In an era marked by more severe federal sentencing guidelinesfor
white-collar criminals, most American corporations still don't have a clue
about effectively deterring this type of misconduct.
BARBARA ETTORE
I t is one of the ironies of doing business today that, while companies
are being asked to do more with less, they are also being told to do so
under stricter legal and ethical guidelines. In a time of tighter rules,
the days of tolerance for cutting corners, looking-the-other-way and one-hand-washing-the-other
are rapidly fading. But the experts say that most companies haven't yet
learned how to cope with changing paradigms.
Just being "within the law" doesn't cut it in this ever-more-complicated
world. To the beleaguered manager, it may seem that standards are constantly
changing and that their organizations must scramble to adhere to new norms—even
as they are subject to new regulations that require even more rigorous conformity
and self-examination.
"There was a time in our country when white-collar crime was tolerated,"
says Jeffrey M. Kaplan, an attorney with the New York firm of Arkin Schaffer
& Supino, and an expert in business ethics and legal compliance. "Now,
in a time of diminishing resources, both the costs of crime and the costs
of punishment—including the impact on shareholders, consumers and employees—have
become too great for society to bear."
In support, a new set of far-reaching guidelines came into effect in November
1991. Called the Federal Sentencing Guidelines—directives for federal
judges to follow in white-collar crime sentencings—they mandate much
stricter punishments, among them enormous financial settlements up to and
exceeding $500 million, depending on the crime. Slaps on the corporate wrist?
Hardly. But the more interesting part of the guidelines stresses prevention
of these kinds of crime, putting the responsibility squarely on corporations
to do so. In fact, for the first time
in modern statutory law, the federal government is telling American business
that a serious, proactive effort to prevent white-collar crime in the workplace
can mitigate a judgment against a company.
These guidelines have accelerated an already strong movement in some corporations
to create ethics and whistle-blowing procedures, to hire ombudspeople, to
inaugurate ethics statements and internal hotlines and to educate employees
and define ethical behavior. In fact, the "business" of business
ethics is, arguably, a billion-dollar industry, considering the consultants'
fees and the videos, training programs, interactive psychodramas and other
tools used by companies today.
Some of these organizations are in the vanguard. But professionals glumly
delineate two contradicting attitudes that coexist in American business
today. First, any company that professes to be unaware of the importance
of ethics in doing business now is, quite simply, lying or ignorant. And,
second, most companies are giving insufficient attention to ethics—
until they get into trouble and learn the lesson the hard way.
To be sure, American corporations have done their fair share of malfeasance.
Similar white collar crimes seemed to run in decade-long cycles. In the
'60s, there was a spate of bid-rigging by electrical companies. In the '70s,
it was illegal payments overseas by giant government contractors. The '80s
saw pervasive insider trading, banking abuses and illegal practices by defense
contractors.
The '90s? Well, there have been some brokerage scandals, a corporate finagle
here and there, and one big bond scandal at Salomon Brothers for illegal
bidding at US. Treasury auctions. But no defining set of white-collar crimes
has yet emerged to shape this decade. There are no major cases under the
Federal Sentencing Guidelines yet, either. Legal specialists say it will
take several years for a test case to surface. This is not for lack of intense
government interest; the 1993 Federal Bureau of Investigation budget, for
example, included $200 million earmarked for 20,000 new investigations,
most of them in white-collar areas.
The wheels of law grind exceedingly slow—which is why the guidelines
themselves are an extraordinary instrument for compliance. They came to
pass during the long Reagan-Bush tenure—administrations noted
for getting regulation off the back of business. The rules mandated, in
effect, that in exchange for that business-friendly climate, corporations
would have to do their own policing.
The government got ahead of the curve for once, say the professionals, and
defined what an ethics program might include. At the heart of the guidelines
are seven fundamental points spelling out in detail the ideal ethical compliance
policy. "In theory, these are tremendous strides, creating an organization
that is ethically state-of-the-art," says attorney Kaplan.
In brief, the guidelines call for a company to create powerful internal
constituencies with a mandate to ensure an ethical climate. These could
consist of committees of top officers who must meet regularly, receive information,
act and report to the board. Moreover, what these entities do must be disseminated
to the entire organization, and there must be a public report within the
company, involving the CFO, the corporate legal officer and division heads,
as one example.
