Ethics Newsline®

Do corporate boards really care about ethics?

Last June, the prestigious Conference Board flagged a warning about ethical indifference among corporate directors. A survey of business executives at one of their conferences found that “while 81 percent of firms have conducted ethics and compliance training among their employees, only 27 percent have held any training sessions for their directors.” More than half of the executives thought their boards were “‘not engaged enough’ in major ethical issues involving the company.”

Following last year’s warning, have boards mended their ways? Or are ethical issues still an expensive drain? Well, grab your calculators (as results-oriented directors are wont to do) and let’s add up the following numbers:

• Lucent Technologies settled a class-action suit for misleading investors ($517 million) and was then fined for obstructing the probe ($25 million).
• Drug giant Pfizer was hammered for aggressively marketing one of its drugs to doctors for “off-label” use in unapproved ways ($430 million).
• Citigroup was nailed for loan abuses to low-income and high-risk borrowers ($70 million), one week after it settled a class-action suit for biasing its brokerage advice in urging investors to buy WorldCom stock ($2.65 billion).
• Strong Capital Management and its founder, Richard Strong, were penalized for their part in the mutual-funds scandal ($140 million).
• NEC was fined for fraud under its contract to provide Internet access to the nation’s poor schools ($20.7 million).

And that’s only in the past two weeks.

A silly exercise? Perhaps. Ethics is not only about money but about reputation, sustainability, and human progress. Some directors already have a well-developed sense of ethics, with or without training. A board can have a serious conversation about competing values-driven strategies without calling it an ethics discussion. Besides, the Conference Board’s survey tapped only 80 executives who already cared enough about ethics to attend its conference.

Nevertheless, the survey’s message is important, if only because the evidence is so stark. Directors, after all, set the ethical tone for the entire enterprise. Whatever they care about gets attention, and whatever they shrug off gets downplayed. If the message sent to executives under their watch is that ethics is not worth much discussion, or fungible and negotiable, or a public fig leaf to hide impropriety, or a card to play only if it’s convenient, what will be the results?

The answer is alarming obvious: In the last two weeks, ethical nonchalance cost at least $3.85 billion. Who should be accountable? Boards.

But does it follow that boards need “training” in ethics to become more responsive? Here the language does a disservice to the concept. Directors may well view “training” as the necessary but somewhat drab instruction in black-and-white compliance issues given to all employees. In their minds, a two-hour drilling in the perils of wrongdoing has little to engage top-level decision makers operating, as they so often are, along a complex gray scale. Little wonder some three-quarters of them resist it.

What do boards need? It’s not training so much as education — or, more precisely, opportunities for learning. It’s not programmatic as much as Socratic, characterized by excellent facilitation and thoughtful dialogue. Most important, it’s conceptually and intellectually substantive.

Directors need to understand that ethics is not a narrow discipline intent on creating limits to growth and barriers to accomplishment. It’s a decision-making tool applicable to everything that a firm (or an individual) does. It’s not only about avoiding temptations. It’s also about three grand ideas:

• Making tough choices in the gray zone when both sides are right
• Having the moral courage to act on those choices in the face of significant risk
• Creating a corporate culture where ethics comes naturally, allowing employees to save their moral courage for the really big issues

Getting boards to talk about those things isn’t simply “ethics training.” Directors need to engage in big-picture conversations about integrity and values. They need a powerful, clear language of ethical discourse. They need help staying ethically fit and communicating that fitness through the entire firm. Finding ways to help them do these things — and finding a name for it other than “training” — is the next major task of corporate ethics.

©2004 Institute for Global Ethics

“They grabbed my arms, my legs, twisted me up, and unfortunately one of the individuals got up on my back from behind and put pressure down on me while I was face down. Then he — the same individual — reached around and began to choke me and press my head down against the steel floor…. When I couldn’t breathe, I began to panic and I gave the code word I was supposed to give to stop the exercise…. That individual slammed my head against the floor and continued to choke me. Somehow I got enough air, I muttered out, ‘I’m a U.S. soldier, I’m a U.S. soldier.’”

– U.S. veteran Sean Baker, formerly of the 438th Military Police company in Guantanamo Bay, Cuba. Baker, who was told to pose as an uncooperative detainee in a training exercise for U.S. soldiers who did not know his identity, received a medical discharge after the beating, which he says caused severe brain injury. The military acknowledges that Baker was injured but says his medical release was for “unrelated reasons” — a statement Baker has denounced as a betrayal, according to a local NBC affiliate.

WASHINGTON
With nearly half of the nation’s biggest mutual fund firms facing charges of fraud and misconduct, the U.S. Securities and Exchange Commission (SEC) last week adopted new rules designed to bolster the industry’s ethics.

