Presentation on theme: "What Makes Good and Smart People Do Dumb and Unethical Things?"— Presentation transcript:
1 The Ethics Thing: Why It Matters More in Hard Times and Why It’s So Hard to Do What Makes Good and Smart People Do Dumb and Unethical Things?Professor Marianne M. JenningsW.P. Carey School of BusinessJennings
2 Ethical Lapses Student loan lenders: Sallie Mae and 17 universities AT&TTitanXeroxKmartCitigroupLucentImCloneArthur AndersenHealthSouthRoyal AholdParmalatApollo GroupMarsh & McLennanAIG (twice)(Putnam)(Mercer)Fannie Mae (twice)KPMG (twice)GMOptions scandals (200 companies)HPUniversities and travelSiemensCountrywide FinancialSociété GeneralMilberg WeissBear StearnsSatyam (India)Stanford InvestmentsStudent loan lenders: Sallie Mae and 17 universitiesAdelphiaBoeingCendantComputer AssociatesTyco InternationalGeneral ElectricGlobal CrossingMerrill LynchEnronQwestWorldComRoyal ShellNortelKrispy KremeRefcoUnitedHealth GroupMerckChiquitaWorld BankBPMadoff Investment SecuritiesJennings
3 Government Issues Oil for food UN scandal Post-Katrina corruption in contract awardsIraq contract awardsRob Reiner using his favorite companies for California commission contracts and political purposesArlen Specter’s aide’s spouse gets earmarked fundsArizona State treasurer investigation for conflicts: Maricopa County assessor and conviction: $400 per low-income loan to seniorsMike EspyHenry CisnerosTaser and the law enforcement officialsColorado and the $1,500 office chairsContributions for changing the no-touching rule at San Diego strip clubsScottsdale School District and the bidsNew York assistant principal who gave his son the answers to 35 questions on the Regents’ examKerik and employment of illegal immigrantsDMV employees who gave out licenses in exchange for cashWilliam Jefferson and the cold cashEliot Spitzer, former New York governorDavid Paterson, New York GovernorJustice Department and monitorsU.S. Postal Service and the dinnersThe docs, research, and drug firmsFiring of an IGBritish MPs and expense accountsThe stock sell-off and Rep. DurbinIllinois – Gov. RyanIllinois – BlagoBaltimore’s mayorDetroit’s mayor – Kwame KilpatrickSan Diego -- $1.1 billion pension fund deficit; skimming to meet city budgetConnecticut – Gov. RowlandChicago – Mayor’s office and contractsEmbezzlement – BLMFormer Delay aides and guilty pleasAbramoffDuke Cunningham -- $2.4 million from defense contractorsState crime labs and scandalsTom DeLayClark County Commissioner and the MyTai concessionPhiladelphia mayor and the pay-to-play contracting systemDarlene Druyun and BoeingHR director of JeffCo County and the $32,000 in personal expenses on county credit cardGovernors engaged in business relationships with those who receive state contractsBLM chief in Monterey doctoring invoices to embezzleUSDA employees and the $100K for visasDept. of Interior and forged documentsGraduation rate manipulationVECO and Alaska officialsTed Stevens, former senator, AlaskaBLAGOEthics officer for U.S. MarshallRep. Charles Rangel, taxes, donationsTimothy Geithner and the SS taxesJennings
5 a. These were not close calls. EmbezzlementPersonal charges on credit cardsPonzi schemesConflictsBriberyManipulating government reports and dataWithholding or covering up informationFinancial fraudJennings
6 b. Those involved were aware of their ethical lapses.
7 The A-Rod Explanation“I knew we weren’t taking Tic Tacs I wanted to prove to everyone that I was worth, you know, and being one of the greatest baseball players of all time.”Alex Rodriguez on his steroid use from
8 Donald TrumpWhen I build something for somebody, I always add $50 million or $60 million onto the price. My guys come in, they say it is going to cost $75 million. I say it’s going to cost $125 million and I build it for $100 million. Basically, I did a lousy job. But they think I did a great job.Donald TrumpForbes, June , p. 120
9 S&P text message exchange Rahul Dilip Shah and Shannon Mooney “Btw, that deal is ridiculous.”“I know, right Model def[initely] does not capture half the risk.”“We should not be rating it.”“we rate every deal. It could be structured by cows and we would rate it.”
10 Reinhard Siekaczek, former Siemens employee, largely responsible for Siemens accounting system that hid bribes for 5 years“People will only say about Siemens that they were unlucky and that they broke the 11th Commandment. The 11th Commandment is: ‘Don’t get caught.’”
