For more information, see this week’s Research Report.

by Robert I. Cusick

Robert I. Cusick is director of the Office of Government Ethics in Washington, the Executive Branch agency charged with preventing and resolving conflicts of interest and fostering ethical standards for government employees. Appointed by President Bush in 2006, he serves a five-year statutory term. This column is drawn from a speech he delivered in Melbourne, Florida, on April 14, 2009.

Over the past few months we have been overwhelmed with news of foreclosures, financial recession, huge public debt, and widespread social problems resulting from job losses. For many months we have lived under a foreboding cloud of numbers, amid a prevailing sense that no one really knows what to do.

But before banks failed — before they admitted that billions of dollars of their putative wealth were toxic assets, before AIG’s reputation crumbled, before our national debt expanded so drastically — there was another failure, one that was not to be measured in numbers. It was an ethical failure of enormous proportions.

Much of that failure was connected to conflicts of interest. Corporate directors and officers and investment bankers, who stood to gain so much from ethical compromise, found it easy to mischaracterize the real risk of investment vehicles. By misrepresenting lending practices, they exposed the companies and the shareholders they putatively served to risks contrary to their fiduciary duties. Short-term gains — or at least the appearance of gains — were more important than long-term integrity. Numbers, points on the board, were everything. Hubris and arrogance found a fertile field in the absence of firm ethical standards. Such leaders as existed in the financial industry allowed themselves to be distracted by “innovative” new products, higher short-term profits, and pleasing numbers. They did not lead with integrity — the integrity to acknowledge the illusion of wealth they had built. As a result, trust in these institutions now has failed, and “distrust,” as Ralph Waldo Emerson said more than a century ago, “is a very expensive thing.”

Let me be clear: I am not an economist. I do not speak for the administration. I regulate no one in the private sector. But the work I do with the Office of Government Ethics (OGE) produces a certain way of thinking, and it is from that perspective that I speak. That thinking has led me to my own definition of government ethics as that system of laws and procedures that tends to ensure that official government decisions are informed by the public interest and not corrupted by private interests. The core of that system is the identification and disclosure of conflicts of interest, along with measures to remove or remedy them. Accountability and transparency are the cornerstones of our effort.

Why do we at OGE care about conflicts of interest? Because while some people can make principled decisions uncorrupted by a desire to feather their own nests, others cannot. But which ones are they? Our experience and instinct tells us that we cannot know. It would be much easier to appoint government officials without considering possible conflicts of interest. But because public trust is the lifeblood of democracy, it would not be easier to govern.

In the private sector, however, many businesses regularly hire people with little thought to possible personal conflicts of interests. Yet there, too, such conflicts tend to produce detrimental effects. They can neutralize or impair free-market forces. They can result in contracts to engage less competent individuals or to produce products of less than the best quality. They can distort budget planning and make economic analysis less predictive. They can bestow economic power based on relationships rather than objective analysis. They can require rationalizations of inappropriate risk taking. And they may be cloaked in levels of complexity — as in credit default swaps or securitized debt investment packages — that create disincentives for transparency.

Under our national financial recovery efforts, these effects are less clear than they once were. Suppose a prospective Treasury appointee has a perfectly legal bank deposit of $400,000. If that official might participate in discussions about whether to “bail out” a bank, then does such a large account — in excess of the $250,000 limit that the Federal Deposit Insurance Corporation (FDIC) guarantees — present a possible conflict of interest? Are federal officials who supervise lending to such a bank able to act with ethical clarity when the federal government, as a majority shareholder, is almost indistinguishable from a private investor? Should these supervisors think only as government officials, or should they incorporate private-investor thinking as well? Exactly where is the distinction between private-citizen thinking and government thinking?

We at OGE, along with 6,000 ethics officials across the Executive Branch, are working our way through these shifting analytical sands. From our point of view, there are three essential elements in an ethical organization: A code or set of principles that is enforceable, ethical leadership of the organization, and an ethical culture that arises from the first two. I believe that for the financial recovery effort to be firmly grounded, these three elements should be required of every organization that comes under government supervision.

