Friday, October 31, 2014

“The Ethical Crisis in America” – A Status Report

In America, the bursting of the so-called “dot-com bubble,” led to an unfolding ethical crisis that has expanded to become multinational, and now, global in its occurrence.

Corporations Were At Fault

At the beginning, in America, corporations were blamed both for their lack of ethical culture and for their failure to police themselves and their executives.

Today, most American corporations have significantly rectified their shortcomings by installing ethical and compliance officers, creating new procedures for controlling improper behavior, establishing ongoing ethical training programs for managerial employees, improving their corporate governance practices, and embarking upon corporate social responsibility initiatives.

As corporations build upon these successes and adjust to the contemporary regulatory environment wherein criminal indictments, stiff monetary penalties, extensive jail time, and the collapse of entire businesses have become commonplace, many traditional business practices are being reversed.

For example, in the past corporations were quick both to resist regulatory or judicial investigation, and to provide legal defense for their executives as functionaries of the organization when they were accused of crimes.

Now that has all changed. Today companies actively cooperate with the authorities to avoid the certain destruction that often accompanies a government indictment.

Directors, are doubly cooperative in their efforts to not be seen as defending any sort of impropriety, and in their desire to protect themselves against claims on their personal finances. Thus, organizations distance themselves from the illegal or unethical activities of their executives, and act to shift blame for misconduct from the organization to the individuals under suspicion, leaving them to handle their own defense.

Regulatory Agencies Were Also to Blame

As well, after the dot-com burst, the U.S. regulatory infrastructure was blamed for insufficient “checks and balances” and a failure to adequately scrutinize business activities.

Today, U.S. regulatory agencies are armed with enhanced budgetary support and the teeth of new legislation (e.g. Sarbanes-Oxley, U.S. Securities and Exchange Commission governance rules, stock exchange rules, and stiffer U.S. Sentencing Guidelines). The SEC and the Department of Justice have aggressively moved forward to police and punish white-collar crime on a massive scale. The Wall Street Journal reports that the Justice Department has charged more than 900 individuals in over 400 corporate fraud cases during the last four years, and that 500 of those defendants have been convicted during that time.

In their pursuit of wrong-doing, the terms of engagement between regulatory authorities and corporations have changed. In times past, prosecutors may have often avoided pursuing white-collar crime because it was either too complex or too time-consuming. But that is no longer the case, as prosecutors have worked on more white-collar cases they have acquired the skills and knowledge that are necessary to seek justice even in complex business and securities law proceedings.

The Deferred Prosecution Agreement

Most significantly, the SEC has adopted a new tool known as the “deferred prosecution agreement.” Since the demise of the accounting firm of Arthur Andersen in 2002, the SEC has learned that an action brought against a company can destroy its brand and public credibility, often leading to the collapse of the respective business and serious economic fallout for displaced clients, innocent employees, shareholders, and the economy. Arthur Andersen, one of the top five accounting firms in 2001, was dealt a death blow that put the entire organization out of business, leaving thousands unemployed and all with greatly tarnished reputations.

Now regulators and prosecuting attorneys, realizing the potential impact on the economy of putting a giant out of business, have developed the “deferred prosecution aggrement,” hoping to punish only the guilty parties, preserving the company to continue doing business. Hence, regulators are slower to bring charges, and more thoughtful about the strategy that will result in justice and serve the ends of society.

In a deferred prosecution agreement, a company agrees not to contest a list of alleged violations in return for a deferred or suspended prosecution, and the appointment of an independent monitor to supervise the company’s rehabilitation. If the company is able to reform itself, the agreed upon charges are dropped after a certain period of time.

It is believed that this approach stops short of destroying the company, while still allowing individual executives to face criminal charges and stand trial before the law.

Deferred prosecution agreements have been developed in an effort to head off ultimately unnecessary business and economic disruption, and are for use in instances where corporate reform is likely once the bad apples have been removed.

Recent examples include KPMG for their promotion of allegedly abusive tax shelters, Bristol-Meyers Squibb Company for “channel stuffing,” and Royal Dutch/Shell Group for overstating energy reserves, all of which have received deferred prosecution agreements in deference to the severe and unintended disproportionate economic impact that comes with corporate indictments.

In Summary

These, and other developments, evidence continuing proactivity and increasing sophistication on the parts of both corporations and regulatory authorities as they grapple with instilling a higher ethical standard within the world of business.

The legal and regulatory framework provide a system for detecting and preventing problems, and for making the lessons systematic. As this becomes more commonplace in large corporations, their executives are internalizing the economic benefits of a corporate ethical culture.

More organizations are adopting a higher ethical standard, and, as organizations become more transparent and accountable, the government is going after executives for conduct that prior to the bursting of the dot.com buddle might not have gone unnoticed.

American capitalism is certainly not beyond improvement, but substantial strides are being made. Increased enforcement and higher standards are working more effectively to increase the ethical culture in the U.S. Our evidence of the successes being achieved in the world of business and within our society is that, as a higher standards becomes normal, a lower standard is no longer tolerated.

Excerpted from an invitational speech under the same title, delivered during July 2005 by Dr. Lindsay Moore at the 2nd Annual Teaching Business Ethics Conference, held at the Leeds School of Business, University of Colorado, Boulder, Colorado, U.S.A.

Copyright © 2005 KLM, Inc. All Rights Reserved.

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