Wharton's Eric Orts is joined by Stephen Arbogast of the University of North Carolina and Anita Cava of the University of Miami to discuss the new role of ethics in business school education.

There was plenty of blame to assign to the actors responsible for the Great Recession. The global economic slide was the result of rampant greed in the financial sector, with individuals and institutions complicit in finding creative ways to make as much money as possible with little regard to the risks or consequences.

The turmoil prompted some people to point the finger at business schools, asking why the MBAs who caused the collapse weren’t taught the importance of character and accountability. Business schools have been teaching ethics for decades, but did the financial crisis change the way universities emphasize morality and corporate responsibility? The Knowledge at Wharton radio show on SiriusXM recently asked professors from three schools to answer that question. Eric Orts is a professor of legal studies and business ethics at Wharton; Stephen Arbogast is a finance professor and director of the energy center at the Kenan-Flagler Business School at the University of North Carolina in Chapel Hill, and Anita Cava is a professor of business law at the University of Miami Business School and co-director of the school’s ethics programs. The following are key points from their conversation. (Listen to the full podcast using the player above.)

Don’t Blame the Business Schools

The professors believe it’s unfair to blame business schools for the moral failings of those working in high finance. While academic institutions make for easy scapegoats, they aren’t the right place to look for the reasons why people behaved as they did during the prelude to the crisis or after the recovery.

Even before the recession, there were periodic calls for business schools to step up and do something whenever examples of corporate greed made headlines. Orts said he questions whether those requests were appropriate or correct.

“It’s too much to say it’s all the business schools’ fault, because we are responding to markets just like other people are doing,” Orts said. “We are looking to recruiters — what are recruiters looking for, what are banks looking for, what are consulting firms looking for? So, this is a broader cultural issue that we have to all discuss…. It’s a broader political, social, ideological question.”

“The landscape for actually taking action and not having to throw your career completely out of window has improved a lot in the last 10 years.”— Stephen Arbogast

Arbogast agreed, saying that blaming business schools is “an exaggerated claim.” Young graduates who enter the business world are often confronted early in their careers with a moral quandary that forces them to make unsavory choices, sometimes to preserve their jobs.

“One of the principles that we came to was that young people, in some sense, were the most vulnerable. If you look at, for example, situations in the financial crisis, you see senior executives not being prosecuted. The people really going to the wall were mid-career or young people,” he said, noting the case of former Goldman Sachs trader Fabrice Tourre, who was in his 20s when he was convicted of investment fraud and fined nearly $1 million by the Securities and Exchange Commission. Meanwhile, veteran Goldman Sachs committee members who reviewed the deals went unpunished.

Ethics Teaching Methods Have Changed

Recognizing the difficult choices often faced by entry- and mid-level employees, UNC decided to change the way it teaches ethics to its students, Arbogast said. Instead of focusing on ethics from a legal or philosophical perspective, as it has been taught traditionally, students are now encouraged to think about ethical behavior in practical, situational ways.

“Training potential CEOs on values is good, but they have to be able to survive the road up the corporate ladder to be able to act on those values later in their careers,” Arbogast said.

UNC professors teach students to pay close attention to the financial control and compliance culture of a firm, which can be evident during the recruiting process if graduates ask the right questions or dig for the right information. For example, does a firm have an independent audit function? When someone reports something troubling to an auditor, are they given confidentiality?

“These are interesting litmus tests of whether the control and the culture in an organization will support people on ethics, or will they hang them out to dry because management wants to do something and doesn’t want to let ethics or the law to get in the way,” Arbogast said. “This is a different kind of conversation we have with students … and interestingly, their attention pricks up.”

“I think the real push in our profession at this point needs to be thinking about personal character, personal values.”–Anita Cava

Teaching methods have also been changed at Wharton and the University of Miami, where Cava has been for 35 years. Back then, she recalled, the module around ethics wasn’t particularly strong or reinforced. Now the school has robust programs to engage students in co-curricular activities designed to get them thinking about how to be better citizens. There’s a campus-wide film series, conversation sessions and internships at nonprofits.