But promoting these elements cannot be a solely federal effort, particularly since virtually every corporation in the country is incorporated under state rather than federal law. Board members need to be addressed more directly by state government about their duties to shareholders. At present, their level of communication with shareholders (other than large institutional shareholders) is almost nonexistent. That is especially true as concerns the compensation committees of boards of directors. In the financial sector, the lack of transparency and failure of accountability have been particularly evident. Many funds have sold themselves to clients in a way that emphasizes a lack of transparency. While the name of Bernard Madoff is most prominent, dozens of other investment funds pride themselves on obscuring what they do except for the result. Can this be tolerated any longer?

Even prominent financial executives are admitting the need for greater regulation and for a serious effort to establish higher standards of behavior. If this effort does not arise from the common sense of influential, experienced members of the industry, it surely will be imposed from outside. National anger and government response cannot be ignored. Ethical leaders must emerge. Enlightened cooperation among government and private sector agents, as well as nonprofit bodies that long have tried to improve corporate governance, must be undertaken to produce organizations more immune from the lobbying pressures that bedevil legislative efforts in this sector.

Recovery cannot depend on regulation alone. But neither can it depend on corporate structures shot through with conflicts, secrecy, and disregard for the public interest. Such destructive power must be tempered by a new sense of ethics. The financial industry has created its own conflicts for itself. Ethics rarely thrives in secrecy. Ethical analysis is rarely served while participants are seated around a table stacked with shareholder cash. Ethical culture rarely grows in a group that feels itself immune from oversight.

The rules and regulations established at OGE are not easily transferable to the private sector. But the ethos that underlies them, especially in regard to conflicts of interest, should be studied in restoring integrity to the financial system.

©2009 Institute for Global Ethics

Rushworth Kidder is on vacation. His column will return next week.

“This is a very bad thing. It’s like downloading spyware onto your computer, but the government is the spy.”

–Charles Mok, chairman of the Hong Kong chapter of the Internet Society, an international advisory group on Internet standards. Mok was speaking to the New York Times about a new and sweeping directive issued by China, which is requiring “all personal computers sold in the country to include sophisticated software that can filter out pornography and other ‘unhealthy information’ from the Internet.” While the government’s stated target is smut, free-speech advocates note that it also can function as a backdoor into all personal computers, allowing the government to censor information and block anything it wants.

Source: New York Times, June 8.

For more information, see: Related Newsline story, June 15 — Related Newsline story, Mar. 24, 2008 — Related Newsline story, Nov. 19, 2007 — Related Newsline story, July 24, 2006 — Related Newsline story, June 12, 2006.

Government claims it’s to protect children against porn; researchers and activists scoff, noting that the “Green Dam” blocks access to politically sensitive sites and even crashes word processing program when encountering forbidden words

BEIJING
China last week brought a simmering ethics issue to a boil when it demanded that by July 1 all computers sold in the country, including those manufactured in the United States, come equipped with software ostensibly designed to filter pornography — but which press reports say also censors sensitive political topics.

Chinese officials said the “Green Dam Youth Escort” software was designed only to block pornography, notes Bloomberg, but researchers in the United States and elsewhere discovered it also shuts down word processing programs when certain keywords are entered. The software also blocks access to sites about the Tiananmen Square military crackdown and the banned religious group Falun Gong.

While trade and human rights groups have protested the software mandate, Chinese officials defended the move, saying it was necessary to protect the nation’s youth, and that feedback from schools where the Green Dam was in place showed people were satisfied.

A New York Times editorial called on computer manufacturers to threaten not to sell their products in China, but claimed that international computer makers “have no history of standing up to Beijing. We hope they are making a stronger case in private for a rollback than was apparent in the anemic public statement issued by a coalition of American trade associations. They called for ‘an open and healthy dialogue’ with the government but seemed to go along with the farcical claim that its intention really was to improve parental control.”

On another front, researchers say that the Green Dam is leaky when it comes to security. A team from the University of Michigan says the software contains many exploitable errors in programming, meaning that malicious code could be used by hackers — or by the Chinese government — to seize control of individual units and spy on surfing habits and individual data, ZDNET reports.

Sources: Bloomberg, June 12 — ZDNET, June 12 — AFP, June 12 — New York Times, June 12.

For more information, see: Related Newsline story, May 25 — Related Newsline story, May 11 — Related Newsline story, Dec. 15, 2008 — Related Newsline story, Nov. 3, 2008 — Related Newsline story, Oct. 6, 2008.

