Ethics Newsline®

In the October 7 issue of BusinessWeek, the magazine rates the best and worst corporate boards in the United States. According to the analysis, which weighted factors including board independence and stock ownership, the rankings are as follows:

Best:

• 3M


• Apria Healthcare


• Colgate-Palmolive


• General Electric


• Home Depot


• Intel


• Johnson & Johnson


• Medtronic


• Pfizer


• Texas Instruments

Worst:

• Apple


• Conseco


• Dillard’s


• Gap


• Kmart


• Qwest


• Tyson Foods


• Xerox

Does ethics really matter? Consider the sad little morality play now showing in New Jersey.

For months Senator Robert G. Torricelli (D-NJ) has been gearing up to take on his Republican opponent, Douglas R. Forrester, in this November’s election. The stakes are enormous. Democrats control the Senate by the thinnest of majorities. It only needs the flip-flopping of one seat — like Sen. Torricelli’s — to hand the whole Senate to the Republicans.

In July, “the Torch” (as Torricelli is known) was stiffly rebuked by the Senate Ethics Committee for taking illegal gifts from New Jersey businessman David Chang. Torricelli apologized and went home to seek redemption.

Case closed, or so we thought — until, responding to a media request late last month, a judge made public the results of a federal probe into Torricelli’s fund-raising ethics. The senator’s polling numbers plummeted. Fearing that the scandal would drag down both himself and his party, he made the wrenching choice last week not to continue his campaign.

This case has more ethical lessons than a Garden State police cruiser has flashers. Among them:

• Ethical lapses have career-ending potential. Last summer, Rep. James B. Traficant (D-Ohio) was expelled from the U.S. House of Representatives and sentenced to jail. He joins a growing list of top corporate executives, most recently Andrew Fastow of Enron, to be led away in handcuffs. Now comes Torricelli. The naïve notion that since everybody violates ethical standards, it’s okay — that moral lapses are inconsequential, and that only dummies get caught — gets harder to swallow by the day.
• Ethical lapses have institution-changing force. When values get twisted and careers go off the rails, the impact can be enormous. Most Arthur Andersen employees were honest, thoughtful people trying (as auditors must) to avoid even the appearance of scandal. Yet when a few employees drove this Big Five accounting firm into the ethics wall, the wreckage was so vast that we now have the Big Four. Similarly, most Democratic senators are working honestly and hard to retain their majority. Yet a single senator’s ethical calamity could undo all of their efforts.
• Ethical lapses can poison whole systems. Torricelli’s withdrawal may throw New Jersey into an electoral crisis with national implications. He bailed out less than 51 days before the election. Under New Jersey law, that’s the last moment a party can yank one name and substitute another on the ballot. The New Jersey Supreme Court, however, unanimously ruled in favor of such substitution — giving voters the right to vote directly for Torricelli’s replacement, former New Jersey Senator Frank R. Lautenberg. The state’s Republicans, predictably, have appealed to the U.S. Supreme Court. They fear a precedent-setting ruling that permits replacements any time the originals sink too low in pre-election polling — replacements who, with lots of newcomer appeal and little time left for public examination, might get swept into office on torrents of novelty and ignorance.
• Ethical lapses foster personal animosities. Several candidates were offered the post-Torricelli slot, including former Sen. Bill Bradley. The one least favored by Torricelli appears to be Lautenberg. Stories abound of an almost Shakespearean loathing between these two, dating from their service together in the Senate. As of this writing, there remained a real question whether Torricelli could bring himself to release some $7 million of his remaining campaign funds to help his old enemy.
• What goes around comes around. In 1996, Torricelli’s race against Republican Dick Zimmer became a nationally recognized poster child for nasty campaigning on both sides. Since then, polling by the Institute for Global Ethics has discovered an inseverable connection in voters’ minds between unethical campaigning and unethical public service. Our polling in June, for example, indicated that 86 percent of the U.S. public believes unfair attack campaigning is unethical, and 76 percent thinks negative campaigning produces less ethical and trustworthy leaders. Not surprisingly, the senator who won by mudslinging has himself been slung into the slime of unethical behavior. (Footnote: In our sample, more than eight in 10 think nasty campaigning makes people less likely to vote. Fact: The Torricelli-Zimmer race produced stunningly low voter turnout.)

