Published on 01/4/2005

With globalization of world economies, business practices throughout the world are becoming more uniform. Business ethics, however, are globalizing at a much slower pace. The recent events related to Enron, WorldCom, K-Mart, Tyco, Global Crossing, Cutter and Buck, ImClone and other U.S. organizations have replayed memories from the 1970’s and 1980’s such as Bank of Boston, Ivan Boesky, Charles Keating, Guinness, Robert Maxwell, Toshiba and Deutshe Bank. This we know: near term, it is very likely that another U.S. technology company and another U.S. retailer will collapse as the result of the ethical misguidance of their executives and boards of directors.

An Experiential Perspective On Business Ethics In The United States

Introduction

With globalization of world economies, business practices throughout the world are becoming more uniform. Business ethics, however, are globalizing at a much slower pace. The recent events related to Enron, WorldCom, K-Mart, Tyco, Global Crossing, Cutter and Buck, ImClone and other U.S. organizations have replayed memories from the 1970’s and 1980’s such as Bank of Boston, Ivan Boesky, Charles Keating, Guinness, Robert Maxwell, Toshiba and Deutshe Bank. This we know: near term, it is very likely that another U.S. technology company and another U.S. retailer will collapse as the result of the ethical misguidance of their executives and boards of directors.

We are familiar with a Fortune 50 company that has made it a practice to utilize corporate jets to retrieve lobsters from the fishing docks in Bar Harbor, Maine for four corporate executives. The trips have had only the purpose of lobster transportation at $1,400 per aircraft operating hour during repeated eight hour round trips. We are familiar with a large organization whose financial performance has been nearly exclusively driven by “cookie jar” funding derived from its public offerings instead of by its operations, while improper and non-disclosed payments have been made to several senior executives through the company’s accounting and payroll systems. We are familiar with an organization that records revenue on the date of purchase order execution while certain company executives receive exceedingly large vendor kickbacks. We are familiar with a company that repeatedly records revenue by shipping products to warehouses operated by that company, with no currently known purchaser or further destination for those products.

Those examples provide only a sampling of the violations that have recently occurred and/or are currently occurring through the use of special purpose entities, engineered balance sheets, fraud, veiled embezzlement, purposeful violation of S.E.C. and I.R.S. regulations, and other means. None of those organizations are clients of Leadership Strategies, LLC and while the vast majority of organizations are led in an ethical manner or within one standard deviation of it, the generally narcissistic philosophies and behaviors of some organizational leaders and their counselors and consultants are fascinatingly troubling.

White Collar Crime On The Rise

The most important reason why there appears to be so much white collar crime in the United States is that there are so many more laws regulating business in the United States to be broken. Additionally, journalists, investors and U.S. citizens may be more consumed by the subject of business ethics in the United States because there is more misconduct to worry about than in other economies.

Sixty-five percent of the individuals convicted of securities law violations in the 1980’s received jail sentences, some very lengthy. In 1978, executives spent more time in jail for price fixing than in all of the nearly 100 years since the passage of the Sherman Antitrust Act. Yet Enron, WorldCom, K-Mart, Tyco, Global Crossing, Cutter and Buck, ImClone and other corporate disintegrations have occurred during the last year alone as a direct result of executive incompetence, dishonesty or inattention. That statement simply reflects the fact that it is not possible, in WorldCom’s case for instance, to mistakenly classify $3.9 billion of operating expenses as capital expenses without corrupt motivation.

Many of our senior executive and board clients have found that it is monumentally easier and in nearly all cases financially beneficial to themselves and to their shareholders to run their companies in a manner, using the words of several board members with whom we work, “where full disclosure of all material facts either is not or would not be embarrassing or painful”.

People do not eat while scuba diving because the conditions surrounding them while diving do not allow it, making such activity both mentally and physically impossible. Because the participants expect those conditions while diving there is no discomfort connected with those environmental requirements. Individuals who must eat do not dive at the same time. The individuals who have been doing the organizational equivalent of feasting on lobster while diving have done so because they and possibly their boards and/or major shareholders have not established the conditions under which the feast could never have occurred. We propose and many of our clients have found that it is in fact painlessly simple to establish the leadership, systemic and environmental conditions under which unethical, illegal and dubious activities are simply NOT ABLE TO OCCUR within organizations.

Some Solutions That Work

While the solutions to current challenges within given organizations vary considerably, below for your consideration are several of the most universally beneficial and simple steps that you and your organization may take toward elimination of the market, reputational, financial, and criminal risks related to these corporate governance and ethical issues:

Americans more than any other people tend to consider their own personal ethical rules and standards, however inappropriate, to be universally accepted. As a result, it is crucial to establish a code that definitively and clearly creates a shared and mandated understanding of the nature and scope of the company’s responsibilities as well as for the individuals employed there. Executives and employees who violate the code should be terminated rapidly, without recourse and with no parachute.
Executive and management base and variable compensation must be driven by local or regional market data and directly traceable contribution to the company’s results by the incumbent. Our research over the years has shown clearly that those individuals who are most prone to ethical and legal transgressions are those who are also overpaid in comparison to the market and to what they are contributing in directly measurable ways to the employer and its shareholders. There tends to be a direct relationship between excess pay and the likelihood of ethical misdeeds, and all compensation in excess of what a person would earn if self-employed must be rationalized by the organization.
Employment contracts should be written or edited to provide for termination without exit compensation in situations where false or misleading operating or financial information is created or in cases where actions taken by individuals are intended by them, or have the result of, creating personal gain at the possible or probable expense of any or all other stakeholders. Individuals who are unwilling to have their employment contracts edited for this purpose are most likely the same individuals who have taken inappropriate actions in the past or will do so in the future. There is no legitimate reason for any person to not agree with contractual changes intended to ensure ethical and defensible behavior on their part and on the part of the company.
Eliminate any vendor rebates or kickbacks, without regard to what they are called within your organization or whether they have been “standard” within your industry or not. Our research shows clearly that rebates by any name lead to unjustified compensation and excess inventory. They also clearly result in other forms of rebates or kickbacks to individuals within your company, nearly all of which are unethical and/or illegal. Negotiate a lower landed cost from vendors, without rebates or kickbacks. If the vendor refuses, simply find another vendor. Additionally, no executive or purchasing staff member in your organization should receive any form of kickback from suppliers for what they purchase from those suppliers with your organization’s funds, whether those kickbacks are provided directly by vendors or through your company’s payroll. We are familiar with one company whereby their inventory, consisting heavily of distressed items, recently exceeded half their annualized revenue largely due to vendor kickbacks to executives referred to internally as “incentives”.
Allow no person, including the senior-most individuals, to “remove themselves from day-to-day responsibility” within your company until they no longer receive a paycheck from the company. Our research shows clearly that ethical degradation begins at approximately the same time as when senior individual(s) become less active with the company “day-to-day”. Working and retiring are mutually exclusive events and no person at any level within your organization should be without substantial “day-to-day responsibility” until they actually do retire or depart. The efficiency and productivity of any organization is heavily reflective of the degree to which those at and near the top of that organization hold significant “day-to-day responsibility” with the same behavioral work ethic required of other staff members.
If your public accounting firm has recently hired any or many former Andersen associates or partners, actively consider changing to a firm that has not done so, while remembering that it has been reported that Andersen charged Enron $68 million in 2001 for services now determined to be of little or no value. Your organization deserves both competent and ethical assistance from its accounting, audit, law and consulting firms. Individuals from Andersen have now scattered far and wide and it would be prudent for you to ensure that they scatter in directions other than within your organization or within organizations servicing your organization.
Closely evaluate your board and committee membership, ensure that board members individually spend meaningful time within company locations at least twice per year, and terminate board members who have missed more than one board meeting or board commitment during any one year.
Choose executives very systematically while formally assessing their ethical and compliance values and behaviors. Develop a selection methodology that includes a valid structured evaluation system having the effect of eliminating all risk of hiring, promoting or retaining unethical and/or non-compliant individuals. Establish an understanding with all executives that, aside from their ability to do their job, their job is no different than any other job. Remain rather conservative in the areas of executive perquisites and required executive behaviors. When an executive becomes pompous or disconnected from the reality of your business and its markets (these events tend to occur simultaneously) ensure that both the pompous and disconnected tendencies are rapidly eliminated.
Eliminate much of the insular tendency toward falsely assuming that same-industry experience adds to the capability set of managers and executives hired and employed by your company. All industries and companies are in the business of performing financially while serving customers through human and capital assets. All industries are largely similar, and one of the largest reasons why companies do not change purposefully and fittingly with their markets is because they do not modify the types of individuals they are hiring, promoting and retaining. Markets change at approximately three times the pace of insular organizations and our research indicates clearly that insularity creates fertile ground for market disconnection, personal malfeasance and organizational failure.
Consider changing your accounting and legal firms every four years and only utilize firms that will not charge extra in order to “learn your business”. If the firm is qualified, their associates will know slightly in excess of 85% of everything that is to be known about your industry and business. Monitor firm billings exceedingly closely and pay no provider on an hourly basis. When you do not pay on an hourly basis, the professional services firm becomes motivated to eliminate issues and challenges quickly. When you hire a professional services firm, “do the math” to determine how ethical the firm is with regard to its fees.
Maintain active involvement with and immediate responsiveness to local communities and media publications such as newspapers and business publications. Openly communicate internally and externally about all business activities that are not competitively confidential. The tendency by organizations to be secretive and non-responsive with regard to their internal constituencies and external surroundings tends to be directly proportional to the occurrence of repetitive ethical and legal violations.
If yours is an organization whereby certain senior executives have in any manner coordinated what may be or are known to be inappropriate activities with board members or major shareholders, rapidly develop a disclosure and remediation plan among the involved groups in order to fully rectify the situation retroactively and prospectively so that corrections may occur on internal terms to the greatest degree possible.

As indicated above, the complexity of your challenges may vary greatly when compared with other organizations. The above list is merely intended to serve as a starting point for the improved financial performance of your company while concurrently eliminating much financial, legal and market risk. Some or all of the above steps, and others, are being taken within several of our public organization clients with remarkable financial and organizational efficiency results.

Conclusion

Many of our clients have found that “ethics” is the wing nut that most beneficially holds the organization together. It has become clearly evident during the last year what happens when that wing nut either does not exist or is not tightened properly. If that is not enough of a reason to pursue ethical remediation, if necessary within your organization, consider this: The percentage of lower and middle level employees who know, are affected by, and talk openly about ethical and legal errors above them is exceedingly high.

Because one of our areas of specialty is Corporate Governance and financial performance, please visit the “Corporate Governance Solutions” section of our web site, Contact us or call us at 480-467-0344 and we would be pleased to discuss, clarify or expand on any of the above points.

Brian Gagan is a partner with Leadership Strategies, LLC and holds management and human resources degrees from the University of Maine and Syracuse University. Some of Brian’s primary areas of specialty are mergers and acquisitions, elimination of organized labor influences, organizational structuring, senior executive performance improvement, board functionality, international expansion, executive compensation and perquisite design having a direct effect on organizational financial performance improvement, and peaceful elimination of human capital performance roadblocks. Brian can be reached at 480-467-0344 or by email at bgagan@peopleresults.com