Wanted: More Ethical Management

In my Rutgers PhD seminar, I start the semester with a dinner at my house. There the students receive a list of topics we can discuss during the term. To cover those that win the most votes, I invite guests to the classes.

This year as always, topic No. 1 was mergers and acquisitions.

But surprisingly, No. 2 was business ethics.

|Do You Cheat?'

Fortunately, we have on our faculty Dr. Donald McCabe, a specialist on this subject. His research includes a survey on the question: "Do you cheat in school?"

Move than 6,000 students have responded, and the results have been written up in People magazine.

Don came to my class. Had any readers of this column been in the room, they would have been horrified.

Bad Omens

This is what they would have heard:

* Business students admit to cheating more than any other group except medical students.

* It is tough to get to the top in business without cheating, these students feel, so their cheating is justified.

* Women are more moral than men-that is, until they enter business school. Then, when they see what it takes to get top grades and get jobs, they become more like men.

* Even at schools where the average SAT scores were 1,240, 90% of those returning the survey admitted to cheating.

* Honor codes scarcely change the results.

* Typical quotes: "Not cheating is not getting ahead." "Are you kidding? These are the 1990s."

Too many Americans stress individual rights without thinking of responsibility, McCabe told the class. When asked what his goal is in his work and his teaching, he replied: "To get people to take responsibility for their own decisions."

Ownership and Control

We discussed what could be done to improve the ethical climate of American business. The topic that received the most attention was the need to weld ownership and control more firmly together.

When managers are like feadal lords, with no one on staff who can contradict them and no concern for the shareholders, it is easy to forget ethics. It is also easy to see how salaries can reach quite generous levels in such companies.

Two days before our class, Warren Buffett, interim chairman of Salomon Brothers, had announced that 106 people at that firm had been paid $1 million or more in the previous year - regardless of whether their performance justified such compensation.

|Equity Partnership Plan'

His solution: In the future, the most highly paid people at Salomon will get their compensation largely in stock, rather than cash.

As Buffett put it: "The equity partnership plan motivates managers to think like owners, since it obliges them to hold the stock they buy for at least five years and therefore exposes them to the risks of the business as well as the opportunities.

"We wish to see...managers become wealthy through ownership not by simply free-riding on the ownership of others."

Linkage Is Critical

This is certainly a key ethical issue. We have seen banks and many other businesses in which the board members, supposedly controlling the CEO and the company, had virtually none of their own wealth invested.

Linking an individual's well-being with the company's can lead to more ethical evaluation of the company's interest.

One of my students asked: "If the officers and the board members have too much of their own money tied up in the company, won't they become too conservative?"

But I thought of the sort of people who want to borrow 100% of a project's needs with the attitude, "If it succeeds, I win; if it fails, the bank loses."

If a project is too risky to undertake when the managers own a lot of stock in the company, it is too risky to undertake - period.

A Reasonable Exception

Linking management and ownership is not always good medicine. Pension fund monies, for example, should not be placed in the company's stock. Tying people's day-to-day income and their pension to the same operation means that in case of trouble, both go down together.

But in general, tying managers' fortunes to those of their company can certainly encourage decisions that serve the company's interests.

From a broader perspective, as McCabe points out, bad ethics invites regulation. Furthermore, top managers who feel no responsibility to follow common ethical principles set a terrible pattern for the generation of business students who hope to follow them in positions of authority.

Mr. Nadler is a contributing editor of the American Banker and professor of finance at the Rutgers University Graduate School of Management.

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