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Leaders who know right from wrong

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How to detect integrity in your potential successors.

By Ellen Frankenberg

As more shocking stories of corporate crimes and accounting wizardry wind their ways through the courts and our evening news, family business owners may value their own companies more than ever. The ability to set high moral standards based on shared values is a major strength of corporations directed by healthy families. Entrepreneurial families instinctively know that before they can entrust their financial future to the next CEO, they need to know that the books won’t be cooked, and that the business will be managed in an ethical manner.

But how do you develop ethical offspring? Children are not born with integrity. It is slowly built into a personality long before the first day on the job—in the second grade or the tenth grade, during playground skirmishes, bedtime chats, and basketball games. Integrity grows with parents who can nurture and also set limits. It’s often reinforced by religion. Education and democratic traditions help, too. Most of us develop integrity the hard way, by sorting through the thousands of moral dilemmas we face every day, ideally with guidance from those we love.

The former Harvard psychologist Lawrence Kohlberg spent years asking individuals from various cultures and classes how they would respond to a series of moral dilemmas. For example: If your wife were dying of cancer, and you couldn’t afford the one drug that could save her life, would you 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 developed a theory about how humans gradually develop integrity. His ideas were strictly theoretical, of course. But business leaders searching for integrity in their successors may find some of his ideas very practical.

Adults may shift in and out of different levels of integrity in different circumstances. But most of us probably fall into one of Kohlberg’s following six categories more consistently than the others. Think about where you and your colleagues stand on this ascending ladder of moral development.

1. Fear of punishment. This first and lowest level of moral development is common among very young children. It 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 only because I fear being audited; I will show up on time for work only because I don’t want to be embarrassed or criticized.

2. Expectation of reward. At this level you consider the interests of others—if you get something out of it too: “You scratch my back and I’ll scratch yours.” Children who become remarkably good “because Santa Claus is coming to town” are operating at this level. I will do my job simply to get my paycheck. If I get a kickback, and we keep this between us, so will you.

3. Identification with peers. Adolescents frequently make choices according to what their friends are doing, often to their parents’ consternation. However, their growing focus on other people’s perspectives (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 look down on it.

4. Acceptance of law. Many adults base their moral choices on the conviction that laws are just, and therefore should be followed, for the benefit of the whole society. For example: I will stop for a red light, even though there are no cars in sight; I will pay my taxes correctly—even if I’ll never be rewarded for it, even if I’ll never get caught cheating, 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. Adults who function at this level go beyond what is specified by law. They make choices based on promises or commitments they have freely embraced. “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. And family businesses expect this kind of moral maturity from successors who commit themselves to lead their companies through an uncertain future, 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 my marriage vows, even though most couples I know aren’t.

6. Ethical choices that go beyond promises, or even the law. This level is populated by “moral geniuses” who break new ground, challenging others to develop new moral standards. Lincoln issued the Emancipation Proclamation, even though it was widely unpopular 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.

Those Enron and WorldCom executives who are now squirming on the nightly news operated somewhere between Level 2 (seeking personal rewards) and Level 3 (doing what my peers do). If convicted, they’ll be forced back to Level 1 (fear of punishment)—the level on which the U.S. justice system operates.

But 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’ll be called on to make tough decisions, alone in the middle of the night, for which they’ll 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.

When you’re choosing future leaders for your family business, watch out for those self-centered moral midgets who focus only on personal rewards, without regard for the impact of their behavior on others.

The good news from Kohlberg’s work is that individuals and societies can grow in moral maturity. But few people 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, say, or a lost account) becomes greater than the risk of change.

Does integrity affect the bottom line? As a matter of fact, it does. A study reported in the Harvard Business Review last September found that when Holiday Inn employees believed the words and actions of their managers were honest and consistent, profitability increased by 2.5%, or $250,000 per year per hotel.

Ellen Frankenberg, Ph.D. ( is a family business psychologist in Cincinnati. Her book, Your Family, Inc., is also available in Spanish.

Moral maturity check-up

Where are you on Lawrence Kohlberg’s ladder?

Level 1. Do you do your job each day because you will be criticized if you don’t?
Level 2. Do you go to work each day primarily because you want a good paycheck?
Level 3. Do you go to work each day primarily because that’s what everyone else in your family does?
Level 4. Do you pay your taxes honestly because it is the right thing to do, as required by the law?
Level 5. Do you conduct your business honestly (even in tough times) because, in the long run, it will be best for everyone involved?
Level 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?
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