Table of Contents
Corporate Business Ethics - Analysis and Leverage
Shigehisa Tsuchiya, Ph.D.
Professor and Chair, Dept. of Management Information Science
Chiba Institute of Technology
2-17-1 Tsudanuma, Narashino- shi, 275-0016 JAPAN
Phone : +81-47-478-0463 ; Fax : +81-47-478-0354
E-mail : tsuchiya@ pf.it- chiba.ac.jp
Abstract:
Corporate business ethics have become a major topic in Japan as well as in the
United States. Last year, as many as six major corporate wrongdoings were
revealed in Japan, resulting in severe damage to public image and profit
Furthemore, falsification of inspection records regarding cracks at three nuclear
power plants by Tokyo Electric Power Co. (TEPCO) is certain to affect the nation’s
energy policy. Through systemic analysis and model building of the process of the
six major corporate accidents, we have identified that most important common
causal factor was low business ethics, and that openness is the leverage point to
improve them Based on the findings, we have designed a gaming/simulation for a
Japanese power utility company to help top management and employees make
openness a part of their theory-in-use of action through experiential learning.
Gaming/simulation can change actions of participants in their work and in their life.
Keywords: corporate business ethics, experiential leaning, gaming/ simulation,
openness, systemic analysis
1. Introduction
Corporate business ethics have become a major topic in Japan as well as in the United States.
Last year, as many as six major corporate wrongdoings were revealed in Japan, resulting in
severe damage to public image and profit, sharp decline of stock prices, and resignation of top
management people.
In January 2002, a whistle-blower exposed how Snow Brand Foods Co. mislabeled meat
products to take advantage of government subsidies tied to bovine spongiform encephalopathy,
or mad cow disease, while an employee told agricultural authorities about a similar fraud at
Nippon Meat Packers Inc. in August. Whistle-blowing is an attempt by a member or former
member of an organization to disclose wrongdoing in or by the organization (Velasquez, 2002,
p.471).
In May, an anonymous informant forced Duskin Co., which holds the Mister Donut
franchise license in Japan, to admit it had sold pork buns made with a banned additive. Sales
have plunged, and franchisees wanted a management shakeup. In July, two employees of Mitsui
& Co. were arrested for manipulation bidding for power project on Kunashiri Island in Northem
territories of Hokkaido. The Company was barred for three months from bidding on overseas
projects financed by the Japanese Government. And in August, another scandal gave blow to
Mitsui & Co. It was revealed that Mitsui bribed a high-ranking Mongolian government official to
secure an order for official development assistance project, which forced its top management to
resign.
The Tokyo Electric Power Co. (TEPCO) scandal is the latest and most serious case of
corporate wrongdoing brought to light by an insider. On August 29, 2002, the Ministry of
Economy, Trade and Industry s Nuclear and Industrial Safety A gency said it had found evidence
of false inspection records taken from the late 1980s to early 1990s regarding cracks at three
nuclear plants of TEPCO. As a result, 14 nuclear reactors have been stopped to allow inspections
and checkups.
Falsification of inspection records regarding cracks at nuclear power plants by TEPCO is
certain to affect the nation's energy policy, which was devised on the premise of continued
reliance on nuclear power, and will hamper Japan's efforts to fully liberalize the energy market.
Expected delay in nuclear power plant construction touched off by the latest scandal could thwart
Japan’s plan to lower carbon dioxide emission to meet reduction targets stipulated in the Kyoto
Protocol.
2. Analysis and modeling of the cases
2.1 Causal loop model
We have analyzed the six major corporate accidents in 2002 in Japan, and built a causal loop
model that shows the root cause and the leverage common to these six cases (Figure 1). Leverage
competition
s
© pressure to lower
ethical standard
public image of
the company profit Bi
0
R3
® ethical standard
of the company 2
pressure to ethical standard
increase agreed upon by
openness the society
\ aa ® Tong delay
\ organizational S$ B 2
defensive gap in ethical \
s routines standards
efforts to improve
double-loop lack of ethical standard
learnin s
ig _ ‘ef Openness
Ss gap perceived by
the company
Fig. 1 Deterioration of Organizational Business Ethics © S. Tsuchiya, CIT, 2003
is where actions and changes in structures can lead to significant, enduring improvements. Our
causal loop model is apparently a combination of ‘shifting the burden and ‘drifting goals’
systems archetypes Systems archetypes are elaborate structures that recur in our personal and
work lives again and again (Senge, 1990, p. 92).