New law will require bigger warnings and curb advertising that glorifies the habit

WASHINGTON
Congress last week passed legislation that allows the U.S. government to regulate tobacco. President Obama, promising a quick signature, said the measure counteracts years of indifference to a product that is known to be addictive and harmful, reports CBS News.

Obama has acknowledged that he personally has had difficulty quitting smoking, notes a report from CNN.

The main provisions of the measure will force tobacco companies to post bigger health warnings on cigarette packaging, ban flavored cigarettes, and restrain advertising that glorifies smoking, reports the London-based Independent, which notes that two major British tobacco companies serving the United States also will be affected.

The measure was lauded by a variety of public-health agencies. Opposition was largely muted, and what dissent there was came from tobacco-growing states and tobacco companies who complained about First Amendment issues related to curbs on content of their advertising and communications.

According to National Public Radio, everyone seems to agree that stanching tobacco use will save lives — even the Congressional Budget Office, which warns that a reduction in smoking may exacerbate financial woes in Social Security and Medicaid because people likely will live longer.

Sources: CBS, June 12 — NPR, June 12 — Independent, June 12 — CNN, June 12.

For more information, see: Related Newsline story, May 25 — Related Newsline story, Aug. 25 2008 — Related Newsline story, Aug. 25, 2008 — Related Newsline story, May 14, 2007 — Related Newsline story, Jan.22, 2007.

NBA receives high marks for hiring; a high-profile resignation follows report of recruiting violation; University of Alabama hit with probation after allegations that athletes abused free-textbook privilege

VARIOUS DATELINES
Three major stories involved ethical angles on sports last week. They included:

• The University of Central Florida’s Institute for Diversity said the U.S. National Basketball Association (NBA) is “the industry leader on issues related to race and gender hiring.” A study by the Institute gave the NBA an A-plus for race and a B-plus/A-minus for gender, leading to a combined A, according to the Orlando Sentinel. Of particular interest was the fact that the NBA had one Asian head coach and 11 black head coaches at the start of the 2008-2009 season, the highest minority percentage of any pro sport in the country.
• Tim Floyd stepped down as the University of Southern California’s basketball coach last week following a published report that accused him of giving cash to an intermediary who helped recruit a star player, reports USA Today. That player, O. J. Mayo, is the subject of an NCAA investigation into whether he received improper benefits, notes USA Today.
• The NCAA placed the University of Alabama’s football program on probation last week for violations related to misusing free textbooks. The Associated Press reports that several athletes were accused of using their free-textbook privilege, which is part of their scholarship packages, to obtain textbooks for other students not entitled to the benefit. Several other athletes from various university teams were cited for similar infractions, says the AP.

Sources: AP, June 12 — Orlando Sentinel, June 11 — USA Today, June 10.

For more information, see: Related Newsline story, June 8 — Related Newsline story, May 18 — Related Newsline story, May 11 — Related Newsline story, Apr. 20 — Related Newsline story, Mar. 2.

Some speculate that digital-TV conversion may have ethical side effects; Times of London looks at ethical aspects of search engines; comedian’s jibe ignites debate over propriety of innuendo directed at one of Sarah Palin’s daughters

VARIOUS DATELINES
Moral aspects of broadcasting and digital communication were featured in the world press last week. Among the stories:

• Last week’s conversion of all 1,700 U.S. television stations to all-digital transmission was the subject of hundreds of news stories describing the attendant confusion among people who no longer could receive signals with their old-fashioned analog TVs. But the Christian Science Monitor notes that there are two ethical components to the story: First, environmentalists worry that mass dumping of obsolete TVs will create an ecological hazard; second, the need for a cable connection or converter box may disproportionately deprive certain racial and economic groups of television service.
• The Times of London examines an interesting angle on the introduction of new search engines to the competitive and highly profitable market. The Times’s James Harkin looked at two ethical dilemmas: (1) the fact that a recent survey of business recruiters showed that they resort to search engines when screening candidates, with half admitting they rejected candidates based on unverified information found on the Internet, and (2) the possibility that emerging search engines may not be so hygienic as Google in separating paid search results from those that are returned and ranked on more objective criteria.
• There’s a media-ethics spat over a joke told by U.S. late-night comedy host David Letterman. Letterman made this remark in a monologue last week, referring to former GOP vice-presidential candidate Sarah Palin’s visit to New York: “One awkward moment for Sarah Palin at the Yankee game, during the seventh inning, her daughter was knocked up by Alex Rodriguez.” As ABC News reports, Palin was in New York with her 14-year-old daughter Willow. Letterman replied that his joke was aimed at Palin’s older daughter, 18-year-old Bristol, who was not on the trip, and offered an apology, which Sarah Palin refused. Palin characterized Letterman’s joke as “perverted” and declined an invitation to appear on the program with a remark that she wanted to keep Willow “away” from Letterman — a jibe that also came in for its share of criticism from those who say Palin is distorting and magnifying the issues.