11 Bear Stearns and a fund manager “[T]he subprime market looks pretty damn ugly If we believe [our internal modeling] is ANYWHERE CLOSE to accurate I think we should close the funds now. The reason for this is that if [our internal modeling] is correct then the entire subprime market is toast If AAA bonds are systematically downgraded then there is simply no way for us to make money --- ever.” Emphasis in original.
12 Peanut Corp of AmericaThe cost is costing us huge $$$$ Desperately at least need to turn the Raw Peanuts on our floor into money We have other peanuts on the floor that we would like to do the same with.”Stewart Parnell, CEO of Peanut Corporation of America, sent January 19, 2009 on findings of salmonella in the company’s product. The company has declared Chapter 7 bankruptcy.
13 Wachovia Knew “YIKES!!!!” “DOUBLE YIKES!!!!” “There is more, but nothing more that I want to put into a note.”Warning from a Wachovia bank executive to colleagues that the bank had received 4,500 complaints of fraud in two months from customers who had been fleeced of $400 million by marketing firms who paid the bank large fees for access and on returned checks.“We are making a ton of money from them.”Charles Duhigg, “Papers Show Wachovia Knew of Thefts,”New York Times, Feb. 6, 2008, p. C1, C8.
14 S & P Congressional report “Rating agencies continue to create [an] even bigger monster — the CDO market. Let’s hope we are all wealthy and retired by the time this house of cards falters.”Standard & Poore’s analyst on mortgage-backed instruments and their ratings
15 Asking and Knowing But Not Acting “How much of this sort of stuff do they do? I mean, how much cooking goes on in there?”John Houldsworth, former CEO Cologne RE (entered plea)“They’ll do whatever they need to [do to] make their numbers look right.”Richard Napier, former General Re executive (entered plea)Anthony Biacno, “In Trial of Former General Re Executives, Taped Calls Play Crucial Role for Both Sides,” New York Times, Jan. 17, 2008, p. C3.
16 What makes good and smart people at great companies, cities, towns, organizations, and agencies do really ethically dumb things? Bad apples or bad barrels?Jennings
17 Results at any cost using any means. 1. Watch the pressure
18 Merrill Executive on Numbers Pressure “It got to the point where you didn’t want to be in the office on Goldman earnings days.”Randall Smith, “O’Neal Out As Merrill Reels From Loss,” Wall Street Journal, October 29, 2007, pp. A1, A16.
19 Pressure: Probability from the Financial Analysts Institute P = f(x)x = amount of money involvedThe discovery of the relationship between maintenance and botulismJennings
20 Ray McDaniel – Moody’s“The real problem is not that the market underweight[s] ratings quality but rather that in some sectors, it actually penalizes quality. … It turns out that ratings quality has surprisingly few friends: issuers want high ratings; investors don’t want ratings downgrades; short-sighted bankers labor short-sightedly to game the ratings agencies.”
21 Roger Clemens“Clemens was determined to prove he wasn’t fading, and McNamee, having just arrived at the Show, was committed to staying there. So there would be other injections, but with the first one the two men crossed a stark line into territory they would never escape. Clemens became a cheater, and McNamee became his enabler.”Teri Thompson, Nathaniel Vinton, Michael O’Keeffe, and Christian Red, “American Icon: The Fall of Roger Clemens and the Rise of Steroids in America’s Pastime” Alfred Knopf (2009)
22 Curbing the PressureEmphasize REAL results; it’s not just the numbers, it’s how you got the numbersDistinguish between superior skill, foresight and industry, and cheating.Do you have procedures, strategies, and processes that streamline and fix problems and issues?Watch the addictive and self-defeating nature of manipulation and temporary resultsHelp employees understand that you need real results, not interpretations or temporary fixesAre you violating regs to get results?Watch for unconsciously sent signals.“Find a way.”“Whatever it takes.”“Sharpen your pencil.”Jennings
23 2. Watch the Rationalizations! Warm Language and Warming Thoughts2. Watch the Rationalizations!
24 Watch the “warm” language: The Labels “Cooking the books.”“Copyright infringement”“Manipulated appraisal”“Changed the numbers”“Backdating Options”“You lied”“Financial engineering”“Managing earnings”“Smoothing earnings”“Getting results”“Peer-to-Peer file sharing”“Got a second opinion”“Pro forma adjustment”“Deseasonalized the data”“Periodic look-backs”“No, I misremembered.”
25 Watch Your Language! “The employee stole from inventory.” “He was accepting cash for political favors.”“Bribes”“Suspended from school”“Conflict of interest”“The employee showed poor judgment.”“He was just accessible.”“Useful expenditures” (Siemens)“Restricted”“It wasn’t so much a conflict of interest as it was a confluence of conflicting motives.”
26 Watch for Rationalizations “Everybody does this.”“This is the way it has always been done.”“It doesn’t really hurt anyone.”“If I don’t do it, someone else will just do it.”“This isn’t bad! You should have seen ““That’s the way they do it at __________.”“No one likes a snitch.”“It’s a gray area.”
