The "How" of Business Ethics in the Financial Sector

March 27, 2012

JULIA KENNEDY: Welcome to everyone who's joining us here in the room and who is joining us online.

Many of you have been to these events before, but for those who are new let me just refresh a little bit about how the workshops work. We are going to run a few cases here.

We expect you all to speak up and participate as we go through different scenarios that Mary presents. Actually, she has really helped us create this whole format based on her "Giving Voice to Values" [GVV] curriculum. So it's great to have her here to run the workshop. Our theme today is "Issues in Ethics and Finance." We'll start with an introduction of Mary and her curriculum and then jump into the cases.

I discovered Mary Gentile through a book galley that was sent to the Carnegie Council. She really won me over when we had a vigorous discussion about the Carnegie Council's own Business Ethics Workshops, as she is very passionate in her approach to business ethics and really knows how to voice her values. She demonstrated and now is teaching, which is wonderful.

A little more about her background. After earning a Ph.D., Gentile cut her teeth in the business education business at a little place called Harvard Business School [HBS], writing cases there. She got the idea for the Giving Voice to Values project while she was at Columbia Business School, and then the Aspen Institute and Yale School of Management helped support the project.

She is currently affiliated with Babson College School of Business, which is regularly ranked number one on business rankings of schools in entrepreneurship.

Giving Voice to Values has become much more than just a book. The curriculum is available for free online, with many cases and resources for educators across the globe. And Gentile also consults with companies and business educators around the world, spreading her message that people don't need to be given values; they need the tools to implement those values. You'll hear a lot about how in today's discussion.

Gentile is a joy to collaborate with and it's a treat to have her here to run these cases in a key area, both to the contemporary workplace and to our market here in New York, ethics and finance.

It's wonderful to have you here.

MARY GENTILE: It's a pleasure.

JULIA KENNEDY: Why don't we just first jump in by talking about something that has been in the news a lot, which is Greg Smith and Goldman Sachs. Greg Smith wrote a controversial editorial in The New York Times in March of 2012. Goldman is known for being the most value-driven on Wall Street historically, but he decried a decline in the firm's moral fiber.

I'm curious what your thoughts are, and feel free to engage us all in discussion.

MARY GENTILE: Thank you very much, Julia.

Let me just say Julia has been a pleasure to work with, as has the Carnegie Council. So I'm really feeling very fortunate to be here.

After having looked at the list of who was going to be around the table today, I was really pretty excited, because you represent a lot of different pieces of the puzzle. I had a really wonderful conversation before we came down here at lunch and have heard other pieces of the puzzle. I think we can learn from each other.

What Julia and I had cooked up was a more interactive conversation today, and we had started out with a few cases. But then when the Greg Smith thing happened, we both thought, "Well, we better at least put it on the table; otherwise no one's going to be paying attention."

I have my thoughts about it, but I was thinking that maybe what I would propose is to invite you all to think about two questions and just share a few thoughts, which I think will be a nice lead-in to the rest of what we hope to do today.

The two questions I wanted to get your thoughts on were—and you can think about them I think in this sequence might be helpful:

  • First, what have you been hearing from people? That may be from your peers, if you work in the financial industry, or if you teach in the financial industry, or if you yourself have been talking to fellow investors.

  • But then, I also am interested in your own reactions. Knowing who is in the room, I think this could be quite interesting.

If anyone wants to maybe start with either or both of those questions, I think it would be good just to get a few ideas on the table. So what you have been hearing and your own reactions to the whole Greg Smith situation.

PARTICIPANT: What I've been hearing is sort of a combination of things. I've been following this story in the news, so I don't know exactly where I got what idea. But I think there is this tension between what he stated was a decline in values over the last two or three years versus what you hear, that Goldman doesn't have these values in the first place; you hear that it has been like this for a decade or two decades, whatever.

We do have the example I think of just the financial industry over the last 20 years being characterized as being more aggressive and more out of control maybe than before, and maybe then in the future, given that there are some regulatory issues floating out there, Dodd-Frank being one of them. So I think there is a tension there between did this person just discover in the last two or three years that there was a problem, when there was a problem already, or is it really true?

MARY GENTILE: Right. And your thoughts on that?

PARTICIPANT: My thoughts are that I think there has been a historical context in which the financial industry has really grown in a way that's beyond what would be reasonable historically. So the kind of pay that has taken place, the incentive structure—I think there has just been a greed factor, for lack of a better word, that has been allowed to blossom without regard to the fact that there are other stakeholders and other drivers that should be taken in to account in the financial community.

MARY GENTILE: So, given your earlier question about is this new or is this the way it has always been, it sounds like you think there has been an escalation at least, right?

PARTICIPANT: I think he represents the reality, and his speaking up touched off a large "Aha!" moment about yeah, this is really the way it has evolved. But it didn't just happen yesterday; it happened over time, I think.

PARTICIPANT: I'm going to continue a theme that we actually started talking about when we were upstairs. That is, I believe that the financial industry is very similar to many other industries in a certain way, and that is that incentives and compensation drive everything, and how you create that incentive structure can undermine any kind of value structure that you think you have. Even when businesses think they are acting in good faith, you've got that incentive structure that just undermines the entire thing. I think that's the heart of the matter.

I think if we can get at that in a variety of industries—I come from pharma, and there's a continuing discussion of how you create the incentive structure for the sales force, because no matter what you do, I think you're defeating the purpose. I think that's very clear and obvious in the financial services industry, where the bonuses are what some people would call obscene.

PARTICIPANT: I just wanted to ask a question about two twin issues that have been brought up: regulation and incentives and compensation. These are not new themes for any of us around the table.

I very much want to take advantage of the people who are working in different business environments around this table who can talk to me about why we haven't moved forward more on the issues of trying to design different types of compensation and incentive systems in management.

And also, on the regulatory side, I see so much pushback to Dodd-Frank now. I'm not a lawyer, so I'm not into the details, but I just feel we're at a stage where we need some kind of regulation. How it's designed is critical. So why aren't we making more progress?

