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What We Really Need Are Leaders Who Know Right from Wrong

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Ellen Frankenberg, Ph.D.

As more shocking stories of corporate wrong doing and accounting wizardry wind their ways through the courts and our evening news, family businesses owners may value their own companies more than ever.

Those family firms that hold regular, candid meetings of their boards of advisors/directors, and also convene their family "stakeholders" periodically to share correct information, can claim the moral high ground, and often a better long term return on investment than Nasdaq.

The ability to ask questions directly of those who manage the company, and set high moral standards based on shared values is a major strength of corporations directed by healthy families.

A 1998 survey of 485 family firms in Canada, conducted by Chrisman, Chua and Sharma (Family Business Review, Volume XI, Number 1, March, 1998, pp.19-34.) discovered that the two most important characteristics that family members look for in their business successors are "integrity" and "commitment to the business". Gender and birth order, in spite of perennial discussion, landed at the bottom of the list.

Before the MBA, before marketing genius, before engineering brilliance, the characteristic named most frequently was integrity. Before an entrepreneurial family can entrust its financial future to the next CEO, they need to know that the books will not be cooked, and that the business will be managed in an ethical manner.

Children are not born with integrity. It is slowly built into a personality long before the first day on the job, in the 2nd grade or the 10th grade, during backyard skirmishes, bedtime chats, and basketball games. Integrity grows with parents who can nurture and also set limits. It is often reinforced by religion, perhaps by education and the best traditions of our democratic society. Most of us develop integrity the hard way, by sorting through the thousands of moral dilemmas that we face every day, ideally with guidance from those we love.

Lawrence Kohlberg, formerly of Harvard, developed a theory of moral development, based on interviews with individuals from various cultures and classes by asking them how they would respond to a series of moral dilemmas. For example, if a man's wife was dying of cancer, and the pharmacy had the one drug that could save her life, would the man be justified to break into the pharmacy and steal the drug?

By analyzing not only the final answer, but also how individuals reach tough moral decisions, Kohlberg was able to develop a theory about how humans gradually develop morality, their sense of what is right and wrong. Although Kohlberg's work remains theoretical, business leaders searching for integrity in their successors may find some of his ideas very practical.

As adults, we may shift in and out of different levels in different circumstances, but we probably fall into one of the following six categories more consistently than the others.

1. Fear of Punishment. The first and lowest level of moral development, according to Kohlberg, is based on a "fear of punishment". This level is common among very young children, and focuses on whether harm will come to me, regardless of how others might be hurt by my actions.

I will slow down on the highway, only because I see a police car ahead of me; I will pay my taxes correctly because I don't want to be audited; I will show up on time for work because I don't want to be embarrassed or criticized.

2. Expectation of Reward. The second level of moral development is based on the hope of reward. It focuses on meeting one's own interests. The interests of others are considered - if I get something out of it too: "You scratch my back and I'll scratch yours…" I will do my job simply to get my paycheck. If I get a kickback, and we keep this between us, you will too. Children who become remarkably good "because Santa Claus is coming to town" are operating on Kohlberg's second level of moral development.

3. Identification with Peers. Those who function at Kohlberg's third level ordinarily decide what is right or wrong according to what their friends or family are doing. Adolescents frequently make choices on this basis, often to their parents' consternation. However, their growing focus on the perspectives of others (rather than only their own) represents a step toward moral maturity.

I will do my job because my family expects me to; I go to church or synagogue because my neighbors do; I stop smoking because my friends now look down on it. If my peers are shorting their customers, I try to find out how.

4. Acceptance of law: This level of moral development is typical of many adults, who base their moral choices on principle: on the conviction that laws are right and just, and should be followed, for the benefit of the whole society. I will stop for a red light, even though there are no cars in sight; I will pay my taxes correctly, even if I never get caught, even if I will never be rewarded for it, and even though my friends have told me about tax evasion tricks that skirt the law.

5. Ethical choices based on a covenant or promise. The fifth level of moral development, described by Kohlberg, goes beyond what is specified by law. Adults who function at this level make choices based on promises or commitments they have freely embraced; they fulfill social contracts. Marriage expects this kind of moral maturity, which is perhaps why half of us end up divorced. "For richer or poorer, in sickness and health" is an open-ended commitment to love and care for another through an unknown future. The U.S. Constitution expects this kind of moral maturity of patriots who freely volunteer to serve their country.

Family businesses expect this kind of moral maturity from successors who agree to lead their companies through an uncertain future, with integrity and commitment to the business, because their work will benefit the whole family.

I do my job because the whole family is counting on me, and even though they will never know what it demands of me. I will vote because I am concerned about our nation, even though I am not forced by law to vote. I will be faithful to the promises of marriage, even though most of the couples I know aren't.

6. Ethical choices that go beyond promises, or even the law. Kohlberg's sixth level of moral development is rare, discovered by moral "geniuses" who break new ground, who go beyond previous commitments and challenge their cultures to develop new moral standards that later are incorporated into law. Lincoln issued the Emancipation Proclamation, even though it was widely unpopular at the time in both North and South; Gandhi developed non-violent protests to liberate India; Martin Luther King, Jr. challenged the "Jim Crow" laws that were once widely accepted in the U.S..

As we watch Enron and Worldcom executives squirming on the nightly news, we are shocked by the behavior of business leaders who allegedly operated only in pursuit of extraordinary personal rewards (Level 2, common to small children), justified perhaps in their minds because everyone else was doing it (Level 3, common to teen agers), acting without respect to principles expressed in the law (Level 4). If convicted, they will be forced to go back to Level 1 (fear of punishment), the level on which the U.S. justice system operates. Fear of punishment still remains the foundation for moral behavior, lest we forget.

Family business leaders are often expected to make decisions according to Kohlberg's fifth level of moral maturity, an extremely high level of integrity. Sometimes they will be called on to make tough decisions, alone in the middle of the night, for which they will never be punished, for which they may not receive any extraordinary rewards, while their peers may be deceiving their stockholders and looting their employees' retirement funds, and defying the law.

When choosing future leaders for your family business, look out for those who function like moral midgets in adult bodies, self centered and focused only on personal rewards, without regard for the impact of their behavior on others. The good news is that Kohlberg's work implies that individuals and societies can grow in moral maturity, but usually one doesn't skip from level 1 to level 5 overnight. Most of us grow, one step at a time, especially when the pain of maintaining the old behavior (a divorce, a lost account) becomes greater than the risk of change.

The September, 2002 issue of the Harvard Business Review ("The High Cost of Lost Trust" by Tony Simons) also indicates that "behavior integrity" is good for business. When employees believed that the words and actions of their managers were honest and consistent, profitability at 76 Holiday Inns across the U.S and Canada increased by 2.5%, or $250,000 per year per hotel.

Integrity in your company's leadership will benefit all those on your payroll, all those customers and suppliers who count on your word, the community that supports your business, and especially, all those who gather (and ever will gather) around your family table.

See check up below:

Moral Maturity Check-Up


  1. Do you do your job each day because you will be criticized if you don't?
  2. Do you go to work each day primarily because you want a good paycheck, or expect some positive recognition?
  3. Do you go to work each day mostly because that's what everyone else in your family does?
  4. Do you pay your taxes honestly because it is the right thing to do, as required by the law?
  5. Do you conduct your business honestly (even in tough times) because, in the long run, it will be best for everyone involved?
  6. Have you questioned some typical behaviors, or the prevailing culture within your company, because, after thoroughly studying the issue, you have discovered a better way to treat people?



Dr. Ellen Frankenberg, President & CEO


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