After a unanimous vote by SEC commissioners last week, mutual fund executives now face a raft of new requirements, including a mandate that they report their personal holdings and trades in stocks and funds.

Executives and managers must get permission to participate in IPO launches and must report ethics and legal violations to their company’s compliance officer, general counsel, or similar executive, reported the Washington Post.

The new rules come as the SEC continues to ponder how best to rein in an industry facing rampant charges of market timing, illicit trading, and favoritism. Twelve of the nation’s 25 biggest mutual find firms have been sued by the SEC, noted the Post.

Proposed reforms still under debate include requiring all mutual funds to be chaired by people who do not manage the firm’s funds — a shift that would require changes at 80 percent of U.S. mutual fund firms. Also proposed: a rule upping the independent population on corporate boards from 50 percent to 75 percent, reported the New York Times.

“The relationship between an investment adviser and its clients is supposed to rest on a bedrock foundation of fiduciary principles,” SEC chairman William Donaldson said last week. “[A]dvisers owe their clients more than mere honesty and good faith. Recent experience suggests that all too many advisers were delivering much less.”

NEW YORK
New York’s attorney general last week filed a long-threatened civil suit against Richard Grasso, the former head of the New York Stock Exchange (NYSE), alleging that he was paid too much for his work.

Attorney General Eliot Spitzer’s civil suit asks a judge to overturn Grasso’s $187.5 million compensation package, and allow a recalculation to a lower — and in critics’ views, fairer — amount, reported the New York Times.

“There is a simple reality here: Mr. Grasso was paid too much,” Spitzer charged last week. “He has the money in his checking account and he has an obligation to return it.”

Grasso resigned last September under pressure after the size of his pay package was revealed, leading to charges that the NYSE board had abrogated its fiscal responsibility in approving the lavish deal.

Spitzer’s suit targets Grasso, the NYSE itself, and former NYSE member Kenneth Langone, the former chairman of the NYSE’s compensation committee and a friend of Grasso.

Spitzer is suing under a state law mandating that heads of “quasi-public” nonprofit corporations can be held liable for receiving unreasonable compensation, noted the Times.

“This case demonstrates everything that can go wrong in setting executive compensation,” Spitzer said in a statement. “The lack of proper information, the stifling of internal debate, the failure of board members to conduct proper inquiry and the unabashed pursuit of personal gain resulted in a wholly inappropriate and illegal compensation package.”

Grasso, who waived an approved $48 million in future compensation when resigning, has denied any wrongdoing, saying his pay was commensurate with the heads of many Wall Street firms.

While that may be true, the head of the NASDAQ stock exchange makes far less than Grasso, according to the Times.

Spitzer’s case may have gained an edge last week with the cooperation of Henry Ashen, who oversaw internal compensation at the NYSE and served as liaison with the board in brokering Grasso’s compensation, reported the Associated Press.

Ashen last week conceded that the board was given some “inaccurate and incomplete” information when deciding on Grasso’s pay. Ashen agreed to return $1.3 million in bonuses for his work, Spitzer said.

ROME
Italian regulators last week accused more than 4,400 doctors of colluding with pharmaceutical giant GlaxoSmithKline in a scheme aimed at securing prescriptions of Glaxo drugs.

The allegations, which are expected to lead to formal criminal charges, are the result of a two-year investigation by Italy’s tax police, the Guardia di Finanza, reported Britain’s Independent.

Investigators detailed a long list of perks and alleged bribes awarded to Italian physicians in a bid to secure their loyalty in prescribing Glaxo products over rivals’ products and less-expensive generics.

More than 100 employees of GlaxoSmithKline were implicated in the investigation, which found “medical tours” to the Caribbean and “cultural retreats” at premier ski slopes listed as “sales support activities” by Glaxo.

Glaxo, which reportedly funneled $276 million into such activities, last week said it is “committed to ensuring all of its business practices are of the highest possible standards,” according to the BBC.

Special to Newsline from Canadian correspondent Errol P. Mendes

TORONTO
The Globe & Mail is reporting that George Heller, the CEO of Canada’s oldest retail company, the Hudson’s Bay Company, is attempting to spearhead a global ethical sourcing initiative that has been three years in the making.

Heller is reported to have focused on this initiative because various groups have urged him to verify and correct working conditions at factories that provide Hudson’s goods sold in Canada.

He concluded that the only effective way to deal with the allegations of sweatshop suppliers is to have a global sector-wide effort to monitor factory conditions.

To achieve this goal, Heller is hosting a meeting of the International Association of Department Stores, which includes major international retailers such as Federated Department Stores and Galeries Lafayette.

These major retail-sector players will discuss the establishment of a sector-wide approach to sharing social compliance and audit information and a central database of information on global ethical sourcing.