In all of these six cases, the burden for coping with intensifying competition was shifted to an
easy option—lowering the ethical standard of the company, which increased profit (B1).
However, a decrease of corporate ethical standard caused an increase of the gap in ethical
standards between the society and the company. If it perceived the gap properly, the company
could have made efforts to improve its ethical standard and, with considerable delay, its ethical
standard would have recovered (B2). The company, however, did not recognize or ignored the
gap because of lack of openness due to organizational defensive routines. Organizational
defensive routines are actions or policies that prevent individuals or segments of the organization
from experiencing embarrassment or threat. Simultaneously, they prevent people from
identifying and getting rid of the causes of the potential embarrassment or threat (Argyris, 1990,
p. 25). The increased gap between ethical standards of the company and the society triggered
whistle- blowing by insider(s) resulting in damage to the public image of the company, falling
sales, escalation of regulations, and huge loss, which in tum could increase the pressure to lower
business ethics and widen the gap (R3 and R4). Reflection on the huge loss also put pressure on
the company to increase openness so that the top management could recognize the gap and take
appropriate actions to improve corporate business ethics (R6). However, it is extremely difficult
to create and maintain open communication among members of the company because
organizational defensive routines prevent openness from becoming a part of their theory- in-use
of action. Openness tend to be their espoused theory that has very little to do with how they
actually behave (Argyris, 1993, p. 89).
2.2 Tokyo Electric Power Company
Let us examine Tokyo Electric Power Co. (TEPCO) case in detail. Nuclear and Industrial Safety
Agency said on August 29, 2002 that it had found evidence of false inspection records taken
from the late 1980s to early 1990s regarding cracks at the nuclear power plants of TEPCO. It was
also revealed later that their nuclear power plant falsified inspection data on the air-tightness of a
nuclear reactor container by injecting air.
TEPCO admitted “there has been systematic and inappropriate management of nuclear power
inspections and repair work for a long time” (Press Release, Sept. 17, 2002). They confirmed
“dishonest acts had taken place, including injecting air into the primary containment vessel in
order to lower the leak rate while TEPCO’s workers were involved in the 15th and 16th periodic
inspections at Fukushima Diichi Station’s Unit- 1” (Press Release, Dec. 11, 2002).
Who started this fraudulent practice of hiding data, and for what purpose? The TEPCO press
release of September 17, 2002 addresses the motives and background to the misconduct: “For
employees in charge of the inspection and maintenance work, the most important concern was to
complete periodical inspections and to bring their own generating plants back on line as
scheduled. They had a strong sense of responsibility in that regard. The top management in the
nuclear departments also had the same strong sense of responsibility.” The ostensible reason is
social responsibility of power supply, but the real reason was apparently responsibility to the
company to lower cost because it costs TEPCO 100 million yen a day to replace power supply of
a nuclear power station with that of thermal power stations. This process corresponds to the loop
B1 in the Figure 1.
Lowering the ethical standard of the company widened the gap between ethical standards of
the society and the company. However, lack of openness due to organizational defensive routines
prevented TEPCO from perceiving the gap properly. TEPCO press release of September 17,
2002 said, “The employees in charge of the maintenance work could not help but follow such
precedents (systematic and inappropriate management) in their organization, even if they felt that
something was wrong. ... (The employees in charge as well as the top management) had a strong
sense of responsibility. Those concems fostered the mistaken idea in all the maintenance sections
that they did not have to report problems to the regulator and local governments in the vicinity of
the nuclear power stations as long as they did not cause any safety problems.” This process
corresponds to the loop B2 and R5 in the Figure 1.
