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