For those who still insist that ethics is inconsequential, then, a quick recap. Here’s the original turpitude: accepting illegal campaign contributions, and then stonewalling and prevaricating about them. And here’s what follows in its train: a career-ending move for a bright, politically savvy legislator (done); a monumental shift in political control just as tension over Iraq rises to the boil (very possible); a precedent for ballot substitution that could void the significance of primary elections and scramble the nation’s electoral process in the last weeks of campaigning (potential); a nasty tug-of-war between personalities vying for money intended for use in a campaign (unresolved); and a sad but powerful testament that while the end (being a public servant) never justifies the means (unethical campaigning), it often reflects those means — showing, once again, that those who play with torches risk spontaneous combustion.

(c)2002 by the Institute for Global Ethics

“American society has really gone beyond the pale in turning every part of the environment into ad space. There should be some things that are off limits.”

–Michael Maynard, professor of journalism, advertising, and public relations at Temple University in Pennsylvania. Maynard’s comments come after the city of Springfield, Florida, announced that it will be getting 15 new police cars equipped with cutting-edge technology — in exchange for placing advertisements from local and national businesses on the cars’ sides. The Christian Science Monitor reports that a growing number of U.S. cities are making similar deals, pulling in badly needed revenues by selling ad space on police cruisers to companies — a deal critics say could bias police independence and impartiality. (“Your Ad Here: Cop Cars as the Next Billboards,” Christian Science Monitor, Oct. 3.)

LONDON
A genetic makeup that predisposes someone toward crime should be considered as a mitigating factor by judges of the future when imposing sentences, a British bioethics panel recommended last week.

If a person’s genetic code predisposes them to violence, they perhaps should be given a sentence tailored more toward treatment and therapy than outright punishment, Britain’s Nuffield Council on Bioethics said.

“If people are found guilty of criminal behavior it shouldn’t be an excuse, but it may be relevant to the way in which they are treated,” professor Bob Hepple, chairman of the council’s working party, told Reuters.

Hepple’s comments come after a study of young boys with the same weakened gene. Researchers found that 85 percent of the boys, if abused while young, exhibited abusive or antisocial behavior later in life.

The Nuffield Council cautioned that while genes may predispose people to violence or other problems, they are not solely causative. Environmental factors also play a pivotal role that makes genetic exculpation untenable, the council said.

“The connection between genes and diseases is far from straightforward,” the report notes, “and the relationship between genes and behavior is even more complicated.”

The council last week released a set of recommendations aimed at exploring these relationships while steering gene research in an ethical direction, reported the Reuters news agency.

The report advocates controversial research into the links between genes and behavior, but warns that more stringent safeguards are needed to prevent genetic profiling, custom babies, and future human-rights abuses.

“We don’t think the case is made out yet for preventive detention or anything of that kindthat would be horrifying science fiction stuff,” Hepple told Reuters.

TEL AVIV
The controversial practice of embryo screening resurfaced last week with the story of Israeli parents who saved the life of their son by having a daughter chosen from among several embryos because her blood marrow was a match to his.

The procedure, which was carried out in the United States, involved screening several viable test-tube embryos for a bone-marrow match. Those that failed the test were destroyed; the one that passed was implanted in the mother, who carried the embryo to term.

Upon birth, the girl’s umbilical cord was used to provide surrogate blood cells for her critically ill brother.

Dr. Amos Toren, an Israeli who helped the couple, said the procedure appears to have paid off, with the brother recovering and apparently cured, reported the Associated Press.

The practice of embryo screening, which involves the discarding of unsuitable embryos, has raised the hackles of religious groups, who argue that the practice is tantamount to killing.

Scientists have struggled to address such concerns by pointing to the benefits of the practice, which promises to save the lives of many seriously ill patients.

Last year, U.S. President George Bush outlawed most stem-cell research that would result in the destruction of embryos. Israel, however, has no such policies, noted the AP.

LONDON
U.K. police can ask doctors to take blood samples from unconscious drivers suspected of operating their vehicles while drunk or on drugs, according to new guidelines adopted last week by the British Medical Association (BMA).

“It is extremely rare for the BMA to advocate taking samples from people … without their consent, but in this case we see a clear public interest,” BMA Ethics Committee chairman Dr. Michael Wilks told the Reuters news agency.