The aim is to prevent industry members from duplicating and overlapping information gathering on the same suppliers and to allow use of the confidential information by participating retailers to make proper decisions on which suppliers can meet their respective sourcing standards.

Heller says he hopes that major international retailers and department stores will sign on to the pact within the next six to nine months.

WASHINGTON
A federal judge last week gave the green light to the continuation of the largest civil racketeering suit in U.S. history — a bid by the U.S. government to force the tobacco industry to disgorge $280 billion in past profits.

The 1999 federal suit, filed one year after a landmark $206 billion settlement between Big Tobacco and 46 states, sought to mimic the states’ effort to recover the costs of treating sick smokers.

U.S. District Judge Gladys Kessler later threw out that portion of the government’s suit, but last week agreed that the trial could proceed to test allegations of racketeering and fraud by cigarette makers.

The government contends that Big Tobacco lied for decades about the addictive nature of nicotine, about the health risks of smoking, and about the industry’s efforts to market its dangerous products to children.

As punishment, the government is seeking $280 billion — a figure representing 30 years of cigarette sales to smokers under 21, adjusted for inflation, reported the Los Angeles Times.

The Clinton-era suit was dealt a setback when the incoming Bush administration slashed the resources of investigators building the case. A congressional outcry later got the funds restored, reported the Washington Post.

Although cigarette firms tried to have the suit tossed out, Kessler last week rejected their arguments.

If federal prosecutors can prove that the industry lied to smokers and could be discouraged from similar behavior by being fined, then damages might be warranted, she ruled last week.

The trial, which is expected to last between three and five months, is scheduled to begin September 13, according to the Associated Press.

Defendants in the case include Altria-owned Philip Morris, British American Tobacco, Brown & Williamson, Liggett, Lorillard, R. J. Reynolds Tobacco, the Counsel for Tobacco Research, and the Tobacco Institute.

SAN FRANCISCO
U.S. Attorney General John Ashcroft exceeded his authority when he tried to shut down Oregon’s assisted-suicide law, a federal appeals court ruled last week, calling Ashcroft’s move “unlawful and unenforceable.”

Oregon voters approved the state’s Death With Dignity Act twice, in 1994 and in 1997, giving terminally ill patients the right to receive a life-ending dose of medicine after satisfying a series of safeguards.

As a senator, John Ashcroft asked President Clinton’s attorney general, Janet Reno, to block the law. She refused, but Ashcroft took the step himself after being appointed to the position by President Bush in 2001.

Citing a federal law designed to crack down on the narcotics trade, Ashcroft warned Oregon doctors that they could be barred from practice and prosecuted if they complied with the Oregon law, reported the New York Times.

Last week, ruling on a challenge to Ashcroft’s directive, a three-member panel of the U.S. Ninth Circuit Court of Appeals upheld Oregon’s law, ruling that Ashcroft had distorted the intent of the federal law and abrogated states’ rights.

“The attorney general’s unilateral attempt to regulate general medical practices historically entrusted to state lawmakers … far exceeds the scope of his authority under federal law,” one of the court’s more conservative judges, Richard Tallman, wrote for the panel’s 2-to-1 majority.

“The Ashcroft directive not only lacks clear congressional authority, it also violates the plain language of [federal law],” Tallman continued. “We express no opinion on whether [assisted suicide] is inconsistent with the public interest or constitutes illegitimate medical care. This case is simply about who gets to decide.”

The court said states, not representatives of the Justice Department, get to decide, reported the Los Angeles Times.

Justice Department lawyers said they were reviewing whether or not to appeal the case to the full Ninth Circuit court or to the Supreme Court.

WASHINGTON
The nation’s top judge last week ordered a study of federal judicial ethics following a period of intense criticism over alleged conflicts of interest by members of the Supreme Court and federal benches.

U.S. Supreme Court Chief Justice William Rehnquist appointed a six-member committee, which is scheduled to start meeting next month. The panel will be chaired by Justice Stephen Breyer.

As the committee gets to work, the Supreme Court is expected to rule in the case that thrust this issue into the spotlight, noted the Associated Press.

That suit, filed by a conservative watchdog group and the Sierra Club, seeks to require Vice President Dick Cheney to release details about who helped him draft the nation’s industry-friendly energy policy.

Supreme Court Justice Antonin Scalia, who went on a duck-hunting trip with Cheney three weeks after agreeing to hear the case, has refused to recuse himself, sparking a public outcry over possible bias.

While Scalia has raised the ire of watchdog groups, other justices including Ruth Bader Ginsburg and Rehnquist himself — have engaged in less flamboyant acts that also have raised questions, according to press reports.

