Ethics Newsline®

“There oughta be a law!” It’s a phrase you hear more and more these days. It pops up whenever the ethical issues in the news are particularly rotten. And it’s a natural response. After all, if baseball players use steroids with impunity, Harvard applicants hack into databases to check their admission status, specialist traders on the New York Stock Exchange rip off their clients, then let’s toughen up the regulations.

Let me take a contrarian view. I’m all for vigorous efforts to identify wrongdoing, enact laws, and ensure compliance. But compliance is no substitute for ethics. Yet a look around the corporate landscape suggests that we’re galloping into a new Age of Compliance — on a horse named Sarbanes-Oxley.

Why? The rote answer is, “Because of Enron.” True, the collapse of Enron that began in the autumn of 2001 — and carried to perdition its accounting firm, Arthur Andersen — was stark evidence of unethical corporate behavior. But Enron was just the beginning: The spring and summer of 2002 saw revelations of corporate malfeasance that included WorldCom, Global Crossings, Adelphia, and a host of others. As examples piled up, markets plunged and public trust in corporations ebbed, as various polls showed:

• That summer, a Gallup Poll asked how much confidence people had that the financial information reported by companies was accurate. More than half the respondents (54 percent) said “none at all” or “not much.”
• That summer, too, the Pew Research Center for the People & the Press found the same number (54 percent) agreeing that “government regulation of business is necessary to protect the public interest” — an increase from 38 percent just eight years earlier.
• Meanwhile, a Harris Poll found nearly four in five Americans agreeing that “most corporate executives put personal values ahead of employees and shareholders.”

Little wonder, then, that on July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act, one of the most far-reaching pieces of compliance legislation in years. Hastily composed and poorly designed, it nevertheless made good that old refrain — “There oughta be a law!”

The jury is still out on the costs to corporations of Sarbanes-Oxley compliance, but it’s a safe guess that it’s already in the billions of dollars and millions of person-hours. No one doing Sarbanes-Oxley work adds value to any company. They design nothing, make nothing, and sell nothing. They make no improvements to management, marketing, or morale. They meet no demands, satisfy no necessities, create no opportunities. They simply report.

Sounds harmless? Perhaps, until you recall that Soviet Communism already tried that experiment. In an astonishing seventy-year-long drama, the world watched as an entire economy hired vast segments of its potential workforce — perhaps as much as one-quarter — to do nothing but spy on, report out, and pass judgment against the other three-quarters. Little wonder that the Iron Curtain economies collapsed. Pull a quarter of the workers in any business in the world out of productive activity — and make the remaining workers support them — and see how long the firm survives. While no companies put 25 percent of their efforts into Sarbanes-Oxley, the analogy is sobering. Carry compliance to its logical extreme, and you gut the competitiveness of business.

Nonsense! shout the regulators, who insist that it’s only through reporting that we’ll stem the post-Enron excesses. That could be true — for a while. But if compliance is all we’ve got, creative minds bent on duplicity will quickly find ways around it. When they do, how can the compliance-minded respond but by passing new laws and tightening present ones? Does anyone think those laws will reduce the cost of corporate compliance? While we may not reach the Soviets’ 25 percent, what figure will be acceptable? Two percent? Five percent? Seven percent? These begin to sound like profit margins — exactly the difference between success and failure.

What’s needed? Three things. First, let’s get clear on our goals. We’re not seeking a compliant corporate culture but an ethical one — a business climate that encourages doing things right because it’s good business to do so, not merely because the regulations say you’ve got to.

Second, let’s shatter the mesmerism that compliance exercises on the nation these days. No business ever complied its way into integrity. A climate of integrity, however, can eliminate any number of wrongs before they happen — leaving compliance with less to correct.

Third, we need to build our climate of integrity through values-based self-regulation — not in a waffling and wooly way, but through a robust, powerful application of moral reasoning and decision making to the toughest business decisions. Compliance grows out of that climate. It can never replace it.

©2005 Institute for Global Ethics

“All you can really do with that kind of money is give it away. There’s no way you can spend it. What I’m interested in doing is setting up a medical research foundation and seeing if we can’t make a difference in the world.”

– Orthopedic surgeon Gary Michelson, discussing his plans last week for a $1.35 billion settlement payment from Medtronic, Inc. Michelson had sued Medtronic over the licensing of some of his 500-plus patents, which range from groundbreaking spinal surgery techniques to a new paper clip, reported the Associated Press. (“L.A. Doctor to Get $1.35B in Settlement,” AP, Apr. 22)

WASHINGTON
Accounting firm KPMG last week agreed to pay $22.5 million, including the return of four years’ worth of fees, to settle allegations that the company helped Xerox Corp. hide bookkeeping fraud.

