The Importance of Ethics

Doing right is good for business

In September 1982, seven people in the Chicago area died after ingesting Extra-Strength Tylenol capsules that had been laced with cyanide. The incident was a major crisis for Johnson & Johnson, as Tylenol was one of the company's most successful and trusted products. James E. Burke, CEO of Johnson & Johnson at the time, made the difficult decision to recall all Tylenol products from store shelves nationwide, even though the tampering was limited to the Chicago area. This recall involved over 31 million bottles of Tylenol and cost the company more than $100 million.

Burke also communicated openly and honestly with the public, the media, and government regulators throughout the crisis. He held press conferences, issued public statements, and appeared on television to provide updates and reassure consumers. His transparency and candor helped to maintain public trust in the company. Despite the significant financial cost of the recall, Burke's decision to prioritize consumer safety and act with integrity ultimately paid off. Johnson & Johnson was widely praised for its ethical response to the crisis, and the company was able to rebuild consumer confidence in the Tylenol brand. In the years that followed, Tylenol regained its position as a leading over-the-counter pain reliever.

James E. Burke's leadership during the Tylenol crisis is a powerful example of how honesty and ethical conduct can have a lasting positive impact, even in the face of adversity. As a technology leader and veteran, I've had the privilege of witnessing the impact of ethics in both the military and industry. In my experience, ethical behavior is not just a moral obligation; it's a strategic imperative that can make or break an organization. Contrast Burke’s actions with Kenneth Lay and Jeffrey Skilling, former Enron CEOs who along with Enron’s CFO Andrew Fastow, were convicted of fraud, conspiracy, and other crimes. 

The Enron scandal, which came to light in 2001, is one of the most infamous cases of corporate fraud and corruption in history. The scandal involved the collapse of Enron Corporation, once one of the largest energy companies in the United States, and revealed a complex web of deceit, unethical practices, and financial manipulation that ultimately led to the company's downfall. Enron Corporation, headquartered in Houston, Texas, was founded in 1985 as a result of a merger between two natural gas companies, Houston Natural Gas and InterNorth. Under the leadership of CEO Kenneth Lay and later Jeffrey Skilling, Enron expanded its operations beyond natural gas to become a major player in the energy trading and commodities markets. The company was hailed as a pioneer in the deregulated energy market and was considered one of the most innovative and successful companies of the 1990s.

Behind the facade of success, Enron was engaging in fraudulent accounting practices and deceptive business dealings. The company used a variety of complex financial structures, known as special purpose entities (SPEs), to hide its debts and inflate its profits. These SPEs were created with the assistance of the accounting firm Arthur Andersen, which was complicit in the manipulation of Enron's financial statements. Enron's unethical practices began to unravel in 2001 when the company reported significant losses and was forced to restate its financial statements for previous years. The restatement revealed that Enron had overstated its earnings by hundreds of millions of dollars and had concealed billions of dollars in debt. The revelations led to a loss of investor confidence, a sharp decline in Enron's stock price, and the company's eventual bankruptcy in December 2001.

The Enron scandal had far-reaching consequences, both for the individuals involved and for the broader business community. Several top executives, including Lay, Skilling, and Fastow, were charged, convicted, and sentenced to prison; although Lay died before sentencing. The scandal also led to the collapse of Arthur Andersen, which was found guilty of obstructing justice for its role in the destruction of Enron-related documents. The accounting firm was effectively dissolved, and thousands of employees lost their jobs.

In the aftermath of the scandal, regulatory reforms were introduced to improve corporate governance and financial transparency. The Sarbanes-Oxley Act of 2002, for example, established stricter accounting and auditing standards and increased the accountability of corporate executives. The Enron scandal remains a cautionary tale of corporate greed, unethical behavior, and the abuse of power. It serves as a reminder of the importance of ethical leadership, transparency, and accountability in the business world.

There are sharp lines that people and companies should not cross such as laws and regulations. Then there are the fuzzier lines that people and companies use to make decisions that include ethics, morals, principles, values, virtues, and beliefs. In a future post we can get into the difference between all of these but for now let’s group them all under ethics and define that as the guiding principles that define right and wrong behavior, and that plays a crucial role in shaping the culture and reputation of any organization. In the business world, ethical conduct is not only about adhering to laws and regulations; it's about creating an environment where integrity, honesty, and fairness are valued and upheld. 

On the night of Dec. 11, 1995, in Lawrence Massachusetts a boiler in a mill exploded, burning down three buildings and injuring more than 30 workers. Aaron Feuerstein, the third-generation owner of Malden Mills that suffered the catastrophe, could have taken the insurance payout and closed the factory. Instead, Feuerstein used the funds to pay his employees' salaries and rebuild the factory.

Born on December 11, 1925, Aaron Feuerstein joined his family's business in 1943. Under his leadership, Malden Mills introduced Polartec, a synthetic fleece, which became widely used in outdoor and cold-weather gear. Despite the company's innovation and success, the fire in 1995 threatened to end everything. Feuerstein, however, chose the path of resilience and community support. He paid his 3,000 workers for three months following the fire, and spent millions from his insurance and personal wealth to rebuild the factory. Feuerstein’s actions earned him widespread acclaim and even landed him on the cover of "Inc." magazine, which dubbed him "The Mensch of Malden Mills." 

An incident that I recall from a previous company of mine helped reinforce the shared ethics that the executive team had. We were experiencing a payment issue that impacted a couple hundred customers. We were well outside of the range of any legal or regulatory reporting requirements but we had our general counsel in the incident management meeting. As we were discussing options, I recall her saying “what would you want to happen if you were a customer?” Everyone in the room immediately understood how to handle the issue. I knew from that moment forward that this executive team was going to operate at the highest ethical standards and that it was a group I wanted to be part of. 

As we've seen from the examples above, ethical leadership has the power to inspire loyalty, trust, and respect among employees and stakeholders. It can also contribute to the long-term success and sustainability of an organization. Conversely, unethical behavior can lead to corporate scandals, financial losses, and irreparable damage to a company's reputation. As leaders, we must recognize that our actions and decisions have far-reaching consequences. We have a responsibility to lead with integrity and to create a culture where ethical behavior is the norm. By doing so, we can build stronger, more resilient organizations that are capable of navigating the challenges and uncertainties of the business world.