(FORTUNE Magazine) – AS THIS economic slowdown lingers like some stubborn low-grade infection, managers are putting the heat on subordinates. Many of the old rules no longer seem to apply. Says Gary Edwards, president of the Ethics Resource Center, a consulting firm in Washington: ''The message out there is, Reaching objectives is what matters and how you get there isn't that important.'' The result has been an eruption of questionable and sometimes plainly criminal behavior throughout corporate America. We are not dealing here so much with the personal greed that propelled Wall Street operators of the Eighties into federal prisons. Today's miscreants are more often motivated by the most basic of instincts -- fear of losing their jobs or the necessity to eke out some benefit for their companies. If that means fudging a few sales figures, abusing a competitor, or shortchanging the occasional customer, so be it. People lower down on the corporate food chain are telling the boss what they think he wants to hear, and outright lying has become a commonplace at many companies. Michael Josephson, a prominent Los Angeles ethicist who consults for some of America's largest public corporations, says his polls reveal that between 20% and 30% of middle managers have written deceptive internal reports. At least part of this is relatively harmless -- managers inflating budget proposals in the hope of ultimately getting what they really need, for example. But a good share of it will almost surely hurt the people and the companies involved, in some cases grievously. The U.S. press, broadcast and print, has become increasingly adept at uncovering corporate misdeeds. Witness the frenzy of reports raising questions about Dow Corning's breast implants. The stock of Corning Inc., one of the two corporate parents of Dow Corning, has declined by about 15% since the scandal erupted, even though the implants represented only around 1% of Dow Corning's revenues and its insurance coverage seems adequate to cover potential litigation. The Justice Department has become far keener on catching and punishing white-collar criminals since the S&L crisis and the BCCI scandal. Last November tough new sentencing guidelines for corporate crimes went into effect. Warns Josephson: ''We are going to see a phenomenal number of business scandals during the 1990s. We are swimming in enough lies to keep the lawyers busy for the next ten years.'' The faint sign of good news is that many big U.S. companies have begun to respond to the crisis. According to a survey of FORTUNE 1,000 companies conducted by Bentley College in Boston, over 40% of the respondents are holding ethics workshops and seminars, and about one-third have set up an ethics committee. Some 200 major U.S. corporations have recently appointed ethics officers, usually senior managers of long experience, to serve as ombudsmen and encourage whistleblowing. Regrettably, such actions won't put an end to ethical dilemmas -- or to the current spree of shoddy practices. Dow Corning had a substantial ethics program in place for 18 years before the breast-implant scandal, but no % questions about safety or testing of the implant materials were ever raised to the ethics committee. The problem, says Kirk Hanson, a Stanford management professor and president of an ethics research group called the Business Enterprise Trust, is extreme pressure to perform. ''Quite simply,'' he says, ''the individual who isn't perceived as a top achiever is a candidate for a layoff.'' Under such circumstances, flirtations with impropriety are hardly surprising. Virtually every day we read about the hapless folks who get caught. Citicorp fires the president and senior executives of a credit-card-processing division for allegedly overstating revenues. American Express cans several executives for failing to write off accounts of customers who had filed for bankruptcy, as required by company policy. Alamo Rent A Car agrees to refund $3 million to customers who were overcharged for repair costs to damaged vehicles.

