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Volume 6, No. 1

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Learn from Experience
A four-step process for communicating business ethics

Application: The transfer of tacit knowledge is important in creating a company culture, including the ethical dimension.

Suppose you are being encouraged by your manager to push the envelope too aggressively in your company's accounting practices to make the numbers for this quarter. You can seek advice from two sources. One is an eager young associate who has just finished graduate school and is current on all that is written on the topic. The other is a seasoned executive who has dealt with this type of scenario many times in the past and whose reputation is above question. Chances are you would prefer the experienced colleague. Both may have the same explicit training, may have read the same books and studied the same issues, but the experience of being on the job, making decisions, and having to respond to difficult situations is invaluable. The experienced colleague has tacit knowledge in addition to the explicit knowledge that is conveyed through formal training.

Explicit knowledge can be written down and transferred by impersonal means such as by reading books, going to classes, or having someone explain a procedure. Tacit knowledge, on the other hand, is knowledge that is embedded in personal experiences and cannot be effectively transferred without personal interaction. It is much more difficult to transfer to others than is explicit knowledge. However, tacit knowledge of many types is critical for successful business operations. The transfer of tacit knowledge is also important in creating and maintaining a company culture, including the ethical dimension.

The Learning of Tacit Knowledge: A Model

Organizations create knowledge by combining existing knowledge in new ways. A frequently cited description of how tacit knowledge is learned is that of Nonaka and Takeuchi. [1] They describe the knowledge creation process as a cyclical process with four stages: socialization, externalization, combination, and internalization. This model suggests that tacit knowledge is exchanged by repeated iterations of this four-step process that results in a "learning spiral." This model is diagrammed in Figure 1. [2]

The Learning of Tacit Knowledge: A Model

One area in which this cycle is invaluable for business is in the development of new knowledge that provides competitive advantage. Both explicit knowledge and tacit knowledge are necessary to generate innovations. Group members could not speak with each other or interact with the external environment without shared explicit knowledge. But if the knowledge creation process depends solely on combinations of explicit knowledge, only incremental innovation is possible. Creation of novel and difficult-to-imitate innovations using both tacit and explicit knowledge is less open to imitation or reverse engineering and more likely to produce sources of sustained competitive advantage than is using explicit knowledge alone.

Another area of business in which the cycle can come into play is the development of company culture. Documents such as the company mission statement, the handbook, and contracts provide explicit information about how the company operates or claims to operate. Tacit knowledge about the culture includes informal socialization, externalization, the combining of ideas, and then internalization. The internalized tacit knowledge of the culture may not always correspond completely with the explicit statements.

The leaders of Enron, Tyco, and Adelphia all appeared aware of the ethical or legal implications of their actions, but such knowledge failed to stop them. Pfeffer and Sutton [3] note that variation often exists between what we know we should do and what we actually do. They label this variance as the planning-doing gap and suggest a reason for it is that most forms of education -- including company orientations -- do not address tacit beliefs and knowledge. This tendency suggests that the tacit learning model suggested by Nonaka and Takeuchi may be very useful in helping us understand how tacit learning can be directed toward more positive outcomes. The scenario with which we began this article suggests that understanding that it was more important to upper management to "make the numbers" than to be completely transparent about the company's financial status would be a form of tacit knowledge.

As an illustration of how tacit learning can work, we present a real example of this spiral as applied to the tacit learning about ethics and "slippery slopes." This example involves a workshop experience for students in executive education who spend a couple of days meeting with convicted white-collar felons at a federal penitentiary and then processing the experience's implications for their own businesses and lives. This program is carried out in the context of a formal executive degree program in an educational institution. However, it illustrates the tacit learning process. The process is one that can be adapted to other contexts and issues. [4]

The Nellis Experience

The Ethics Workshop involves bringing approximately 60 to 100 business executives to the Nellis Federal Prison Camp in Nevada where they talk with men who have been convicted of white-collar crimes and sentenced to prison. In many ways the inmates are similar to the workshop participants - except for the fact that they are convicted felons in prison. [5]

Experiencing Prison

The Ethics Workshop begins with a reception on Thursday evening at a hotel in Las Vegas. Socialization is limited to encouraging participants from different executive education classes to get acquainted with each other. The externalization phase follows with former inmates speaking to the students about their crimes and their experiences in the federal prison system. Combination occurs in a question-and-answer session among the students and the former inmates after the formal presentation. Students are then encouraged to get some rest at the end of the evening, a process that allows their subconscious to begin internalizing what they have heard and seen in the convicts' presentations.

Friday morning begins with a bus ride to the prison camp, which is located at Nellis Air Force Base. The buses must clear several security checks at the base and at the federal prison camp before the students are led into a simple prison camp auditorium.

The learning spiral begins again. Students are introduced to six or seven inmates who serve as hosts and presenters, many of them former CEOs and high-ranking business executives. Students and inmate presenters socialize over coffee and pastries as all credentials are checked. The guests are then seated, and each inmate presenter spends about thirty minutes describing his conviction and life in the prison camp. The inmates often try to combine their knowledge with the students' knowledge by describing the jobs they held or pointing out how much they are like the students. Students internalize the knowledge as they sit and observe the presentations.

The learning spiral increases in intensity at lunch. Groups of five to eight students eat a simple spaghetti and salad lunch with an inmate presenter and then go on a 15-minute tour of the prison camp. The small group time at lunch allows socialization, externalization, and combination. The tour time allows the students to see the context of the inmates' lives and internally process the morning and lunchtime activities.