PARTICIPANT: In terms of people in the finance industry, one of my friends who's at Cap One says, "The lay public doesn't understand markets." Another one, who is at Immigrant and was at Merrill says, "All these auditors are stopping us from making loans. Banks are now full. From no regulation, we have now people being so scared that they stop us from doing business."

I think the finance industry underwent what my memory tells me, because I'm old enough, happened to entertainment and sports. When money flowed in, values went away.

The other thing about the finance industry is the leadership was taken over by traders. They had a certain mindset that they didn't have when Goldman Sachs was a nice partnership.

The same thing with co-ops in New York: landlords were landlords, then they were people who sold their buildings and made hundreds of millions of dollars they never expected to.

The same thing happened in finance when they went public. You can go back. There was a play in the 1980s, I think, Other People's Money. That has a lot to do with it.

My own thoughts have to do with the entertainment and the sports industry. When Johnny Carson's agent realized he could ask for a piece of the business instead of a salary, the whole entertainment world changed.

PARTICIPANT: I was going to put a little historic perspective in it. I've been very closely involved with the financial services business. I knew, back when, a lot of the Goldman Sachs partners and heads of Goldman Sachs. They were really exceptional people. They had the best values.

Just yesterday, when Professor Shiller was talking, he mentioned John Whitehead, who I still see now because he comes to all the Mitt Romney events, which is really funny. Anyway, he is still the most lovely, gracious person.

I think when the traders came in, which was in the 1980s—and I was really right in the middle of that and watching them come in—it was another mindset, and they dispensed with the culture that these older ones had done and started making money, the fast-track money and everything.

PARTICIPANT: First of all, what I've heard—and I'm still somewhat in finance—is actually nothing, which is to say "ho-hum" on most people's part I think.

My perspective on this particular article—and I'll confine myself to this—is Goldman 20-something years ago when I got out of business school, a number of people went to work for Goldman. What was interesting was they said, "When we underwrite something, when we take on a big position for a company that we're going to distribute, we don't just go and do it. We have built up a trading pattern. We know all the trading in that name. We learn it and we really know exactly where it's all going to go."

To me, in a somewhat analogous business, the loan syndication business, there is an integrity to that that I realize that even other investment banks didn't do. I admired them for what was, in a functional sense, integrity.

As recently as 15 or 16 years ago, they actually entered the syndicated loan business and they did the same thing. They had a trading business first and then they started underwriting. The idea was that, of course, you don't trade to lose money, but you trade also to facilitate the business of financing large companies.

It does seem that the trading profit has become the primary motivator in the years since then. It does coincide with their going into a corporate form of business—although I don't know if it's just that or it's the fact that capital is sloshing around so much more in the last number of years as well. I wouldn't pretend to know the cause.

But there is definitely a progression in Goldman's behavior that I have seen over 20-something years at the working level as well as at the leadership level—well, I don't know the leadership level; you do. But it is more than the last few years evidently.

So I'm not sure if Mr. Smith has found his perfect exit or if something came particularly late to his desk or what. But I can corroborate the idea that there has been this actual decline in Goldman itself.

PARTICIPANT: Also another ethical question about whether Goldman changed. I think The Wall Street Journal talked about the end of partnerships, and when the company went public it did create different incentives. So I think that has been pretty well documented, at least in the press.

The other big thread that I saw is whether Smith did enough to change Goldman when he was there. I'm a little skeptical about that. He was a VP, right? That's not high at all; that's very junior. So the question is whether he even had the power to make a difference.

The thing that was related to that question was: Why is he so junior for so long? Maybe he had an axe to grind. So is this op-ed a result of him wanting to stick it to his employer before he left? And now he has a book deal apparently.

The third question is another motivating question, which is: Did he wait until he got his bonus and got rich enough to not be really worried about making a living anymore and trying some new entrepreneurial-type things?

My personal view is I tend to be more generous toward his motivations, because what he's saying seems to be true among what we're saying here. Also, from my own career, my own experience, I think it's fairly naïve to think that a young person or a junior person can necessarily change a massive organization so easily. I think that's quite extraordinary, that expectation to heap on a young executive.

Maybe that's lowering the bar—what is it, the bigotry of low expectations? [Laughter] I hope that's not it. But I'm trying to be magnanimous. Some thoughts that I've seen.

PARTICIPANT: I do think that it's very dangerous to say "this caused that" and to have everything pointed to a single cause—whether they went public or didn't go public. I mean one could argue also that elimination of Glass-Steagall—under the Democrats, by the way—broke down the barriers within banks. I happen to think that is a big contributor.

I think relative to Greg Smith, I agree with the gentleman earlier. I do think his motives were less than genuine, because the "book deal" and his discovery of religion in sort of a nanosecond leads me to think that his motives were less pure. I do think the culture has changed there, but I think he kind of knew what he was getting into joining the firm. But that's my own personal opinion.

PARTICIPANT: I guess, in answer to your question, I've heard people on both sides with respect to the particular motivation that might have led Mr. Smith to make his statement. I was not aware that he already had a book deal.

But, like the previous gentleman, my preference would have been to have given him the benefit of the doubt, in part because I do think there are a lot of people who are in that situation and who would like to rebel and who don't have the ability to do so. I think it's rare for an individual to actually have the guts to do what he did. Now, motivations are very complicated and it is very hard to judge these things.

But I would add, however, just two or three points based on some of the comments that we've just heard.

One is that I don't think a lot of people join firms like Goldman or others on Wall Street in order to eradicate malaria in Zimbabwe. I mean that's not their objective. They really go there to make as much money as they can for themselves.

It's often wrapped in, if not the American flag, at least the belief or the statements that "we're helping the efficiency of the capital markets" and all that. I don't think anybody goes to Wall Street to help the efficiency of the capital markets. But maybe that's just me thinking that. But that's generally what you hear.

