent, on the expectation that auditors will perform their duties honestly and truthfully disclose a company's financial position. Similarly, trust in science depends on the reliability of scientific data and how scientists present their findings. It's essential to recognize that a business decision not only has practical implications but also conveys a certain message. Employees, customers, and suppliers perceive the decisions made by top management as signals. Even if a company's leader acts with the best intentions and violates the ethical rules accepted in the organization, this may send a message that rules can be disregarded and ethical principles are mere words without substance.

Step 7

Check each option now by asking yourself three questions: Is it legal? Is that right? Is it useful? At this stage, you should also feel how autonomous you are in your decision, whether you are acting under external influence, what state you are in, whether you are balanced, and whether you have a conflict of interests. If you realize that you are in a conflict-of-interest situation or that you are too emotional at the moment, then it may be better to pass this decision to a colleague, consult with someone who is above these emotions, or even postpone the decision, if there is an opportunity to do so.

Step 8

Focus on your positive personal qualities and envision yourself as someone who acts honestly and morally. Consider what a decent person you know or a respected professional colleague would do in your position. Reflect on how they would react to your decision and what they might remember about you when you leave. While many may not contemplate these aspects, they hold significance not only ontologically but also in a practical sense. Building a reputation is an ongoing process, and information about you will circulate through communities and social networks no matter how many jobs or industries you change on your way. Honesty and a good reputation serve as open doors to new opportunities. Therefore, it's crucial to conduct business in a manner that leaves you comfortable with your decisions.

Step 9

Listen to your intuition. It is often a source of good business decisions. It tells us how to act or how not to act even before we comprehend the situation. Over the years and with experience, a good professional becomes more sensitive to situations in which "something feels off." If intuition sends you signals, then take extra time to think and use all the analysis tools that you have in your arsenal.

Step 10

Make a decision and reevaluate it by posing two crucial questions: How would I feel if my family were to discover my decision? And how would I feel if an article detailing my decision were published tomorrow? These queries can provide valuable insights into the ethical dimension of your choice and help ensure that it aligns with your personal and professional values.

Adhering to this model sincerely and thoughtfully, reaching an ethical decision in most situations shouldn't be challenging. However, making the right ethical decision is only half the equation. The next crucial step is to act accordingly. People often choose unethical behavior despite knowing it's wrong. This reflects the fundamental nature of evil or wrongdoing—the awareness that something is wrong, yet the decision to proceed anyway. The Apostle Paul touched upon this in his letter to the Romans: "For I do not understand what I am doing; for I am not practicing what I want to do, but I do the very thing I hate." In religious terms, it's labeled as sin, and in ethical theory, it's known as moral weakness—the gap between how one should act and how one actually acts. This behavior is influenced by various factors, among which the most important is the influence of the environment.

The moral atmosphere within a team and the ethical culture of an organization subtly but consistently influence the decisions and actions of employees, who quickly discern the expected behavior. In environments fostering a "selfish" climate, employees perceive that self-interest is the norm. An altruistic and morally sensitive individual is unlikely to thrive in, for example, an investment bank. Conversely, in organizations cultivating a "friendly" climate, employees sense an expectation to treat others with empathy and support. It's not surprising that members of organizations with a "selfish" climate find it more challenging to undertake an unprofitable yet moral action compared to those in organizations with a benevolent climate, where such actions are better understood and expected.

The ethical culture within a company is not established solely through slogans and instructions; it primarily stems from the personal example set by the company's leadership within the team and the signals conveyed to employees regarding the types of behavior encouraged or discouraged within the organization. To foster an ethically charged corporate culture, management can employ various tools: regularly highlight instances of exemplary behavior, implement both monetary and non-monetary incentives for ethical conduct, help employees derive moral guidance through the formulation of clear rules and a code of ethics, showcase real stories of commendable ethical actions, and openly address immoral acts to emphasize their disapproval within the company.