KPMG will pay a $10 million civil penalty, $2.7 million in interest, and $9.8 million in disgorged revenues for its auditing work for Xerox from 1997 through 2000, reported the New York Times.

The U.S. Securities and Exchange Commission (SEC) accused KPMG of rubber-stamping false financial statements that overstated Xerox’s financial results by $1.5 billion over the span of four years.

The SEC rebuked KPMG for getting too cozy with Xerox, saying the firms’ 40-year relationship had compromised the auditor’s willingness to flag bad bookkeeping practices.

KPMG went so far as to remove a senior employee from the account at Xerox’s request after the partner raised questions and complained to KPMG’s chairman about Xerox’s accounting practices, noted USA Today.

“This is a fairly egregious fraud on the part of Xerox, and KPMG didn’t live up to its role as gatekeeper,” said Paul Berger, associate director of enforcement at the SEC.

Last week’s settlement will be set aside for restitution for investors who lost money after the fraud was revealed in 2000. Six former Xerox executives already paid $22 million into the fund when settling related charges in 2003.

The SEC still is pursuing charges against five KPMG partners involved in the audits, according to the Times.

LOS ANGELES
Manufactured timelines, fabricated details, and lazy reporting chipped away at the reputations of two of the nation’s leading newspapers last week, prompting apologies from editors caught off-guard.

In California, the Los Angeles Times fired Eric Slater, an 11-year veteran journalist at the paper, after discovering a wide range of ethical and procedural lapses in a recent story covering the 2002 death of a college student.

Slater’s story included straight-forward factual errors, quotes from sources that could not be verified by the paper, and other flaws, prompting two correction columns and an internal inquiry into the matter.

The Times last week announced it had fired Slater, saying that “beyond the specific errors, the newspaper’s inquiry found that the methods used in reporting the story were substandard.”

On the other side of the country, the Boston Globe severed relations with freelance reporter Barbara Stewart, apologizing for publishing her piece on a Canadian seal hunt that had not actually taken place.

Stewart’s story described a brutal and bloody seal slaughter in the past tense. The Canadian government, which oversees the annual event, complained, noting that the slaughter had been rescheduled due to bad weather.

Stewart told Boston Globe foreign editor Jim Smith that she had prepared the piece in advance, basing the bulk of it on extensive research, fabricating a few details that she assumed would logically happen.

“Clearly, that doesn’t in any way forgive the many errors that took place on her part and our part,” Smith told the Washington Post last week.

While the Stewart incident is embarrassing for the Boston Globe, it may not be “that big a deal,” Dan Kennedy, media writer for the Boston Phoenix, told the Post. “It was an unknown freelancer writing a fairly small story inside the paper, and they took care of it immediately.”

But “no matter how many times this keeps happening, it’s still a shock to editors,” Kennedy added. “You just don’t think people are going to do this.”

The Post notes that a similar dust-up recently hit the Detroit Free Press, which suspended star sports columnist Mitch Albom for writing about a Final Four basketball game a day before it happened.

SALT LAKE CITY
The rebellion against President Bush’s signature education law gained momentum last week with one state, eight school districts, and the nation’s largest teachers union taking aim at what they say are unfunded and illegal mandates imposed by the federal law.

The Utah Senate last week voted to reject portions of the 2002 law known as No Child Left Behind (NCLB), authorizing state officials to ignore any provisions not fully funded by the federal government.

The state said that while it applauds the federal effort to improve educational standards, NCLB is too top-down intrusive and fails to fund itself, as required by the law itself.

Last week’s legislation, which Utah’s governor has said he will sign, turns its back on a 15-month lobbying effort by the U.S. Department of Education, which had tried to head off the rebellion, noted the New York Times.

Opening another front in the legal assault on NCLB, the National Education Association and school districts in three states — Michigan, Texas, and Vermont — last week agreed with Utah, filing suit against the federal government for allegedly underfunding the program.

The U.S. Department of Education denies the charges, insisting that NCLB’s demands are fully funded and that state analyses showing a shortfall are mistaken.

Connecticut, which says it will be forced to pay $8 million of its own funds to meet the federal program’s requirements, has announced plans to file suit as well.

COLORADO SPRINGS
Still stinging from a sexual assault scandal that erupted two years ago, the U.S. Air Force Academy confronted a new ethical issue last week, saying it is struggling to correct a climate reportedly hostile to non-Christian cadets.

The academy said it learned of the problem last May after conducting a survey of its students, 90 percent of whom are Christian — mostly Protestant, Catholic, and Mormon, reported the Los Angeles Times.

Non-Christian cadets reported being harassed or intimidated because of their beliefs — a problem that grew worse after Christian students eagerly promoted the release of “The Passion of the Christ” last year, officials said.

“We started getting people coming forward,” academy spokesman Johnny Whitaker told the Times. “Folks sent emails to the chaplain describing events — none of which were reported when they happened.”