What makes these conversations sometimes difficult, I think, is that you have people like the people who wrote the Forbes article, or you'll hear others who will have a particular point of view with an axe to grind that they are trying to make a point and to substantiate. And then we have people on the other side. Rarely do the actual issues end up being debated in an unbiased fashion.

I think some of the issues, which I'm very eager to hear you discuss today, are issues of how much of the culture can you actually drive purely by addressing the matter of incentives—because there's very little doubt that, no matter what you do in setting the incentive structure properly, there will be conflicts of interest. I think they are recognized by the people who run these firms, and some of them in fact—even the head of Goldman Sachs—pride themselves in saying, "We live in a world of conflict of interest, and part of what makes us great is that we know how to handle them."

So they recognize they are there and they have to address them. I think those are addressed partly through a proper incentive structure, partly through the law and regulation, but part of it is really just ethics, which is the matter of doing something that might not be in your interest, where you don't even think you'll get caught, but you don't do it anyway because it's in some sense inappropriate or wrong or it has a cost on others that you don't bear, and therefore you shouldn't be doing it.

Those are matters that are very, very difficult to address either through regulation or through incentives. I would love to hear what you have to say about that.

PARTICIPANT: I was very interested in what you said about these guys were really great guys.

PARTICIPANT: They were.

PARTICIPANT: I come from the world of pharma and I started my life in pharmaceuticals. Our path was we forgot who the patient is and we went right for the sales. We found that we were in a system where we were front-loading, we were trying to get as many sales as possible that would come from the next quarter into this quarter so that budgets would be made and incentives would be paid.

But then we went through a transformation. We got a new CEO who was totally ethics-driven. He basically turned the company on its ear. He said, "We're going to do it completely differently. We know that there is stockholder value. We know that we need to return a profit to our shareholders. But we're going to do it the right way. I'm going to take a reprieve for about two years so that we can get this right."

What he did was he instituted a set of values. But it's not just a set of values on the wall; he incorporated it into everything we did, every presentation we made, how we were evaluated.

He implemented the 360-degree peer performance review. He said, "Those who are the number-one achievers today, I hope you're the number one achievers tomorrow. But if you are and you've done it the wrong way, you're out the door." It was an absolutely incredible experience to go through.

He was also very sensitive, just as the financial industry is, that we were the kids to knock on the block—big, greedy pharmaceutical companies. And we were very proprietary and we were very quiet in who we were because we wanted to remain under the radar screen so we wouldn't tip off any competitors.

But what we found is, through pharma, that we were one step above the tobacco industry. This was the low.

And then we found that people around the world honestly felt that pharmaceuticals were really not developed by pharmaceutical companies but they were developed by the NIH [National Institutes of Health] or anybody else and that all we did was sell them to make a profit.

My being part of that industry for about 30 years, I think every day that I had the experience of seeing how to do it wrong and how to absolutely do it right. There was never a decision that was made—whether it was to stay with the drug, if in fact we felt that it wasn't going to be the best thing for the patient or, if there could have been a problem, walk away from it—which is a very hard thing to take your R&D [research and development] people and move them from one to the other.

PARTICIPANT: Where to start?

What we're going through right now is not new—in the 1980s, with Dennis Levine, the junk bond king, so on and so forth.

We have touched so many different topics. Again, where to start?

I think that we are shooting the messenger, as opposed to focusing on the message. We're dissecting the intentions of this gentleman who wrote something that he felt, as opposed to—well, let's say he was the worst employee, let's assume the worst—is the message right? And does he have to be perfect, this gentleman, at his work for us to listen to what he says? And he is the reason why we are here, right?

Compensation—where to start? The fact that we have put a value or a price on a person, as opposed to the knowledge. Don't tell me that only one person, and one person alone, can do that job. How about number two, or bring him up to number one, to be the number one person? I mean there are so many different things and there is not going to be enough time here—not to answer the questions, but to bring up more questions, or the right questions, to eventually find the answer.

I'll tell you this. Ten years from now we'll have the same argument, the same discussion, the same conversation.

PARTICIPANT: I am currently an executive in the software industry, but I was trained on Wall Street. In 1987, I was in the training program at Salomon Brothers. There was not a single lecture on ethics. But we did have to study for Series 7, Series 63, Series 3, and embedded in those rules were a foundation of ethics and what is right and what is wrong in terms of behavior toward the customer—segregating customer funds and all of the other rules.

And yet, during my class, unbeknownst to me, there was an author in the class. I was also an author but my book hadn't come out yet. Michael Lewis was the author. He of course was writing Liar's Poker—a year out of the training class; he was a year ahead of me at Salomon. We were introduced to each other as authors. We couldn't tell each other what we were writing, so we kept it a secret that we were authors.

But what we learned from Liar's Poker and other whistle blowers throughout Wall Street history going back 100 years is that there has been a tension between reform—government reform, self-regulation, ethics, and culture—and the prevailing norms. The prevailing norms have been below the standard of regulation, and the cultural norms have been somewhat, you might say, two-sided: (1) is the public message and (2) is the private message.

If you Google the following keywords "LIBOR (which stands for London Interbank Offered Rate) scandal, 2012," you will see a scandal brewing which makes the subprime mortgage scandal look small in comparison. The S&L crisis [savings and loan]of the late 1980s will look small compared to the LIBOR crisis.

Over $300 trillion worth of short-term loans are keyed to this LIBOR interbank rate, which is the borrowing rate for banks to borrow from one another and institutions beyond the banks. So a lot of pension funds key short-term paper rates as some number of basis points above LIBOR.

Pension funds in the United States and Europe are suing in a class action suit to try to discover transparency about what traders are doing in terms of collusion and price-fixing of LIBOR. The estimates are that over $175 billion of excess basis points in the aggregate have been billed to clients, including pension funds, over the last 10 years or so.