The wide gap in the ethical standards triggered whistle- blowing. A former employee of the
company contracted to carry out the inspection came forward as a “whistle-blower” informing
the misconduct to the then Ministry of International Trade and Industry (MITI) in July 2002.
Tepo’s then president received an alarming report from a senior official at the electric power
generation division, but he brushed it off as unimportant. However in May of 2002 when General
Electric Intemational Inc. (GEII), one of the main nuclear power plant maintenance company,
notified the maintenance problems to TEPCO, they started an investigation. In September, the
scandal was exposed, which resulted in resignation of four top management people of TEPCO
including the chairman and the president, severe damage to public image and profit, shut down
of 14 nuclear reactors, and sharp decline of stock prices. Ministry of Economy, Trade and
Industry came up with preventive measures that center on making regular self- inspections of
nuclear power generation facilities and equipment a legal requirement. This process corresponds
to the loop R3 and R4 in the Figure 1.
According to the press release of September 17, 2002, TEPCO is committed to the following
four measures to prevent a recurrence:
1. To improve transparency and the disclosure of public information
2. To create an environment for conducting appropriate business activities
3. To conduct more stringent intemal audits and to reform the corporate culture
4. To thoroughly comply with corporate ethics
One of the New Y ear resolutions of the new president of TEPCO is to create “a system that will
never allow workers to engage in dishonest practice” and “a climate in which workers will never
engage in dishonest practice.” This corresponds to the loop R6 in the Figure 1.
3. A search for new methodology
Our analysis has made it clear that deterioration of corporate business ethics was the root cause
of the six major corporate accidents in 2002 in Japan. How, then we can prevent deterioration
and improve business ethics?
3.1 The case method
The case method seems to be the only methodology in use for teaching and training in business
ethics because moral truth cannot simply be told and passed on. Donaldson and Gini (1996, p.16)
claim that adapting the case method to ethics is relatively easy because this method emphasizes
practical reasoning, which is a crucial component of ethical reasoning. Cases emphasize means-
ends reasoning and can be used to do the same when the ends are not only market share and
profits, but fairness and rporate integrity. Handled properly the case method can spark the
search for skills and values of utmost human import. It can, perhaps more effectively than any
other method, demonstrate the need for intellectual solutions to practical problems (p.19).
Yet, as Donaldson and Gini (1996, p.18) admit the case method can become a boring
exposure to the prejudices of others. Cases necessarily oversimplify business situations. Whereas
cases can imitate reality by demanding decisions on the basis of incomplete facts (no reat world
decision maker has all the facts), cases are at odds with reality in presenting a “static” rather than
a dynamic decision making context. A case presents a situation in which the action has already
occurred, but everyday situations unfold gradually, and every hour brings fresh information to
the decision maker. Hence the skills of knowing when to seek new information, and of knowing
when the proper moment has arrived to make a decision, are not developed by the case method.
In Japan, most organizations are apparently not learning from mistakes - even from their own
mistakes. Japanese organizations are highly reluctant to admit mistakes, and they seem to prone
to repeating the mistakes and scandals over and over again. Nippon Meat Packers Inc. made the
same mistake as Snow Brand Foods Co., and TEPCO did not lear a lesson from the scandal of
Mitsubishi Motor Co. in which an anonymous tipster revealed in mid-2000 that the carmaker
covered up product defects for more than 30 years.
It is true that some companies quickly formulate preventive measures every time another
shocking scandal is uncovered. But the measures often do not work because many were actually
not much more than superficial remedies. For instance, in the case of TEPCO, the company
installed a system in each of its nuclear power plants in 1998 to encourage employees to covertly
inform of wrong-doing, but it did not work. Staff at the company’s nuclear power generation
division pride themselves on helping the govemment implement its national nuclear power
policy. The division evolved into an intemal sanctuary, with no outside supervision.