The BMA’s recommendation would allow police to ask doctors to take blood samples from unconscious or incapacitated drivers, but would prohibit them from testing the samples until the drivers reawakened and gave their consent.

Drivers who refuse such consent would be liable to prosecution, reported the BBC.

Declan Duggan, whose son was killed while riding in a car with a drunk driver, said the new rule would close a legal loophole that some drivers have used to escape prosecution for accidents they caused while under the influence.

“There were three boys in the car and the only person whose blood was tested was my son’s,” Duggan told the BBC. “The driver’s was not tested and the only reason he was not tested is because he was unconscious. This loophole had now been closed.”

Britain’s Home Office agreed, reported the BBC.

The BMA said its decision is an attempt to balance patients’ rights with the problem of drunk driving, adding that safeguards should be established to prevent police from abusing the policy.

Under BMA rules, doctors would have the right to refuse a police request for a driver’s blood sample.

“Medical practitioners will have a power, but not a duty, to take the samples,” a Home Office spokeswoman said. “All doctors could refuse a request if they considered it was inappropriate.”

PHILADELPHIA
A pro-Israel policy and research group last week insisted it has done nothing wrong in listing the names of eight U.S. professors and 14 universities it accuses of bias towards Palestinian rights and political Islam.

The group’s new Web site, CampusWatch.org, is aimed at professors who criticize U.S.-Israeli foreign policy, voice concerns about Israel’s occupation of Palestinian territories, or teach positively about Islam.

The professors were listed with photos and “dossiers” detailing their activities and comments that run counter to the views held by the Middle East Forum, led by Daniel Pipes.

The actual dossiers were removed after a wave of criticism, although the rest of the site, including a “Keep Us Informed” section asking for “reports on Middle East-related scholarship, lectures, classes, demonstrations, and other activities relevant to our work” remains intact.

Pipes said he merely tried to stimulate discussion and open the eyes of students caught in an anti-Israeli academic world, reported the New York Times.

“Our argument,” Pipes told the Times, “is that Middle Eastern studies at most universities present only one interpretation, a left-leaning one that offers only group-think on the subject of terrorism and intolerance.”

Pipes’ site aims to put the spotlight on professors he says castigate Israel or oppose current U.S. policies in the region. Listing professors’ names and locations is simply providing information, not targeting them, he insisted.

More than 100 other professors disagreed, flooding the CampusWatch site last week with requests to have their names added to the list, according to the Times.

The outraged professors’ said their goal was twofold: to dilute the Web site’s agenda on one hand, and to de-radicalize the targeted professors’ alleged politics on the other.

“It’s that whole mode of terror by association, with the Cold War language of ‘dossiers,’ and we’re watching you,” Ammiel Alcalay, a Hebrew professor at Queens College in New York, told the Times. “It makes graduate students and untenured professors very nervous, and makes it even harder to talk about Israel.”

Lisa Anderson, dean of Columbia University’s School of International and Public Affairs, told the Times, “Last year, Martin Kramer wrote a book arguing against federal funding for Middle Eastern studies in universities, and that scared people.”

“Meanwhile, there’s concern that the rhetoric around the Arab-Israel conflict is becoming increasingly associated with anti-Semitic sentiments, and that’s scaring people too,” added Anderson, who will soon become head of the Middle East Studies Association.

NEW YORK
Some of the nation’s most popular retailers — Gap, Target, and Abercrombie & Fitch among them — last week agreed to pay more than $11 million to settle charges of supporting sweatshop factories in Saipan.

The retailers, which also include J.C. Penney, Lane Bryant, Limited Brands, and Talbots, will each pay into the fund, which will be used to monitor factory conditions and provide back pay to workers.

Nineteen other retailers have agreed to previous settlements of sweatshop charges related to Saipan, a West Pacific island where more than $1 billion worth of “Made in the U.S.A.” clothing is produced each year. Saipan is a self-governing trust territory of the United States; residents of the island are U.S. citizens but cannot vote.

Human rights groups have long complained that prominent U.S. companies have contracted with firms on the island to produce clothes under dangerous and abusive working conditions — charges the firms deny.