Complaints, including 55 over the last few months, have involved people “saying bad things about persons of other religions or proselytizing in inappropriate places,” Whitaker said. “There have been cases of maliciousness, mean-spiritedness, and attacking or baiting someone over religion.”

Whitaker said the academy has moved to correct the problem, requiring a 50-minute religious-sensitivity training class for all cadets. The institution’s 9,000 staff members eventually will be required to take the training as well.

That broad roll-out is important since some of the abuses are coming from academy authorities, said Kristen Leslie, a Yale University professor of pastoral care who led a group invited by the school to review its chaplain program.

One chaplain told 600 cadets to “tell their fellow cadets that those who are not born again will burn in the fires of hell,” Leslie told the Associated Press. When such rhetoric comes from academy staff, it “suggests the cadets were supposed to assume this was the party line,” she warned.

“We’re making strides out here,” academy spokesman Whitaker said last week. “We recognize the problem.”

Tom Minnery, vice president of public policy at the evangelical Christian-based Focus on the Family, headquartered in the academy’s hometown of Colorado Springs, sees the matter differently, contending that it is the Christians cadets who are being persecuted.

“Christianity is deeply felt and very important to people à and to suggest that it should be bottled up is nonsense,” Minnery told the Times. “I think a witch hunt is under way to root out Christian beliefs.”

ATLANTA
Hoping to take a bite out of student crime, a school district in Central Georgia last week signed on with a national program that rewards students for informing on classmates who may be breaking school rules.

The national Student CrimeStoppers program and similar initiatives reward students with cash for telling on classmates who may be carrying firearms, doing drugs, smoking on school grounds, or engaging in other forbidden activities

USA Today last week profiled a number of school districts across the country that have adopted such programs, noting that school shootings — like last month’s killing of nine students by a classmate in Red Lake, Michigan — often cause a flurry of interest.

“It’s a proactive attempt from the principal’s standpoint,” said Tim Hensley, spokesman for a school district that includes Model High School in Rome, Georgia, which will pay students up to $100 for information about rules violations.

A Texas school district has paid more than $2,100 to students so far this year for information on classmates selling prescription drugs and smoking cigarettes. A North Carolina school district has paid out more than $1,000.

“This year, we’ve given out $1,100,” Cherryville High School principal Stephen Huffstetler told USA Today. “For $100, they’ll turn their mothers in.”

While such programs are lauded by some school authorities, Russ Skiba, professor of educational psychology at Indiana University in Bloomington, cautioned that there may be a downside as well.

“There’s a balance here between creating a society of snitches and creating a sense of community responsibility,” warned Skiba, who helped review violence prevention programs for the U.S. Education Department.

Special to Newsline from Canadian correspondent Errol P. Mendes

NEW YORK
Canadian businessman Maurice Strong, the former United Nations envoy to North Korea and a longtime adviser to Canadian Prime Minister Paul Martin, has been linked to a key person charged in the U.N. Oil for Food corruption scandal.

Strong has acknowledged publicly that in 1997, a South Korean man, Tongsun Park, invested in an energy company with which he was associated. The company has no relationship with Iraq according to Strong.

Park is suspected of funneling bribes to U.N. officials in the Oil for Food scandal, according to the Reuters news agency.

According to the unsealed indictment, the South Korean businessman acted as an unregistered agent for Iraq in the United States during the 1990s when Iraq was under U.N. sanctions for invading Kuwait.

The indictment alleges that Park received millions of dollars from Iraq to bribe U.N. officials to violate provisions of the Oil for Food program, which allowed Iraq to export oil only if it used the proceeds for humanitarian efforts within Iraq. Investigators allege that U.N. officials were bribed to look the other way as Saddam Hussein and other Iraqi officials enriched themselves from the program.

Strong also is alleged to have invested $1 million in a Canadian company set up by the son of an unnamed senior U.N. official.

Strong, who has denied any involvement in the scandal, has stepped down from his role as the U.N. secretary-general’s envoy to North Korea while investigators look into his links with Park.

WASHINGTON
The U.S. government last week sent conflicting signals on clean-up plans for a dangerous gasoline additive called MTBE, with a federal judge okaying a massive lawsuit against MTBE’s makers while Congress moved to shield the industry from liability.

Between 80 and 100 lawsuits have been filed against the makers of methyl tertiary-butyl ether (MTBE), a gasoline additive that helps cars run cleaner, but also easily contaminates groundwater.

MTBE has fouled more than 1,800 community water systems in 29 states and poses a potential clean-up cost of $29 billion, according to U.S. House Rep. Lois Capps (D-Calif.).

Water providers, towns, counties, cities, and at least one U.S. state have filed suit against the compound’s manufacturers, accusing them of knowing about MTBE’s dangers but hiding them from the public.

