This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

Corporate lawyers have a unique opportunity to influence American companies to benefit by practicing the ethical standards their mission statements and codes of conduct espouse, a Villanova Law School professor told a gathering of Delaware’s bench and bar recently.

After a two-year pandemic pause, jurists and attorneys returned to the Hotel DuPont in Wilmington for the 36th Annual Francis G. Pileggi Distinguished Lecture in Law to hear Business Ethics: What Everyone Needs to Know,’ presented by J.S. Nelson, an Associate Professor at the Harvard Business School and an Associate Professor at Villanova Law School.

Nelson began by popping what she identified as numerous myths about ethics

Compared to the statutes and rules that corporate lawyers deal with, ethics is rather esoteric

Ethics–essentially, man’s instinct to do the right thing–is not a theoretical subject, but is rather the foundation for the formulation, interpretation, application and enforcement of laws, Nelson said.  “Ethics is nothing like what you think it is.”

Ethics are just a matter of subscribing to a set of principles

It’s more complicated than that because humans have a dual nature regarding ethics, she pointed out.  On one hand, they proudly endorse certain values and behaviors and believe they are ethical, but on the other, they are very susceptible to pressure from certain institutions and situations to compromise or suspend even fervently held values and principles—often with famously disastrous results.

The people who said they were “just following orders” during the Holocaust were unique

Nelson told the group that extensive behavioral studies have repeatedly produced the exact opposite conclusion: regardless of ethnic, cultural or religious background more than two thirds of test subjects will yield to consistent unified pressure to join with an institution or group’s program –when the program directly contradicts the subject’s core ethical principles.

She said this dynamic applies in the corporate world when employees confront a corporate culture that tolerates or even promotes lax quality control, poor safety or working conditions, gender inequality or sexual harassment or questionable financial practices.  They will often do what they must to get along in the world in which they find themselves.

Ethical management does not produce a better bottom line.

Actually, in the long run, a management that provides good working conditions with equal pay, benefits and opportunities and prioritizes quality and safety over short-term operating cost savings will attract and retain more engaged, efficient staff, enjoy greater profits, and “won’t have to worry about where the next scandal will be coming from,” Nelson predicted.

But to have that positive proactive effect, the institution must present a consistent unified position against even small ethical wrongs, because it’s all too easy for a company’s effect on ethics to reverse and snowball in the negative direction, she said.

The Boeing example

For example, Nelson said, the Boeing Company had a stellar safety record until its management and board decided to create a higher passenger capacity version of its workhorse 737 jetliner without a complete redesign.  Instead, they opted to essentially hang bigger engines on its wings to lift the greater weight and when that caused a tippy fore/aft balance problem, they devised a computer program to help pilots compensate, but the program had deadly flaws that allegedly caused two crashes with the loss of all aboard, she explained.

That triggered an FAA investigation that grounded the entire 737 MAX fleet for 20 months and a successful shareholder suit in the Delaware Chancery Court that claimed Boeing’s directors were liable for lax safety that caused large financial losses. In Re the Boeing Company Derivative Litigation, No. 2019-0907-MTZ opinion issued, (Del. Ch. Sept. 9, 2021).

As this blog has reported, ethical failure allegations played a key role in Vice Chancellor Morgan Zurn’s Sept 9, 2021 landmark ruling which found plaintiffs’ derivative director oversight claims met the tough pleading standards of the Delaware Supreme Court’s Marchand ruling with well-supported allegations that a majority of the directors are likely liable for Boeing’s billions of dollars in losses and penalties. Marchand v. Barnhill, 212 A.3d 805 (Del. 2019).

Importantly, Vice Chancellor Zurn’s ruling repeatedly pointed to the Marchand standards in finding that Boeing’s directors:

  1.  Got no regular safety information on the 737 MAX or any of its planes due to their “complete failure” to establish a committee or regular board reports on safety issues,
  2.  After the first crash, did not immediately investigate what caused the 737 MAX to repeatedly push its nose down in a series of disastrous dives at low speeds and instead virtually ignored the problem even though safety was a “mission critical” area,
  3. Intentionally misled federal regulators about the scope and seriousness of a computer pilot training program meant to help them use software that would allegedly minimize nose-down dives,
  4. Allegedly lied to the public and regulators about how comprehensive, how much in good faith and how quickly implemented their post-crash safety program was.
  5. Never pressed the CEO for more information or questioned his conclusions when he repeatedly told the board the 737 MAX was safe and blamed the crashes on pilot and maintenance errors.

But Nelson pointed out that rulings on alleged low points in corporate behavior often prompt positive changes in ethical standards, “and sometimes today’s ethics become tomorrow’s laws.”