Ethics Newsline®

Prior to 9/11, I would have defined the job of a good corporate board member in a simple phrase: to find out where the organization needs to go and make it want to go there.

That definition still has merit. The first part requires good listening — to the internal organization, certainly, but also to the externalities, the faint signals and nascent trends that tell us where society is heading. The second part requires communicating — persuading, encouraging, and cheering on, but also cautioning and even obstructing. Of the two, the talent for communicating is better understood. Less discussed is the role of the director as futurist, forward thinker, and reader of the over-the-horizon radar.

Over the last year, however, a third qualification for board membership has become evident: a clear sense of ethics and a passion for integrity. The attacks of 9/11, the parade of miscreants from firms like Enron, Andersen, Adelphia, and Tyco, and the downward-sucking vortex of distrust in the markets have together elevated ethics to top billing. And given the role that boards played (or failed to play) in this litany of malfeasance, it’s now clear that a principal role of the director is as keeper of the firm’s ethical flame. That means that (to restate the definition above) the director’s job is to find out what ethical direction the organization needs to go, and make it want to go there with integrity.

Ethical trend-watching, then, is central to good governance. Among the trends that have become visible in the last several months, here are two (and the hint of a third) worth watching:

1. Trust is ebbing. Surveying nearly 13,000 employees in top U.S. companies, the Watson Wyatt WorkUSA 2002 Survey found that only 39 percent of employees now trust senior leaders in their firm. More chillingly, less than two-thirds (63 percent) believe their companies “conduct business with honesty and integrity” (down from 68 percent in 2000), while only 45 percent “have confidence in the job being done by senior management” (down from 50 percent).
   
   Oddly enough, that lack of trust may have a silver lining. According to another survey carried out by KPMG Forensic, 83 percent of employees would now “report their colleagues to their bosses for major incidents of fraud,” while 44 percent would report them for minor incidents like stealing office letterhead. “In the past, we’ve found that employees have felt less inclined to report obvious incidents of fraud due to their unwillingness to turn in their fellow employees,” says Alex Plavsic, head of Fraud Investigations at KPMG Forensic. In the post-Enron age, however, workers now see that fraud can destroy whole companies — that it’s not, in Plavsic’s term, a “victimless crime,” but rather something that could eliminate their own jobs.
   
   How can directors respond? Focus on rebuilding trust not simply among external stakeholders but within the firm itself — and create a culture that rewards both loyalty to the good and whistleblowing about the bad.

2. CSR is cresting. Interest in corporate social responsibility (CSR) is on the rise, according to recent findings from PricewaterhouseCoopers’ Management Barometer survey. More than two-thirds (68 percent) of large companies in Western Europe now report not only economic data but environmental and social impact data as well — the so-called “triple bottom line.” The movement lags in the United States, however, where only 41 percent provide such information.
   
   Why does CSR matter? Because it can be a bellwether of a corporation’s ethical stance. Not surprisingly, then, it’s seen as crucial in an age of public distrust. Jericho Communications, in its survey of CEOs of Fortune 1,000 companies, finds 36 percent feeling more conscious of corporate social responsibility since 9/11. Just 12 percent, however, said they’re allocating more money for it — hardly a groundswell, but a notable trend given current economic pressures.
   
   Two things for directors to note: Bad companies use CSR as a fig leaf to cover ethical failings — it’s often easier to endow a university chair than to clean up a moral swamp. Good companies use CSR to promote transparency, a key element in building public trust.

3. Keep an eye on peace-building. For decades, corporations have kept away from the resolution of global conflicts, assigning that responsibility to diplomats and politicians. There are hints that such reticence is being reevaluated. The Jericho poll found 52 percent of its respondents believed that corporations, by acting responsibly in communities around the world, could weaken the influence of terrorist groups. In addition, 42 percent noted that a U.S. company’s CSR policies toward communities around the world should equal its commitment to communities in the United States.
   
   Don’t call it a trend just yet, but watch how it develops. As boards understand the golden link between peace and prosperity, look for more firms to see how they might contribute to global CSR, and particularly to peace. In future years, could peace-building become the fourth bottom line?

Three trends worth watching, then. But why from the boardroom chairs? Because if there’s one iron law of corporate ethics, it is this: Only when the ethics message emanates from the very top — not the No. 2 or No. 3 spot — will it be believed and acted upon internally. And only then will a company be genuinely ethical.