There is clearly quite a bit more iceberg down there. No one knows how many top managers are intentionally overlooking questionable acts because they are paying off. Josephson tells of a bank whose executives one day discovered that a large number of customers had been overbilled for mortgage payments. ''There's no doubt what you ought to do in a case like that,'' says Josephson. ''You come clean and you take your hit.'' That's what the bank eventually did -- but only after regulators discovered the error. Some practices born of competitive excess fall into a kind of gray area. Last autumn Toys ''R'' Us managers sent employees to rival Child World stores around the country to buy up large quantities of heavily discounted items, which were then resold in their own stores. Misrepresentation? Other acts now taking place clearly cross the line. Gary Edwards tells of one struggling company that recently placed fake want ads in the hope of luring competitors' employees to job interviews where they might reveal trade secrets. Stanford's Hanson reports that three of his returning students were asked by summer employers to call up competitors and seek information under the guise of doing academic research. Many top managers desperate for profits have turned to emerging markets overseas, a trend that presents a fresh set of ethical dilemmas. Far too often, a company will send off its team with no directive other than finding new business. Bribery and sloppy accounting may be a fact of business life over there, the customer base may be riddled with questionable characters, and yet the sales force is supposed to find its way with no ethical compass. Mark Pastin, an Arizona State University management professor who has consulted with many companies seeking to go global, suggests that the confusion overseas could later lead to problems at home. Says Pastin: ''Don't forget that you eventually are going to re-import those managers. Once they've come back, do you think they're going to put on their old ethics like a new suit?'' As Pastin notes, ethics begin at home, in the nexus between employer and employee. The recent layoffs at many big companies carry a slew of ethical implications. Many job reductions have clearly been necessary, the result of lousy business. But at least some top managers have axed employees to pump up profits for the short term or impress Wall Street. Says Hanson: ''Unfortunately, layoffs have sometimes become a way to buy a multiple.'' At such companies much of the work load may still be there, while many of the bodies are not. Middle managers end up pressuring the remaining employees to work unconscionable amounts of overtime. What are the ethics of that? Compensation for top executives has become a hot-button ethical issue during this recession as well, especially at those companies where workers are being fired and the big guys' salaries appear excessive or unrelated to job performance. In such cases the old argument that companies need to bestow grand wealth on chief executives to prevent them from fleeing to a more beneficent competitor seems especially flimsy. The market for the overpaid chiefs of losing or minimally profitable enterprises is not a large one. In effect, the top dogs are isolating themselves -- but not their employees -- from the brutal realities of the marketplace. The basic injustice involved is obvious. In tough times it's all the more important to remember that ethics pay off in the end, and on the bottom line. Ten years ago James Burke, chief executive of Johnson & Johnson, put together a list of major companies that paid a lot of attention to ethical standards. The market value of the group, which included J&J, Coca-Cola, Gerber, IBM, Deere, Kodak, 3M, Xerox, J.C. Penney, and Pitney Bowes, grew at 11.3% annually from 1950 to 1990. The growth rate for Dow Jones industrials as a whole was 6.2% a year over the same period. The case is probably easier to make in the negative: Doing the wrong thing can be costly. Under the new federal sentencing guidelines, corporations face mandatory fines that reach into the hundreds of millions for a broad range of crimes -- antitrust violations, breaking securities and contract law, fraud, bribery, kickbacks, money laundering, you name it. And that's if just one employee gets caught. Even if you don't land in court, you might find yourself on the front page or the evening news, which could be worse. In the past few years, most media have given much more coverage to business. Newspapers and magazines all over the U.S. now employ investigative reporters with MBAs and business experience to dig into the affairs of companies. The old advice is still the best: Don't do anything on the job you wouldn't want your mother to read about with her morning coffee. Even if a company's slippery practices go undetected, there is still a price to pay. Successful enterprises are inevitably based on a network of trust binding management, employees, shareholders, lenders, suppliers, and customers -- akin to the network that Japanese call keiretsu. When companies slip into shoddy practices, these crucial relationships start to deteriorate. Says Barbara Ley Toffler, senior partner of a Boston ethics-consulting firm called Resources for Responsible Management: ''The effects aren't obvious at first. People may feel bad about what they're doing, but they rationalize it somehow.'' Eventually a kind of moral rot can set in, turning off employees with higher personal standards and stifling innovation throughout the company. She adds: ''People in these situations feel frightened, constrained. They are not in the proper frame of mind to take prudent risks.'' Companies that depend heavily on customer service are especially vulnerable. A company that jacks up prices unfairly, skimps on quality, or beats up on employees can hardly expect its salespeople to treat customers properly. Says Arizona State's Pastin: ''You can put on a happy face for only so long before reality intrudes. I don't