From the October 2002 issue of Entrepreneur

Adam Smith's The Wealth of Nations is perhaps the most famous book about economics. But it gets short shrift at his grave in Scotland. The father of capitalism's tombstone gives another book top billing, as is appropriate. He always felt The Theory of Moral Sentiments was his more important work.

Smith took trust and ethical behavior seriously. Perhaps the leaders of Arthur Andersen, Enron, WorldCom--and who knows who else by the time you read this--missed that part of history class. Thanks to their inattentiveness, other executives are relearning how much trust matters.

"We've got it wrong when we say business is business, and [it] has nothing to do with ethics," says R. Edward Freeman, who teaches business ethics at the University of Virginia at Charlottesville. "Adam Smith thought that markets wouldn't work unless people wanted to do the right thing."

Trust underlies your business relationships with employees, customers and suppliers, says Paul P. Baard, management and communications professor at Fordham University in New York City. "Where am I going to work? From which supplier am I going to purchase? These decisions all involve trust," Baard says.

W. Michael Hoffman, executive director of the Center for Business Ethics at Bentley College, thinks ethics tend to be taken for granted. "Warren Buffett said after the [1991] Solomon Brothers [U.S. Treasury bond] trading scandal that trust is like the air we breathe," he says. "When it's present, nobody really notices. But when it's absent, everybody notices."


"Warren Buffet said . . . that trust is like the air we breathe. When it's present, nobody really notices. But when it's absent, everybody notices."

In 2002, people paid attention as Arthur Andersen, Enron, Tyco, WorldCom and other companies cast a veil of suspicion across American business. Think this is only a big-company problem? Don't.

"Everyone has something to worry about," says Laura P. Hartman, president of the Society for Business Ethics. "You could be at the most reputable firm, and this stuff could trouble you."

If you need to be convinced of the importance of ethical behavior, just think of it in terms of your P&L statement. Entrepreneurs tend to pay employees less than corporate America does. According to Baard, that's because employees earn psychic benefits from growing a small business. If they get psychic scars due to broken trust, you'll have to pay more to retain them.

And consider that handshake deal you've got with your suppliers. If you fail to pay invoices within the agreed-upon time frame, you haven't kept your promise. "Suppliers will say that we're going to get more contractual now," says Baard. Breaking that trust just drove up your legal bill.

It's Up to You

Fortunately, entrepreneurs carry an ace in this game. Trust is easiest to maintain through person-to-person contact. You run a company that's small enough to know your employees, customers and suppliers. Your larger competitors don't. "With entrepreneurial companies, customers are dealing with the person who makes the decision instead of the middle manager," says Baard.

This assumes, of course, that you're acting in a trustworthy manner. And trust is based on people believing you're acting ethically. Ah, ethics. The culture wars of the past two decades have made "ethics" a loaded word. Successful businesses are built on comity, not antagonism. So who wants to engage in debates over ethics?

You do, actually. Ethical behavior is as simple as living up to your stated values. And only you can define what those values are. More important, Hoffman and other business ethicists believe that ethical behavior can become your competitive advantage during this crisis of confidence in American business.

There are two components to instilling trust through ethical behavior. You have the most control over the first: your actions as a leader. The second is more troublesome: how your employees interact with customers and suppliers. Their actions will determine how trustworthy your company is perceived to be. Think about your work relationships. You haven't been paying enough attention to building trust, says Baard, if you notice coolness in your employees, customers or suppliers. That signal indicates distrust, and you'd better work fast to address its causes.

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Hoffman suggests evaluating whether your actions match your values. With ethical muteness, you're not expounding the values in your heart. "You have to talk about ethics and make it an important part of your company before it becomes important for you to act," he says. Stating your beliefs gives people a marker for judging your actions.

An equally common source of the values-action gap is ethical paralysis. This comes when the opportunity to act on your beliefs conflicts with the opportunity to make money. The short-term cash infusion you receive might backfire if your customers or suppliers think you're only in the relationship for the money.

As bad as that may be, even worse is ethical hypocrisy. One example, says business coach Daniel K. Oestreich, co-author of Driving Fear Out of the Workplace: Creating the High-Trust, High-Performance Organization, is negotiating to sell the company while telling your employees you're not going to sell it. Should your employees find out, you will lose their trust. They may flee the company and leave you holding an empty shell. Better to be forthcoming. A surprising number may stick around because you trusted them to make decisions for themselves.

For many entrepreneurs, addressing ethics takes time they don't believe they can spare. According to Douglas K. Smith, management consultant and author of the forthcoming On Value and Values (The Financial Times Press), they're right about the time commitment."It's extremely hard to find space and time to deliberate about things," he says. "But that lack of deliberative context is often a cause of a lack of trust." By not thinking before acting, you frequently cut ethical corners without realizing it.

Confidence Crisis
THINK YOU'RE IMMUNE from the ethical lapses of Enron or WorldCom? Your employees might not agree, according to a survey by Walker Information of 2,500 employees at companies of different sizes. In general, small businesses fared worse than the largest corporations.