27 So, we make it all gray! Why is it important that it be gray to you? Is it legally gray?Is it ethically gray?Is it a good-faith disagreement?What if it’s not a gray area?Does everyone believe it’s a gray area?Interpretation vs. loophole vs. nondisclosure of relevant informationJennings
28 On gray areas and getting caught Yeah, it would be like finding a gray area. In motorsports, we work in the gray areas a lot. You’re trying to find where the holes are in the rule book.Danica Patrick, in a Sports Illustrated interview with Dan Patrick in answering his question, “So you would do it?” (referring to performance enhancing drugs). Ms. Patrick said she was just joshing. Well, then it’s not cheating, is it? If nobody finds out?”Indy racer Danica Patrick, in a Sports Illustrated interview with Dan Patrick. Ms. Patrick was answering Mr. Patrick’s question question on whether she would use performance-enhancing drugs if she could not be caught. Ms. Patrick said she was just joshing.
29 3. WATCH FOR The fear that silences Working on the barrel3. WATCH FOR The fear that silences
30 What Employees Won’t Do and Why 65% DIDN’T REPORT (1999)37% DIDN’T REPORT (2003)41%-50% DIDN’T REPORT (2005)45%-60% DIDN’T REPORT (2006)42%-60% DIDN’T REPORT (2008)96% feared being accused of not being a team player (same 1999 and 2003)(80% 2006)81% feared corrective action would not be taken75%-88% (2006)68% feared retribution from their supervisors49%-64% feared retaliatory action (2006)(SHRM)Jennings
31 Ethics at Work 20089% of employees feel they have an ethical culture at workEthics Resource Center
32 Ethics at Work KPMG 2000 Survey 74% of employees observed a high level of illegal or unethical conduct at work in the past 12 months50% of employees observed misconduct that, if revealed, would cause their firms to “significantly lose public trust”74% feel pressure to “do whatever it takes”KPMG Survey76% of employees observed a high level of illegal or unethical conduct at work in the past 12 months49% of employees observed misconduct that, if revealed, would cause their firms to “significantly lose public trust”KPMG Survey74% of employees observed a high level of illegal or unethical conduct at work in the past 12 months50% of employees observed misconduct that, if revealed, would cause their firms to “significantly lose public trust”Jennings
33 FAA and SafetyFAA Inspector Mark Lund given a desk job after throwing down the flag on a Northwest problemInspector General’s Conclusion“A potential negative consequence of FAA’s handling of this safety recommendation is that other inspectors may be discouraged from bringing safety issues to the FAA’s attention.”
34 Hallmark/Westland Meat Co. “The video just astounded us. Our jaws dropped We thought this place was sparkling perfect.”Anthony Magidow, General ManagerDavid Kesmodel and Jane Zhang, “Meatpacker in Cow-Abuse Scandal May Shut as Congress Turns Up Heat,” Wall Street Journal, Feb 25, 2008, pp. A1 and A10.
35 Who has the highest success rate for uncovering fraud? “The latest research shows that uncovering financial issues and fraud has its best shot in employees.” (M.M. Jennings)Alexander Dyck, Adair Morse, & Luigi Zingales, “Who Blows the Whistle on Corporate Fraud?” Financial Economics February The authors find that employees are the best source for detecting fraud and support financial incentives for gaining more information from them, e.g. more qui tam recovery.