Then, what can we do to prevent deterioration of corporate business ethics and improve
them? From our analysis of the six cases, we claim that the leverage is openness. If it maintains
adequate openness among top management and employees, the company will be able to
recognize the gap between the ethical standard of the company and that of the society and take
actions, which in time will improve its ethical standard (loop B2 in Figure 1).
3.2 Openness
3.2.1 Participative openness and reflective openness.
To create and maintain effective open communication essential for good corporate business
ethics, we need reflective openness as well as participative openness. We have to both make it
safe to speak openly and develop the skills to productively challenge our own and others’
thinking.
Participative openness, the freedom to speak one’s mind, is the most commonly recognized
aspect of openness. This is because the philosophy of “participative management,” involving
people more in decision making, is widely espoused (Senge, 1990, p.277). By stating our views,
we all appear to be contributing to collaborative leamning— yet, little real learning takes place
because, on a deeper level, no one’s view is changing or being affected. Participative openness
by itself will rarely lead to better quality decisions because it does not influence the thinking
behind people's positions.
While participative openness bads to people speaking out, “reflective openness” leads to
people looking inward. Reflective openness starts with the willingness to challenge our own
thinking, to recognize that any certainty we ever have is, at best, a hypothesis about the world. It
involves not just examining our own ideas, but mutually examining others’ thinking.
Reflective openness is based on skills that include distinguishing espoused theory from
theory- in-use, becoming more ware of and responsible for what we are thinking and not saying,
and dealing with defensive routines. But these skills take time and persistence to develop, and
most managers are completely unaware of them. There is no established methodology to make
openness a part of their theory-in-use (Senge, 1990, p.278).
Unless these two different types of openness are integrated, the behavior of “being open’ will
not produce real openness. We feel a need to be more open, to which we respond with the
behavior of participative openness— expressing our views more forthrightly, soliciting others’
inputs, and talking more with everyone about our problems. When this happens, participative
openness can become a “symptomatic solution.” Then, it shifts the burden away from the
“fundamental solution’ —reflective openness: developing the skills of inquiry, reflection, and
dialogue( Senge, 1990, p.278).
TEPCO lacked adequate participative openness. The employees in charge of the maintenance
work could not help but follow inappropriate precedents in their organization, even if they felt
that something was wrong. TEPCO did not have adequate reflective openness either. When the
then president of TEPCO received an alarming report from a senior official at the electric power
generation division in July 2000, he brushed it off as unimportant.
3.2.2 From espoused theory to theory- in-use
The question now is how to make openness as a part of the theory-in-use based on which
members actually act. Firstly, we examine espoused theory and theory- in-use, and then discuss
effective methodology to transform the mental models of the members.
Human beings hold two kinds of theories of action. Espoused theory is the one they claim to
follow. It is composed of beliefs, values, and attitudes. Theory-in- use is the one they actually use
when they act. In the six cases, openness was merely an espoused theory. Organizational
defensive routines have prevented it from becoming a part of their theory- in-use.
In most organizations governing values are to be in unilateral control, to win and not lose,
and suppress negative feelings. And action strategies based on the values are to advocate,
persuade, sell, and use face-saving devices. Because most individuals use these actions, the
actions become part of the fabric of everyday life. And because so many individuals use these
actions frequently, the actions become organizational norms. The results are organizational
defensive routines (Argyris, 1990, p.25).
Organizational defensive routines are actions or policies that prevent individuals or segments
of the organization from experiencing embarrassment or threat. Simultaneously, they prevent
people from identifying and getting rid of the causes of the potential embarrassment or threat.
Organizational defensive routines are anti-leaming, overprotective, and self- sealing.
