It is commonplace that individuals and the companies they represent over-commit, over-sell, and over-promise in an effort to make a sale, and in a broader context to steal a march on the competition. And, while self-interest shall remain forevermore the primary motive of human behavior, acting on ethical principles has been demonstrated to be good for the individual and therefore in the best interests of the organization.

When behavior to misrepresent a customer is acted out knowingly it creates a moral hazard that an executive leadership group driven by an ethical construct that goes beyond a fixation with the bottom line can not countenance and must move to stop dead in its tracks. A moral hazard arises, therefore, when a party to a transaction acts in bad faith knowing full well that the risk of such an action is borne by another party. A moral hazard taken to an extreme can lead to criminal behavior.


I wrote about what perhaps was the most egregious ethical failure ever visited on the largest number of consumers when I discussed the subprime mortgage fiasco in America’s Service Meltdown. I’ll quote directly from the book. “The subprime mortgage crisis which began in 2007, racked up roughly $200 billion in defaulted mortgages. The crisis also violently convulsed the credit markets. Fannie Mae and Freddie Mac, government sponsored enterprises chartered to provide a stable supply of mortgage money for home buyers, sucked in $200 billion in order to remain solvent. The consequences of the crisis were so widespread that it could not spare many of the presumed titans of Wall Street: Bear Stearns, one of the largest underwriters of mortgage bonds, was bought by JP Morgan Chase for approximately seven cents on the dollar. Washington Mutual, the nation’s largest savings and loan, was also bought by JP Morgan Chase, for approximately three cents on the dollar from its price a year before. Merrill Lynch was bought by Bank America in a shotgun wedding over a weekend (facilitated by much strong-arming by the federal government, the deal was approved by shareholders who were falsely told that Merrill Lynch executive bonuses of as much as $5.8 billion would not be paid without the bank’s consent when in fact the bonuses had already been authorized). AIG, the largest insurance carrier in the nation with much of its portfolio in mortgage-related products, and a casino operation that hedged exotic debt instruments, had to be bailed out with a $180 billion loan by the federal government (ultimately repaid by AIG including a $23 billion profit to taxpayers). And, Lehman Brothers, one of the most exposed banks to the subprime mortgage market, went out of business after 160 years.”

Moral hazards were on display during the subprime mortgage debacle courtesy not just of greedy financial institutions but of others as well: Home buyers lied about their incomes and lived beyond their means; mortgage brokers were incented to sell high-risk mortgages and did so with abandon;  mortgage underwriters processed applications without full documentation so as to score big production numbers; regulators lowered capital lending requirements, and overrode anti-predatory state laws; credit rating agencies rated mortgage-backed junk as AAA securities, and so forth.  The real estate bubble, fueled by artificially low interest rates, gave all the players a “high” who became giddy with their own success. Whatever the attribution of the crisis is assumed to be, however, in the end it was a failure to serve the consuming public.

Similarly, Rick Singer, the fraudster behind the college admissions cheating scandal, which culminated in the indictment of over fifty people, was hardly alone in his role depriving hard-working and honest students of a chance to be legitimately accepted to college. Test administrators, athletic department staff, coaches, and parents were all complicit in what federal investigators say was the largest college admissions scandal ever generating millions of dollars for the scoundrel Singer.

There is always the potential to give rise to a moral hazard anytime one party to a transaction has an incentive to behave against the interests of another party. Moral hazards can be mitigated somewhat by regulations but, in the end, regulation spells out the lowest common denominator of acceptable behavior. And, besides, regulations do not provide enough of a deterrent to keep crooked individuals on the straight and narrow. Consider that only one Wall Street banker went to jail for fraud (although lesser luminaries did end up in the slammer and some are still behind bars). In most recorded cases of fraud and abuse, it’s important to remember, there were laws on the books to preclude the offensive behavior.

Moral hazards can also be mitigated by the presence of contracts that are fair and balanced and which give as much as they take. Unfortunately, the preponderance of marketplace transactions is essentially one-way and invariably favors the supplier. I had a client that commissioned a third-party software contractor to build an e-commerce portal. Unfortunately, the contract was written in such an abstruse and recondite way that not even my client’s legal counsel picked up on the fact that the contractor was not writing the software code as a “work for hire.” Which is to say that my client, for practical purposes, had no ownership rights to the software. It wasn’t until my client had spent serious sums of money developing the portal that my team discovered the contractor’s sleight-of-hand. In the end, my client had to litigate the matter and incur significant legal costs. Finally, the admonition to the consumer of caveat emptor is helpful but hardly practicable in the rapid-fire of day-to-day commercial transactions.


The acts of fraud and abuse perpetrated by corporations and others are the result of individuals operating in an ethical vacuum. All of the regulations in the world, therefore, will not prevent fraud. Remember, there were plenty of regulations in place at the time of Bernard Madoff’s fraudulent scheme. Similarly, there were regulations in place at the time of Enron’s fraud. In that case, CFO Andrew Fastow chose to break the rules with his financial shell game. And, Elon Musk, CEO of Tesla Inc. knowingly flouted the SEC’s financial disclosure regulations for his own aggrandizement.