Last week’s settlement ends a class-action suit filed on behalf of 30,000 Asian workers based in Saipan. The deal does not require the companies to admit any wrongdoing, and establishes a monitoring panel that may be aided by the United Nations’ International Labor Organization.

James Hale, executive vice president and general counsel of Target, last week complained that the settlement addressed bogus abuses concocted for publicity purposes.

“This isn’t about whether we care about factory conditions. We care a great deal about them,” Hale told the Associated Press. “This was just a case brought by class-action lawyers to stir up publicity and they did it.”

Such angry reactions are to be expected, business professor Jordan Kaplan told the Reuters news agency.

“From the retailers’ perspective it’s going to increase costs of goods sold and that may have a negative effect on sales,” Kaplan said. But “given the parade of CEOs and senior executives being led away in handcuffs, this sends a message to the American public that big business and retailers do have a conscience even if took a class-action suit to get them to find it.”

A report from the San Francisco Chronicle notes that the Saipan issue may be moot by 2005, when new labor laws are expected to push companies to look for cheaper, less visible places to produce their clothes.

The lead candidate so far is China, where labor abuses are often ignored and the government mutes most dissent, warns the Chronicle.

Special to Newsline from Canadian correspondent Errol P. Mendes

OTTAWA
The blue-ribbon Accounting Standards Oversight Council, an advisory body to the Canadian Accounting Standards Board, is recommending that financial statements in Canada show stock options as an expense now, without waiting for the counterpart U.S. bodies to take the lead.

Stock options can have a major impact on a companys bottom line but under most current accounting regulations they are not required to be listed as an expense or debt. Hidden debts in the form of stock options were factors in recent corporate collapses in the U.S. and Canada.

The vice-chair of the council, Senator Michael Kirby, is quoted in the Globe & Mail saying that making the change is more important than waiting for the United States, even if this puts Canadian companies at a disadvantage compared to their U.S. competitors.

Council chair Tomas Allen is also quoted as saying that its aim is to ensure that investors have reliable, clear information on which they can base their investing decisions.

The Canadian Accounting Standards Board does not have to follow the recommendations of the council, but at least one influential member of the Accounting Standards Board has given indications that they will do so in this instance.

MOUNTAIN VIEW, California
Software maker Veritas last week announced the resignation of the company’s chief financial officer, Kenneth Lonchar, after discovering he had lied about earning an MBA from Stanford University.

Lonchar, who also served as executive vice president, had been with Veritas since early 1997. Last week he said he regretted “this misstatement of my educational background.”

Veritas insisted that Lonchar’s lie “has no bearing on the accuracy … or the quality” of the firm’s financials, but share prices plunged 17 percent after the CFO’s departure, noted the Financial Times.

NEW YORK
The world’s five largest music companies agreed last week to pay $143.1 million to settle charges that the firms unfairly inflated the price of CDs sold in the United States from 1995 through 2000.

The firms were targeted by a lawsuit launched two years ago by New York and Florida, which were later joined by 38 other states, reported the New York Times.

The states’ complaint centered on a policy known as “minimum advertised pricing,” under which manufacturers subsidized retailers’ advertising efforts in exchange for an agreement to not sell CDs below a predetermined price.

Music companies insist the policy, which effectively barred big-box firms such as Wal-Mart from severely undercutting the competition, was aimed at protecting smaller retailers who could not afford similar price cuts.

But consumer rights groups and U.S. states said the deals merely kept CD prices high, instead of allowing market forces to drop them lower and lower as competition increased.

In the end, the states won, inking a settlement last week that earmarks $67.4 million for cash refunds to consumers and $75.7 million for CD donations to libraries, schools, and other state-funded organizations.

“This is a landmark settlement to address years of illegal price fixing,” New York State attorney general Elliot Spitzer said last week. “Our agreement will provide consumers with substantial refunds and result in the distribution of a wide variety of recordings for use in our schools and communities.”

The companies involved in last week’s deal denied any wrongdoing, but said they would pay into the settlement fund in order to avoid protracted, expensive litigation.

The five music companies included Bertelsmann Music Group (BMG), EMI Music Distribution, the Warner-Elektra-Atlantic Corporation, Sony Music Entertainment, and Vivendi’s Universal Music Group.

The nation’s three largest retailers — Musicland, Tower Records, and Trans World Entertainment — also signed onto the deal, reported the Times.

