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 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• 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

• 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

Government Issues

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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.

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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 2001-2003

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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 TrumpForbes, June 12 2009, 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 11th Commandment. The 11th Commandment is: ‘Don’t 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.

www.doj.gov.

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 company’s product. The company has declared Chapter 7 bankruptcy.

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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. 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

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.

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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 PRESSUREResults at any cost using any means.

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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.

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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 – 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.”

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)

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.”

2. WATCH THE RATIONALIZATIONS!

Warm Language and Warming Thoughts

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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.”

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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.”

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.”

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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

On gray areas and getting caughtYeah, 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.

3. WATCH FOR THE FEAR THAT SILENCES

Working on the barrel

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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)

Ethics at Work 2008

• 9% of employees feel they have an ethical culture at work

Ethics Resource Center

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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”

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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 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.”

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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 2007. 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.

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Opening Up Communication: Interaction1. 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

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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

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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

surveyJosephson Institute 2008

Cheating in College

11% reported cheating in 1963

49% reported cheating in 1993

75% reported cheating in 2003/2005/2006

50% 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 governor’s daughter’s MBA

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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”

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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”

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Why do we all think we’re 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. We’re doing so well that we equate performance with ethics.

4. We’re 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."

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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“”

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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.”?

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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?

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ENRON51

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Guess who said it!

“I have the highest ethical standards.”

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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 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.”

Bernie Madoff: October 7, 2007

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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

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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

5. WATCH THE CONFLICTS!Organizations with ethical slippage began and ended with conflicts

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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

Conflicts • Believe in conflicts of interest!

• Remember the two ways to manage a conflict:

• Don’t

• 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

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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

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

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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

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J.P. Hayes, the golfer

"I would say everybody out here [on the PGA Tour] would have done the same thing."