June 20, 2010

Big business: Losing the fight
to do right

Harmful corporate action reflects rot at the core of a company's culture, and change must come from the top.

By DAN BOXER and PETER PITEGOFF

Goldman Sachs, Massey Energy, now BP -- a nonstop barrage of news has placed into question the capacity for ethical behavior by vitally important corporate and public institutions.

ABOUT THE AUTHORS

Dan Boxer, adjunct professor of governance and former chief administrative officer for Fairchild Semiconductor, and Peter Pitegoff, dean of the University of Maine School of Law, are co-chairs of the law school’s Governance & Ethics Symposium Series.

Polls show that our business, political and financial systems, and the people who lead them, are seen as lacking in ethics, competence and respect. They are failing the American people. We have a crisis of ethical culture in both the public and private sectors.

This year and last, the University of Maine School of Law's Governance and Ethics Symposium Series presented timely public discussions of governance and ethics implications of the financial crisis of 2007-08.

The goal was to help drive an understanding and, hopefully, implementation of constructive practices in governance, ethics and social responsibility by Maine organizations and boards, whether business, nonprofit or governmental.

The fallout from the financial crisis was the focal point of our latest discussions. But recent events demonstrate that unethical and inappropriate behavior hardly resides solely within financial institutions, and that the problems go far beyond individuals' behavior.

News reports reveal boards of directors granting huge pay packages for hospital administrators while their organizations lay off workers and seek more state and federal money.

Charities blatantly ignored obvious conflicts and invested endowment money with board members who were little more than "runners" for Bernie Madoff.

Public officials, with depressing repetition, are caught, literally, lying, cheating and stealing.

The business world, however, has been at the head of the pack in a glaring display of ethical, moral and governance lapses. Here are just a few recent examples.

Goldman Sachs and others that were bailed out by taxpayers profited by betting against financial instruments they created and sold to clients. Goldman also helped mask Greece's weak economy by employing Enron-like financial manipulation.

Massey Energy's Upper Big Branch Mine explosion in April, the worst coal-mining disaster in 40 years, killed 29 miners. Massey had been cited for 500 violations in the preceding year, and miners testified in congressional hearings that they faced retaliation for reporting safety problems.

Toyota's famous defective gas pedal led to the deaths of innocent people, while executives followed a culture of willful blindness to risks and stonewalled regulators and the public.

The horrendous explosion on BP's Deepwater Horizon oil rig in the Gulf of Mexico in April killed 11 workers and ruined an entire ecosystem and the livelihoods of thousands of people. BP had neither a backup shutoff device commonly in use nor a meaningful pre-drilling risk assessment. The company accounted for more than 95 percent of the citations issued for egregious or willful safety violations at U.S. refineries in recent years, according to the Occupational Safety and Health Administration.

Documents released by a congressional committee outlined instructions from Johnson & Johnson to a contractor to buy and send back all packs of Motrin. "Act like a regular customer and leave," the instructions said. "There must be no mention of this being a recall of the product."

For the second time in a year, the Federal Trade Commission has required Kellogg's to eliminate wildly speculative health and immunity-related claims for its children's cereals.

In each situation, some individual or group of individuals felt empowered or pressured to put profit ahead of principle and engage in conduct that was inappropriate, unethical and harmful.

Ironically, each company proudly disseminated its code of corporate conduct and ethics, along with sustainability and corporate citizenship reports touting social responsibility.

Corporate codes of conduct and corporate citizenship reports, in the absence of any culture that puts force behind concepts, are of no value beyond public relations. Harmful corporate actions are rarely committed by a single "bad apple" or devised in secret by rogue employees.

In each of the recent cases, PR teams trained in "crisis management" were rolled out to handle the situation. Discoveries of corporate malfeasance were treated as public relations issues to be "managed." There was no immediate and unconditional acceptance of responsibility, termination of top officials or board resignations.

Perhaps most telling, there was no commitment to change the way the business is overseen and no action to ensure an ethical, moral and risk-conscious culture going forward.

Senior managers and the boards that oversee them need to ensure a culture that emphasizes "doing the right thing." That means "setting the tone at the top." An ethical culture that goes beyond strict legal compliance must be as important to a business as strategic reviews. The tone must be enforced, communicated and reinforced, in a forceful and unequivocal manner. Zero tolerance for action or inaction that could harm others must be imbedded in the corporate culture.

Employees should be encouraged to question and report potentially unsafe, unethical or inappropriate conduct before it is too late. Ethical behavior should be part of job tenure and performance reviews. Hotlines and internal whistle-blowing should be facilitated, and there can be no tolerance for retaliation against those who report concerns.

Boards of directors must send a clear message to the work force that, although they have a duty to deliver profit to shareholders, real long-term gain for shareholders occurs only if the interests of all stakeholders are considered.

BP, in its zeal to maximize profitability and production, downplayed serious operational red flags and ignored the potential consequences of failure for other stakeholders. As a result, shareholders saw the value of their stock plummet.

Goldman, Toyota and the others also did their shareholders a huge disservice, by allowing a culture that downplayed risk, tolerated ethical lapses and lacked moral oversight.

Those involved in the governance of all organizations owe it to their stakeholders to be part of an ongoing dialogue on ethics and social responsibility.

They need the perspective and knowledge to effectively promote a culture that demands a higher level of conduct and a serious commitment to socially responsible, long-term and sustainable behavior.

The UMaine law school, through its Governance and Ethics Symposium Series and its growing presence in the governance arena, will continue to provide a forum for these discussions.An ethical culture that goes beyond strict legal compliance must be as important to a business as strategic reviews. The tone must be enforced, communicated and reinforced, in a forceful and unequivocal manner.

 

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