36 Opening Up Communication: Interaction How much time do you spend on unscheduled and unformatted time with employees?When was the last time you changed offices and why?When was the last time you had an unscheduled conversation with a front-line employee?MBWAThe “Challenge Meeting”Jennings
37 Daily Introspection and Improvement 4. Watch for Complacency
38 We all think we are ethical. None thought their ethical standards were lower than those of their peers in their organization (1%)Society of Human Resource ManagersJennings
39 A Look At Your Future Work Force 64% of high school students cheated on an exam in the last year at least once62% have lied to a teacher in the past year82% have copied another’s homework82% have lied to their parents in the past year42% have lied to save money30% stole from a store in the past year26% admitted lying on their answers to the surveyJosephson Institute 2008Jennings
40 Cheating in College 11% reported cheating in 1963 50% graduate students reported cheating (2006)Jennings
41 Work: Résumé puffing into deception 50% had false informationThe false information was material: degree; job title; previous employmentExamplesWest Virginia University and the governor’s daughter’s MBAJennings
42 Ethics at Work KPMG 2000 Survey 74% of employees observed a high level of illegal or unethical conduct at work in the past 12 months50% of employees observed misconduct that, if revealed, would cause their firms to “significantly lose public trust”74% feel pressure to “do whatever it takes”KPMG Survey76% of employees observed a high level of illegal or unethical conduct at work in the past 12 months49% of employees observed misconduct that, if revealed, would cause their firms to “significantly lose public trust”KPMG Survey74% of employees observed a high level of illegal or unethical conduct at work in the past 12 months50% of employees observed misconduct that, if revealed, would cause their firms to “significantly lose public trust”Jennings
43 Why do we all think we’re the most ethical person in the room? We are not talking about it with others.We have rationalized, labeled, and defended ourselves into believing we are ethical.We’re doing so well that we equate performance with ethics.We’re doing so well that we are offended when ethical issues are raised.The failure to internalize and reflect.Jennings
44 Guess who said it?"Ethical standards and practices in the workplace are the pillars of successful employment and ultimately the benchmark for a strong business."Jennings
45 Franklin Raines, former CEO of Fannie Mae (ousted in 2005) Final report on what went wrong concludes: “[management was] manipulating earnings and creating an "unethical and arrogant culture“”Jennings
46 A Few Quiz QuestionsWhat CEO said, “We are the good guys. We are on the side of angels.” and “We are doing God’s work here.”?Jennings
52 “I have the highest ethical standards.” Guess who said it!“I have the highest ethical standards.”Jennings
53 Dr. William McGuireFormer CEO UnitedHealthGroup, to his board when confronted by it with an investigation that revealed backdating on one-half billion in his stock optionsJennings
54 “I have done absolutely nothing wrong.” Guess Who Said It?“I have done absolutely nothing wrong.”
55 Rod R. Blagojevich, former governor of Illinois
56 Guess Who Said It!“In today’s regulatory environment, it’s virtually impossible to violate the rules. It’s impossible for a violation to go undetected, certainly not for a considerable period of time.”
58 Guess Who Said It!“Embezzlement cannot be condoned in any manner. [n]ot only did he steal from the stockholders But he breached the fiduciary duty placed in him. Wrongdoing of this nature against society is considered a grave matter [h]e should receive the maximum sentence.”Jennings
60 Fighting Complacency and Slippage Development of values: The CredoEducation on valuesAdhering to values“We get results, but not by “Immerse yourself in ethical detail to create an ethical culture
61 Chicago Alderman Doherty’s analysis of the Illinois governor’s pay-to-play “This is not like a guy taking $500 for a zoning change. This is selling a U.S. Senate seat.”Chicago Alderman Brian DohertyJudy Keen, “Blagojevich case is a blot on Chicagoans’ pride,” USA Today, December 11, 2008, p. 5A
62 Organizations with ethical slippage began and ended with conflicts 5. Watch the conflicts!
63 A. Conflicts Matter “I’m too smart to be bought by a slice of pizza.” Georgetown University medical studentOne minute with a pharma sales rep translates to prescribing 16% more of the rep’s products than the doc was prescribingFour minutes with a pharma sales rep translates to prescribing 52% more of the rep’s products than the doc was prescribingArlene Weintraub, “Just Say No to Drug Reps,” BusinessWeek, Feb. 4, 2008, p. 69
64 Conflicts Believe in conflicts of interest! Remember the two ways to manage a conflict:Don’tDiscloseEstablish definitive rules and follow them.Jennings
65 6. watch the Rules and enforce them The Flat Organization When It Comes To Living by the Rules6. watch the Rules and enforce them
66 Enforcement is Absolute, Unequivocal, and Egalitarian “If the janitor had taken the liquor, he would have been fired.”Student’s observation on discussion of tolerance for a manager who “borrowed” three bottles of vodka on a Friday night for her birthday party after work and brought in replacements on Monday morningJennings
67 Following up on IssuesAction on complaints, issues, tracking, follow-up, and discrete disclosureGovernment inquiries, suits, regulatory issues: Follow up to find out if steak accompanies the sizzleSometimes issues are raised prematurely: the legal case is not yet thereCompanies that failed to follow up: Tyco, HealthSouth, WorldCom, Madoff, Satyam Nortel,Agencies that failed to follow up: SECJennings
68 All matters, individual, organizational, large, and small boil down to simple questions 7. VIGILANCE: Watch OUT FOR Complexity; BEWARE OF the fog; UNDERSTAND THE POWER OF TRUTH
69 Truth and Its Percolating Quality The laws of probability do not apply when it comes to the surfacing of unethical or illegal conducta. Three people can keep a secret if two are dead.- Hell’s Angels’ motto (courtesy B. Franklin)b. Lying is good. It’s the only way we ever get at the truth.- Dostoevskyc. Circumstances beyond your control will cause bad acts to be discovered.- AnonymousJennings
70 J.P. Hayes, the golfer"I would say everybody out here [on the PGA Tour] would have done the same thing."