House Judiciary Committee head Rep. James Sensenbrenner (R-Wis.) earlier this year added to the chorus of discontent, castigating judges for failing to adequately police themselves and punish wrongdoing by colleagues, according to the AP.

“I decided that the best way to see if there are any real problems is to have a committee look into it,” Rehnquist said last week via a court spokesman.

SAN FRANCISCO
A subsidiary of computer giant NEC last week agreed to pay nearly $21 million in criminal fines and penalties for trying to con San Francisco’s schools into overpaying for a useless computer system.

NEC Business Network Solutions, a Texas subsidiary of NEC, was sued in 2002 for allegedly using bribes and inflated bills to rig a computer contract that would have left the San Francisco Unified School District with an incomplete and inoperable computer system, according to the city attorney.

The contract was part of the federal E-Rate program, which hits the nation’s phone users with a small surcharge used to fund Internet access and computer technology for poor and rural schools.

Under the supervision of a quasi-governmental nonprofit, tech companies bid on such contracts, with school districts anteing up additional funds — in San Francisco’s case, an estimated $10 million, reported the San Francisco Chronicle.

Critics say the multibillion-dollar E-Rate program, launched in 1996, long has been marred by fraud and inadequate oversight. More than 40 criminal investigations into alleged abuse are under way, noted the New York Times.

NEC’s settlement last week included guilty pleas to felonies of wire fraud and antitrust violation. Monetary penalties include $16 million for the federal government and a $4.7 million criminal fine.

Desmond McQuoid, a school district supervisor implicated in the scam, pleaded guilty to mail fraud last year and was sentenced to 21 months in prison, according to the Times.

“Congress established the E-Rate program to help educate the underprivileged,” U.S. attorney Kevin Ryan said last week. “This criminal attempt to steal funds from the program comes at the expense of children across the country, and is totally unacceptable.”

George Cothran, an investigator for the city of San Francisco, said similar violations by NEC alone have been found in Arkansas, Illinois, Michigan, Mississippi, South Carolina, and Wisconsin.

“This is a big deal — a nationwide scam that had been running three years by the time we caught up with it,” Cothran told the Chronicle. “It looks like we’re going to put an end to this.”

“We made mistakes with E-Rate,” NEC America general counsel Gerald Kenney, said in a statement. “We’ve acknowledged and accepted responsibility for those mistakes, cooperated fully with the government, and taken action to ensure that these problems can’t happen again.”

From Norwich Union:

“An overwhelming 96 percent of people in Britain believe we are more likely to seek damages today than we were a decade ago a new report reveals.

“Independent research commissioned by Norwich Union looked at whether the public believe there is a compensation culture and what people really think about claiming compensation.

“While three-quarters of Brits are worried about the impact of an increasing ‘blame and claim’ culture, nearly half say they are themselves more likely to claim compensation.

“In fact more than one in five people (21 percent) believe they should claim for compensation whenever they can.

“The report is the first in-depth look at whether and why the ‘blame and claim’ culture has taken hold in the past ten years. One of the key factors is that the British sense of collective responsibility has given way to an individualistic approach to life where, as one respondent said ‘you are what you have.’

“According to David Hooker, director of claims at Norwich Union, the research clearly points to a cultural shift: ‘The research reveals a disparity in what people think about the compensation system, and how they act. Whilst it is excellent that over the years we have increased access to justice we have to exercise those rights with responsibility, acknowledging the consequences of our actions.

“‘What’s more worrying is that successively younger generations express less concern about the impact of a ‘blame and claim’ culture, and this shift, if left unchecked, could mean the nation’s compensation bill continuing to rise….

“On making the compensation system fairer and more efficient the public say:

• “Prosecute people who make false claims (38 per cent)…
• “Government should put a limit on claim entitlements (21 per cent)
• “Compensation lawyers should get half of what they currently do and receive a fixed fee, rather than a percentage of costs awarded (66 per cent)….

“…Every year $18.4 billion in compensation claims is paid out according to the Institute of Actuaries (December 2002) — this costs $920 per household. Bogus or excessive claims cost local authorities as much as 117 million a year, according to the Commission for Architecture and the Built Environment.

“There has been a 48 percent increase in the number of claims being handled by the NHSLA (National Health Service Litigation Authority)….

“Mr Hooker said: ‘This issue needs urgent engagement from government, individuals and business. We need to exercise our rights in a more socially responsible way so that those that are entitled to compensation receive it swiftly and at a fair level. If we don’t do something now, the public will have to foot an ever increasing bill, and our public services will suffer irrevocable harm.’”

“The highest proof of virtue is to possess boundless power without abusing it.”

– Thomas Macaulay (U.K. historian, author, and statesman, 1800-1859)