Cava said business schools like hers are redefining their purpose.

“Ten years ago, we changed our mission statement to include creating principled leaders as part of the point of the school,” she said. “And the new dean who came in just last year, John Quelch, refined that to principled leaders with global depth. With that, we’ve seen even more energy in that direction.”

Orts said Wharton has undergone a similar process, shifting instructional focus away from the traditional axiom that business is about maximizing profit within the limits of the law. He said academia is asking itself, what is the fundamental point of a business school?

“In that respect, I think there is a useful conversation to be had. I think there are changes on how we teach responsibility in business, law, and ethics in business, etc. But the question goes deeper to, what are we really about … and what are we teaching students to be doing”?

Students Are Encouraged to Think More Broadly

Orts said he teaches his students to look at business responsibility on two different levels: a more philosophical grounding in ethics and a more practical engagement in personal values. He wants students to “get in touch” with their own values and think more broadly about situational pressures they may encounter.

“It’s not that people are immoral or amoral going into a situation necessarily, but that the situations put them at risk,” he said. “It makes sense to step back and think about that, that you’re going to be in those situations, and then what to do about it. That can be a legal response, a protective response. That’s another goal that I think we mostly teach at Wharton is prophylactic, which is the legal side. How do you stay out of trouble? We want our students to not be on the front page of any papers and to keep their hands clean.”

Cava teaches a free bootcamp twice a year that focuses on organizational compliance, and in her regular classes, she pitches ethics as a critical-thinking skill. She also incorporates real-life lessons for the students to ponder, such as the scandal that felled Enron and the accounting scheme that damaged Wells Fargo, a bank she characterized as an instructional “gift that keeps on giving.”

“I ask my students to not only watch Sen. Elizabeth Warren’s scolding of [former Wells Fargo CEO] John Stumpf, but I also ask them to realize that people all down the food chain were making decisions that were based on making a couple more bucks and really harming other people,” Cava said. “I think the real push in our profession at this point needs to be thinking about personal character, personal values.”

Whistleblowers Are No Longer ‘Lone Wolves’

The professors emphasize to students that the legal landscape has changed in recent years to offer greater support for whistleblowers and others willing to report wrongdoing. In fact, a whole cottage industry has sprung up around it; there are law firms dedicated to representing whistleblowers.

Arbogast said this change began in the wake of the Enron scandal with the Sarbannes-Oxley Act of 2002, which contained whistleblower protections. “But they were quite imperfect, and the Bush administration Labor Department did a terrific job of undermining what Sarbannes-Oxley protections were supposed to accomplish. “ After that, the Dodd-Frank Act “really improved whistleblower protections and instituted a bounty program for reporting through the SEC.”

“One of the really large problems right now is we see a reaction, that seems to be gathering strength, against any kind of regulation, and that’s a dangerous sign for the future,”–Eric Orts

Some very successful cases have been brought under the False Claims Act, also known as the Lincoln Law, which imposes liability on individuals and businesses that defraud the federal government. And the nonprofit National Whistleblowers Center in Washington, D.C., was established in 1988 to advocate for those who report wrongdoing.

All of these changes mean that principled whistleblowers “don’t have to do it as lone wolves anymore,” Arbogast said. “The landscape for actually taking action and not having to throw your career completely out of window has improved a lot in the last 10 years, and this is something that is useful to bring to students’ attention.”

Orts said Wharton strongly believes that ethics and law go together. Professors talk a lot to students about financial regulations, including how they changed after the crisis.

“One of the really large problems right now is we see a reaction, that seems to be gathering strength, against any kind of regulation, and that’s a dangerous sign for the future,” he said. “We have to educate our students to be able to navigate the problems from an ethical point of view, but they also would be helped by the larger perspective of, how do we really get a handle on this problem that’s going to probably come back? How do we get change so we can avoid these really bad financial crises?”