Percent who disagree or strongly disagree with the following statements:

SOURCE: Walker Information

Company Ambassadors

OK, so you're confident that you've addressed all these personal blind spots. But how do your employees act? Hartman recalls consulting for one CEO. "He ran the business in a paternalistic way. He said everyone knew the values. I said, 'Let's test it,'" she says. Hartman's survey indicated that the CEO was wrong: The employees had widely different ideas about the company's values.

She suggests entrepreneurs conduct a simple ethics audit. Ask yourself whether a subordinate asking about an ethical dilemma would get the exact same response from each of your managers. If not, you've got some work to get the message out.

Learn More
Create an ethical business by inspiring your employees. Read "Missed Mission" and "Actions Speak Loudest" for your own inspiration.

According to Eric Douglas, CEO of Sacramento, California, management consulting firm Leading Resources Inc., you need three documents to clarify these issues for your employees. Separate values, purpose and vision statements help define how you operate, what you do, and where you're headed.

Hartman suggests making sure employees can apply such statements to their daily activities. She praises Harley-Davidson's value statement: "Tell the truth, keep your promises, be fair, respect the individual, and encourage intellectual curiosity."

It's important to post these mantras around the company, says Steve Walker, whose Indianapolis-based Walker Information Inc. conducts market research on customer loyalty and corporate reputation. Cisco, he notes, prints its corporate culture statement on each employee's electronic security access card. No one can deny knowledge of such an omnipresent message.

Your employees will inevitably run into conflicts trying to square the corporate values with their daily work. This is exactly why you've established these principles. "Ethics only exists because of conflicts," says Hartman. It's your job to ensure an open channel of communications so they feel comfortable talking about it.

By taking time to explain how you believe they should act, your employees will eventually learn to think through ethical dilemmas on their own. "You need that because employees are going to be making decisions for your company, for you and for your customers that you can't make for them," says Hoffman. This ongoing dialogue also allows you to disarm other trust-zapping scenarios. One of the worst is the brooding of worrywarts.

"Trust and fear are opposites," Oestreich says. "When there's a high level of trust in an environment, people can talk about what's bothering them. When they can't do that, they worry about what might happen to them. They might develop stories about what's going on." You can stop that rumor mill in its tracks by sharing information about the state of your business, says Leading Resources' Douglas.

Your employees will follow your lead when integrating these values into business life. Reward a salesperson that wins business with tactics undermining the company values? Other employees will note the hypocrisy of your corporate values. Didn't punish someone who fibbed to a customer? Expect to detect more lying in the future. To help your trust-building values thrive in your organization, you've got to live up to them yourself.

A Growing Credibility Gap
PERCENTAGE OF PEOPLE who think the Enron scandal is representative of many or most American companies:

SOURCE: Wall Street Journal/NBC News

Built to Last

Hoffman, Hartman and others warn against getting too smug. Hubris is your worst enemy. "Being an ethical company is a job that never has completion," says Hoffman. "It's a constant process rather than an end product."

Properly instilled ethical values become your company's sinew. Your original employees intrinsically understand the values and convey them to new hires. This is crucial because as you grow, you'll lose the ability to maintain the one-on-one relationships that engender trust. At some point past 100 employees, it becomes too difficult. That's why midsized companies often fail to instill trust, says Walker.

"Entrepreneurs put together companies by establishing relationships with people built on trust," says the University of Virginia's Freeman. "As the company gets bigger, entrepreneurs may not focus on that as much as they did in the beginning. Once they start thinking about the company as a regular business, they forget what actually made it successful in the first place."

You may inevitably have to spend more time worrying about investors and other constituencies of growing enterprises. But if you've laid the ethical groundwork, you'll be trusted in those new relationships. And your employees, following your lead, will continue to instill trust in your company among customers and suppliers.

Saving Face
Spoilers exist. Occasionally, individuals will act in ways that ruin trust in your business. Here are some steps you should take to prepare for and recover from the worst:
  • Check your standards: Join the Ethics Officer Association (www.eoa.org, 617-484-9400), suggests Steve Walker of Walker Information. It only costs $750 per year, but it gives you access to some of the best business ethicists around. Don't have time for another association? Assign an employee as your ethics officer. Give him or her some of your time to make sure your vision matches your company's values statement.
  • Act quickly: When you encounter ethical misconduct in your firm, strongly reprimand the employee who violated your company's ethics policy. This sends a signal to other employees that you don't tolerate inappropriate behavior. And make sure to come clean to the affected customer or supplier immediately. "Bad news, unlike wine, does not get better with age," says Eric Douglas of Leading Resources.
  • Give it time: Trust is built up over time. Don't expect to repair a breech with your first efforts to address the problem.
  • Form a committee: If the rotten apple is you, says Fordham University's Paul Baard, form a compliance committee to monitor how well you keep your promises. Think of it as the ethical equivalent of a bankruptcy proceeding's creditors committee.

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