(c)2002 by the Institute for Global Ethics

“A simple application of the law is not going to produce what people will perceive to be justice, because many of the things that have been happening are not necessarily illegal, even if the public considered them immoral. So if the only response is a legal response, I think the public will end up being quite soured about corporations and the business world.”

– Tom R. Tyler, New York University psychology professor and specialist in the study of popular conceptions of justice, speaking to the New York Times about the current spate of corporate arrests for fraud and other wrongdoing. (“Even if Heads Roll, Mistrust Will Live On,” New York Times, Oct. 6.)

CHICAGO
Chicago last week became the first major U.S. city to require all companies with city contracts to disclose whether they or their firms’ predecessors profited from slavery, warning that businesses would lose contracts for lying.

The ordinance, passed on a unanimous 44-to-0 vote by the city council last week, would not punish firms that did profit from slavery, but would simply collect the information in a database.

Firms that lie and deny any involvement in the slave trade will be stripped of their contracts with the city, reported the Chicago Tribune.

The measure is aimed at collecting data for use in future lawsuits aimed at assessing and recovering reparations for African-Americans, according to its author, Dorothy Tillman.

“I believe people would like to know if a corporation they’re contemplating doing business with has its roots in trading in human cargo,” Tillman told the Associated Press.

Chicago Mayor Richard Daley agreed, saying the measure “will not prevent companies from doing business with the city, but it will shed a light on slavery.”

Robert Bennett, former dean of Northwestern University Law School, said the Chicago measure may be well intentioned, but could run into problems down the road.

“If they start threatening companies … then we may be talking about extortion,” Bennett told the Los Angeles Times. “There is a public interest in having history about slavery, but this is a strange way of going about compiling that history.”

California passed a similar measure two years ago, although that legislation applies only to insurance companies doing business in the state.

FRANKFURT
German media giant Bertelsmann AG last week apologized for decades of misrepresenting the firm’s World War II-era past, acknowledging that an independent commission found evidence that Bertelsmann profited from the Nazi occupation and the slave labor it provided.

Critics have long questioned how Bertelsmann, a provincial publisher of religious tracts before the war, had morphed into a printing powerhouse for German troops by the war’s end.

Bertelsmann had portrayed its corporate history as an example of a company that weathered the war with strong financial savvy and a stronger conscience, saying it had been shut down in 1944 for refusing to support Hitler’s Nazi party.

Last week, the company admitted that the shutdown was more likely due to wartime supply restrictions, that the firm had published anti-Semitic tracts, and that its founder had financially supported the Nazis.

The announcement largely confirms an unofficial report released two years ago, following questions that surfaced in 1988 after its CEO boasted of the firm’s exemplary anti-Nazi record.

That claim was a point of pride for Bertelsmann, whose founding family has become one of Germany’s most generous philanthropists — an ethic they tried to extend to their company, noted the New York Times.

Two years ago, Bertelsmann, the world’s fifth-largest media empire, voluntarily paid into a $4.5 billion reparations fund for Holocaust survivors, as a sign of support for survivors even though the firm said it had steered clear of abusing them.

Last week, Bertelsmann CEO Gunter Thielen offered his apologies for the company’s mistaken history.

“I would like to express our sincere regret for the inaccuracies … in our previous corporate history of the World War II era, as well as for the wartime activities that have been brought to light,” Thielen said in a statement.

The Times noted that while Bertelsmann apologized for its misrepresentation, it did not actually apologize for its behavior during the War — an omission company representative Tim Arnold admitted was deliberate.

“Can you really apologize for the actions of a different generation and what we view as a different company?” Arnold, who coordinated the efforts of the independent research commission, asked the Times. “It is a global company with very different values. Our regret is genuine and sincere.”

GENEVA
A coalition of Catholic groups last week asked the United Nations to confront the Vatican on issues of sexual abuse, saying the Holy See has failed to adequately uphold an international treaty against child exploitation.

Catholics for a Free Choice led the call last week, releasing a report documenting 5,000 cases of alleged abuse by Catholic clergy in more than 20 countries, including Austria, Australia, Poland, and Latin America.

“This report shows that sexual abuse in the Catholic Church is not an American crisis, it is a global crisis,” the group’s president, Frances Kissling, told the Reuters news agency.