The consequences of ethical misconduct are real and severe and will, in time, doom the mightiest enterprise. Adelphia Communications, Arthur Andersen, Tyco, Qwest, Wachovia, and WorldCom are but a few of the names which were eventually cut down to size for their continued arrogance in the face of flagrant moral, and ultimately illegal, misbehavior. Unfortunately, the comeuppance suffered by these malefactors is little consolation to those individuals who lost their jobs, their homes, and their hard-earned life-savings at the hands of these unscrupulous predators.

Still, the depredations continue. As one contemptible example, Wells Fargo was ordered to pay $185 million in fines and penalties for opening unauthorized deposit and credit card accounts. More recently, the bank was slapped with a civil penalty of $1 billion by the Consumer Financial Protection Bureau (CFPB) for mortgage interest rate fraud and for forcing nearly two million customers to buy unnecessary auto insurance. Wells Fargo seems to revel in a culture of deceit and appears hard-wired to cheat. Since 2000, according to Violation Tracker, a search engine focused on corporate misconduct, Wells Fargo has been fined nearly $11.5 billion for sixty-one different abuses. This, from a “too big to fail” bank that cost taxpayers $36 billion in bailout funds. Clearly, Wells Fargo has never been too big to cheat.

Another example of ethical misconduct involves Facebook. The company’s default privacy settings and use of personal data have been found to be illegal by a German court. It is estimated that over 50 million user names were sold by Facebook to various providers. Legalities aside – Germany has very strict privacy prohibitions compared to the United States – what is disgustingly unethical on the part of Facebook is that the fine print of its Terms and Conditions was purposely recondite to allow the company to “infer” the user’s permission to share private data. But what is most unconscionable is that Facebook’s Founder and CEO, Mark Zuckerberg, on numerous occasions has publicly stated that the company “will never sell your information without consent.” Mr. Zuckerberg’s execrable behavior, in effect, gives a green light to others in the organization to lie and cheat as the boss would have it.

Not to be left behind is Uber’s cover-up of a hacker’s breach which amounted to the theft of the personal information of approximately 25 million customers and drivers. Instead of reporting the breach to authorities, which is required by law, Uber chose to keep the matter hush and pay the hackers a ransom thereby risking additional fraud and theft. In the end, the subterfuge cost the company a settlement of $148 million. Incidentally, Uber’s misconduct in that case followed on the heels of the Federal Trade Commission’s (FTC) $20 million settlement with the company for making misleading income and lease agreement claims to its drivers. So much for ethical leadership.

The onus to treat the consumer fairly rests squarely with the supplier. That is obvious and true if at times rarely practiced. But that obligation is underscored if the organization abides a service ethic. The Service Ethic, as I have formulated it, are those principles and practices that govern how individuals and their organizations behave toward the customer. The Service Ethic rests on three pillars:

1. Craft a mission to serve the customer. Articulating a mission is a most important first step in focusing the organization’s principles and practices. The mission must be clear, unambiguous, and succinct in stating that “customers are first.” I have used that opening salvo in the mission statement of all of my companies so as to leave no doubt what we valued most dearly. And, as confusion reigns supreme in many circles about what constitutes a mission statement versus a vision statement the following distinction is my take on the difference: a mission statement is how you want to run the company; a vision statement is an expression of reach which lies beyond the company’s current grasp. A statement that expresses the company’s desire to garner, say, 20% of the market is a prototypical example of a vision statement.

Commitments to employees, stockholders, and other stakeholders although clearly important in their own right cannot purport to represent the raison d’être of the corporationTo serve the customer and the marketplace is the principal reason for the corporation to exist and it must trump all other considerations.

2. Reinforce the mission operationally. Service-leadership responsibilities must be consistent with the mission while being grounded at the operating level. By way of examples, the leadership must follow through on the following: 1) hire service-smart workers, 2) empower workers to act in the customer’s behalf, 3) provide workers with a program of continuing education geared to new product and service offerings, 4) support workers with information systems geared to interact with customers effectively and efficiently, 5) incent service workers with the appropriate tangible and intangible rewards, 6) ensure public and private messaging does not subvert the mission, 7) take remedial action with intransigent workers, and 8) allow whistleblowers the freedom and protection to sound the alarm when something seems untoward.

3. Abide the Golden Rule of Service: A worker’s correct ethical choices should be grounded on the following two propositions, neither of which can be implied to bring harm to others: 1) “Do what you say you are going to do”, and 2) “Don’t do what you say you are not going to do”. And, yet this simple formula is systematically flouted by most organizations. Adherence to these propositions – admittedly, more easily said than done – speaks tomes to the character of the individual and his organization. A failure to abide by these propositions while making excuses or lying about why a stated promise wasn’t kept gradually erodes the goodwill that has been built with the customer or keeps customer goodwill from being established in the first place. Moreover, being faithful to a promise or commitment made to a customer isn’t just good business – which obviously it is – but it is virtuous behavior which should comfort the responsible individual.

It is gaining more and more currency that consumers focus as much on the integrity of their suppliers as on the quality or price of their products. It is a visionary executive leadership group, moreover, that understands that service excellence driven by an unremitting adherence to the Service Ethic can prove an unassailable competitive advantage in the twenty-first century while enhancing the moral standing of the corporation. The reach of the Service Ethic extends far beyond mere legalities. As the great German philosopher Immanuel Kant said, “In law, a man is guilty when he violates the rights of others. In ethics, he is guilty if he only thinks of doing so.”  

Management Advisor


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