The Biggest Ethical Mistakes Made by CEOs and How to Avoid Them

I was recently asked about the biggest ethical mistakes CEOs make. In 35 years as an ethics consultant, I have seen some doozies. After all, you only hire an ethics consultant if you face an ethical dilemma. And once an ethical mistake occurs, it is extremely hard to set things right with the public and media, who already may believe that companies routinely engage in unethical conduct. The truth is that most of these mistakes are entirely avoidable—if you are on the lookout for them.

Here are the top 5 ethical mistakes I’ve seen made by CEOs.

Mistake #1: Assuming that a business practice is acceptable because it’s common practice in the industry. This depends on which companies in an industry you compare yourself to. For example, Enron was the most admired company in the energy industry—until it wasn’t. If you are the first one in an industry caught doing something wrong, you often pay the price for the entire industry correcting its practices. There is a scene in the movie Tin Men in which two aluminum siding salesmen sit outside a congressional hearing saying to one another, “We only did what everyone was doing.” If this sounds a bit lame, avoid putting yourself in the same position.

Mistake #2: Confusing legal advice with ethical advice. The job of legal counsel is to tell you the legal consequences of various courses of action—not whether you should take those actions. It is the job of the CEO to decide which risks to take and which to avoid. An action can be legal but still be unethical. Many of the investment activities that led to the 2008 recession were perfectly legal—and also perfectly unethical. It is a mistake to use your legal counsel as your conscience just because you are used to disclosing confidential information to your lawyers. Once you step outside of the domain of legal advice, legal counsel is no more able to give good ethical advice than any of your other advisors.

Mistake #3: Trusting the managers potentially implicated in an ethical issue to investigate the issue. While it is important to show managers that you trust them, it is more important to protect the reputation of your company. It is hard for managers to admit they made an ethical mistake or that an ethical mistake was made on their watch. The CEO should have resources, such as a compliance officer or director of internal audit, outside the line of command to investigate potential legal and ethical breaches. When these resources are regularly used to investigate serious matters, line managers will not be surprised when they are called upon to investigate an ethical issue. They will not conclude that you don’t trust them if they know that this is how serious issues are always addressed.