Of course it has been offset by losses, because they go long and short LIBOR, so the shorts have not been deducted from that aggregate excess profit estimate. But it is a serious amount of money, overcharging, if you aggregate all of the basis points times the number of contracts.

So it seems that we are looking at one culture of one firm, which had a sterling reputation before 2008, and it has been tarnished since then, and yet I think the norms at Goldman Sachs are excellent compared to the majority of firms on the street. The norms at other firms have been lower, and you can just look at the financial history of Wall Street and see the names and you would know that they were lower by looking at the number of suits, class-action suits and others, and regulatory enforcements by the SEC [U.S. Security and Exchange Commission].

So I think that Dodd-Frank is part of the cultural shift. There have been a lot of hearings in Congress about corporate values and Wall Street values and how they need to be reined in by Washington, by the federal government.

So I believe that this debate that we are having is not only important, it should be an ongoing debate, it should be an institutionalized civic conversation at the national level.

MARY GENTILE: I want to say thank you all for sharing some really useful ideas and perspectives on this issue. I think Julia and I were right, that we couldn't launch into something without having an opportunity to talk about that because it is so much in our minds and in our thoughts right now.

I think maybe the way to make a transition here—as you said, "Where to begin?"—I think the way to make a transition is to tell you the slightly out-of-body experience I was having as I listened to this conversation just now.

The slightly out-of-body experience I was having is feeling like this is so familiar to the kind of conversation that I used to hear when I was at Harvard Business School, in the classroom there. Some of the details are different. Many of you have more experience than some of those students had, although they wouldn't have acknowledged that at the time; there was no shortage of ego and confidence in those rooms. But the conversation was very, very similar.

Let me tell you how it was similar.

It was similar because there were a lot of very good points that were made.

It was similar because there were good points on various sides. Somebody said "both sides"—there are more than two sides. So there were good points on various sides that were made.

It was similar in that some people had a historical perspective and some people don't.

It was similar in that some people are feeling this personal emotional frustration around trying to figure out—there has been no accountability. This is a problem; there are real victims here.

It was similar also in the sense that there were some people, perhaps not always consciously, who were in fact thinking about the roles they had played in their own lives and in their own businesses and in their own careers and trying to figure out "Where did I fit in this spectrum that we're talking about?"

So there were a lot of similarities in that way.

The other way it was similar is that what I would feel in those conversations, what I would see in those conversations, is that we weren't really preparing those students—and those were students who are leaders today, partly responsible for some of what we've talked about—we weren't doing anything to really prepare those people to act on any of that in a constructive way. Not because of bad intentions, although some of them may have had bad intentions, but really even the ones who were well-intended—let's be generous, as some of you were trying to be—we were not preparing them to figure out how they might act on that at all.

Students would come out of those conversations saying, "The great thing about going to business school and being in top business schools is that you hear so many different perspectives and you see so many different points of view." Yes, that's wonderful, and that is in fact what makes us sophisticated thinkers, and it is what in fact keeps us from blindly implementing a narrow agenda on folks where it maybe doesn't fit.

On the other hand, that in and of itself is not enough. Multiplicity, pluralism of ideas, in and of itself is not enough. We have to give people a way to work through them.

So what I often say to people at the beginning of my remarks around the work I'm doing now is that it grew out of a crisis of faith. It grew out of 10 years at Harvard Business School and then almost 20 years at other business schools around the world, and feeling that maybe trying to teach business ethics to future business leaders is unethical, because what I felt that what we often did is that we had these conversations, a bit like what we did here. We would bring students in and give them thorny ethical case dilemmas. They would argue all the different points of view.

But in the end they would walk out experiencing what one professor said—I love the phrase—he said, "Mary, I fear that our students are experiencing ethics fatigue." They maybe came into the room thinking they knew what was right, but by the time they walked out, not only were they thinking more complexly, which is a good thing, but they were also pretty much disempowered in terms of thinking that there was something you could do.

Now, depending on your personality and your agenda, you dealt with that in different ways. For some of them it meant something that you just pushed underground and you go forward and you try to be successful in narrow terms—build an institution, make a lot of money, and then give it to your alma mater.

Some of them would deal with that by becoming quite cynical. They may take the same actions, but they wouldn't dress it up in the language that one of you used, about "the future of capitalism is serving the development of the world in a broader way." They wouldn't even bother to go there. They would just say, with the Liar's Poker perspective, "We're going to win the game."

Then there would be some folks in the room who would just be disillusioned.

What I ended up thinking is, "We really need to shift the way we think about this."

So I am going to tell you that there were three flips, three shifts. It was kind of a jujitsu move. That's at the heart of the work I am trying to do. I'm going to give the three flips and then we can go to one of the cases if you like. But it feels like I should give them after what I just heard.

  • The first flip was that we needed to shift what we were teaching.

  • The second shift was we needed to shift our idea of who we were teaching.

  • The third shift was we needed to shift our idea of how we were teaching.

Let me go through with what we were teaching. What we typically did in top business schools—and I now work with companies and it's a lot of what they often do in their internal trainings and programs as well—is that we would do two things: we would raise awareness and we would teach analysis.

By raising awareness, what we are trying to do is say, "We're going to expose you to all the kinds of ethical challenges that you will encounter in business so you will recognize them when you encounter them, so you won't be a dupe."

With analysis, what we would do is: "We're going to give you all the rules, we're going to give you all the policies, and we're going to give you all the models of reasoning that will help you think through these thorny issues, so that you will be able to come up with an ethical and responsible course of action."

Now, don't get me wrong. I think these are both really important goals. But they are both extremely limited.

The first one is limited, the awareness issue, because although, of course, it's important in a complex world, many of the issues that we were talking about in this last 10 or 15 minutes were not those complex issues. I mean they're complex in implementation, but what was at stake was often fraud, illegality, deception. Not always, but in many cases, the things that hit the front page of the paper, the things that degrade trust in business as an institution and in business leaders and in an industry, as you were talking about, are often not those really thorny, complicated ones.

