For many years, visitors to the Carol and Lawrence Zicklin Center for Business Ethics Research at the Wharton School were greeted by icons of corporate scandals: Large office signs from WorldCom, Arthur Andersen and Enron. Installed by professor William Laufer, the Julian Aresty Professor of Legal Studies and Business Ethics, Sociology and Criminology, who served as the Center’s director from 2000 until last year, the signs were reminders of how compliance and governance failures (or many of them, repeatedly) can precipitate the fall of even the most profitable and prominent corporations. The signs are tucked neatly away in Prof. Laufer’s office now, but the subprime mortgage meltdown, and the resulting global financial crisis, have created plenty of replacement candidates—AIG’s blue box logo, say, or Countrywide’s tiny pastel house.

The financial crisis has precipitated all sorts of structural redecorating—on Wall Street, in Washington, DC, inside the homes and minds of average Americans. Given the accounting scandals, reckless lending practices and terrible risk management during the bubble years, along with the wide-reaching consequences those unethical actions have wrought, it seems likely the crisis will also influence the teaching of business ethics. At Wharton, for instance, as part of the school’s sweeping changes to its MBA curriculum, the Department of Legal Studies and Business Ethics is getting a fine-tuning. The law and ethics classes, each six sessions and currently taught separately, will be combined into one 12-session course beginning in the Fall of 2014. According to G. Richard Shell, the Thomas Gerrity Professor of Legal Studies and Business Ethics and Management, the curriculum overhaul was already underway when the financial crisis hit, but he says the meltdown “certainly informed our thinking.” The course integration especially made sense in light of recent legislation like the Dodd–Frank Wall Street Reform and Consumer Protection Act, the single biggest overhaul to financial regulation since the Great Depression. “The fact that we have periodic scandals, and more government regulation, just underscored combining law with ethics,” Shell explains. “The two things are related; in many cases, legal rules take their foundations from ethical norms.” At the moment, he says, the department’s professors are in the process of creating the integrated course. “We’re identifying subjects, legal or ethical, that each of us has a passion about and we’ll present that to each other over the next six months. We’re pooling our intellectual capital.”

Thomas Donaldson, the Mark O. Winkelman Professor of Legal Studies and Business Ethics and the current director of the Zicklin Center, says the two courses hadn’t previously been combined largely because “in the academy we balkanize ourselves,” creating separate disciplines with territory-specific journals. He notes, wryly: “The world doesn’t listen to the journal editors so much.” A lack of knowledge in either law or ethics, he says, hinders a student’s ability to understand an issue. “If you’re looking at a question like insider trading, some big ethical questions arise out of how you define it,” Donaldson says. “If you don’t know what the laws are in the U.S. or Switzerland, it’s hard to get deep into the subject.”

More topical issues have also arisen out of the financial crisis, like executive compensation and bonuses. In many cases during the subprime era, bankers were rewarded with bonuses for concluding a deal that appeared to have present value to the company but posed long-term financial or reputational risk—the so-called pay-for-peril phenomenon. The practice was likely one of the workforce pressures that pushed employees into making unethical decisions. “I can’t teach a course in business ethics after the crisis without addressing pay-for-peril,” Donaldson says. Speaking more broadly of the influence the crisis has had on his classroom, Donaldson adds, “I don’t know of anyone teaching at Wharton who hasn’t changed to some extent.”

For Diana Robertson, Wharton’s Joseph Kolodny Professor of Social Responsibility in Business, one of those changes has been a greater emphasis placed on risk management. “We’re all blaming the banks and the financial services industry for overly risky behavior,” Robertson says, “but individuals perpetrated this behavior; we can’t just blame institutions.” Ethics courses have always emphasized critical thinking, Robertson says, but, “I’m trying to get the students to understand the level of risk involved in various decisions they make and recognize when an issue is crossing a line and becomes unethical. There’s much more of an emphasis on risk than in the past.”

Judy Samuelson manages the Business and Society Program at the Aspen Institute, which every two years issues “Beyond Grey Pinstripes,” a report that measures how business schools prepare MBAs for social, ethical and environmental stewardship. According to Samuelson, there was a big uptick in the interest in business ethics post-Enron that has deepened with the current crisis. Still, she says, “students exit business schools thinking more like profit maximizers than when they come in. If you enter as a consumer and exit thinking about shareholder value—externalize costs, discount the future—you can teach ethics until the cows come home but you’re running against the grain.” The subprime crisis, however, may provide an opportunity for business schools to instill social responsibility across the entire curriculum and curb what Samuelson calls “short-termism.”

Samuelson also believes the conversation surrounding ethics is deeper now. “After Enron, it was, ‘Why did they let the Jeff Skillings of the world into Enron?’” she says. “It’s not just about getting the bad apples out now. People are more willing to say we had a global meltdown here. We’re looking at big questions: executive compensation; regulation; too big to fail; the role of influence peddling in Washington. It’s also raising interesting questions about the purpose of the firm. Is the purpose of the firm what Milton Friedman said: Shareholder primacy? I think you’re starting to see a much broader interest in the purpose of corporations. Is it societal as opposed to financial?” Samuelson says the global recession may be “the Rahm Emanuel moment” for ethics leaders to reshape how society views the role and responsibility of corporations.

