Lubbock SHRM

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“I see in the near future a crisis approaching that
unnerves me and causes me to tremble for the safety
of my country. As a result of the war, corporations
have been enthroned, and an era of corruption in high
places will follow, and the money power of the country
will endeavor to prolong its reign by working on the
prejudices of the people until all wealth is aggregated
in a few hands…”

                             -- Abraham Lincoln, 1864
           What is Ethics?
• The discipline dealing with what is good
  and bad and with moral duty and
• The principles of conduct governing an
  individual or group
• A guiding philosophy
     What is Business Ethics?
• A form of the art of applied ethics that examines
  ethical principles and moral or ethical problems
  that can arise in a business environment.
• The range and quality of business ethical issues
  reflects the degree to which business is
  perceived to be at odds with non-economic
  social values
• Corporations have redefined their core values in
  light of business ethical considerations
 Examples of Un-Ethical Practices
• Marketing
  – Price fixing
  – Bait and Switch
  – Greenwash – Misleading consumers of the
    environmental practices of the company
 Examples of Un-Ethical Practices
• Production
  – Genetically modified food
  – Product testing
  – Ford Pinto Scandal – “the barbecue that seats four”
     Can HR Be Un-Ethical?

• We must not look the other way when
  faced with…
  – Discrimination/Retaliation
  – Employee Privacy/Surveillance
  – Safety
    Drivers of Business Ethics
• Demand for more ethical business
  processes (known as “Ethicism”)
• Pressure on industries through public
  initiatives and laws
• Interest in business ethics accelerated
  dramatically during the 1980’s and 1990’s
  to combat a series of fraud, corruption,
  and abuse scandals.
Corporate scandals are not new
           Widespread Moral Deficits…
Ivan Boesky                            Insider Trading
                                       $100 million – 3 years
Michael Milken                         Securities Fraud
                                       10 years
Charles Keating Savings & Loans
                                       Investors lost $200 million
Source: A Century of Greed, Scams, Scandals and Swindles - A Look at the Seamy Side of 20th Century Wealth
February 2000
    Fortune magazine chooses Enron
        as it’s “Best Managed and
        Most Innovative company”,
              5 years in a row
       #1 – Quality of Management
          #2 – Employee Talent
•   August 2000: Stock at $73 billion
•   March 2001: FY2000 revenues at $100 billion
•   Sep 16, 2001: “Buy more shares”
•   October 2001: Enron pays its regular dividend
     – October 16, 2001
       $618 million 3rd Qtr Loss
       $1.2 billion reduction in shareholder equity
    – October 31, 2001
        SEC upgrades inquiry into a formal investigation
• December 2, 2001
    Enron files for bankruptcy
    4,000 employees fired

• 20,000 workers lose their jobs

• $73 billion in stock value - gone
    Enron – What Happened?
“Enron apparently, with the approval or
advice of its accountants, auditors and
lawyers, used thousands of off-the-book
entities to overstate corporate profits,
understate corporate debts, and inflate
Enron’s stock price.”

           Source: Corporate and Criminal Fraud and Accountability Act of 2002
•   $3.9 billion in expenses hidden
•   $3.3 billion in accounting irregularities
•   17,000 jobs lost
•   Company applied for bankruptcy
•   Market value of $100 billion
•   Tax evasion
•   Evidence tampering
•   1500 jobs lost
•   Additional 4,500 laid off
•   Down $86 billion in one year from peak
    share price
           Global Crossing
• Ghost transactions

• 2000 jobs lost

• Down $40 billion in a few months
• Questionable loans

• Loss of $6.5 billion in market value in one

• Company in bankruptcy
        Wall Street Analysts
Investment Banking Firms
• Biased research
• 10 firms fined $1.4 billion by SEC
                  Citigroup Salomon Smith Barney
                       Credit Suisse Group’s CSFB
                              Merrill Lynch & Co.
                           Goldman Sachs Group
                                 Morgan Stanley

          Source: Regulators Finalize $1.4 Billion Settlement Against Wall St. Firms
                                                                  - PBS Newshour
       Insurance Companies
• March & McLennan
  – Largest Insurance broker
  – Soliciting rigged bids for insurance contracts
  – Will pay $850 million

• AON Corporation
  – Second largest Insurance broker
  – Fraud and anti-competitive practices
  – Will pay $190 million
         Source: “Classic Financial and Corporate Scandals” website
     Fannie Mae - Mortgages
• Improper accounting methods

• KMPG would not stipulate that reporting
  was accurate

• Reported a $9 billion loss
• $22.5 million settlement with SEC
• Avoids trial next year on charges that KMPG
  willfully ignored warning signs related to Xerox’s
  accounting maneuvers
• Largest accounting firm settlement in history
• "This is a fairly egregious fraud on the part of
  Xerox, and KPMG didn't live up to its role as
  gatekeeper," said Paul Berger, associate
  director of enforcement at the SEC.
          Source: USA Today – KPMG to pay $22.5M to settle Xerox questions– 4/19/2005
Part 2
          Lockheed Review
• Integrity is hard to teach but it is easy to
• “Modeling” – Sending messages through
• What drives un-ethical behavior?
  – Goal driven, desire to meet objectives,
    pressure to compromise ethics
• Who drives un-ethical behavior?
  – Management, Peers, Customers, and Self
  Developing an Ethical Culture
1. Get Leadership Buy-In
2. Communicate Consistently
3. Use a Variety of Internal Communications
  •   Newsletters
  •   Calendar
  •   Hotline
  •   Code of Conduct
4. Provide Annual Training
5. Ethics Component in Performance Appraisals
              HR’s Role
• Promote the Positive
• Walk the Talk
• No “Finish Line” with Ethics
• Do the Right Thing When No One Is
• Ethics – A Life-long Practice
• The Ability to Push Back When Senior
  Management Strays
                      Extra! Extra!
Lockheed Martin to Pay $2.5 M to Settle Racial Harassment Lawsuit

                            • January 2, 2008
                            • EEOC says African American
                              Electrician Subjected to ‘N-
                              Word’ and Threats of
                              Lynching at Worksites Across
                              the Country
                            • Largest award obtained by
                              EEOC to individual
                            • “We never forget who we’re
                              working for” Lockheed Martin
                              Company Slogan
        Creation of New laws
Sarbanes-Oxley Act
• CEO’s CFO’s certify accuracy
• Fines up to $1 million/10 years
• No personal loans to executives
• Auditing procedures, incl. rotation
• Whisteblower protection
• Attorneys must report violations
                Source: “Sarbanes-Oxley Explained” website
                American Institute of Certified Public Accountants
    Cost of SOx Compliance
2001-2005 Increase Percentage
• S&P Small-Cap 292%
• S&P Mid-Cap 245%
• S&P 500 163%
       Scandal Hits Lubbock
• 1999-2000 CFO gives self bonus of $4.6M
• Jan 2001 – Oct 2005 (Post SOx) CFO wire
  transfers to personal account totaling $69
• CFO sentenced to 25 years in prison
   Misguided Cures for Corporate
• Enron and other Corporations did not fail
  because they violated accounting standards;
  they violated accounting standards to cover up
  their financial weaknesses
• Sarbanes-Oxley swept all of the important
  issues off the table – legal obstacles to
  corporate takeovers, tax distortions that
  encourage companies to use too much debt,
  and so on

                            Source: CATO Institute Policy Report
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