believe employees can deliver superior service if they don't think their company is treating customers with respect.'' Ultimately, many of the most effective managers and most productive workers will find a way to work somewhere else. When the economy turns up again, companies with a sorry reputation for ethical behavior will have a harder time attracting top-quality people. Among the scariest aspects of the current situation, ethicists say, is how unaware many top managers are of what is going on. Michael Josephson, who is usually called in after a company has landed in the headlines, begins by circulating questionnaires among top and middle managers to determine what's happening. More often than not, the CEO expresses shock and disbelief at the results of the anonymous survey. Adds Josephson: ''There's very often a sort of 'kill the messenger' attitude, which may have led to some of the problems in the first place.'' Once the scope of the problem is clear, the next step is to communicate in no uncertain terms what is expected of managers and other employees. Hewlett- Packard, for example, works hard to ensure that all employees are familiar with its extensive standards for business conduct, which cover everything from conflicts of interest and accounting practices to handling confidential information and accepting gratuities. The standards are high; salespeople are instructed to avoid commenting on a competitor's character or business practices, even to refrain from mentioning the fact that a competitor might be facing a lawsuit or government investigation. A little innovation helps in getting the message across. Citicorp has developed an ethics board game, which teams of employees use to solve hypothetical quandaries. General Electric employees can tap into specially designed interactive software on their personal computers to get answers to ethical questions. At Texas Instruments, employees are treated to a weekly column on ethics over an international electronic news service. One popular feature: a kind of Dear Abby mailbag, answers provided by the company's ethics officer, Carl Skoogland, that deals with the troublesome issues employees face most often. Managers at Northrop are rated on their ethical behavior by peers and subordinates through anonymous questionnaires. More and more companies are appointing full-time ethics officers, generally on the corporate vice-presidential level, who report directly to the chairman or an ethics committee of top officers. One of the most effective tools these ethics specialists employ is a hot line through which workers on all levels can register complaints or ask about questionable behavior. At Raytheon Corp., Paul Pullen receives some 100 calls a month. Around 80% involve minor issues that he can resolve on the spot or refer to the human resources department. Another 10% of callers are simply looking for a bit of advice. But about ten times a month, a caller reports some serious ethical lapse that Pullen must address with senior management. Says he: ''Most people have high standards, and they want to work in an atmosphere that is ethical. The complaints come from all levels, and they are typical of what you would find in any business: possible conflicts of interest, cheating on timecards, cheating on expense reports.'' Some companies have been motivated to set up an ethics office after a spate of unfavorable publicity. Nynex took the step in 1990 following a series of scandals, including revelations of lewd parties in Florida thrown for suppliers by a Nynex executive. Later 56 middle managers were disciplined or discharged for allegedly receiving kickbacks, and the SEC accused a former unit president of insider trading. The company has since been beating the drum about ethics, but Graydon Wood, Nynex's newly appointed ethics officer, says the job requires a realistic view of human behavior. Says he: ''You have to recognize that even with all the best programs, some employees do go wrong. Last year some marketing people didn't report properly, resulting in unjustified commissions. We fired them.'' In the current crunch much deception and unethical conduct can be avoided if top managers make sure that the performance goals they set are realistic. Ethicists often cite a classic case that occurred at a GM light-truck plant several years ago. The plant manager got caught with a device in his office that periodically speeded up the line beyond the rate designated in union contracts. Confronted with the evidence, he pointed out that the company's production specifications were based on the line running at maximum allowable speed 100% of the time. He was simply trying to make up for inevitable down time. Managers must be sure that what they actually do fosters rather than impedes ethical conduct. One sure way to send the word is by rewarding admirable behavior. No code of ethics and no amount of cajolery by the chief executive will have much effect if promotions regularly go to the people who pile up big numbers by cutting corners. Says Kirk Hanson: ''Senior management has got to find a way to create heroes, people who serve the company's competitive values -- and also its social and ethical values.'' These role models could be especially important for younger employees who are trying to survive in what seems to be an increasingly hostile business environment. Michael Josephson reports some dispiriting news about the start that the new generation are off to. He cites surveys of Americans 18 to 30 years old that show between 70% and 80% cheated in high school and between 40% and 50% cheated in college. And -- are you ready for this? -- between 12% and 24% say they included false information on their resumes. Commenting on Americans' ethical standards in the 19th century, Alexis de Tocqueville declared that the nation had become great because it was good. He may have overstated a bit, but in pursuit of profits today we may indeed be losing an element vital to our long-term success tomorrow.