On a more practical level, the financial crisis is also adding to the roster of case studies that ethics professors use with students—classic examples of behavior both bad (Enron, WorldCom) and good (Johnson & Johnson’s handling of the 1980s’ Tylenol recall). Nien-hê Hsieh, associate professor of Legal Studies and Business Ethics at Wharton, says he’s lately been discussing the Goldman Sachs Abacus case in his classes. In the mid-2000s, the investment bank created collateralized debt obligations, sold them to investors and bet short against those CDOs. Hsieh says: “It’s part of the general question of what are the responsibilities of investment banks and financial services in general—to their clients, to their shareholders—and how do we think about the role of financial services in the broader economy.” Debating the abacus case, he adds, allows students to think about their role as future business leaders in the economy and society.

Donaldson says that whenever he cites the Abacus case in class, or the BP spill, or the fall of Lehman Brothers, “I have everyone’s attention.” Students perk up when he raises questions about pay and bonuses, too, as well as the ways in which industries are lulled into negative practices, like bundling toxic mortgages. “When I taught the MBA class, which finished a few weeks ago, five of the six classes dealt with ethics issues that had been significant in the last five years.”

The classroom changes, post-crash, aren’t just happening at Wharton. Patricia Werhane, Wicklander Chair of Business Ethics and Executive Director of the Institute for Business and Professional Ethics at Depaul University, says that her department changed the syllabus during the 2008 school year to reflect the subprime crash. “When we have something that’s very timely and happening as we’re teaching, we go right to the source,” she says. “We ask students to look at Countrywide or Bear Stearns, analyze what they did and didn’t do. There are lots of lessons to be learned from looking at those cases,” like proper risk management and the way in which a firm’s rewards systems may promote unethical behavior.

Even the Bernie Madoff case provides a learning opportunity. “A lot of business ethics teaching asks, ‘Is this the right thing to do or not?’” says Hsieh. “In Bernie Madoff’s case, you could argue that it’s clear cut. I would love to hear the student try to make the case that there’s nothing wrong with what he did. But I think it’s useful for two reasons: It’s helpful to see there are clear-cut wrongs. It’s not always grey. And I think the other reason is that it raises questions about what responsibilities investors have. Challenging the mentality of, ‘Things are going right, [so] I’m not going to question it.’” Or, as Werhane succinctly puts it: “If you’re getting a flat 15 percent return every year, that’s impossible.” she adds: “The lesson there is find out where your money is going. To me, the sad part about Madoff is that he took advantage of his friends. He undermined our trust even in each other. It’ll be a long time before I give money to the people I play golf with—and I play golf.”

Madoff is a figure that stands out in the global financial crisis because he’s one of the few offenders the public can name. Unlike corporate scandals of the past—the fall of Enron, say, or the savings and Loan defrauding in the 1980s—there have been few courtroom scenes this time around or handcuffed executives sent off to jail. The subprime crash was fueled by behavior that may not have been illegal, but was ethically suspect. “The leaders of some financial institutions engaged in decision making that perhaps did not fully give credibility to what the potential operational and reputational risks might be to the firm,” says Dean Krehmeyer, Executive Director of the Business Roundtable Institute for Corporate Ethics, a partnership between the Business Roundtable and faculty from top business schools that studies business practices in regards to ethical decision making. “That’s different than an Enron, where you can clearly see fraudulent activity.” In some respects, helping students learn to make the right decisions within the grey space has always been a key part of teaching business ethics. (“If it was simply a matter of legality, that would be the easiest course I’d teach,” says Werhane. “Just don’t break the law.”) But the lack of identifiable villains from the financial crisis is indicative of the increasing complexity of the global financial system. “In the case of Enron you could say there were a few bad apples and that led to why bad things happened,” says Hsieh. “Here, it’s not really a bad apple theory, unless you point to Bernie Madoff. For the most part, people were doing what everyone else was doing. that makes a very diffuse response and very complex and difficult to talk about.”

Still, Krehmeyer says, the subprime crisis has provided business schools with “an opportunity to train future leaders to face the complex decisions that will occur during their careers, so they can make decisions that truly create long-term value.”


The Enron sign in the Zicklin conference room was a visual reminder of something else about ethical scandals: Their cyclical nature. “In the 25 years I’ve been teaching, there’s been a crisis every half decade,” says Tim Fort, the Lindner-Gambal Professor of Business Ethics at George Washington University’s School of Business. “The subprime crisis. Enron before that. Drexel Burnham before that. The Lockheed bribery scandals before that.” Several people interviewed for this story underscored that the subprime crisis isn’t the first business ethics scandal, nor will it be the last. Fort says that while “students love it when what they’re learning is in the Wall Street Journal,” he hasn’t been analyzing any Lehman case studies in class. “There are ethics lessons in the whole shakeout—perennial ethical issues of greed and lax regulation—but on the particulars I’m withholding judgment,” he says. “I tend to wait until some of the facts settle out, though I think we’re probably getting there.”