Details on how consumers can obtain refunds will follow formal court approval, noted the Washington Post.

WASHINGTON
After years of raisingp the bar on permissible perks, U.S. drug companies were warned last week to mind their marketing manners or face prosecution by the government for fraud and abuse.

For the first time, the U.S. Department of Health and Human Services (HHS) issued a new set of standards, following the lead of the Pharmaceutical Research and Manufacturers of America (PhRMA), which unveiled a similar code last April.

PhRMA’s code of conduct bans a host of luxuries — free golf balls, opera tickets, extravagant speaking fees, and “educational” trips to Hawaii, among them — currently lavished on doctors willing to prescribe a company’s products.

“Arrangements that fail to meet the minimum standards set out in the PhRMA code are likely to receive increased scrutiny from government authorities,” the government warned last week, according to the Reuters news agency.

While the new government standards are voluntary, violating them may expose firms to investigation and prosecution under federal fraud and kickback laws, the New York Times reported.

The HHS measures would bar financial payments to physicians for switching patients’ medicines to brand-name products. It would also ban the practice of hiring prescribing doctors as “consultants.”

Also targeted is the widespread practice of quoting a high wholesale price for a product, but routinely selling it to doctors for far less. Under current law, doctors are allowed to bill Medicare and Medicaid for the difference — a process that costs the government an estimated $1 billion annually, reported USA Today.

That practice has come under increasing scrutiny as the cost of Medicare and Medicaid is expected to double to $800 billion over the next decade, noted the Times.

Last week’s announced standards, currently up for 60 days of public comment, also call on every drug company to appoint a compliance officer, set up an abuse hotline, and adopt safeguards for whistleblowers.

LONDON
Thousands of U.K. students will have their college-entrance exams re-graded, the government announced last week, following an outcry over alleged bias by exam boards accused of unfairly attempting to make the exams more rigorous.

The controversy over the country’s “A-level” exams has been brewing for weeks, with students complaining that they received failing grades on tests they should have passed last summer.

The students — as well as a growing number of critics — allege that the three exam boards scoring the test unfairly graded down students’ scores after being criticized for making tests too easy in recent years.

Critics say that while the attempt to counter grade inflation is welcome, the boards may have gone too far — arbitrarily dropping scores to save face, thereby causing some colleges to reject students for too-low test scores, reported the Reuters news agency.

Mike Tomlinson, a former chief inspector of British schools, is heading an independent panel looking into the incident.

The controversy has resulted in political finger-pointing and the firing of Sir William Stubbs, head of the watchdog Qualifications and Curriculum Authority, by Education Secretary Estelle Morris.

Revised scores are expected by mid-October.

From PricewaterhouseCoopers:

“Multinational companies in Europe and the U.S. are expanding their corporate reporting to include information on ‘triple bottom line’ — economic, social, and environmental — performance in order to influence stakeholders and the global capital markets, according to PricewaterhouseCoopers’ latest Management Barometer survey.

“In Western Europe, two-thirds (68 percent) of large companies report such information in addition to required financial reports; in the U.S., 41 percent provide such information, the survey found.

“According to the survey, more large Western European companies provide data in each category of the triple bottom line than those in the U.S.:

“‘The Triple Bottom Line got an earlier start in Europe, and is further evolved there than in the U.S.,’ said Sunny Misser, Global and U.S Leader of PricewaterhouseCoopers’ Sustainability practice. ‘With the current breakdown of confidence in financial reporting, large companies are facing increasing demands and expectations from stakeholders and are being held more accountable for their performance and actions. The Triple Bottom Line approach is a proactive step in providing shareholders with increased transparency and a broader framework for decision making.’

“Misser said some executives might experience challenges with the Triple Bottom Line reporting process, as tools and metrics to measure social and environmental performance are still in the developmental phase.

“‘Triple Bottom Line reporting as it currently stands, has its limitations, but it’s a great way for companies to disclose meaningful non-financial information that impacts their financial results. This is the time for companies, especially in the U.S., to seize the opportunity,’ he said….”

“The end of all political effort must be the well-being of the individual in the life of safety and freedom.”

–Dag Hammarskjöld (Swedish economist and philosopher, UN secretary general, and 1961 Nobel Peace Prize Laureate, 1905-1961)