They're often the ones where basic people can say, "You broke the law," or, "You lied to me." So awareness is good. Awareness is not sufficient.

Analysis, we realize—again, it's good. We want to discipline our thinking. We want to hear everything we heard in this room, because there was nothing that was said in this room that wasn't intelligent and useful. But it didn't necessarily tell us what the right thing to do is, and it certainly didn't tell us how to get it done.

And so what we decided was we need to add something to awareness and analysis. We need to focus on action.

So the first shift was what we would teach. We don't give out dilemmas that are really complicated and say, "What's the right thing to do?" We give your scenarios where it's pretty clear, most people would agree what's right, and we say, "How would you get it done?"

So we are teaching a different content. Instead of the content of ethical analysis—which is still good and still needs to be taught—but in a business school we're trying to focus on how do you get the right thing done.

The other thing is that we are focusing on those more clear-cut issues. Faculty will often say—and actually practitioners; I've talked to many business leaders who say the same thing—they'll say, "You know, Mary, the black-and-white issues are easy. It's the gray issues that are really hard."

I say to that: "Yes, gray issues are really hard. But if I could trust people to manage the black-and-white issues effectively, I would live with that, because the gray issues are where reasonable people of goodwill and intelligence can legitimately disagree. The black-and-white issues are the ones where most of us—not everyone, but most of us—would agree that this is over the line; why don't we focus there first?"

So we shifted what we were teaching.

The second thing we shifted was who we were teaching. I think this gets a little bit to some of the conversation we had just now about who Greg Smith is. None of us really knows, I don't think; at least I don't know.

But, typically, when we would talk about what we were trying to do in a business school class and what we were trying to do in a business training program, we would be thinking about that person who is maybe predisposed to break the rules, that person who is maybe predisposed to stretch the rules, and we wanted to constrain them. We wanted to train them and constrain them.

So what we decided was: "Let's think about who we're teaching in an entirely different way." So we imagined a bell curve. We can't prove this, but we imagined a bell curve. We said that at one tail-end of the bell curve, let's say those are people who would self-identify as opportunists, people who would say, "I will do whatever it takes to maximize my material self-interest, values be damned." Now, those people do exist, so they're over there.

PARTICIPANT: All sociopaths. [Laughter]

MARY GENTILE: I think sociopaths are in there.

At the other end of the tail we'll say,"These are the people who would self-identify as idealists." Now, nobody fits into any of these categories all the time. It is often the perspective. But idealists would say, "I will always try to act on my values regardless of the impact on my material self-interest."

What we say is the majority of the people in the business school classroom—they went to business school for god's sake—and the majority of people in business—and, frankly, I put myself here—are under the bell, and we call them pragmatists.

We define pragmatists as people who would say, "I would like to act on my values as long as it doesn't put me at a systematic disadvantage." Now, that's not the same as saying "as long as I know I will succeed"; it's not the same as saying "as long as I know I won't lose." It means "I think I have a shot."

So if you think of people that way, then our task as educators or as managers—I feel we don't have a lot of leverage with the opportunists, frankly. I'm not so worried about the idealists, except I wish they were more skillful and more competent. But I think our leverage is with the pragmatists. I think our leverage is with these folks who say, "I'd like to act on my values if I thought I had a shot."

What we say is, "Well, let's give you the skills, the tools, and, importantly, the practice, to feel more equipped, so that you feel that you have more options, so that you feel like you can be more likely to succeed. I'm not trying to persuade anyone to be anything they're not. I'm trying to help you be who you want to be already at your best."

So that's where we're focusing. That's where we feel that we may have some leverage.

You know, the opportunists will always be with us. The point is you don't need everyone to behave perfectly. You need enough.

So that's the second flip.

The third flip was how we teach it. We created a pedagogy. We created a curriculum, which I can tell you about later if you're interested in it, but I don't think it's as important for this conversation, although it is in fact being widely adopted now. It's in several hundred institutions and schools and businesses on all seven continents, and it is growing rapidly. Law schools—actually someone mentioned law earlier—I'm now being invited to speak to law schools and schools of engineering and schools of medicine as well.

So those were the three flips.

Now, then you turn to a situation like Greg Smith, and you think: What good would this do in a situation like this? Because, as many of you pointed out, there's all kinds of institutional and systemic realities and incentives that are lined up to push against the kinds of behavior that we're talking about, even if you wanted to engage in it.

So what we usually say in that situation is: "Sure, you can look at 'Giving Voice to Values' (GVV as I call it) and say, 'This is about individual behavior.'"

So if you are asking me to do something that I think is wrong and you're my boss, as an individual I can learn better how to communicate with you and how to respond in that situation.

But what do you do if it's a systemic issue? I've dealt with this a good bit in other parts of the world actually—and in the U.S., but primarily in South East Asia—when issues come up around corruption.

The way we talk about it is: if it's an individual issue, you try to deal with it as an individual; if it's a systemic issue, it needs to be addressed at a systemic level, which is something that you talk about a lot at the Carnegie Council.

However, that doesn't happen without the role of individuals. So when we talk about GVV, when we're talking about systemic challenges, like corruption or like some of the challenges we're talking about in the financial sector, we will then say: "What could an individual do?"

In the case of a Greg Smith, the way I think about him is: I don't know him personally; I don't know whether he was a high performer, a good performer, a low performer; I don't know whether he has good intentions, bad intentions; I don't know whether the book was the motivation; I don't know any of that.

But I tend to think about how change happens. We know that change has to happen from both inside and outside. We know that we need to have these kinds of pressures and demands on the outside—sometimes unreasonable, sometimes not fully thought out, sometimes with mixed motivations. We also need to have pressure from inside, sometimes with all the same limitations. But one doesn't work without the other.

