Magazine

Online Extra: Calling the Ethics Cops


Corporate America is a surprisingly corrupt place. The high-profile scandals may have been just the tip of the iceberg. Graft, self-dealing, dishonesty, sexual harassment, and other unethical activity is strikingly common, according to recent surveys by search firm Hudson Highland Group and the Ethics Resource Center. The outfits found that between 31% and 52% of U.S. workers have witnessed co-workers operating unethically.

But that could change. One byproduct of the scandals is growth in the ranks of ethics officers. A professional group for in-house corporate cops, the Ethics & Compliance Officer Assn., began with just 16 founding members in 1992, grew to 600 three years ago and has since doubled to 1,250. For the unethical these days, says Keith T. Darcy, executive director of the Waltham (Mass.)-based ECOA, "there are no secrets and no places to hide."

Companies are finding improprieties very expensive. "The greatest threat to any publicly traded company is a well-publicized scandal," says Zachary W. Carter, a former U.S. Attorney for the Eastern District of New York and former judge in the Criminal Court of New York who now sits on the board of Marsh & McLennan (MMC) The insurance brokerage giant early last year agreed to pay $850 million to settle allegations of price-fixing and collusion leveled by New York Attorney General Eliot Spitzer.

TOO MUCH POWER? Since mid-2002, a corporate task force of the U.S. Justice Dept. has helped secure more than 700 corporate fraud convictions, with more than 100 chief executives and presidents convicted, along with more than 80 vice-presidents and more than 30 chief financial officers. In all, over the last four years, the task force has brought charges against a stunning 1,300 defendants.

In some companies courts have given outsiders exceptional clout to forestall more wrongdoing. Some outside monitors can probe as they wish and even fire suspect employees at will. Former SEC Chairman Richard C. Breeden can do just that at KPMG, the accounting firm that was caught up in an embarrassing tax-shelter sales scandal.

Such exceptional powers are provoking a backlash. Corporate defense lawyers at the National Assn. of Criminal Defense Lawyers grumble that Breeden can become "the prosecutor, judge, and jury" at KPMG. And David B. Pitofsky, a former federal prosecutor now in private practice, argues that outside monitors in general should only "monitor and report" on company behavior, leaving action to the courts.

"PRINCIPLES-BASED APPROACH." But backers of aggressive corporate self-policing say ethics officers must be free to scrutinize everything in a company. Only then could they stand in the way of another Enron, argues Lee S. Richards III, an independent examiner at software company CA (CA) (formerly Computer Associates), which was caught up in an accounting scandal in recent years (see BW, 11/21/05, "Computer Associates: Clearing a Cloud").

Inside ethics officers "are in a position to prevent scandals of all sizes and shapes," adds Richards. He says they must have senior status in their companies, be able to look into "every nook and cranny," and take problems over the CEO's head to the board, if needed (see BW, 6/14/04, "Will Directors Morph Into Corporate Constables?").

Smart managers will give ethics honchos a long leash. Spitzer and other regulators are taking an ever-more expansive view on what is unacceptable. So in-house supercops like Eric R. Dinallo, who left Spitzer's office to become head of regulatory matters and affairs for Morgan Stanley (MS), take a broad "principles-based approach," instead of hewing narrowly to the stated rules. Dinallo argues that practices that "just don't, in fact, feel right" probably aren't.

STRICT RULES. Ethics officers run training programs that spell out what's acceptable in dealings both internally and outside (see BW Online, 2/19/04, "Putting Teeth in Corporate Ethics Codes"). They advise on ethical quandaries, such as when gifts are appropriate. And they monitor hotlines set up so whistleblowers can draw attention to wrongdoing.

"The rules are strict, and I don't apologize for that," says Susan E. Shepard, a former prosecutor and former commissioner of investigation for New York City who joined Nortel Networks (NT) as chief ethics and compliance officer last February. Nortel brought her on after it ousted CEO Frank Dunn and a clutch of other executives in 2004 amid disclosures of financial misreporting (see BW Online, 1/12/05, "Nortel: Beyond Closing the Books").

Much of the dishonesty occurs at lower levels. Shepard tells of thefts in 2003 at Nortel in which equipment worth more than $1 million was stolen from a company lab affected by layoffs. Employees walked out the door with the gear, unchallenged. When her staff early last year reviewed an investigation of the thefts, she was stunned that controls on taking equipment out were still lax. That's not so anymore, the ethics chief says.

In another case, a Nortel staffer was leaking company information to her husband, who worked for a competitor; the staffer has been canned. "When intellectual property is your product, you have to protect it," Shepard says.

SENDING A MESSAGE. Patrick J. Gnazzo, the new compliance chief at CA and formerly vice-president for business practices with United Technologies (UTX) warns of a more everyday sort of corruption. Vendors or other business associates try to curry favor through improper gifts. Once, he says, an outside colleague seeking business at United Technologies sent a manager an oar and promised to send on the canoe if they could just meet to talk. The manager tipped Gnazzo to the obvious bribe. "He didn't get the canoe, and he gave me the oar, and I sent it back," Gnazzo recalls.

For ethics officers to do their jobs well, the commitment must come from the top, ethics experts say. Top managers at Morgan Stanley recently sent a powerful message, for instance, by firing a research analyst and three sales staffers after they took clients to an Arizona strip club last November. The firm in mid-2004 paid $54 million to settle a gender-discrimination case where complaints had been raised about male-only outings.

These firings reflect management's commitment to do the right thing, says Paul Shechtman, a court-appointed outside monitor who oversees Morgan Stanley's compliance with the settlement. Says Shechtman, "The decision was entirely theirs and made at very senior levels, and was made without much debate."

OUTSIDE ENFORCEMENT. But the job can still take intestinal fortitude, especially since ethics officers could easily make enemies. "The ethics officer of today, I believe, has to be somebody who is prepared to be fired," says Jeff Benjamin, the top ethics official at pharmaceutical giant, Novartis (NVS)

Only a Pollyanna could believe all managers will do the right thing all the time without the threat of the law on their necks. "Self-policing can be enormously beneficial," says monitor Shechtman. "[But] I don't think anybody thinks the corporate world can do without police anymore than the rest of the world can do without police."

And yet, self-policing by well-equipped ethics officers certainly can't hurt. So long as people will be tempted to stray, these ethics officers will be in hot demand. By Joseph Weber in Chicago


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