"To a greater degree, employees, shareholders and officers feel ethical
issues are the issues for them," says Kaplan. "We are seeing the
beginning of solutions. That's where we're at."
But a host of experts might take issue with those statements. Darlene Orlov,
president of Orlov Resources for Business, a human resources consulting
and training company based in New York, maintains that when people look
to the law alone as the arbiter of what is right and wrong, they frequently
get into trouble. "A corporation could say, 'If it's legal, it's okay,'
and exempt moral judgments," she says.
Orlov goes on to say that not only are there morally incorrect laws—slavery
is an historical example—but also that laws themselves occur because
of changes in what people think is right and wrong. These changes come from
"internal mechanisms for recognizing ethical dilemmas."
"People are compartmentalized in their ethics," Orlov continues.
"Someone who cheats on her spouse would never steal a dress. A man
who cheats on his taxes would never cheat a friend at cards."
Another specialist contends that corporate codes of ethics focus too much
on the negative "thou shalt not," what employees should not do.
"Employees can always find an exception," says Craig Dreilinger,
president of The Dreiford Group, a management consulting firm in
Bethesda, Md. "[Corporations] must go beyond the negative particulars
and get their people to see the spirit of the law."
As elusive as the understanding of law and behavior can be, certainly there
is no lack of corporate interest in finding a workable solution to ethical
dilemmas. In the past six to 12 months, Dreilinger alone has seen "at
least double" the number of serious inquiries for assistance in setting
up ethics programs—introduction and implementation from companies who
haven't had them before, or the need to "drill deep into the issues"
from those who have.
Clearly, American managers have focused on ethical compliance programs as
the way to fulfill their responsibilities and to avert white collar crime
in their workplace. Even Winthrop M. Swenson, deputy general counsel of
the U.S. Sentencing Commission—and chairman of the staff unit that
developed the corporate guidelines—says, "If [corporations] have
done everything reasonably necessary to implement a rigorous compliance
program, it doesn't make sense to hit them over the head, because we really
can't ask them to do more than that."
Swenson's statement quite rightly applies to the sentencing aspect of the
guidelines—the
"letter" of the law. But many experts maintain that most corporate
compliance programs fall short of the guidelines, or, worse, that these
programs do not prompt more ethical behavior, the "spirit" of
the law.
"I personally don't think [the guidelines] have changed the landscape,"
says Robert J. McGuire, former New York City Police Commissioner and president
of Kroll Associates, the New York-based white-collar crime investigative
firm. McGuire says the guidelines have been, "a blip on the radar screen"
producing only "modestly more enlightened" corporations.
Roger J. Magnuson, a partner at the Minneapolis law firm of Dorsey &
Whitney and head of its white-collar and corporate compliance practice groups,
concurs. "A surprising number of compliance programs at companies are
not well benchmarked and probably would not pass guidelines' muster,"
he says.
If we assume that ethics programs at some American companies—programs
executed from the top down and with the best of intentions—are ineffectual,
we must also assume that these strategies haven't made that much of a difference
in the way companies operate.
This is a conclusion both depressing and frightening.
The Ethics Resource Center, a well-known nonprofit Washington consultancy
that has worked with more than 100 companies on ethics, recently surveyed
10,000 employees from its client companies in aerospace, telecommunications,
healthcare and consumer products. The survey indicated that ethics programs
"failed to penetrate the [corporate] culture." Fifty-five percent
of the respondents said they "never" or "only occasionally"
found their company's standards of conduct "useful in guiding their
business decisions and actions." And, 8 percent had not read the standards.
It has become standard practice to point out that business is becoming ever
more complicated. Enterprises will have to make increasingly sophisticated
decisions in less time, with intangible intellectual property issues and
murky technological distinctions. Face-to-face contact has waned; companies
these days often don't fully know who they are doing business with and what
is the source of capital in a deal. In addition to the federal guidelines,
corporations can find themselves subject to other avenues of punishment.
The Sentencing Commission's Swenson points out that a corporation that has
honored the letter of the guidelines could still be subject to antitrust,
interstate trade, the False Claims Act, and other considerations. "The
guidelines control criminal penalties," he says, "but they don't
control penalties from other quarters, such as state laws and corporate
liability laws."
So, what is a good-citizen company to do if compliance programs alone don't
promise —or, even foster—ethical behavior? Can ethics be imposed
on an organization? How can a corporation truly raise the level of its ethical
behavior?