Richard Shell expressed a similar view. “I followed the current crisis and I’m not completely clear what caused it to metastasize the way it did,” he says. “Bubbles are not unethical. Bubbles are just capitalism. I think the sounding bell that’s different in this case is not so much the level of unethical behavior but the integration of the global market. I never coded it myself as some extraordinarily new form of ethical lapse.”

But there is something that feels different about the subprime scandal—its global impact. The mortgage broker in Arizona who knowingly issued home loans that couldn’t be paid back and the Wall Street banker selling toxic mortgage-backed securities both helped to cause the economic collapse of European countries an ocean away. “In a global economy, these crises can become increasingly widespread, compared to prior crisis,” Krehmeyer says. “While it’s terrible what happened to the Enron shareholders, for those of us who weren’t Enron shareholders or living in Houston, TX, the impact was not as traumatic.” Along with other Wharton faculty, Diana Robertson attended the world economic Forum in Davos, Switzerland this year, and recalled hearing a comment about the pervasive damage caused by a few institutions. “Nicholas Sarkozy was talking about regulation, and Jamie Dimon of JPMorgan Chase said we don’t need more regulation, we need jobs,” Robertson recalls. “Then Sarkozy comes back and says, ‘Let’s not forget this crisis started with the failure of a U.S. bank.’”

Every person interviewed for this article spoke of the ways in which globalism is making business ethics more complicated— from the interconnectedness of global markets to how the internet can expose the smallest wrongdoing (“You can take a cell phone picture and it goes worldwide in 10 minutes,” Fort says) to figuring out how to do business in a multicultural global environment. “Companies are moving into new countries, cultures, religions,” says Werhane. “How do you deal in those markets? Or do you just not go in?” For instance, in some countries it may be the custom to pay small amounts of money to get goods through customs or make contributions to the government when bidding for a project. As Donaldson puts it, “To what extent can we say, ‘When in Rome, do as the Romans do?’”

One case study that’s become a modern classic of globalism is Google in China, in which the tech company made attempts to expand its search engine into the communist country but was required by the government to censor information. Says Donaldson: “If Google is asked to redirect users who type ‘Tiananmen Square’ to a government propaganda website, how is Google to face that situation? Certainly it’s the law in China that you have to censor searches. Do you not obey the laws in the localities you’re in? Or do you say no, as Google eventually did?”

It’s worth noting that many of the issues surrounding globalism have been cropping up in domestic business situations for decades. “Bribes are standard operating procedure” in a number of American industries, Shell says. “It’s not really a third world problem; it’s a capitalism problem. One of the things to cover is fiduciary duties and conflicts of interest. Look at Lehman. They were both selling and buying the same securities. our goal as educators is to put those warning signs in place.”

According to Robertson, while many multinationals are actively working to develop global standards, students who are hired by smaller firms to work internationally may be “in much more dangerous territory,” ethically. As a result, she says, ethics professors are placing greater emphasis on the importance of corporate governance, and teaching global differences in corporate governance. “If we’re in a global economy, we have to be cognizant of those differences,” Robertson says, adding that such questions are “among the most difficult kinds of ethical issues.”

Not surprisingly, Shell believes that at least one of the two courses will be organized around a special topic relevant to a business sector—for example global business, financial services, or marketing. The department is currently doing research to determine exactly which special topic or topics the courses may cover. Another key aspect will be a focus on continuing education. Moving forward, “we’re offering one free week-long executive education program every seven years for life for Wharton MBA graduates,” Shell says. “We’re hoping they come back as they rise through the ranks and become more responsible for decisions.” The thinking is that a business school can educate students about social responsibility, but 15 or 20 years later when those students are executives and faced with complex decisions, demands to meet quarterly profits and other workplace pressures, it’s difficult to remember lessons of the classroom—or to even foresee what those needs will be in new and emerging fields. Or to act on them when you’re a junior level executive fresh out of business school. Fort recalls a student once writing him a letter that said, in effect, I can’t do anything for the first 20 years of my career, but when I get in power I’ll be a good guy. “You may have lost that moral anchor by then,” Fort says. “You have to prepare people in a way that they can always maintain a dimension of their own integrity.”

Ultimately, it goes back to the fundamentals of business ethics—things like providing students a framework for good decision-making, no matter the variables of the situation, and instilling the moral courage to speak out about unethical behavior one may see. Dean Krehmeyer believes one of the positive outcomes of the subprime mess would be if business ethics became more integrated throughout the business school curriculum, breaking free from the academic silo in which it has often been viewed. “The leading business schools provide increased emphasis on connecting ethics and business, refocusing on areas such as risk management, the value of an ethical culture and a strong corporate commitment to value creation over the long term,” he says. “This crisis hopefully illuminates the real value of continuing to truly embed ethics in every aspect of corporate decision making.” It would be nice if the walls of the Zicklin conference room stayed empty for a while.