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The Seven Signs of Ethical Collapse How To Spot the Moral .ppt

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The Seven Signs of Ethical Collapse How To Spot the Moral .ppt Powered By Docstoc
					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
                                       •   AT&T
Ethical Lapses                         •   Titan
•   Student loan lenders: Sallie Mae   •   Xerox
    and 17 universities                •   Kmart
•   Adelphia                           •   Citigroup
•   Boeing                             •   Lucent
•   Cendant                            •   ImClone
•   Computer Associates                •   Arthur Andersen
                                       •   HealthSouth
•   Tyco International
                                       •   Royal Ahold
•   General Electric                   •   Parmalat
•   Global Crossing                    •   Apollo Group
•   Merrill Lynch                      •   Marsh & McLennan
•   Enron                              •   AIG (twice)(Putnam)(Mercer)
•   Qwest                              •   Fannie Mae (twice)
•   WorldCom                           •   KPMG (twice)
•   Royal Shell                        •   GM
                                       •   Options scandals (200 companies)
•   Nortel
                                       •   HP
•   Krispy Kreme                       •   Universities and travel
•   Refco                              •   Siemens
•   UnitedHealth Group                 •   Countrywide Financial
•   Merck                              •   Société General
•   Chiquita                           •   Milberg Weiss
•   World Bank                         •   Bear Stearns
•   BP                                 •   Satyam (India)
                                       •   Stanford Investments
•   Madoff Investment Securities
                                                       •   Oil for food UN scandal
Government Issues                                      •
                                                       •
                                                           Post-Katrina corruption in contract awards
                                                           Iraq contract awards
 •   Illinois – Gov. Ryan                              •   Rob Reiner using his favorite companies for
 •   Illinois – Blago                                      California commission contracts and political
 •   Baltimore’s mayor                                     purposes
 •   Detroit’s mayor – Kwame Kilpatrick                •   Arlen Specter’s aide’s spouse gets earmarked
 •   San Diego -- $1.1 billion pension fund deficit;       funds
     skimming to meet city budget
 •   Connecticut – Gov. Rowland                        •   Arizona State treasurer investigation for
 •   Chicago – Mayor’s office and contracts                conflicts: Maricopa County assessor and
 •   Embezzlement – BLM                                    conviction: $400 per low-income loan to seniors
 •   Former Delay aides and guilty pleas               •   Mike Espy
 •   Abramoff                                          •   Henry Cisneros
 •   Duke Cunningham -- $2.4 million from defense      •   Taser and the law enforcement officials
     contractors
 •   State crime labs and scandals                     •   Colorado and the $1,500 office chairs
 •   Tom DeLay                                         •   Contributions for changing the no-touching rule
 •   Clark County Commissioner and the MyTai               at San Diego strip clubs
     concession
 •   Philadelphia mayor and the pay-to-play            •   Scottsdale School District and the bids
     contracting system                                •   New York assistant principal who gave his son
 •   Darlene Druyun and Boeing                             the answers to 35 questions on the Regents’
 •   HR director of JeffCo County and the $32,000 in       exam
     personal expenses on county credit card
 •   Governors engaged in business relationships       •   Kerik and employment of illegal immigrants
     with those who receive state contracts            •   DMV employees who gave out licenses in
 •   BLM chief in Monterey doctoring invoices to           exchange for cash
     embezzle
 •   USDA employees and the $100K for visas            •   William Jefferson and the cold cash
 •   Dept. of Interior and forged documents            •   Eliot Spitzer, former New York governor
 •   Graduation rate manipulation                      •   David Paterson, New York Governor
 •   VECO and Alaska officials                         •   Justice Department and monitors
 •   Ted Stevens, former senator, Alaska
 •   BLAGO                                             •   U.S. Postal Service and the dinners
 •   Ethics officer for U.S. Marshall                  •   The docs, research, and drug firms
 •   Rep. Charles Rangel, taxes, donations             •   Firing of an IG
 •   Timothy Geithner and the SS taxes                 •   British MPs and expense accounts                  3
                                                       •   The stock sell-off and Rep. Durbin
What can we learn?




                     4
    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 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

                            7
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 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.

