Where Have all The Ethics Gone?

Symptom: The Expensive Preschool

Jack Grubman is a telecom analyst for Citigroup's Salomon Smith Barney. He is also the father of twins he wanted to enroll in Manhattan's 92nd Street Y, home of a prestigious nursery school that is supposedly harder to get into than Harvard. In 1999, Grubman, who wasn't particularly excited about AT&T as an investment, had rated the company's stock as "neutral." However, in early 1999 Sanford Weill, chairman of Citigroup, asked Grubman to take a "fresh look" at AT&T. Grubman began a review but also stated in an email that was titled "AT&T and the 92nd Street Y" that he'd love Weill's help in getting his twins in to the Y's preschool. Shortly after the memo was written, Grubman upgraded AT&T's stock to "buy." Not long after the upgrade, Salomon won some lucrative AT&T business. At about the same time, Citigroup gave $1 million, spread over five years, to the 92nd Street Y, and the Grubman twins were admitted to the preschool.

Kinds of Abuses

Whether Jack Grubman did anything wrong, Citigroup's $1 million donation to the school and the Grubman twins' admittance have been characterized in the press as a symbol of the ethical abuses that have recently plagued our economy. During 2000 and 2001, there were numerous revelations of corporate wrongdoing that created a crisis of confidence in the capital market system. Some of the most notable abuses included:

Misstated financial statements and "cooking the books": Examples include Qwest, Enron, Global Crossing, WorldCom, Xerox, etc. Some of these frauds involved twenty or more people helping to create fictitious financial results and mislead the public.
Inappropriate executive loans and corporate looting: Examples include John Rigas (Adelphia), Dennis Kozlowski (Tyco), Bernie Ebbers (WorldCom), etc.
Insider trading scandals: The most notable example is Martha Stewart and Sam Waksal of ImClone.
Initial Public Offering (IPO) favoritism, including spinning and laddering: Spinning involves giving IPOs to those who arrange quid pro quo opportunities; laddering involves giving IPOs to those who promise to buy additional shares when prices increase. Examples include Bernie Ebbers of WorldCom and Jeff Skilling of Enron.
Excessive CEO retirement perks: Companies including Delta, PepsiCo, AOL Time Warner, Ford, GE, and IBM have been highly criticized for endowing huge, costly perks and benefits, such as expensive consulting contracts, use of corporate planes, executive apartments, maids, etc., for retiring executives. 
Exorbitant stock options for executives: In 1997, for example, Bernie Ebbers of WorldCom had a salary of $935,000 but received stock options worth approximately $46 million. 
Loans for trading fees and other quid pro quo transactions: Financial institutions such as Citibank and JP Morgan Chase, for example, provided favorable term loans to companies such as Enron in return for the opportunity to make hundreds of millions of dollars in derivative transactions and other fees.
Excessive debt: Because of excessive debt and other problems, six of the ten largest corporate bankruptcies in history occurred in 2002 and four of these firms experienced financial statement frauds.
Massive fraud by employees: While not in the news nearly as much as financial statement frauds, there has been a tremendous increase in employee fraud against organizations. Some of these frauds have been as high as $2-3 billion.

Why Ethical Problems Occur

Ethical problems such as these usually occur when three factors come together: 1) some kind of pressure, 2) a perceived opportunity, and 3) some way to rationalize the act as appropriate, given one's personal code of conduct. Such pressures include:

• Executive incentives to provide favorable earnings reports to meet Wall Street's earnings forecasts.
• The need to report increasing earnings to maintain high stock prices so that endowed stock options can be exercised.
• High rewards for short-term profitability at the expense of long-term growth.
• Large amounts of debt and leverage. 
• Greed by CEOs, investment and commercial bankers, investors, and others.

Some opportunities leading to abuses include:

• A sound economy in the1990s that masked many problems. 
• Rule-based accounting standards that made it difficult for auditors to argue against aggressive accounting practices.
• Inappropriate behavior of CPA firms, especially some partners who were more concerned about building their practices than maintaining independence.
• Educators failing to teach ethics, fraud detection, and analytical skills to students.

Moral development researchers maintain that people develop honesty through a combination of proper modeling (example) and labeling (teaching and training.) They also argue that when either of these is absent or when inappropriate modeling or labeling is present, people will be less honest. Unfortunately, bad modeling makes up most of the news we read and watch on television. Families who used to provide most of the honesty labeling are spending less and less time together. As a result, many people working in business have developed situational rather than absolute ethics. Situational ethics, combined with pressures and opportunities like those described above, can make it easy for people to rationalize participating in these abuses. 

In some cases, more than twenty-five people cooperated in the same fraud. In one case of financial statement fraud, for example, the chief financial officer (CFO) instructed the chief accountant to artificially increase earnings by $105 million so the company could meet Wall Street's earnings forecast. Although the chief accountant was skeptical about the purpose of these instructions, he did not challenge them. The mechanics were left to the chief accountant to carry out. He created a spreadsheet with seven pages of improper journal entries, 105 in total, that he determined were necessary to carry out the CFO's instructions. In total, between twenty-five and thirty individuals in the company were involved in making misleading financial entries. 

