“To be ethical is profitable; but to be ethical because it is profitable is not ethical.” These words of philosopher and consultant Peter Koestenbaum, Ph.D., were reiterated at a June conference of business ethics produced by The Conference Board. In a session dubbed the “parade of horribles portion of the program,” the discussion revolved around whether recent corporate scandals would force change for the positive.
“Out of bad can come good,” said Simon Webley, research director of the Institute of Business Ethics in London. He pointed to previous “ripple effects” from past corporate disasters. Out of the Union Carbide Bophal disaster came corporate responsibility for the actions of associates; out of Exxon Valdez came responsibility for environmental damage; from incidents at Nike and Motorola came responsibility for the supply chain, although this is still working itself out.
“What will come of Enron?” Webley asked. “To come is a permanent change in how large organizations are governed and how they are held responsible—that their license to operate can be withdrawn.”
But Webley is not entirely confident in the path of current governance practice reforms. Specifically, he criticized section 406 of the Sarbanes-Oxley Act, which for the first time gives a procedure for companies to waive clauses in their code of conduct. “To waive this for the benefit of a few people is absolutely detrimental,” he said.
But signs that change for the positive can occur are already dawning in the United Kingdom, where about ten years ago, following a rash of corporate scandals, private companies set up committees to create uniformity in codes that were drafted to determine corporate governance rules. In late May of this year, stockholders of the United Kingdom-based GlaxoSmithKline voted down pay packages for senior executives. Although it was not a binding vote, it sent a strong message, according to Webley, that the “fat cat syndrome” will be closely examined because stakeholders are disgusted by what they see as corporate cultures that “reward failure.”
Improvements are also being made on the other side of the Atlantic, according Wayne Carlin, regional director for the Northeast Regional Office of the U.S. Securities and Exchange Commission. He emphasized that the corporate system is not entirely corrupt. “Most people who are senior officers in this country are honest,” he said. “Unfortunately in my line of work, I don’t get to meet many of those people.”
Carlin outlined some of the actions that the SEC has taken in the past year, including those that may not have made headlines, but do mark important trends in governance regulation. Historically, the SEC pursued action against knowing parties engaged in fraud. That has now changed to incorporate what Carlin calls “facilitators” (also referred to as “gatekeepers” by the SEC). These are people who are instrumental in the perpetration of someone else’s fraud.
For example, Michael Marchese was a director with the Boston-based Chancellor Corporation. While Marchese was on the board, the CEO of Chancellor orchestrated a fraudulent accounting scheme. When an outside auditor refused his request to consolidate Chancellor’s financials with those of an acquired company, the CEO fired that team and brought in another. The second team accepted the proposal—because the CEO gave them fabricated documents. Although Marchese was not an active player in this fraud, he was found derelict in his responsibilities as a member of the audit committee because he knew about the first audit team’s decision and never questioned the new conclusion. Because he went along with the proposal and signed form 10-K, Marchese was found guilty by the SEC of a securities fraud violation.
James Fitzhenry, who was general counsel for Portland, Oregon-based FLIR Systems, Inc., was asked by the CEO to persuade a reluctant South American distributor to sign an unconditional purchase agreement. He was unsuccessful in that effort, but two months later during an audit, he still signed representation letters that stated otherwise. According to Carlin, he was found guilty of violating the SEC rule “thou shalt not lie to an auditor.”
Doubts remain, however, as to whether the penalties assessed to these and other individuals will really dissuade future infractions. Carlin, though, believes that the impact on reputation and a career is more daunting than any administrative financial levy.
In concluding the session, Carlin offered CEOs the following three points of advice on dealing with SEC and governance infractions:
“One, if you have a problem, recognize the importance of responding as a good corporate citizen in a genuine and meaningful way.
“Two, in times like these, where we’re in tougher economic times, areas like compliance and legal and ethics are often prime candidates for insufficient support and cuts, but this is exactly the time when it is most dangerous to be cutting support.
“And third, be aware of how facilitators can cause problems—have a broad view of potential exposures within your organization.”