Sources: Christian Science Monitor, June 12 — Times of London, June 12 — ABC News, June 11.

For more information, see: Related Newsline story, June 8 — Related Newsline story, May 25 — Related Newsline story, May 18 — Related Newsline story, Apr. 27 — Related Newsline story, June 4.

Harvard ethics pledge goes viral; ethics and investments examined in reports from New York and London; Australian polls shows perceptions of ethics in business plummeting; British CEO takes a novel, if controversial, approach to finding out what his employees really think

VARIOUS DATELINES
Last week’s business headlines included a range of stories involving ethics. Among them:

• Harvard Business School’s ethics pledge, detailed in last week’s edition of Newsline, assumed new dimensions during the week as the oath apparently resonated and went viral, according to BusinessWeek. Article author Anne VanderMey writes: “Something about the project struck a chord. Maybe it was the desire to distance themselves from B-school villains of the financial crisis, or an effort to get a head start on their future careers in the nonprofit world, or maybe it was genuine idealism. But whatever the cause, the oath has quickly taken on a life of its own. Within weeks, more than half of Harvard’s class of 2009 had signed. Perhaps more interestingly, it didn’t stop at Harvard Yard. MBAs around the world forwarded the oath to friends, gathering nearly 800 signatures to date. Max Anderson, the 2009 Harvard graduate who came up with the idea, said he received requests from people at more than 25 schools around the world about bringing it to their campuses.”
• The Wall Street Journal reports that two companies are suing Lehman Brothers Holdings Inc. for about $190 million, charging that the bankrupt investment bank used deceptive sales practices to market a risky security. The firms, Western Digital and Ceradyne, say they are stuck with worthless investments. Spokespeople for all three parties declined to comment when contacted by the Journal.
• Last week marked the 25th anniversary of the mainstream introduction of ethical investment houses in Britain. The U.K. Guardian reports that while proponents of ethical investing at the start said that investing in companies with a strong ethical and environmental foundation would produce better returns over the long run, investors now are wondering whether those ventures are living up to their initial promise. The Guardian cites various studies showing lower-than-average returns for many ethical funds. Proponents note that there is some evidence that these funds could be more stable in turbulent times because investors are less likely to flee them during a downturn.
• A survey in Australia finds that country’s nurses rated at the top of the list of professionals regarded as the most ethical and honest. The survey, titled the Roy Morgan Image of Professions, found that overall there was a large number of firms falling in the public’s estimation, the biggest dip recorded in the history of the survey. Business executives fell sharply in measures of perception of their ethics, according to a summary of the poll in the Sydney Morning Herald, as did directors of publicly held companies. Administrators of the poll say the economic downturn appears to be the major factor in plummeting confidence in the ethics of professions in Australian. Car salesmen were at the bottom of the list, followed closely by ad executives and newspaper reporters.
• Mangers try hard to find out what their employees are really thinking but are not always successful, reports the Financial Times in a profile of a northern England manufacturing firm’s CEO, who went straight to the source by masquerading as a low-level employee for two weeks. A camera crew followed the CEO, who told co-workers that a TV station was doing a report on what it was like for a clerical employee who had to take a physically demanding maintenance job in order to earn a living. CEO Stephen Martin avoided being recognized because he was new to the job, grew a beard, and often wore protective clothing that obscured his appearance. Martin concluded that management often does a poor job of communicating and expects too much of employees. While the effort was generally regarded as well intentioned, the Management Blog, a publication of Britain’s Chartered Management Institute, notes that there is some concern about the ethics of a boss going undercover, with some readers praising the effort but others noting that it is not entirely up front.