This case does not represent an isolated instance of acquiescence to inappropriate requests. Consider the results of a poll of attendees at the April 1998 Business Week forum of CFOs. Participants were queried about whether they had ever been asked to "misrepresent corporate results." Sixty-seven percent of CFO respondents said they had been pressured by other executives to misrepresent corporate results. Of those who had been asked, 12 percent admitted they had "yielded to the requests" while 55 percent said they had "fought off requests" to cook the books.

Expectations for Marriott School Graduates

Honesty lies at the core of any decent and just society. The people of Ammon in the Book of Mormon enjoyed such a society and were characterized as being "perfectly honest and upright in all things…" (Alma 27:27). Honesty is also at the heart of our religion. Paul wrote, "For we trust we have a good conscience, in all things willing to live honestly" (Heb. 13:18). All who associate with BYU and the Marriott School pledge to live an honor code that includes dealing honestly. Those who are members of The Church of Jesus Christ of Latter-day Saints commit to a particularly high standard of honesty that has characterized our people since the early days of the Church. They know that they must reach the point in their lives where they "know their hearts are honest" to be fully acceptable to the Lord (Doctrine & Covenants 97:8).

With such principles ingrained in us, wherever we are and whatever job we are entrusted to perform, we must stand for principles of honesty and integrity. The model we provide sends strong messages to our co-workers and family members. We cannot afford to be involved in even passive participation in or observance of dishonest behavior. No amount of material wealth is worth having a guilty conscience or compromising our integrity. 
The words of Karl G. Maeser, an early BYU president, about honor and integrity provide a great example for us to follow: "I have been asked what I mean by my word of honor. I will tell you. Place me behind prison walls-walls of stone ever so high, ever so thick, reaching ever so far into the ground-there is the possibility that in some way or another I may escape; but stand me on the floor and draw a chalk line around me and have me give my word of honor never to cross it. Can I get out of the circle? No. Never! I'd die first!" 

Marriott School graduates and friends are valued for their integrity and honesty. A recent Wall Street Journal ranking of business schools identified the Marriott School as one of the "hidden gems" in America. In doing so, it stated that the school is a place where recruiters can find students with high integrity and moral values. There is no finer compliment that can be paid to BYU or the Marriott School. We are grateful to you for the examples you set for corporate America and the legacy you have built for future Marriott School graduates.

FOUR ETHICAL TESTS

1. If the transaction or behavior were printed on the front page of a newspaper, would it be embarrassing (not of "good report") or have the potential to harm other people?
2. Does the quid pro quo transaction cause you to compromise your principles by providing an undue advantage to you, your firm, or anyone else?
3. If the Savior were your business partner would you feel uncomfortable?
4. Does this activity cause you to extend yourself too far financially or become too indebted? 

CULPABILITY OF BUSINESS SCHOOLS

Several factors suggest that business schools may share the blame for a deterioration of corporate ethics.

Ethics courses The decrease in the number of ethics courses is sending a signal to students that ethics are not as important as other skills such as constructing a good spreadsheet or writing a marketing plan.

Fraud recognition Faculty are not teaching students to recognize fraud. Case studies typically do not illustrate unethical or fraudulent activity and many professors feel ill-equipped to deal effectively with these issues.

Ethical values The understanding of and appreciation of ethical values is diminishing. Surveys indicate a decreasing percentage of the population feel strongly about absolute standards of honesty. 

Dot-com excesses The Internet boom gave many students the impression that old values were invalid. Since everyone was getting rich, they felt they should get rich too-even if that meant cutting corners to get there. 

Historical perspective Until recently, many students and instructors had not considered the implications of a major economic downturn. This lack of historical perspective led both faculty and students to a posture of risk taking rather than risk aversion.

Marginalized ethics When ethics courses are offered, they are often taught by nonbusiness faculty and may appear marginalized from the rest of the business curriculum.

What Business Schools Can Do

Code of conduct Schools can establish a code of ethical conduct and invite all students, staff, and faculty to pledge to honor it.

Tone Administrators can set an ethical tone by frequently discussing ethical expectations with faculty, staff, and students.

Curriculum Schools can require all students to complete a substantial, rigorous business ethics course.

Integrate Schools can supplement an ethics course by encouraging faculty to integrate ethical issues into the classroom across all disciplines.

Ethics cases Faculty can teach cases that bring up situations in which students have to identify potential conflicts of interest, fraudulent behavior, illegal activities, and "shrewd" business practices that push the limits of propriety.

Visibility Schools can raise the visibility of ethical issues through seminars, invited speakers, publications, etc.

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Article written by Dean Ned C. Hill and Associate Deans W. Steve Albrecht and Lee T. Perry
Illustration by Pep Monteraut