Businessweek Archives

Ethics For Hire


News: Analysis & Commentary: SCANDALS

ETHICS FOR HIRE

Laundering images of soiled companies is turning into big business

It's a familiar routine. A scandal erupts at a large corporation. Bowing to public pressure, the board vows to get to the bottom of the mess, hiring a retired government big shot or blue-chip law firm to conduct an "independent" investigation.

Name a major company that's been in trouble recently, and it has probably gone through the drill. On July 1, Bankers Trust Co. released the results of an 18-month investigation into its wayward derivatives group, in which the New York law firm Cadwalader, Wickersham & Taft sharply criticized Bankers for lax internal controls. Mitsubishi Motor Manufacturing of America Ltd. in May asked former Labor Secretary Lynn M. Martin to examine its workplace policies. Her preliminary prescription for combating sexual harassment is due in mid-July. Swedish drugmaker Astra responded to its own sexual harassment scandal two months ago by commissioning a probe by New York law firm Winthrop, Stimson, Putnam & Roberts. On June 26, Astra announced it had fired Chief Executive Lars Bildman and another executive partially as a result of the findings.

A BILLION-DOLLAR INDUSTRY. Not surprisingly, the business of helping companies clean up their acts--a sort of Ethics Inc.--is booming. In June, KPMG Peat Marwick hired Winthrop M. Swenson, a former deputy general counsel at the U.S. Sentencing Commission, to join its new ethics consulting business. Arthur Andersen & Co. started a similar unit last October, choosing author and ex-Harvard University business school professor Barbara Ley Toffler to head its ethics unit. Competitors range from management consultants to law firms and private eye outfits to nonprofits such as the Center for Business Ethics in Waltham, Mass. "When you add it all together, you've probably got a billion-dollar industry," says Carole Basri, a Deloitte & Touche ethics consultant.

One reason: Ethics overhauls can be hugely expensive. Orange & Rockland Utilities in Pearl River, N.Y., found that out. In 1993, after running afoul of regulators for widespread financial improprieties, the small utility hired Price Waterhouse and the New Jersey law firm Stier, Anderson & Malone to do an independent investigation. A team of nearly 50 produced a 1,200-page report at a cost of some $7 million. Consultants charged more than $200,000 to design an internal watchdog program. They recommended opening a two-person ethics office at a cost of $175,000 annually. But Orange & Rockland President Larry S. Brodsky says the investment has paid off: "There's no question that we have regained the confidence of the regulators."

The drill that ethics mavens put companies through varies little. First, the investigation. Then a new corporate code of ethics is generally drafted. Ethics training is beefed up, and a toll-free whistle-blower hot line installed. Then ethics officers are frequently brought aboard to manage the training programs and investigate whistle-blower complaints. That's the template followed by disgraced companies since the defense-industry billing scandals of the 1980s, and there are signs that some recent victims of notoriety are following it. Martin says she plans to advise Mitsubishi to increase anti-sexual harassment training, install a monitoring system to track complaints, and hire consultants to review the new programs. Astra has declared it has "zero tolerance" for sexual harassment, slated training for September, and plans to put in an 800 number for ethics complaints.

But does the typical paint-by-numbers corporate ethical overhaul really wipe out malfeasance? Critics contend that many companies are simply looking for window dressing. "They'll have a code of ethics, but there's no effort by senior management to assure middle management that they really mean it," says Swenson of KPMG Peat Marwick. "They'll do enough training to say that they do training, but they won't really analyze their training techniques to see if they are reaching people. They'll have a hot line, but there's no effort to assure people that there won't be retaliation."

A major problem is that many companies install off-the-shelf ethics programs modeled on federal law, rather than one designed to fix specific problems. In 1991, the U.S. Sentencing Commission defined seven elements of "an effective [corporate] program to prevent and detect violations of law." The idea was to ensure that companies with strong compliance programs are not unduly fined because of a lone wrongdoer. But companies now often use the law as a rigid map to design their ethics programs. "The federal sentencing guidelines have taken on a life of their own," worries Arthur Andersen's Toffler.

BUYING TIME. Another frequent source of shortcomings in a probe is the "independent" investigator. Some companies have less than honorable motives in mounting an outside investigation, notes Gerald C. Meyers, former CEO of American Motors Corp. First, the probe instantly produces good publicity. It also buys time with regulators, whose chronic understaffing often makes them willing to consider cutting back their own probe if the company's looks reasonably thorough. And doing even a cursory investigation on its own helps the company's legal position. The reason: An outside attorney's findings are generally privileged. Consequently, a company can get a grip on how badly employees behaved and begin assembling its defenses with little risk of disclosure.

But independent investigators have a built-in conflict of interest because they are paid by the company they are supposed to be scrutinizing. And as suppliers of lucrative services to Corporate America, the law and accounting firms that usually run the probes are well aware a reward may be in store if they put the best face on the bad news. "All the biases are to come back with something the company wants to hear," says Meyers. Stanford University Law School professor Ronald J. Gilson contends the success of an independent probe "all depends on the board."

If the board isn't vigilant, conflicts-of-interest can be glaring: In 1994, a federal court disregarded an ostensibly independent investigation launched by the board of Southern Co., an Atlanta utility holding company, because a law firm that had once represented accused company officers participated in the probe.

The final dilemma: Even a sincere ethics revamp won't necessarily improve a company's behavior. In a 1995 study, the nonprofit Ethics Resource Center in Washington found that employees at companies with "comprehensive ethics programs" know the law better than workers elsewhere and are more likely to report violations. But they also felt just as much pressure to compromise standards in order to meet business objectives and said they witnessed just as much misconduct.

The lesson: Assuring ethical corporate behavior may be a big business. But it's one that has some maturing to do before it proves its full worth.Return to top


Burger King's Young Buns
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

 
blog comments powered by Disqus