Last week, a federal judge in New York said those suits — now consolidated into one federal legal action — can proceed, setting up a massive legal fight for firms including ExxonMobil, BP, and Sunoco.

“Innocent water providers — and ultimately innocent water users — should not be denied relief from the contamination of their water supply if defendants breached a duty to avoid an unreasonable risk of harm from their products,” ruled Judge Shira Scheindlin of the Federal District Court in Manhattan.

That decision, however, would be rendered moot under legislative action approved last week by the U.S. House of Representatives, which moved to shield MTBE’s makers from liability for the contamination.

Under the House’s approved energy bill, MTBE manufacturers would be immunized from most lawsuits, would be given $2 billion to wean themselves of the product, and would have until 2014 to phase it out completely.

That waiver, approved by a narrow 219-to-213 vote, was championed by Rep. Tom DeLay (R-Tex.), whose state is home to some of the lawsuits’ lead defendants, noted the Associated Press.

“They’re not giving MTBE manufacturers a slap on the wrist. They’re giving them a pat on the back,” criticized Rep. Nancy Pelosi (D-Calif.), according to the Associated Press. “It is the taxpayers who are stuck with the bill.”

Unlike the House, the U.S. Senate has balked at immunizing the MTBE industry from liability, quashing the energy bill in 2003 over concerns about the waiver and possibly setting the stage for a similar battle this year, according to the New York Times.

From the Pew Research Center:

“Americans have ambivalent views about the appropriate role for government in curbing sex, violence, and indecency in the entertainment media. They have doubts about the effectiveness of government action, and believe that public pressure — in the form of complaints and boycotts -¡ is a better way of dealing with the problem. They also blame audiences more than the media industry for objectionable material. Significantly, Americans see greater danger in the government’s imposing undue restrictions on the entertainment industry, than in the industry producing harmful content (by 48 percent vs. 41 percent).

“Nonetheless, there is broad public support for several proposals now being considered for curbing indecent material in the media. Fully 75 percent favor tighter enforcement of government rules on TV content during hours when children are most likely to be watching. Sizable majorities also back other anti-indecency proposals currently before Congress, including steeper fines (69 percent) and extending network standards for indecency to cable television (60 percent).

“The latest Pew Research Center nationwide survey, conducted among 1,505 Americans from March 17-21, finds that the tug of war in public opinion about government regulation of entertainment reflects political and religious divides about the issue.

“For example, on the fundamental question of whether undue government restrictions ¡ or harmful content ¡ presents the greater danger, a solid majority of conservative Republicans (57 percent) cite harmful entertainment. Liberal Democrats, by contrast, overwhelmingly believe excessive government restrictions are the larger concern (by 72 percent-21 percent). Similarly, while 51 percent of white evangelical Protestants say offensive entertainment presents a greater danger than undue government restriction, just 27 percent of seculars agree.

“There also is a significant generation gap, both in attitudes toward government regulation and in opinions about what constitutes offensive content. Americans 50 and older register much higher levels of personal concern than do younger adults about different types of TV material, and are more likely to view harmful content as a bigger problem than intrusive government restrictions. By contrast, those under 30 view excessive government restrictions as a far greater danger than harmful content.

“Despite these divisions, however, there are a number of points of broad national agreement on issues relating to entertainment and the government’s role in reducing offensive content:

“Most Americans say parents are primarily to blame when children are exposed to explicit sex or graphic violence. Fully 79 percent say inadequate parental supervision ¡- rather than inadequate laws -¡ is mostly responsible for children being exposed to that sort of offensive material; there are no significant political or religious differences on this point. And by more than ten-to-one (86 percent-8 percent), the public believes that parents, rather than the entertainment industry, bear the most responsibility for keeping children from seeing sex and violence in TV and movies….

“Pew’s survey on entertainment also highlights the changing nature of the public’s concerns over media content. Americans these days are troubled by much more than sex and violence ¡- in fact, sex and violence do not even top the list of people’s personal concerns over TV. Nearly half (46 percent) say they are personally bothered a lot by TV programs showing depictions of illegal drug use, while 38 percent voice a high level of concern over reality programs in which real people are tricked or made fun of….

“Despite the recent string of controversies over sex and violence in the media, however, the overall image of the entertainment industry has not eroded in recent years. Currently, 60 percent say they have a favorable opinion of the motion picture and TV entertainment industry, which marks little change from 2001 (58 percent) or 1999 (60 percent). A comparable majority (55 percent) has a positive opinion of the recording and music industry.

“But the public continues to have low regard for video games manufacturers. Only about a third (34 percent) have a favorable view of the makers of video games, about the same as in June 1999….”

“A lie told often enough becomes truth.”

– Vladimir Lenin (Russian Communist leader, 1870-1924)