Ethical lessons courtesy of Penn State

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A great deal of ink has been spilled and megabytes used in expressing outrage over the child abuse scandal at Penn State University. And justifiably so.

Young boys apparently were victims of a sexual predator, who was a Penn State assistant football coach, and even when such atrocities came to the attention of various key people at the university, nothing was done. The monster was allowed to continue to prey on victims.

While our prayers and primary concerns obviously should be with the victims and their families, there are lessons to be learned here. Some of those lessons are important for reducing chances that similar messes will hit other institutions and businesses.

To briefly review, as widely reported, former assistant coach Jerry Sandusky has been charged with victimizing eight boys over a 15-year period. Mike McQueary, then a graduate assistant and subsequently a wide receivers coach for the Nittany Lions, witnessed one act. McQueary reported this to Penn State Head Coach Joe Paterno, and to two school administrators, Tim Curley and Gary Schultz. Paterno also notified Curley. The university president, Graham Spanier, was informed.

But no one did anything. The police were never told. And Sandusky, after retiring in 1999 and after the witnessed abuse incident, continued to have an office at the university, and access to its facilities.

Lesson No. 1 has to do with the issue of ethics and economics, and the idea of protecting a job or the institution.

We’re left bewildered not only as to why a person would carry out such acts against children, but also why nothing was done to stop him. Some say it’s about the money. That is, people might have been protecting their jobs, and/or sweeping things under the carpet so that a vaunted football program would not be tarnished.

If so, how’d that work out?

Paterno and Spanier have been fired, with Paterno falling from the heights of college sports into the depths in a matter of hours. Curley and Schulz face perjury charges. And McQueary was placed on administrative leave.

As for Penn State, there are the short-term negatives, including ongoing investigations, Moody’s considering a bond rating downgrade for the university’s debt, and lost advertisers. Over the longer haul, Penn State faces the loss of students and top student athletes, and a hard road trying to rebuild its reputation.

In an MBA class on international business I’m teaching this semester, the textbook — International Business: Competing in the Global Marketplace by Charles W.L. Hill — includes a chapter on ethics, and it seems to assume that business ethics and economics are separate realms.

The idea is that purely economic decisions are devoid of ethics, and that’s a big cause of unethical behavior.

But many free market economists would dispute such an assumption. For example, Adam Smith, the father of market economics, clearly would have disputed such an assumption as the author of both The Wealth of Nations and The Theory of Moral Sentiments. In order for free enterprise to flourish, there has to be a sound moral foundation upon which a legal system, contracts, property rights, trade, and trust can be established.

Indeed, it turns out that bad ethics is bad for business and the economy. Who wants to do business with unsavory characters? And who wants to invest in nations where corruption reigns free, and contracts and property rights are not enforced?

In turn, lesson number two is to make sure that your business or organization takes ethics seriously. Given that nothing was done in the Sandusky case, it’s hard to see how ethics was considered important at Penn State.

For a business, it is critical that the firm’s culture emphasizes the importance of doing the right thing. That can mean ethics in the mission statement, a code of ethics, and having an ethics officer whose job it is to train staff in the firm’s code of ethics and in ethical decision-making.

But the firm’s executives must do more than just talk. They must lead by example. That means owners and managers have to show that sound ethics are critical to how and what decisions are made and how business is carried out, and that each person — both the worker and the customer — is treated with honestly and integrity. In the end, it’s best when the Golden Rule governs, i.e., do unto others as you would have them do unto you. Penn State failed miserably here.

Hill’s International Business text offers a compelling example of ethics playing a central role in how a business functions. When former General Electric CEO Jack Welch did performance reviews of managers, he broke them into different groups, including “over-performers who displayed the right values and were singled out for advancement and bonuses, and over-performers who displayed the wrong values and were let go.” That’s a powerful statement on ethics.

The surest path to establishing sound ethics in a business is to hire people with strong personal ethics. The ethics of the individual — formed over a lifetime by family, faith, education, experiences, and the broader culture — do not turn off in the workplace. To the contrary, individual ethics inform business ethics. In the end, quite simply, individual character matters most.

Raymond J. Keating is the chief economist for the Small Business & Entrepreneurship Council. His new book is “Chuck” vs. the Business World: Business Tips on TV.