In order to make reflective as well as participative openness a part of the theory-in- use of
members, we need to transform their mental models through double- loop learning. Based on the
results of their recent research, the first author and his colleague claim that gaming/simulation
can provide interactive leaming environment and make double- loop learning possible (Tsuchiya,
T. & Tsuchiya, S., 1999; Tsuchiya, S., 2001).
3.3 Gaming/simulation
A parable such as Spencer Johnson’s Who Moved My Cheese is an effective tool to help people
discover simple truths they can use to enjoy healthier lives with more success and less stress. It
can open their mind for learning by providing it with an amusing and enlightening environment
to wander about. But, gaming/simulation can be much more powerful methodology especially in
team learning because it involves experience. Gaming/simulation is defined in this paper as
simulation that works wholly or partly on the basis of players’ decision.
The most powerful leaming comes from direct experience, but “learning by doing" only
works so long as the feedback from actions is rapid and unambiguous (Senge, 1990, p.313).
Learning by experience is difficult because, in the real world, there exist what Senge called the
“dilemma of leaming from experience." The factors include:
¢ Learning horizon: Individuals and organizations have a “learning horizon,” a breadth of vision
in time and space within which they assess the consequences of their actions. When our
actions have consequences beyond our learning horizon, it becomes impossible to leam from
direct experience.
* Scarcity of experience: History offers only meager samples of experience. Historical events
are observed, and inferences about historical processes are formed, but the scarcity of
historical events works against effective leaming.
« Irreversibility: Actions cannot be reversed or taken back in real business. The risk and cost of
trial and error is often too much for us to take. Therefore, even when the feedback is rapid and
clear, most of us tend to avoid tests and therefore we miss opportunities to lea.
¢ Ambiguity: In addition, ambiguity in the real world makes it difficult to learn from experience.
Gaming/simulation can overcome the dilemma by compressing time and space, providing
risk- free environment for trial and error, and making shared experience possible. It can change
actions of participants in their work and in their life through experiential leaming in the
simulated world. We claim that it can change an espoused theory of action into a theory- in-use
(Tsuchiya, T. & Tsuchiya, S., 1999).
There are four distinct phases to gaming/simulation design - initiation, design, construction
and use (Duke, 1974, pp.75-113). Gaming/simulation design starts with the clear expression of
purpose and the careful definition of the intended audience. Then, a conceptual map such as
Figure 1 must be developed before construction of the gaming/simulation. It is a graphic
representation of a problem environment and has been found to be valuable tools in
communicating complexity in gaming/simulation. Conceptual map building has been also found
to be used in systems dynamics modeling. Conceptual map as a vital method of systems
representation builds upon the advantages of visual communications. These advantages include
the use of symbols that are understood faster and in a more ubiquitous way that language and the
simultaneity of perception of graphic displays or pictures.
4, “The Rescue Team’
At the request of a Japanese power utility company, we have designed a gaming/simulation
called "The Rescue Team" for training employees about openness. Although there are some
successful applications of gaming/simulation to the real world issue in the United States and
European countries, there seems to be none so far directly aiming at improvement of openness,
which is the key to prevent deterioration of corporate business ethics and improve them.
Following the 24 steps of design sequence developed by Duke, we started with analyzing the
six major corporate wrongdoings in 2002 in Japan. Then we developed a shared conceptual map
of the factors and their relationship related to corporate business ethics (Fig. 1). The group model
building (Vennix, 1994, pp.2-3) was used as a method to create a climate in which team learning
can take place in design stage in order to enhance understanding of the problem.
4.1 Objective
The objective of this exercise is to open the mind of participants for leaning on the subject of
“openness" through objective observation of their own actions in the exercise. The exercise
provides individuals with insights into their theory- in-use and into any discrepancies from their
espoused theory, as well as into the causes of their unawareness of the discrepancy.
In addition, it provides the individuals with an appreciation of how they may be personally
responsible for creating the defensive pattern that they decry in their organization. It also
provides insights into the varieties of organizational defenses that deteriorate openness. Finally,
it provides interactive organizational leaming environment where risk-free practice can be done.
4.2 Background
Individuals and segments of the organization are reluctant to make open communication on any
issue that contains significant embarrassment or threat. In fact, many are concemed that
confronting the issue will be seen as deliberately making the situation worse by opening up a can
of worms. Because most people use these actions frequently, the actions become organizational
norm and are often used unconsciously.