Presentations continue after lunch. The professors carefully observe the students' physical and physiological reactions as they watch the inmate presentations. Some create distance between themselves and the presenters by moving to the back of the auditorium. Others sometimes physically demonstrate that they do not identify with the inmates' actions or explanations of those actions by flushing or fidgeting. Some students make such moves because they begin to associate their current business practices with what the inmate is describing, and they are attempting to dissipate the energy of their own uncomfortable realizations.

A major element in the learning spiral model is a "town hall" meeting when inmate presenters complete their presentations. Students can then ask questions or make statements to the inmate presenters. The result is a combination of student and inmate presenter knowledge. As an example, a student challenged an inmate who had stated he was surprised to find out that his activities were illegal. She asked if he could have comfortably explained to his mother what he was doing before he was caught. He agreed that he would have been embarrassed to explain it to his mother. The student then suggested the "momma test" might make sense as an ethical litmus test: One should avoid any business transactions that cannot be explained with a clear conscience to one's mother. Several inmate presenters have noted during the town hall meetings that they realized they might be in trouble when their spouses expressed discomfort with their business partners or business practices.

The students are then bused back to Las Vegas. The bus ride is purposely not structured to allow the students time to internalize what they have observed. The Friday session ends with a brief 15-minute debriefing of the day before they are released on their own for dinner in Las Vegas. Again, the evening is purposely not structured to allow everyone to process what he or she has observed and experienced either individually or in small groups.

Reflection and Analysis:

The learning spiral begins anew on Saturday morning at breakfast. The professors greet the group and offer them a chance to share any additional thoughts they may have about the previous day or issues that they considered overnight. One of the professors then encourages the students to leave the issues of whether inmate presenters are guilty or innocent behind and focus on what the lesson for each student may be. The discussion focuses on the tensions that are created when what we do and whom we chose to be conflict. The moderated discussion allows externalization of ideas and opinions and a combination of those opinions. When the majority seem to be working on integrating the "being and doing" elements, the professor switches gears to a case study.

The cases used are drawn from a pre-workshop assignment. Students were asked to submit an example of an ethical dilemma they have experienced in their work. The dilemmas selected have been edited to remove any identifying company references. Students are separated into three or four groups. Each group is assigned a faculty moderator to aid the discussion of the ethical dilemmas. These small group sessions allow another opportunity to socialize, externalize, and combine tacit and explicit knowledge.

The group re-convenes as a whole after an hour and each subgroup reports on its decisions. A former inmate often sits in on the session. He informs students of the approximate prison term they could receive because of potential legal issues with the recommended actions. The professors then review the major topics the students have covered, including the concepts of legal, moral, and ethical behavior, and provide a time for reflection and internalization. Afterwards, each student is asked to conclude the workshop by externalizing one idea or phrase he or she wants to take away from the weekend.

Observing the tacit

Faculty members watch throughout the weekend for verbal and physical cues that the prison setting and the presentations are affecting students at a cognitive and at an affective or emotional level. Students being affected emotionally may shift in their seats, move to a different part of the room, or become more sober in the tone of their comments and questions. One professor describes such behaviors as signs that the group is "getting toasty." Students in the ethics workshop usually begin to show "toasty" behaviors on Friday morning, with increasing toastiness becoming apparent as they have lunch with inmates, tour the prison facilities, and then participate in an afternoon discussion. They begin to realize how fine the line can be between legal and illegal behavior. Some begin to show signs of apprehension about the possible consequences of their own behaviors. As students tour the prison facilities after lunch, the palpable sense of confinement also may affect them. These physical and verbal cues are key signs that learning is taking place on a tacit level.

Another key measure that the learning spiral model is working on educating students about ethics at several levels is that on average, approximately two percent of the students in the Ethics Workshop resign their positions within the seven days after the session, often citing the workshop experience as something that "opened their eyes" to issues in their own organizations. While the faculty do not encourage students to share details of why they left, some students have provided follow-up information indicating that the firm they left folded or is under investigation for wrongdoing.


Let's go back to the original scenario and focus on the person being pressured to use questionable accounting practices. Presumably he or she was acting on the basis of tacit knowledge, not explicit formal knowledge, about what would be rewarded at that company. Most company mission statements do not include "Steal from the shareholders" as part of the stated company values. Therefore the first step in developing ethical behavior among management and employees is to understand what is currently being tacitly taught. What values and norms are shared in the socialization process. Are externalization and combination opportunities deliberately planned to reinforce positive ethical behavior or to discover what is internalized before it is passed on through the socialization process?

Tacit knowledge about company values and culture can be deliberately taught if the process is approached thoughtfully. You may not be able to take your employees to a prison camp, but you can find ways to encourage the development of ethical tacit knowledge by promoting the four phases of the learning spiral.


1_ Ikujiro Nonaka and Hirotaka Takeuchi, The Knowledge-Creating Company, (New York: Oxford, 1995).
2_ Ibid., 62.
3_ J. Pfeffer and Sutton, R. (2000). The Knowing-Doing Gap: How Smart Companies Turn Knowledge into Action. (Boston: Harvard Business School Press, 2000).
4_ W. Scott Sherman and Miriam Y. Lacey (1999). "Teambuilding for Competitive Advantage." Graziadio Business Report, (Fall 1999)
5_ Professor Jim Martinoff has escorted graduate business students and executives to federal white collar prisons for more than 20 years. Martinoff originally took students to work with white collar convicts at white collar prisons in Lompoc, CA and now visits white collar criminals at the federal prison camp at Nellis Federal Prison Camp, near Las Vegas, NV. Dr. Scott Sherman began working with the program in 1999 to help ensure students gained life long-lessons from the prison visits.



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