Another common phenomenon is moral seduction, a subtle form of pressure that can gradually lead an ethical person to make unethical decisions. This process unfolds gradually, step by step. For instance, during a financial audit, an auditor aiming to maintain a good relationship with the client and secure a contract for the following year might refrain from insisting that the client alter a particular accounting approach. While not necessarily illegal, this approach could be on the edge of acceptability. In the subsequent year, the auditor may feel compelled to defend their decision from the previous year and could turn a blind eye if the client pushes the boundary a bit further. By the third year, the auditor might approve an accounting approach that violates accounting rules, hoping that the client will rectify the issue before the next audit. By the fourth year, the auditor and the client may be actively involved in covering up evidence and falsifying documents to justify their past practices. In organizations where moral seduction is at play, new employees might be gradually drawn into adopting unethical practices. Initially, they might be asked to do something that raises only slight doubts, perhaps as a small favor or under the guise of being a "team player." Subsequently, employees could be pressured into more serious actions, and at some point, they can find themselves deeply embroiled in the organization's unethical practices, feeling sufficiently compromised by their past actions.

Princeton psychologist John Darley once remarked that the corporate world often necessitates thousands of individuals turning a blind eye to the moral implications of their work: "You become blind to yourself, to your better self." Entrepreneur and author Margaret Heffernan even dedicated a book to this concept titled "Willful Blindness," inspired by her reading of court transcripts from the Enron case and its executives. Willful blindness acts as a mental filter that individuals use to overlook something crucial in their personal and professional lives purposefully. People willingly become blind, exhibiting an unwillingness to engage in conflict situations and choosing not to acknowledge things that don't align with their worldview. Within companies, individuals often adopt an "ostrich behavior," not believing that expressing their opinions can effect change, and, as a result, they remain silent.

Psychologists emphasize that moral consciousness is not inherent to us by default. In highly competitive environments, individuals under intense pressure may overlook the ethical aspects of a particular problem, often without even noticing them. For example, there are studies suggesting that most of the facts of corruption are impulsive actions rather than deliberate. Recognizing this challenge, it becomes crucial to cultivate inner intellectual discipline and leverage our "inner critical thinker" to act independently, avoiding actions merely aimed at pleasing others. Asking simple clarifying questions such as "Did I understand you correctly?" and "Do we genuinely mean this?" becomes essential. Perhaps the most challenging question for many is "What if I'm wrong?" which encourages self-reflection and openness to alternative perspectives.

When discussing the importance of acknowledging the ethical aspects of a situation, I highlighted the use of neutral language and the avoidance of morally charged words as a method to portray the situation as less ethically questionable. This is a form of "moral liberation." If you notice the presence of such euphemisms, it's likely an indicator that something morally problematic may be occurring. But there are other signals of such "liberation," and if you observe them, it might indicate a potential moral issue:

• Moral justification: Certain behavior is considered normal or acceptable because of its indirect positive social results.
• Favorable comparison: "Other people do worse things," "Everybody does that," etc.
• Distortion of consequences: Downplaying the severity of the outcomes resulting from your decision.
• Diminishing personal responsibility: Shifting or blurring responsibility, which is often seen in teamwork or collective decision-making.
• Reduced personal identification: Dehumanizing or distancing oneself from the victim of immoral behavior, using phrases like "He is himself to blame" or "But he is..."

Ethical decisions are the most difficult ones that we have to face. They become especially complex when several ethical principles come into conflict or when there is serious uncertainty about the results. Such situations require careful consideration, the inclusion of a mechanism of empathy, and the sincere desire to act morally responsibly. In everyday life, we very often make decisions based on feelings, guided by intuition, and do not realize that they can play a cruel joke on us. The human brain is designed in such a way that it tries to spend less of its energy, if possible, and simplify the picture of the world. When responding to the world and the challenges life presents, we often resort to stereotypes, stencils, and templates as they provide a convenient and energy-efficient way to navigate situations. Psychology recognizes various "cognitive traps" where the brain offers solutions based on initial impressions or lightweight algorithms.

The ethical decision-making model discussed in this article serves as a valuable framework for a more deliberate approach to addressing such situations, enabling individuals to pause and analyze moral dilemmas from multiple perspectives. Additionally, comprehending the mechanisms of moral liberation can help mitigate the risk that, even after making the right ethical decision, individuals may fail to follow through. A humble recognition of our own biases and distortions, devotion to the truth, and an unshakable moral compass are indispensable attributes of this process. Therefore, it is quite possible that a mentor or an ethics expert can become one of the emerging professions that is unlikely to be displaced by artificial intelligence. Morality is likely to remain one of the few prerogatives of a real human being forever.