Kissling and alleged victims of abuse contend that the Vatican has abdicated its responsibility to protect children as outlined in the 1989 UN Convention on the Rights of the Child.

Signatories of the treaty, including 191 countries and the Vatican, are bound to protect children or face censure by the UN.

Kissling said documents unearthed by the media and U.S. prosecutors show that Catholic officials have known about the sexual abuse of minors since at least the 1940s, but have done little to confront the problem.

Instead, Kissling said, church officials have covered up and reassigned priests accused of abuse — moves she claims are a clear violation of the UN treaty and merit the consequences any other signatory would face, according to a report from Associated Press.

“The Holy See represents special challenges to the United Nations because it tries to have it two ways,” Kissling contended last week. “When it wants to be a religion, it’s a religion, and when it wants to be a state, it’s a state. When the UN goes after the Holy See it says it’s a religious problem, not a state problem.”

Catholic officials at the Vatican so far have declined comment on last week’s request to the UN, saying the Vatican was doing what it could to address the problem, reported Britain’s Independent.

WASHINGTON
The U.S. military has admitted testing chemical weapons on U.S. soil, as well as in Canada and Britain, exposing as many as 5,500 soldiers to deadly nerve agents, including VX and sarin — the same chemicals allegedly being readied for use by Iraq.

Last May, the Pentagon confessed to testing the weapons on U.S. soldiers at sea. Last week, it said such tests had also been conducted on U.S. soil in Alaska, Florida, Hawaii, and Maryland between 1962 and 1971. Other tests were done on British and Canadian lands.

News of the weapons tests comes in 28 reports declassified and presented to Congress last week, where lawmakers are asking for answers on whether such tests sickened U.S. soldiers, reported the New York Times.

Information on 35 additional tests is being examined for possible declassification, according to the Times.

Congressman Mike Thompson (D-Calif.) is credited with pushing the Pentagon to disclose its controversial chemical weapons program — a push he says came after veterans complained to him about mysterious illnesses.

The Pentagon “claimed chemical weapons tests ‘never happened.’ Later, they said ‘not to worry, they only used simulants.’ It’s taken a long time to get this far, and quite honestly, I don’t think we’re there yet,” Thompson told the Washington Post.

While the Pentagon insists that its tests have not been causally linked to veterans’ illnesses, the agency admits it is having trouble tracking down and evaluating the soldiers exposed to the biological weapons, some of whom may not have been told about the experiments.

The Post reports that more than 50 veterans have filed claims citing the tests as the source of health problems developed afterwards.

WASHINGTON
Dick Armey, the Republican head of the U.S. House of Representatives, last week denied that he was retaliating against a Texas newspaper for its coverage of his son’s failed political campaign by sponsoring legislation that would have forced the paper’s owner to divest itself of one of its media properties.

Armey’s actions were aimed at Belo Corp., a Texas-based media company whose holdings include 19 TV stations and four newspapers, including the Dallas Morning News.

Armey tried to force Belo to divest one of its media properties by pinning a rider onto a $10.5 billion military construction bill expected to pass through Congress quickly in the coming week or two, according to the New York Times.

Armey’s effort was blocked following objections from Chet Edwards, a Texas Democrat, who said the rider violated Senate rules against including irrelevant items in spending legislation, reported the Associated Press.

Belo Corp. last week accused Armey of “retaliating against the company out of anger at its newspaper coverage” of the failed political campaign of Armey’s son — coverage the firm insists was fair and warranted.

Armey, who is retiring this November, had hoped his son Scott would replace him as a Texas representative in Congress. That bid fell through last winter, after Scott Armey lost the Republic primary.

Following his son’s defeat, Dick Armey lashed out at the Dallas Morning News for its yearlong series on his son’s record as a county executive. Armey has accused the paper of acting with “vicious unprofessionalism,” but has declined to explain the allegation.

Armey last week denied retaliating against Belo, insisting that his efforts were aimed at limiting the power of media monopolies. “I’m not done with this issue,” Armey pledged.

BOSTON
Harvard University and the Bush administration last week denied any wrongdoing in a 1990 partnership formed to reduce reported debts and increase profits at Harken Energy, a company where Bush served as a board member from 1986 until 1993.

Under a motion filed by Bush at a Harken board meeting, the oil company created an off-balance-sheet firm that absorbed a mass of debt threatening Harken’s solid appearance to investors, reported the Washington Post.

