Presentation on theme: "The Ethics Thing: Why It Matters More in Hard Times and Why Its So Hard to Do What Makes Good and Smart People Do Dumb and Unethical Things? Professor."— Presentation transcript:
The Ethics Thing: Why It Matters More in Hard Times and Why Its 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
Ethical Lapses 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 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
Illinois – Gov. Ryan Illinois – Blago Baltimores mayor Detroits mayor – Kwame Kilpatrick San Diego -- $1.1 billion pension fund deficit; skimming to meet city budget Connecticut – Gov. Rowland Chicago – Mayors 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 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 Specters aides 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 Government Issues 3
4 What can we learn?
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
b. Those involved were aware of their ethical lapses. 6
The A-Rod Explanation I knew we werent 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
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 its 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
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.
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 11 th Commandment. The 11 th Commandment is: Dont get caught.
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.
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, e- mail sent January 19, 2009 on findings of salmonella in the companys product. The company has declared Chapter 7 bankruptcy. 12
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.
S & P Congressional report Rating agencies continue to create [an] even bigger monster the CDO market. Lets hope we are all wealthy and retired by the time this house of cards falters. Standard & Poores analyst on mortgage-backed instruments and their ratings
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) Theyll 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?
1. WATCH THE PRESSURE Results at any cost using any means. 17
Merrill Executive on Numbers Pressure It got to the point where you didnt want to be in the office on Goldman earnings days. Randall Smith, ONeal Out As Merrill Reels From Loss, Wall Street Journal, October 29, 2007, pp. A1, A16. 18
Pressure: Probability from the Financial Analysts Institute P = f(x) x = amount of money involved The discovery of the relationship between maintenance and botulism
Ray McDaniel – Moodys 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 dont want ratings downgrades; short-sighted bankers labor short-sightedly to game the ratings agencies.
Roger Clemens Clemens was determined to prove he wasnt 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 OKeeffe, and Christian Red, American Icon: The Fall of Roger Clemens and the Rise of Steroids in Americas Pastime Alfred Knopf (2009)
Curbing the Pressure Emphasize REAL results; its not just the numbers, its 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.
2. WATCH THE RATIONALIZATIONS! Warm Language and Warming Thoughts 23
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. 24
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 wasnt so much a conflict of interest as it was a confluence of conflicting motives.
Watch for Rationalizations Everybody does this. This is the way it has always been done. It doesnt really hurt anyone. If I dont do it, someone else will just do it. This isnt bad! You should have seen... Thats the way they do it at __________. No one likes a snitch. Its a gray area. 26
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 its not a gray area? Does everyone believe its a gray area? Interpretation vs. loophole vs. nondisclosure of relevant information
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. Youre 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 its 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. Patricks question question on whether she would use performance- enhancing drugs if she could not be caught. Ms. Patrick said she was just joshing.
3. WATCH FOR THE FEAR THAT SILENCES Working on the barrel 29
30 What Employees Wont Do and Why 65% DIDNT REPORT (1999) 37% DIDNT REPORT (2003) 41%-50% DIDNT REPORT (2005) 45%-60% DIDNT REPORT (2006) 42%-60% DIDNT 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)
Ethics at Work % of employees feel they have an ethical culture at work Ethics Resource Center 31
Ethics at Work KPMG 2000 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 2005 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 32 KPMG 2008 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
FAA and Safety FAA Inspector Mark Lund given a desk job after throwing down the flag on a Northwest problem Inspector Generals Conclusion A potential negative consequence of FAAs handling of this safety recommendation is that other inspectors may be discouraged from bringing safety issues to the FAAs attention. 33
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.
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. 35
Opening Up Communication: Interaction 1.How much time do you spend on unscheduled and unformatted time with employees? 2.When was the last time you changed offices and why? 3.When was the last time you had an unscheduled conversation with a front-line employee? 4.MBWA 5.The Challenge Meeting
4. WATCH FOR COMPLACENCY Daily Introspection and Improvement 37
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 38
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 anothers 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
Cheating in College 11% reported cheating in % reported cheating in % reported cheating in 2003/2005/ % graduate students reported cheating (2006)
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 governors daughters MBA 41
Ethics at Work KPMG 2000 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 2005 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 42 KPMG 2008 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
43 Why do we all think were the most ethical person in the room? 1.We are not talking about it with others. 2.We have rationalized, labeled, and defended ourselves into believing we are ethical. 3.Were doing so well that we equate performance with ethics. 4.Were doing so well that we are offended when ethical issues are raised. 5.The failure to internalize and reflect.
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." 44
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 45
46 A Few Quiz Questions What CEO said, We are the good guys. We are on the side of angels. and We are doing Gods work here.?
47 Jeffrey Skilling – while CEO of Enron
Guess Who Said It! Go after the men who seek out prostitutes.
Eliot Spitzer, 2004, as New York Attorney General
Another Quiz Question What company had a 64-page, award-winning code of ethics? 50
52 Guess who said it! I have the highest ethical standards.
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
Guess Who Said It? I have done absolutely nothing wrong.
Rod R. Blagojevich, former governor of Illinois
Guess Who Said It! In todays regulatory environment, its virtually impossible to violate the rules. Its impossible for a violation to go undetected, certainly not for a considerable period of time.
Bernie Madoff: October 7,
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.
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 60
Chicago Alderman Dohertys analysis of the Illinois governors 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
5. WATCH THE CONFLICTS! Organizations with ethical slippage began and ended with conflicts 62
A. Conflicts Matter Im 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 reps products than the doc was prescribing Four minutes with a pharma sales rep translates to prescribing 52% more of the reps products than the doc was prescribing Arlene Weintraub, Just Say No to Drug Reps, BusinessWeek, Feb. 4, 2008, p. 69
Conflicts Believe in conflicts of interest! Remember the two ways to manage a conflict: Dont Disclose Establish definitive rules and follow them.
6. WATCH THE RULES AND ENFORCE THEM The Flat Organization When It Comes To Living by the Rules 65
66 Enforcement is Absolute, Unequivocal, and Egalitarian If the janitor had taken the liquor, he would have been fired. Students 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
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
7. VIGILANCE: WATCH OUT FOR COMPLEXITY; BEWARE OF THE FOG; UNDERSTAND THE POWER OF TRUTH All matters, individual, organizational, large, and small boil down to simple questions 68
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. - Hells Angels motto (courtesy B. Franklin) b. Lying is good. Its the only way we ever get at the truth. - Dostoevsky c. Circumstances beyond your control will cause bad acts to be discovered. - Anonymous 69
J.P. Hayes, the golfer "I would say everybody out here [on the PGA Tour] would have done the same thing."