Ethics Newsline®

Special to Ethics Newsline from IGE fellow Dr. Jonathan Ingbar

Here in the summer of 2005, now several years down the road from Enron, we remain awash in news of corporate wrongdoing. Courtrooms — not boardrooms — are the stage for much of our business news. Bernard Ebbers of Worldcom has been sentenced to prison for securities fraud, conspiracy, and falsifying regulatory filings. Dennis Kozlowski of Tyco International is on trial for purloining $150 million from his former company. American International Group, once admired for its stature and vision, sinks in disrepute as its alleged accounting improprieties and the reported misdeeds of former CEO Maurice Greenberg come to light.

While each of these men was undoubtedly powerful, we cannot help but ask where were the countervailing forces that should have held them in check: Where was the board of directors? Where were the auditors? Where was corporate counsel? Where were other senior executives willing to stand up for their company? Where were the shareholders? Where were the regulators? Where was the investigative business press?

To address these questions, the venerable American Academy of Arts and Sciences launched a project on corporate responsibility. Restoring Trust in American Business is its initial statement of where things stand and of what must be done to begin to right the course of business behavior.

The Academy brought together esteemed individuals from academia, law, Wall Street, and journalism to comment on the state of corporate America. In fifteen papers and commentaries, the contributors spell out how each party — management itself, boards, lawyers, auditors, regulators, shareholders, and journalists — participated in creating the present state of affairs.

Of these analyses, a few stand out. The opening chapter by Mark J. Roe, professor of corporate law at Harvard Law School, succinctly argues that “the core fissue in American corporate governance is the separation of ownership from control … a separation that creates both great efficiencies and recurring breakdowns” (page 9). The diffusion of ownership across millions of stockholders, coupled with the concentration of money, power, and influence in the hands of management has, in Roe’s view, been the dynamic fueling every corporate crisis over the past fifty years, and he makes a cogent case for it. He writes, “With our porous system of regulation, the core regulated group — the managers — can induce regulators to weaken the direct oversight that they face, can influence Congress to deny the regulators enough funding to be effective, can deter good regulation, and can thereby render some gatekeepers ineffectual in checking managers” (page 11).

Among those ineffectual gatekeepers are corporate lawyers, say William T. Allen and Geoffrey Miller of New York University. They limn the gradual erosion of independence of lawyers — whether within or outside the corporation — from the exigencies of purely business concerns. Lawyers who formerly held to “the discernible spirit animating the law” (page 118) now are instruments in service to management.

Geneva Overholser of the University of Missouri holds the feet of business journalists and their media bosses to the fire as well. “In the go-go climate of 1999-2000,” she writes, “journalists were as irrationally exuberant as anyone. No longer critics, they became players — even cheerleaders” (page 149). Much as other employees of large corporations, journalists became indoctrinated with a market mentality that blinded them to the excesses all around.

The book concludes with a report from the Academy’s Corporate Responsibility Steering Committee which, while practical, clear, and concise, provides recommendations that will seem familiar to anyone with a passing interest in the topic: Emphasize the oversight role of boards with respect to business practices and to ethics, compliance, and compensation; strengthen the roles and independence of regulators, such as the U.S. Securities and Exchange Commission; move toward stronger professional standards and more independence for auditors, lawyers, investment bankers, and journalists.

This is useful stuff, to be sure, but lacking a detailed examination of why and how we, individually and collectively, undermine our ethical intentions, it remains incomplete at its core. One contributor, Margaret M. Blair, begins to get at this, but does not go far enough.

If ethics is, to paraphrase Lord Moulton of Bank, obedience to the unenforceable, then we can’t enforce our way to ethics. Surely, the networks of boards, auditors, lawyers, managers, regulators, and the press are essential. But the question of just how we go about creating organizations that manifest the ethical values we hold so central remains largely unasked and unanswered in this work.