So when I see a Greg Smith, there's a piece of me that looks at him and thinks—I think you read the Forbes article; it was written by a career counselor, so you know why she was giving the advice she was giving, and it was, I thought, limited advice. But that aside, when you look at a person like him, if you are already at the point of no return, which he appears to have been, my issue is: What do you have to lose to not try and address it internally before you leave? He may have. I don't know. He may have tried.

But secondly, I feel that what often happens, and what GVV is about, when people do try and address this kind of issue internally is that it builds up, it builds up, it builds up, and it comes from a place of emotion and frustration.

We know that when people react in that way, they don't react very effectively. They tend to get angry, they tend to be emotional, they tend to be blaming, they tend to be less thoughtful.

Often, when it comes to values people feel that, "If I'm righteous, if I'm on the side of virtue, if I stamp my little foot and shake my fist and speak truth to power, this is where courage is, this is what moral courage is."

I'm all for moral courage—don't get me wrong—but I don't think that's our biggest need. I think our biggest need is moral competence. I think if we become more competent at raising these issues, perhaps with lower emotion, certainly with more skill, definitely with more data, definitely with more rehearsal or practice, we actually lower the need for quite so much moral courage.

This actually came from my own personal experience. I was at Harvard for 10 years. It's a very assertive kind of place. The ideas that tended to win out and the people who tended to win out were the people who did the sort of stamping the foot.

I'm an introvert. I don't really enjoy argument. I thought, "Well, maybe I'm going to go to hell. I don't think there's an option for me to raise my voice."

Over the time that I was there, I started to realize that actually there are many ways to raise your voice. So what I did is I went out and spoke to people who had found ways to in fact enact their values in the workplace. Some of them were strong leaders who were assertive and articulate and aggressive, and some of them were introverts who were much more cautious and much more engaging in the way they tried to get it done.

So I started to realize that's another shift we need to do. We need to not do self-assessment, where people evaluate how ethical they are, which is what happens a lot in business schools. Instead, we need to start from the place where you actually say: "We think most of you have values, but you probably have different skills and you probably have different personalities and you probably have different profiles. So let's talk about how you could best express them." It's what we were talking about before we came up here, about finding your energy and going with the place where you have that energy.

These are all the things that fit into the approach.

I'm going to stop, because I want us to have a chance to try it. But that's kind of the approach we are taking with this.

I'm very encouraged. The one last thing I'll say is that I get emails on a regular basis from faculty that will have titles that say, "It works," and then they'll tell a story about some student who was in their class last year, then got their job, went off to their career, and sent them an email and said: "I was at work the other day and something came up"—or they'll call them—"and something came up, and I knew it was wrong. I didn't really think I had any option. Then I remembered our GVV class and I tried it and it worked." That's when I feel that we have some hope.

We start at these serious, high-level, systemic issues and it can disempower us. So what we start to do is we start with issues where you can have some impact. The idea is if you get skillful at that you're going to be better able at being the individual who triggers the systemic solutions to these bigger issues that I think are hugely important.

So that's the idea. But I wanted you to have an experience with it.

Let's start with a very short case. This gets used a lot in business schools. It's called "The client who fell through the cracks." It's a much simpler issue. I will just tell it to you. You don't have to read it.

The story is this. This is a person fairly young in their career working in the financial sector. She is new in the job, she is new in the firm, and she has a new boss, obviously. They manage portfolios for high-net-worth individuals.

Her boss comes to her one day and says, "We have a meeting this afternoon with one of our clients. We had previously communicated to him the benchmark we were going to use for evaluating the performance of this portfolio. We have seriously underperformed the benchmark. I want you to redo the numbers and use a different benchmark so that it will look like his performance has been better, so that we have something good to present to him this afternoon. Go. Do."

She's uncomfortable with this. She kind of thinks this is wrong. Keep in mind she's new, she doesn't really have a relationship with her boss, there's a lot of time pressure.

The question that we would do in the class is not say, "What's right?" Some people might argue this is fine. But we don't even go there. And believe me, in business school classrooms, someone would say, "That's fine."

But we would just say: "What if you felt the way she felt? What if? This is a thought experiment. How could she maybe deal with this situation?"

I'm going to ask you all to just turn to the people around you and have a little bit of a conversation. We're going to give you five minutes to think about: does she have any options; does she have any levers she can pull; what could she try to do?

The questions we usually invite people to think through:

The first thing we ask them to do is to identify what the position at stake is, which I kind of just did for you.

The second thing we ask them to do is consider what's at stake or risk for everyone involved—not just Susan, not just her boss Juan, and not just the client—but what is at stake, what is at risk?

What do you think the—we call them "reasons and rationalizations" (R&R)—what are the reasons and rationalizations, the pushback, that she is likely to encounter from her boss if she tries to address this? And then think about what she might do, what kind of levers could she pull on.

Just take five minutes and then we'll come back to the group.

[Pause for group conversation off-microphone]

MARY GENTILE: What I'd like to do is to just get a few responses from you. You can either speak for your group or you can speak for yourself. What do people think? What kinds of options did you see for Susan?

PARTICIPANT: We thought Susan had three options: to resign; or go to the legal counsel and make a complaint as a whistle-blower, but discreetly, not publicly; or follow the order and hope that she would not be complicit in securities fraud.

MARY GENTILE: And just to understand, with resign did you have included in that saying something externally, or just resign?

PARTICIPANT: We didn't discuss that scenario. But this gentleman mentioned the possibility of writing a reason.

MARY GENTILE: That's the classic sociologist research—exit, voice, or loyalty—that you just lined up, that the options people have are exit, voice, or loyalty. You have exit; you have a voice, but a kind of internal whistle-blowing voice; and then loyalty is following the order. Interesting.

Other thoughts?

PARTICIPANT: First of all, we didn't see that there was a problem there. [Laughter]

MARY GENTILE: Which is why we frame it the way we do. There's always someone like you. [Laughter]

PARTICIPANT: An opportunist.

But then she brought me back to reality.

MARY GENTILE: She brought you back.

PARTICIPANT: Under the bell.