Sources: BusinessWeek, June 12 — Sydney Morning Herald, June 12 — Wall Street Journal, June 10 – Guardian, June 8 — Financial Times, June 8 — Management Blog, June 8.

For more information, see: Related Newsline story, June 8 — Related Newsline story, May 18 — Related Newsline Commentary, May 4 — Related Newsline story, Dec. 22, 2008 — Related Newsline story, Nov. 24, 2008 — Harvard MBA Oath website.

In New Republic essay, Amitai Etzioni contends that there are not enough regulators in the world to enforce good behavior

WASHINGTON
While much of the debate over the economic crisis has focused on the need for regulation, a noted sociologist argues that ethical oversight may be the ultimate answer.

In the New Republic, Amitai Etzioni writes: “The world economy consists of billions of transactions every day. There can never be enough inspectors, accountants, customs officers, and police to ensure that all or even most of these transactions are properly carried out. Moreover, those charged with enforcing regulations are themselves not immune to corruption, and, hence, they too must be supervised and held accountable to others — who also have to be somehow regulated. The upshot is that regulation cannot be the linchpin of attempts to reform our economy. What is needed instead is something far more sweeping: for people to internalize a different sense of how one ought to behave, and act on it because they believe it is right.”

Etzioni argues that although his argument may sound far fetched, social science indicates that it is more than the fear of punishment that steers people away from bad behavior. Most areas of behavior are “extralegal,” he contends, pointing to the fact that people frequently perform actions only because they believe those actions are right, and obey many laws even though the chance of being caught or punished is quite low.

In his essay, titled “Spent: America After Consumerism,” Etzioni concludes that the most necessary transformation in normative culture is a shift away from pathological consumption and a balance between consumerism and other human pursuits.

Source: New Republic, June 17.

For more information, see: Related Newsline Commentary, May 4 — Related Newsline story, May 4 — Related Newsline story, Apr. 27 — Related Newsline story, Apr. 6 — Related Newsline story, Dec. 10, 2007.

“Pluralities, but not majorities, see them as … torture but also as effective and justified,” poll finds

From Harris:

“American attitudes to the interrogation methods used with prisoners in Guantánamo are divided. There is nothing close to a consensus. Pluralities of adults, but not majorities, believe the techniques used were harsh and were torture. But pluralities also believe that these techniques were effective in getting information that saved American lives and were justified. The public is split on whether or not they were a violation of the Geneva Convention on the treatment of prisoners. Furthermore, a plurality of Americans believes that the United States would have been justified in using these techniques to interrogate Japanese and German prisoners in World War II. But they are divided on whether the Germans and Japanese would have been justified in using them when interrogating American prisoners….

“Republicans and Democrats have very different opinions. Most Republicans’ opinions are similar to those expressed by former Vice President Dick Cheney supporting the use of waterboarding and other harsh techniques. Most Democrats line up with President Obama in rejecting their use. Key findings of this Harris Poll include:

• “A 50% to 32% plurality of adults believes the techniques used at Guantánamo, including waterboarding, were harsh; and,
• “A 43% to 35% plurality believes they were torture; but…
• “A 47% to 30% plurality believes they were justified…

“A substantial 46% to 29% of adults believe that the use of the interrogation techniques used at Guantánamo would have been justified, if used in the interrogation of German and Japanese prisoners to save American lives in World War II. The public is split (35% to 38%) on whether or not the Japanese and Germans would have been justified in using these techniques when interrogating American prisoners to save Japanese and German lives.

“Attitudes to the interrogation techniques used in Guantánamo are sharply polarized by party. Former Vice President Dick Cheney spoke for majorities of Republicans who believe the techniques were justified (71%) and effective (74%). Few Republicans (14%) think their use violated the Geneva Convention…. Only small minorities of Democrats agree with the majority of Republicans on any of these questions. Independents’ views fall roughly half way between those of Democrats and Republicans.

“So What?

“Given the complete absence of consensus (with no majorities on any of these questions) it is likely that this is not an issue on which Americans will agree any time soon. And given the sharp polarization of opinion by party, Republican and Democratic leaders will be able to say very different things that will be well received by their supporters, if not by most Americans….”

For the full release from Harris, June 2, click here.

“Don’t let us make imaginary evils when you know we have so many real ones to encounter.”

– Oliver Goldsmith (Anglo-Irish writer, poet, and physician, 1730-1774)