Attorney Magnuson, author of The White Collar Crime Explosion (McGraw-Hill,
1992), suggests crossover—temporary job postings, internships and the
like—between the specialists in public policy (i.e., the regulators
and think tank people) and those in corporate law or private practice. aLet
everyone see the body of regulations that has an actual impact in dayto-day
corporate life," he exhorts. aEven the good-faith employee has to have
his or her consciousness raised."
Some companies have been aggressively policing themselves beyond ethics
compliance strategies. They have become mini-prosecutors, setting up stringent
internal guidelines for employee compliance and disciplinary action. If
any malfeasance occurs, they punish swiftly, then preemptively take the
results to the authorities.
"These companies want to forestall major litigation—multimillion-dollars
in attorneys' fees alone," says Magnuson. "As a mark of good faith,
they are hoping that the federal authorities will say, 'Go, and sin no more.'
It works."
Depending on the crime, such corporations use various punishments toward
the employee wrongdoer: forfeiture of bonuses, suspensions with or without
pay, letters of reprimand in permanent files, downward job reclassification
for those on management tracks, various probationary tasks, as well as outright
dismissal. Of course, the danger in this "terrible swift sword"
school of policing is that a corporation can become too aggressive in its
search for compliance. The employee can be accused, judged and punished
out of hand.
The Sentencing Commission's Swenson acknowledges that the guidelines
give "a strong incentive" for companies to "disclose and
cooperate with authorities," increasing the likelihood that individuals
will be held accountable. "The concern is about getting the right balance
here," he says carefully. "we want to send the message that lawbreaking
won't be tolerated. Yet, we don't want employees to be scapegoats. It may
be a problem [with the guidelines]. I don't know that it's a weakness."
Employee training is one small step for companies. HR specialist Orlov says
that workers bring to their workplace their ethical makeup, derived from
many factors including society, past experiences, upbringing, role models
and institutions, and media attention. Sometimes, the level of corporate
ethics clashes with their own.
"There must be a framework for recognizing ethical dilemmas, and a
process for resolving them and thinking about them pro-actively before problems
arise," Orlov says. "People have to be trained within the context
of work." To this, she advocates ethical training using relevant examples
appropriate to an employee's job, level and industry. For example, training
an entry-level worker how not to take a bribe doesn't make sense. What does
is training him or her to recognize pilfering and providing clear-cut steps
to report it, protect confidentiality, and ensure no retribution.
Here we come to the true heart of the matter. Are all the guidelines, programs
and training inadequate because—unless there is a culture change from
the skin, bones and very fiber of America's companies—corporate ethical
behavior is just about impossible?
Gary Edwards, president of the Ethics Resource Center, maintains that goal-setting
in today's businesses hampers ethical performance. Goals, he says, are typically
set at the top, with no input from lower levels. Managers exhort workers
to exceed goals, and they empower them to act on their own—all while
worker resources are shrinking. Hence, he says true ethical behavior must
examine motivation.
For the Good of the Company
Edwards says the overwhelming number of white-collar crimes arises from
the intentional employee misconduct designed to benefit a
company. "The paradigm of improper conduct," he calls it. The
kind of wrongdoing that puts a corporation on the front page and ruins its
reputation. He says these white-collar criminals think they are different
from and above the common criminal, because they did it "for the good
of the company."
"They believe the objectives have overriding importance over legalities
and ethics," he says, adding that this is the basic ethical flaw, especially
as employees see goal achievement rewarded by promotions and bonuses. This
tacit approval sends strong signals to employees to cut corners ethically.
Without a cataclysmic change in corporate culture and values and in reward
systems and goal-setting, "the guidelines are inadequate," Edwards
says. "It is likely that a company and its attorney can look at the
[guidelines'] seven factors and infer from them that meeting those requirements
would reduce substantially the likelihood of misconduct.
"That would be a wrong assumption," he states. "False comfort.
The company would be impaled on the guidelines."
Thomas A. Russo winces at the word "cop." What he is trying
to do goes beyond the description of police work. He is, he says, "not
just a cop."
Russo, managing director and an officer at Lehman Brothers, is one of a
new breed on Wall Street: the proactive senior-level compliance officer,
with far reaching responsibilities and clout. He has counterparts at such
well-known concerns as Goldman, Sachs 8 Company, Salomon Brothers, Morgan
Stanley and Paine Webber Group Inc.