That device, supported by Harvard’s investing arm, Harvard Management Co., kept Harken afloat through troubled times, propping up its image until the firm recovered investors’ confidence, noted the Boston Globe.

But the concocted firm, which complied with the law at the time, invites unwelcome comparisons to the sort of deal blamed for the collapse of Enron.

Last week, White House spokesman Scott McClellan denied any similarities, saying the Harken-Harvard deal was “disclosed to investors and … conformed to accounting rules.”

Harvard University, which has refused a request to open up its records to the watchdog group HarvardWatch, also defended its role in the arrangement, insisting that everything was “disclosed openly and properly.”

Ben McKean, a Harvard alumnus who helps HarvardWatch, said that even if the arrangement was legal, it may not have been ethical — a nuance, he said, that both Bush and Harvard president Lawrence Summers should understand.

Summers, a former U.S. Treasury secretary, “has the opportunity to get out front here and take a very responsible role as an advocate for accounting reform,” McKean told the Globe.

Special to Newsline from Canadian correspondent Errol P. Mendes

TORONTO
An investigation by the Globe & Mail of 270 of the largest companies in Canada found that 43 percent were giving loans to top corporate officials and 29 percent were not charging any interest on these loans.

Even in the aftermath of the high-profile abuses of low-interest and free loans to corporate executives in the United States, the investigation seems to some observers to indicate that a number of corporate executives are using their companies as their own private bank.

This is the view of the president and CEO of one of Canada’s largest pension funds, Claude Lamoureux, who heads the Ontario Teachers Pension Plan Board.

In the United States, the recently passed Sarbanes-Oxley Act prohibits most companies from giving such loans not available to the public. The measure also applies to Canadian companies listed on U.S. capital markets. Regulators in Canada have not passed similar prohibitions.

The in-depth investigation by the Globe & Mail also found that many Canadian companies would not meet the new governance standards in the United States, had dubious views on what constituted an independent director, and that a small number of individuals held numerous interlocking directorships.

BOILING SPRINGS, North Carolina
The president of a small Christian college in North Carolina resigned last week after admitting that he interfered with the grade transcript of a star basketball player two years ago.

Christopher White, president of Gardner-Webb University for more than 16 years, conceded that he wrote a memo ordering an “F” to be ignored when computing the GPA of athlete Carlos Webb.

That action kept Webb, who received the “F” for cheating, eligible to play in the school’s 2000-01 season, in which it won the National Christian College Athletic Association championship, reported the Associated Press.

Late last month, the university’s board of directors met to discuss White’s actions. At the end of the meeting, White still held his job, while two administrators who had criticized Webb were demoted. Three faculty members then resigned in protest.

Last week, trustees chairman Thomas Hardin defended the board’s action, saying White should not lose his job for a mistake he made two years ago, and that the demotions were unrelated to the administrators’ criticism of White.

Students reacted angrily to the board’s decision, launching public protests and demanding further dialogue on the role White played in covering up for a cheating athlete, noted the AP. Late last week, White resigned.

According to the Charlotte Observer, trustees chairman Hardin said that White’s resignation was voluntary. Hardin refused to say whether White had been offered a severance package.

In his letter of resignation, White wrote, “This is clearly the most wrenching decision I have ever made, but one I must make in the best interest of helping the university move away from the pain and divisiveness of recent weeks.”

LEWISTON, Maine
The mayor of Maine’s second-largest city last week defended his request to Somali immigrants to “exercise some discipline” and slow the tide of new arrivals, insisting the city could not afford to continue welcoming their friends and families.

Lewiston, a city of 35,000 located on the Androscoggin River in Maine’s interior, has seen its Somali population swell to more than 1,000 over the past 20 months.

The slow and steady influx of Somalis from refugee camps in Kenya has strained Lewiston’s social services and city finances, according to a report from the Associated Press.

While over half of the city’s 412 Somali adults have found work, those who remain unemployed are expected to consume more than half of the city’s $528,000 welfare budget. Welfare spending in Lewiston has more than doubled in the last 12 months, reported the AP.

That surge in spending and demand for limited services has sparked a small number of conflicts between the city’s mostly white French-Catholic population and its new, black, Muslim residents.

Last week, in a letter to the Somali community, Lewiston Mayor Larry Raymond said the city needed a break.