PARTICIPANT: We thought that there might be three solutions also.

So one possibility was to just go to the boss and say: "Look, my job is to do what you're asking me to. You've asked for this performance graph."

So what we did is we gave you three graphs rather than one. The first graph was the performance of the portfolio relative to the benchmark that had been stated initially. The second one is the performance of the portfolio with respect to another benchmark that we found that made it look really good, just as you were asked for, along with some bullet points justifying that. The third one is a graph that would show you the performance of the portfolio with those two benchmarks, and you could then superimpose. You could then decide how to present it to your customer.

But then my able colleague actually came up with something much better, which is what the second solution really is, rather than turn it into, "I'm the good guy and you're the bad guy and I'm basically showing you that you're really not a very good guy," let's instead solve for a third problem.

This is: "We want to keep this customer. We haven't done well, we need to clearly change what we're doing, and we don't want to get into a situation where we're doing something that's wrong, right? Obviously you don't want that and I don't want it either. So we're really on the same side of the table. So to deal with that, let's come up with some solutions. So we're going to present the performance of the portfolio and also tell the customer how we're going to be so much better going forward."

At the end of the day this will keep the customer and that person will end up not only maintaining her position but actually strengthening her position eventually with her boss.

MARY GENTILE: So there's actually two pieces of that. There's a strategy for Susan communicating to her boss and there's a strategy for her boss to communicate to the client. Okay, thank you.

Other suggestions, ideas?

PARTICIPANT: We looked at it a little bit differently. Also, I have a bias on this because my stepdaughter was in a situation like that and she quit.

We just looked at all the questions, thinking what's at stake for her: her job, her sense of self, the firm's relationship with the client. What's going through her head as she walks back to her cubicle to think about what these issues are?

What's at risk? A false performance review that goes in front of the client and then it turns out to be harmful for both the client and the firm?

What are some of the reasons and rationalizations that she's thinking through as she sits down to think what she is going to say to her boss? She's thinking about again her job security. She's thinking about how is she touching a piece of this culture that is making her feel very uncomfortable. If she's willing to rationalize that if she does just this she's just a cog in a wheel, it's not going to be a big deal, she'll just go do it, and the chances are there aren't going to be any consequences.

So given the way she's going, what might she do? We suggested that she get her resume together, although I don't think at that stage she's thinking about that.

But the more I think through what I've just said, I would have thought that maybe she would have sat down to figure out: How could I communicate to my boss a way through this? If I'm already so conscious of all of the different risks and rationalizations, then what could I do?

If it was me, I would try to figure out how to go back to my boss, to say, "How can we work through this?"

MARY GENTILE: Interesting. Okay.

Others? Other points that haven't come up that came out of your groups?

PARTICIPANT: We went straight from quitting to my feeling of, if I worked there I would feel I had to be honest, number one—that would be my first instinct. And how can I present this to my boss in an honest way?

So I would go to him and say, "I'm not comfortable with doing this. I'm not sure whether you are, but one way or the other. Here is another way"—which is what you were presenting—"here is another way we could look at this or another benchmark"—as you were saying.

Or giving them an option—not going and saying, "I can't do it," but showing them that there is another way to present the material and be honest. I think being honest with the client is what really wins the day, but giving them the way forward also.

MARY GENTILE: That's interesting.

PARTICIPANT: I think my partner presented it very well. Just the one piece I think that is critical was to not present it as a moral argument, to say, "I am ethical and you're not ethical," and to shift that whole conversation around facts and data and trends and risks and whatever, because you may quit and you may walk away, but then that person is still there and those business practices are going to continue.

I think a major factor for even opportunists is if you say: "Look, we could have a lawsuit on our hands for whatever reason if later on it turns out that this is the case." So one has to play to those realities and bring that out.

But I think it's very important to remove the sting of kind of an ethical judgment with your colleague.

MARY GENTILE: That's really interesting. That's what you were referring to when you said that your partner was more devious? [Laughter]

PARTICIPANT: Skillful.

MARY GENTILE: You had a word. Sorry. Skillful, okay.

PARTICIPANT: I totally agree with that solution. I think it was a very elegant one. I just want to characterize it slightly differently.

I like to think of things in terms of something of value, in quotes. As a practicing lawyer, I had very difficult clients. When they came to me with something that was sort of ludicrous, I always felt, rather than tell them that it's something ludicrous, I would replace it with something of value.

It fits in this case, as well, so that you're coming up with a very nice, elegant solution, but you're replacing the old recommendation with something of value.

When I moved into the ethics arena, that's how I used to discuss it with my staff. Rather than go have an argument with somebody about something that you know isn't appropriate, give them something of value to replace it with.

MARY GENTILE: Very interesting. Thanks.

PARTICIPANT: Maybe my thought has been talked about obliquely already, the thought being that when a person has to do this, there's a measure of courage that's required. The thought occurs to me that when a person does this, it would be entirely appropriate for him to go to another senior mentor in the firm to lay out the situation, not ask for that person's direct help, get his advice, and then he has the courage to go forward knowing that if it doesn't work he has some built-in support if there's any adjudication that comes later, and it turns people like myself from a coward into somebody with a little greater strength.

MARY GENTILE: A little more courage. That's a really interesting point.

Thank you all. You guys came up with some really great suggestions.

Let me tell you what happened and then let me tell you how we use this, because you guys were like a perfect test case.

The actual scenario this is based on was a little bit of some of your things but primarily this group, I think, but it was a bit of some of the other people.

What Susan decided to do—this is a student in the course—she talked to some other people in the firm and said, "Am I crazy? This isn't right."

They kind of said, "No, it's not right, but we don't really know what options you have."

She thought about: "Well, if I say no, my boss is probably just going to go ask somebody else to do it. So the client will still be lied to. If that bothers me, I'm not really fixing it just by saying no to the project."

She didn't consider quitting. That wasn't on the table for her. Remember the things that were going on here: newness, short time frame. Those are usually the excuses the students will give for why you can't be ethical: "There wasn't enough time;" "I'm too new, I don't have any institutional social capital in the organization."

