Collapse of corporate ethics is deep-rooted and enduring

THE BALTIMORE SUN

"Any man who tries to be good all the time is bound to come to ruin among the great number who are not good. Hence a prince who wants to keep his authority must learn how not to be good and use that knowledge, or refrain from using it, as necessity requires."

-- The Prince,

Niccolo Machiavelli, 1469-1527

If there is any truth to the saying that a man's character can be assessed by observing what he reads, then it is easy to understand the current sad state of business ethics in America.

Time and again, those who wish to succeed in business are counseled to seek wisdom in books on leadership written by great thinkers like Machiavelli, Sun-tzu and Carl von Clausewitz.

There they learn to never put too much trust in friends, get others to do the work and take the credit, to conceal their intentions and to crush their enemies totally.

The frightening consequences of this accumulated wisdom taught in business schools across America have been detailed in a number of recent books produced by thoughtful observers of modern business ethics.

Their conclusions: Raw greed, fear and the collapse of regulatory oversight have led to a devastating moral and ethical breakdown in corporate executive suites and on Wall Street. And, they say, moral ambivalence continues.

The recent collapse of Arthur Andersen, one of the most respected public-accounting firms in the nation, is a classic story of corporate rot, as told by four former employees of the firm. They trace its gradual transformation from its role as a conservative auditor to an institution aggressively pursuing profits by consulting for the companies it audited.

Inside Arthur Andersen -- Shifting Values, Unexpected Consequences (Financial Times Prentice Hall, 208 pages, $24.95) describes the cultural changes that accompanied that transition and made it possible for Andersen employees to start shredding thousands of Enron documents in the fall of 2001.

The authors, four former Andersen insiders -- Susan E. Squires, Cynthia Smith, Lorna McDougall and William R. Yeack, conclude that in a struggle between public interest and private profit, private profit won.

The power of corporate arrogance and the dangers of a herd instinct -- on Wall Street and among financial journalists -- are detailed in Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron (Portfolio, 435 pages, $26.95), by Bethany McLean and Peter Elkind, two Fortune magazine journalists.

In the late 1990s, the Houston energy company seemed, in its own mysterious way, to define the so-called new economy. Its stock price climbed as its profits rose, and its executives were praised for their innovative business model.

Then McLean wrote an article for Fortune posing a simple question -- How, exactly, does Enron make its money? -- and the company's house of cards began to collapse.

For a broader perspective of the decline of corporate ethics, readers would be well advised to read veteran financial journalist Roger Lowenstein's Origins of the Crash -- The Great Bubble and Its Undoing (Penguin, 270 pages, $24.95)

Lowenstein argues that the current corporate ethical train wreck had its beginning more than a dozen years ago when business-school professors argued that corporate leaders were massively underpaid.

What came next, says Lowenstein, were excessive executive stock options, irrationally exuberant shareholders, friendly auditors, short-term focus by financial professionals, overemphasis on shareholder value and ethical disaster.

Lowenstein paints vivid portraits of all of the characters of the great boom and bust: Alan Greenspan, Jack Grubman, Jack Welch, Abby Cohen, Henry Blodget and a wide array of dot-com pioneers.

He concludes that Greenspan and other regulators took a dive when confronted with the irrational exuberance of market traders and corporate wheeler-dealers eager to stretch and even break the rules.

Even after significant warning signs, like the failure of the Long-Term Capital Management hedge fund, which forced a billion-dollar bailout managed by the Fed, Greenspan continued to toy with the idea that a new economy with new rules made traditional regulation less important, Lowenstein points out.

He also notes that when the Financial Accounting Standards Board sought to force corporations to accurately account for the extraordinary costs of stock options, Greenspan was blocked by bipartisan pressure from congressional fans of the booming stock market.

While Lowenstein paints a broad-brush exposition of the ethical collapse that accompanied the boom of the '90s and was exposed in the bust that followed, we are reminded that we all share responsibility for the growing greed that feeds the ethical collapse.

If the market boom dislodged America's ethical compass, we're still paying the price.

Martha Stewart is currently on trial in New York, charged with securities fraud and obstruction of justice related to her sale of stock in biotech firm ImClone just before it nose-dived. Prosecutors said she obstructed justice by lying about the stock sale and that she committed securities fraud by lying to prop up the share price of her firm.

And, prodded by the independent digging of New York Attorney General Eliot Spitzer, federal regulators are investigating the $7 trillion dollar mutual-fund industry, alleging mutual-fund share sale abuse in the form of "revenue sharing" -- or mutual funds paying brokerages to tout the funds' shares.

Not surprisingly, corporate leaders across America have been busy in recent months attempting to tidy up their images.

Last month, the Business Roundtable, an organization of chief executives from 150 major corporations with a combined work force of more than 10 million employees in the United States and $3.7 trillion in annual revenues, announced that it will spend $3 million over the next three years working with business schools across the country to create a new institute that will conduct training programs and research in ethics.

University of Virginia business professor R. Edward Freeman, who heads the Darden School's Olsson Center for Applied Ethics and who will help oversee the effort, noted at the time of the announcement that when he tells people he teaches ethics, the typical response is "Must be a short course."

Business Roundtable co-chairman Franklin D. Raines, who is also chief executive of the mortgage financing company Fannie Mae, said the institute's creation represents a reaction to the "unfortunate failures in corporate governance that we've witnessed over the past few years."

"Our overall goal is to restore public trust. If we cannot make our corporations function effectively, the entire nation will be affected," said Raines.

But the work force appears somewhat skeptical about corporate efforts to promote ethical behavior.

A national survey released last year by the Ethics Resource Center showed that nearly half -- 44 percent -- of all non-management employees said they did not report misconduct they observed because they believed that no corrective action would be taken or feared that reports would not be kept confidential.

Workers in organizations undergoing mergers, acquisitions or restructuring are particularly vulnerable to pressures to compromise ethics, the study found. The workers report observing misconduct and feeling ethics-related pressures at nearly double the rate of other workers.

"Though there have been substantial advances over the last decade, what we've learned from the scandals at Enron, WorldCom and other major corporations leaves no doubt that many areas of institutional ethics cry out for reform," the report said.

Or, as Machiavelli said, "There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things."

Larry Williams is business editor of The Sun. In 1986 he edited a Pulitzer Prize-winning series of stories by then-Philadelphia Inquirer reporter Arthur Howe on massive deficiencies in IRS processing of tax returns, which eventually inspired major changes in IRS procedures and prompted the agency to make a public apology to U.S. taxpayers.

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