“This large number of new arrivals cannot continue without negative results for all,” Raymond wrote in the three-page letter. “The Somali community must exercise some discipline and reduce the stress on our limited finances and our generosity.”

“We have been overwhelmed and have responded valiantly. Now we need breathing room. Our city is maxed-out financially, physically, and emotionally,” Raymond added.

The mayor’s comments, which he has stood by in press interviews, were met with indignation by the Somali community, whose leaders called his message “inflammatory and disturbing.”

Somali immigrant Mohamed Diriye said the recent flare-up is precisely the type of thing he was hoping to avoid by moving to Maine. “To be calm and without trouble, that is why we chose here. In big cities, life is hard,” Diriye told the AP.

SAN FRANCISCO
The White House last week intervened in the West Coast labor dispute between longshoreman and management, forcing workers back to the docks for an 80-day cooling-off period in a labor dispute that observers say is likely to flare up again.

The conflict began in June, when the dock workers’ contract expired. After five months of failed negotiations and an alleged stevedore slowdown, management locked out the longshoreman on Sep. 29.

As the West Coast’s 29 ports sat idle, more than 200 container ships anchored offshore, waiting nervously as Christmas gifts, Caribbean bananas, and foreign car parts floated unloaded and unsold.

Heeding the warnings of management, Bush last week invoked the rarely used 1947 Taft-Hartley Act, convincing a federal judge that the shipping shutdown was crippling the nation’s economy.

Last week’s federal action forces both sides to return to work under terms of their old expired contract for an 80-day time out intended to ease tensions and tempers, reported the Washington Post.

That outcome is unlikely, longshoreman Ernest Evans told the New York Times last week, saying he weathered a similar dispute in 1971, when President Nixon took similar action during a work stoppage.

“The employers didn’t want to negotiate before we were ordered back to work, and they still didn’t want to negotiate after the 80 days,” Evans said. “I see the same thing happening again.”

If tempers continue to flare, the port managers may not be the only ones to feel the heat, according to an analysis by the Post, which cautions that Bush and his fellow Republicans may get singed in November’s elections.

After vigorously courting labor votes, last week’s intervention by Bush was seen by many workers as business as usual — blatantly biased to favor management and weaken the hand of workers’ unions.

After meeting last week with business leaders involved in the dispute, an administration official conceded that if Bush’s involvement comes off as heavy-handed, there may be a price paid at the polling booth.

“If this process became a political left-right, Republican-Democrat process,” the official told the Post, it will be like “throwing gasoline on a fire rather than creating a cooling-off period.”

From the New York Times Company:

“Corporate work-life programs hold great appeal for employees according to a just-released New York Times Job Market research study on company work-life initiatives.

“Respondents to the survey indicated they have previously used flex-time benefits (44 percent) and believe it is very important in their job search to find a company that is supportive of their life outside of work (57 percent)….

“Job stress appears to play an influential role in employees’ decisions to join or remain with a company. A large percentage of respondents consider their current or last job as being very stressful (44 percent), and a majority say that the level of job stress they encounter directly impacts their decision to look for a new job (75 percent)…. Few respondents say their current company is very good at helping reduce employee job stress (18 percent) despite employees’ belief that their company (58 percent) or supervisor (77 percent) is supportive of their life outside of work.

“Although employees appear to value work-life programs, a general perception exists that working long hours remains important to career advancement. Job seekers say they tend to work longer than normal business hours in order to get ahead in their careers (74 percent). Overall, respondents who work full-time say they work a total of 50 hours per week.

“Employees say their companies offer specific work-life benefits including flexible hours, work from home (part-time and full-time), job sharing, employee assistance programs, childcare assistance, maternity/paternity/bereavement leave, adoption and eldercare assistance, and wellness programs, among others. Of these benefits, the majority of employees indicated that flexible hours (56 percent) and maternity/paternity/bereavement leave (60 percent) benefits are most likely to be offered at their companies and that adoption assistance (11 percent) or elder care assistance (12 percent) are least likely to be offered….”

“There is one extremely simple method of bringing an end to what is called the Cold War — observe the Charter of the United Nations; refrain from the use of force or the threat of force in international relations and from the support and direction of subversion against the institutions of other countries.”

–John Foster Dulles (U.S. diplomat and secretary of state, 1888-1959)