She took all that and she flipped it—again, the jujitsu move—and used it to her advantage. So she went to her boss and she said: "You know, there really isn't time to redo this analysis in a persuasive way, as you've asked me to do. But what I can do"—and this gets to what you guys said—"here I have an analysis of what happened, I have an analysis of why, I have an analysis of how we will fix this going forward, projections of what the client can expect, and I have talking points for you." So she laid the whole thing out in a very persuasive way.

She wasn't sure what her boss would do, because she didn't really know this guy.

PARTICIPANT: This didn't happen in New York, did it?

MARY GENTILE: Actually, it did.

She laid it all out. What happened is the boss agreed to it and they went forward. The client accepted it.

But what she said to me about the scenario, about what happened, is she said,"You know, what I realized is if I had gone to my boss and told him he was wrong or that this was unethical, I know him well enough—I don't know him well but I know him well enough—to know that this was not going to fly with him and it was certainly going to probably irrevocably damage my relationship with him."

She said, "But I also had the feeling that he wasn't invested in being unethical. He was invested in getting through the day." So she said, "I realized I was solving the wrong problem. I was solving the problem of how to get this unethical guy to be ethical. The problem I needed to solve was how to help my boss get through a difficult conversation with a client," which I think is closest to what you guys were talking about.

And it worked.

What we say to students is: (a) "The approaches and the strategies you come up with, there's no assurance they'll work. With another boss it might not have worked. But when we teach you how to do a marketing plan, there's no assurance that every new product you launch is going to hit the returns that you talk about. We're giving you the skills and the tools and the practice to be better able to do this effectively." So that's one thing we tell them.

Secondly, we kind of say to someone like this: "Part of it is that there is no magic bullet."

When I started interviewing people around these questions of people who voiced their values and didn't voice their values, I thought when I found the people who had done it that there were going to be these great arguments that nobody could argue with.

Now, what I just laid out to you—it worked, but you could imagine someone else not being persuaded by that. What I found is that the people who did this effectively were just actually willing to say it, they were actually willing to say something else.

They also did it skillfully. They did the research. They had persuasive graphics, as you were talking about. They laid it out. But they were willing to say it.

We started looking at the research. There's a lot of research out there now in the fields of social psychology and cognitive neurosciences and behavioral sciences that suggests that the way you change behavior is not through this sort of intellectual persuasion; it's through allowing people to rehearse, it's through action, that people act their way into believing something is possible, they act their way into being comfortable saying the words.

I told you the story about my early days at HBS and feeling that there were lots of conversations I was in that I couldn't even get the words out of my mouth. Then one day I was watching another junior faculty member. She was a woman. She was junior and untenured. She was from the South, so she had this heavy Southern accent. She looked like a Southern belle—she had the little flip and her clothes. She just did not fit in in Cambridge [laughter] and she certainly didn't fit in in Harvard Business School in terms of style.

But, by golly, at every faculty meeting she would just speak up, and she'd speak up in this Southern accent, which, you know, there was a tendency to dismiss her, a tendency to dismiss her because of her youth and her attractiveness, frankly. But she would speak up.

A lot of times people would dismiss her. But she actually started to have this impact. It meant that the conversation was different than it would have been if she hadn't been there.

One day I was sitting there thinking, "You know, do I want to have the wrong thing happen because I never said anything or do I want to have the wrong or the right thing happen but I was actually in the mix?"

I started to realize that it wasn't hurting her irrevocably to speak up. For me that was a turning point. So then I started to practice.

I think that's what we do. What you guys just did right now is that you all strategized about what you might do.

The usual classroom conversation about this would be about how hard this is, and what all the barriers are, and maybe there's a way to get around it. But students would not be practicing arguments and they would not be thinking about, "Is there a way to reframe the debate?"

Basically that is all that GVV is. I always tell people it's not rocket science, except when I talk to engineers. They laugh at me when I say that—"But we are rocket scientists." But it is not rocket science. It is, frankly, just asking a different question. Instead of asking, "What's right?" we ask "How do you get the right thing done?" That's what I would like to ask Greg Smith.

The other thing—the comment you made, sir, about going to somebody and talking about it. There are times when that would be utterly appropriate. There are some organizations where you might be pretty sure that you're not going to get a receptive hearing. It depends. You have to make your judgments.

But what we do know is very helpful—and you named it—is peer coaching. What we do know is that it is very useful if you actually go to someone you trust—they might not be in the organization—go to someone you trust, practice your arguments, and build it.

What we often do, in classroom settings again, is we do adversarial role playing. The faculty—and I'm guilty of this—love to play the villain because it's so much easier; it's frankly so much easier to be cynical. So what we have done is we have just taken that off the table. Nobody wants to be naïve, nobody wants to be Pollyanna-ish, certainly in business.

So with GVV we just say, "This is a thought experiment. You might think this is full of baloney, but for the sake of this conversation we're going to ask you to act as if you wanted to do what Susan wants to do and try to figure out how she could do it effectively. So now the way you show you're smart and savvy is by coming up with a way to do the thing that everyone says it's impossible to do."

So we tried to shift to that.

I wanted to end with a quote that I happened to come across the other day and I thought it was appropriate.

It's from Abraham Lincoln, of all people. He was talking about commitment. The first part is just usual inspirational quote stuff. He says: "Commitment is the stuff character is made of. It is the power to change the face of things."

But then this is the part I like. He said: "It is the daily triumph"—daily, day by day—"the daily triumph of integrity over skepticism." That's the part I liked.

It's not integrity over greed. It's not integrity over falsehood. It's not integrity over self-interest. It's integrity over skepticism. I frankly think that is what we all are facing, and certainly in the financial markets. So what's what GVV is about.

I really loved hearing from all of you. Thank you very much.

JULIA KENNEDY: Thank you, Mary.

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