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What Makes Good and Smart People Do Dumb and Unethical Things?

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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. Jennings W.P. Carey School of Business Jennings

2 Ethical Lapses Student loan lenders: Sallie Mae and 17 universities
AT&T Titan Xerox Kmart Citigroup Lucent ImClone Arthur Andersen HealthSouth Royal Ahold Parmalat Apollo Group Marsh & McLennan AIG (twice)(Putnam)(Mercer) Fannie Mae (twice) KPMG (twice) GM Options scandals (200 companies) HP Universities and travel Siemens Countrywide Financial Société General Milberg Weiss Bear Stearns Satyam (India) Stanford Investments Student loan lenders: Sallie Mae and 17 universities Adelphia Boeing Cendant Computer Associates Tyco International General Electric Global Crossing Merrill Lynch Enron Qwest WorldCom Royal Shell Nortel Krispy Kreme Refco UnitedHealth Group Merck Chiquita World Bank BP Madoff Investment Securities Jennings

3 Government Issues Oil for food UN scandal
Post-Katrina corruption in contract awards Iraq contract awards Rob Reiner using his favorite companies for California commission contracts and political purposes Arlen Specter’s aide’s spouse gets earmarked funds Arizona State treasurer investigation for conflicts: Maricopa County assessor and conviction: $400 per low-income loan to seniors Mike Espy Henry Cisneros Taser and the law enforcement officials Colorado and the $1,500 office chairs Contributions for changing the no-touching rule at San Diego strip clubs Scottsdale School District and the bids New York assistant principal who gave his son the answers to 35 questions on the Regents’ exam Kerik and employment of illegal immigrants DMV employees who gave out licenses in exchange for cash William Jefferson and the cold cash Eliot Spitzer, former New York governor David Paterson, New York Governor Justice Department and monitors U.S. Postal Service and the dinners The docs, research, and drug firms Firing of an IG British MPs and expense accounts The stock sell-off and Rep. Durbin Illinois – Gov. Ryan Illinois – Blago Baltimore’s mayor Detroit’s mayor – Kwame Kilpatrick San Diego -- $1.1 billion pension fund deficit; skimming to meet city budget Connecticut – Gov. Rowland Chicago – Mayor’s office and contracts Embezzlement – BLM Former Delay aides and guilty pleas Abramoff Duke Cunningham -- $2.4 million from defense contractors State crime labs and scandals Tom DeLay Clark County Commissioner and the MyTai concession Philadelphia mayor and the pay-to-play contracting system Darlene Druyun and Boeing HR director of JeffCo County and the $32,000 in personal expenses on county credit card Governors engaged in business relationships with those who receive state contracts BLM chief in Monterey doctoring invoices to embezzle USDA employees and the $100K for visas Dept. of Interior and forged documents Graduation rate manipulation VECO and Alaska officials Ted Stevens, former senator, Alaska BLAGO Ethics officer for U.S. Marshall Rep. Charles Rangel, taxes, donations Timothy Geithner and the SS taxes Jennings

4 What can we learn? Jennings

5 a. These were not close calls.
Embezzlement Personal charges on credit cards Ponzi schemes Conflicts Bribery Manipulating government reports and data Withholding or covering up information Financial fraud Jennings

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 Trump When 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 Trump Forbes, 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 America The 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 involved The discovery of the relationship between maintenance and botulism Jennings

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 Pressure Emphasize REAL results; it’s not just the numbers, it’s how you got the numbers Distinguish 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 results Help employees understand that you need real results, not interpretations or temporary fixes Are 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 Thoughts 2. 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 information Jennings

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 barrel 3. 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 taken 75%-88% (2006) 68% feared retribution from their supervisors 49%-64% feared retaliatory action (2006) (SHRM) Jennings

31 Ethics at Work 2008 9% of employees feel they have an ethical culture at work Ethics 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 months 50% 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 Survey 76% of employees observed a high level of illegal or unethical conduct at work in the past 12 months 49% of employees observed misconduct that, if revealed, would cause their firms to “significantly lose public trust” KPMG Survey 74% of employees observed a high level of illegal or unethical conduct at work in the past 12 months 50% of employees observed misconduct that, if revealed, would cause their firms to “significantly lose public trust” Jennings

33 FAA and Safety FAA Inspector Mark Lund given a desk job after throwing down the flag on a Northwest problem Inspector 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 Manager David 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? MBWA The “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 Managers Jennings

39 A Look At Your Future Work Force
64% of high school students cheated on an exam in the last year at least once 62% have lied to a teacher in the past year 82% have copied another’s homework 82% have lied to their parents in the past year 42% have lied to save money 30% stole from a store in the past year 26% admitted lying on their answers to the survey Josephson Institute 2008 Jennings

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 information The false information was material: degree; job title; previous employment Examples West Virginia University and the governor’s daughter’s MBA Jennings

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 months 50% 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 Survey 76% of employees observed a high level of illegal or unethical conduct at work in the past 12 months 49% of employees observed misconduct that, if revealed, would cause their firms to “significantly lose public trust” KPMG Survey 74% of employees observed a high level of illegal or unethical conduct at work in the past 12 months 50% 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 Questions What CEO said, “We are the good guys. We are on the side of angels.” and “We are doing God’s work here.”? Jennings

47 Jeffrey Skilling – while CEO of Enron

48 Guess Who Said It! “Go after the men who seek out prostitutes.”

49 Eliot Spitzer, 2004, as New York Attorney General

50 What company had a 64-page, award-winning code of ethics?
Another Quiz Question What company had a 64-page, award-winning code of ethics? Jennings

51 Enron Jennings

52 “I have the highest ethical standards.”
Guess who said it! “I have the highest ethical standards.” Jennings

53 Dr. William McGuire Former CEO UnitedHealthGroup, to his board when confronted by it with an investigation that revealed backdating on one-half billion in his stock options Jennings

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.”

57 Bernie Madoff: October 7, 2007

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

59 Jennings

60 Fighting Complacency and Slippage
Development of values: The Credo Education on values Adhering 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 Doherty Judy 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 student One minute with a pharma sales rep translates to prescribing 16% more of the rep’s products than the doc was prescribing Four minutes with a pharma sales rep translates to prescribing 52% more of the rep’s products than the doc was prescribing Arlene 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’t Disclose Establish definitive rules and follow them. Jennings

65 6. watch the Rules and enforce them
The Flat Organization When It Comes To Living by the Rules 6. 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 morning Jennings

67 Following up on Issues Action on complaints, issues, tracking, follow-up, and discrete disclosure Government inquiries, suits, regulatory issues: Follow up to find out if steak accompanies the sizzle Sometimes issues are raised prematurely: the legal case is not yet there Companies that failed to follow up: Tyco, HealthSouth, WorldCom, Madoff, Satyam Nortel, Agencies that failed to follow up: SEC Jennings

68 All matters, individual, organizational, large, and small boil down to simple questions

69 Truth and Its Percolating Quality
The laws of probability do not apply when it comes to the surfacing of unethical or illegal conduct a. 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. - Dostoevsky c. Circumstances beyond your control will cause bad acts to be discovered. - Anonymous Jennings

70 J.P. Hayes, the golfer "I would say everybody out here [on the PGA Tour] would have done the same thing."

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