                                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. 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.
What makes good and smart
people at great companies,
cities, towns, organizations,
and agencies do really
ethically dumb things? Bad
apples or bad barrels?



                                16
Results at any cost using any means.

1. WATCH THE PRESSURE


                                       17
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.




                                               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 – 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.”
Warm Language and Warming Thoughts

2. WATCH THE
RATIONALIZATIONS!

                                     23
    Watch the “warm” language: The Labels

•   “Cooking the books.”       •   “Financial engineering”
                               •   “Managing earnings”
                               •   “Smoothing earnings”
                               •   “Getting results”
•   “Copyright infringement”   •   “Peer-to-Peer file sharing”

•   “Manipulated appraisal”    •   “Got a second opinion”

•   “Changed the numbers”      •   “Pro forma adjustment”
                               •   “Deseasonalized the data”
•   “Backdating Options”       •   “Periodic look-backs”

•   “You lied”                 •   “No, I misremembered.”




                                                                 24
Watch Your Language!
• “The employee stole from   • “The employee showed
  inventory.”                  poor judgment.”
• “He was accepting cash     • “He was just accessible.”
  for political favors.”
• “Bribes”                   • “Useful expenditures”
• “Suspended from school”      (Siemens)
• “Conflict of interest”     • “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.”


                                                         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 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 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.
Working on the barrel

3. WATCH FOR THE FEAR
THAT SILENCES

                        29
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)
                             30
Ethics at Work 2008
• 9% of employees feel they have an ethical
  culture at work
          Ethics Resource Center




                           31
    Ethics at Work
                                                                                 KPMG 2008
                KPMG 2000                  KPMG 2005                              Survey
                 Survey                      Survey
•   76% of employees observed a
    high level of illegal or        •   74% of employees
    unethical conduct at work in        observed a high level of
    the past 12 months                  illegal or unethical          •   74% of employees
                                        conduct at work in the past       observed a high level
                                        12 months                         of illegal or unethical
                                                                          conduct at work in
•   49% of employees observed                                             the past 12 months
    misconduct that, if revealed,   •   50% of employees
    would cause their firms to          observed misconduct that,
    “significantly lose public          if revealed, would cause      •   50% of employees
    trust”                              their firms to                    observed misconduct
                                        “significantly lose public        that, if revealed,
                                        trust”                            would cause their
                                                                          firms to “significantly
                                                                          lose public trust”


                                                                      •   74% feel pressure to “do
                                                                          whatever it takes”

                                                                                     32
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.”
                                           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 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.

                                      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”
Daily Introspection and Improvement


4. WATCH FOR
COMPLACENCY

                                      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
    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

                             39
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

                                              41
    Ethics at Work
                KPMG 2000                  KPMG 2005                             KPMG 2008
                 Survey                      Survey                               Survey
•   76% of employees observed a
    high level of illegal or        •   74% of employees
    unethical conduct at work in        observed a high level of
    the past 12 months                  illegal or unethical          •   74% of employees
                                        conduct at work in the past       observed a high level
                                        12 months                         of illegal or unethical
•   49% of employees observed                                             conduct at work in
    misconduct that, if revealed,   •   50% of employees                  the past 12 months
    would cause their firms to          observed misconduct that,
    “significantly lose public          if revealed, would cause
    trust”                              their firms to                •   50% of employees
                                        “significantly lose public        observed misconduct
                                        trust”                            that, if revealed,
                                                                          would cause their
                                                                          firms to “significantly
                                                                          lose public trust”


                                                                      •   74% feel pressure to “do
                                                                          whatever it takes”
                                                                                     42
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.

                           43
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
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.”?




                    46
Jeffrey Skilling – while CEO of Enron




                  47
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
ENRON
        51
Guess who said it!

“I have the highest ethical
 standards.”




                              52
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


                                            53
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




              57
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 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
Organizations with ethical slippage began and ended with conflicts

5. WATCH THE CONFLICTS!


                                                                     62
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.
The Flat Organization When It Comes To Living by the Rules

6. WATCH THE RULES AND
ENFORCE THEM

                                                             65
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




                                                          66
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
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

                                                                         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.
            - 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
                                                                69
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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