We need methods for breaking through these reluctances and for giving individuals
"permission" to deal with issues they normally would avoid because of their fear of causing
embarrassment or threat. This exercise provides an interactive learning environment in which
participants make objective observation of their actions, become aware of the discrepancy from
their espoused theories of action, and reflect on their actions in the real world.
4.3 “The Rescue Team’
As scenario, we have chosen rescue operation in the Alps. Five players with different expertise
and nationality work together to rescue the victims of a military plane crashed in the Alps in the
winter of 19xx. They are competing against another rescue team to get secret information from
the crashed airplane. They encounter a series of events and have to collectively make a choice
between two altematives, e.g. whether or not to make a short cut. When they make a wrong
decision, they get into danger and have a narrow escape from an accident. They have to come
back to the place where they made the decision. Figure 2 is an example of the events shown on
the screen.
The exercise is designed to cause difference of opinion between the leader and other
members. Each player has different knowledge and information as an expert in a field. The
leader is proud of having plenty experience in rescue work in this area and his opinion is mostly
based on his sixth sense, while other members believe that their opinions have solid scientific
ground.
Up until the last event, the
leader's decision always tums out to
be right. As a result, the leader
becomes overconfident in his ability
and inclined to ignore opinions of
other members; and other members
become reluctant to argue their
judgments. This is the contrivance to
let the participants show their true
colors. The most difficult part of
designing this gaming/ simulation
was how to simulate the real world
where people are often reluctant to where you are
latitude: N45.53.7.977
make open communication on any | ionotude: £65150 381
issue that contains significant [uistance:_24.00m
embarrassment or threat. In an
exercise, however, they can act in
accordance with their espoused theory which is quite different from their theory- in-use in the real
wond.
About one third of the total time is devoted to go through the debriefing process. There are
three distinct phases of post- play debriefing.
(1) The first phase involves letting the players vent their spleens about the things that
happened in the exercise itself. Before asking them to analyze the experience, it is
necessary to give them an opportunity to vent some of the emotions they have pent up.
(2) The second stage is a systematic examination of the model presented by the exercise from
the perspective of various roles. This gives everybody a chance to see what happened
from the eyes of the other role players. The world look different to those in different social
situations; likewise, the exercise looks different to those in different social roles within it.
Analysis cannot take place until perceptions of what transpired have been shared between
participants.
(3) Finally, in the last stage of the debriefing, we urge that the players should focus on the
reality which was represented by the exercise rather than the exercise itself. This means
“bringing them down” and it involves getting out of the exercise situation altogether and
addressing thoughtfully and at some length the actual reality that the exercise simulated.
During this last phase, we show them the conceptual model (Fig. 1).
The categories of this gaming/simulation are openness, teamwork, communication, and
organization development. The materials to be used are The Rescue Team' software, a PC, a
projector, and a map. It takes about two hours to play this exercise including debriefing.
We have run the prototype of the Rescue Team several times and found that it can open the
participants' mind for learning with regard to openness. Through reviewing their own actions in
the exercise, the participants reflect on their actions in the real world and begin to make efforts to
narrow the gap between their espoused theory and theory- in-use regarding openness. Several
electric power companies are planning to use this gaming/simulation for training project teams as
well as ongoing teams about openness soon.
‘ Yi
g Sa ZY Wy, pss
ey are now discussing the organization of the rescue tear
“The loner of the toa ad ober ‘experts are asked to give
their opinion.
Fig. 2 An example of the events
5. Conclusions
Based on the systemic analysis of the six major corporate wrongdoings, we claim that their root
cause was deterioration of corporate business ethics and that the leverage to maintain appropriate
business ethics is openness. We also argue that gaming/simulation can be an effective
methodology to make openness a part of theory-in-use of action through transformation of
mental models.
Acknowledgements
This research project was financed by the Grant-in-Aid for Scientific Research of the Japan
Society for the Promotion of Science, and the grant from the Foundation for Fusion of Science &
Technology.
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