"Just three to four years ago, [Wall Street] wouldn't have put the
emphasis on preventative steps," says Russo. "The emphasis was
on revenue generation." Early last year, Russo began his tenure at
Lehman as head of the corporate advisory division. Reporting to him are,
among other areas, the firm's general counsel and its credit and corporate
audit departments.
"We are putting a system in place to prevent problems," says Russo,
who brings heavy credentials to his position:
15 years as partner at a leading Wall Street law firm, former deputy general
counsel of the Commodity Futures Trading Commission and author of numerous
textbooks and articles on securities law and financial regulation. But even
Russo admits that he can't remember the complex maze of rules governing
financial transactions. How should a trader be expected to? So, Russo is
at Lehman to monitor the firm's compliance, educate its employees before
problems occur and get the firm's lawyers out onto the trading desks to
see how the business works.
Under Russo's direction, compliance has become part of the planning process.
In February, he surprised the firm's senior operating committee with a 60
page summary of his division's 1994 business plan, the first time in memory
that compliance goals were set out in detail. Preemptive in nature, they
are intended to reduce Lehman's regulatory exposure, limit litigation costs
and avoid adverse publicity and erosion of client confidence-the pragmatic
stuff of an ethics strategy.
Russo also co-chairs a new committee, in which new financial products are
investigated thoroughly for compliance before they are actively marketed.
"This is a signal to the firm that compliance is part of everything
we do," Russo says, adding that only select, seasoned traders will
deal with sophisticated products, and only to institutions, not to the general
public.
"We are geared very much to developing an [ongoing] relationship with
[Lehman's] businesses," he continues. "They should feel comfortable
telling us their problems during the quiet times. They should know we've
thought it through and should have confidence in us."
Can one create ethical behavior from outside the individual? "You can
tweak it," says Russo. "If leaders at the top say with clarity,
'I don't want an atmosphere where unethical behavior is acceptable,' then
the entire organization can get it. Sure, people will have unethical thoughts—but
maybe they'll think twice."
—B.E.
Edward P. "Ted" Wolfram Jr., is an unlikely whitecollar criminal.
He is a 63-year-old grandfather, a former stockbroker, a public speaker
at major corporations—and, a convicted felon. In 1983, the government
charged Wolfram, a managing partner at a Toledo, Ohio, brokerage firm, with
four counts of mail and wire fraud, saying that he swindled $47 million
from the firm, which subsequently went bust. Sentenced to 25 years, Wolfram
served, "exactly 10 years, minus one hour," at several federal
prison installations, and eventually was released on parole last October
3.
"No one aided me in what I did, and nobody put me in prison but myself,"
Wolfram says in a telephone interview from his Las Vegas home. "Because
of what I did, 7,000 clients were injured. I stole, and I defrauded my clients,
my partners, my friends and my family."
He says the fraud amounted to less than $47 million-but he does not criticize
the sentence or the judge. "If it's $2, it's too much," he asserts.
Wolfram's 89-year-old father (Edward Sr.), as well as Wolfram's wife and
four children, stood by him during those years, actions that he says "speak
of them, not me." ("The chances of a family staying together if
someone is in prison for three years are minuscule," he points out.)
Wolfram began lecturing on white-collar crime to MBA students from Pepperdine
College who visited the jail as part of Professor James Martinoff's classes.
Wolfram now lectures organizations for Martinoff's Ethical Management Consultants
group, providing his listeners with a voice of experience and sometimes
havng them in tears.
For each out-of-state lecture, Wolfrarn must get written permission from
his probation officer and must call in within 24 hours of his return. He
also must file a monthly financial report.
Wolfram pays no restitution to those he wronged; he voluntarily gave up
his assets— including his home, a collection of European racing cars
and his wife's engagement ring before he was sentenced, and the proceeds
were distributed then. His monthly pay at the consultancy is $1,500 (plus
$289 for healthcare insurance), which is supplemented by his wife's earnings.
Of his current career, Wolfram says, "This is not something I enjoy
doing, but I'm compelled. There are no reasons for ethical misconduct—just
a lot of excuses. I loved myself too much and others too little. There were
consequences to people who really matter."
A telling consequence was driven home to him while Wolfram was in a Tallahassee
prison. During a telephone conversation, his son told him that Wolfram's
young grandson (Edward IV) had burst into tears in class when his teacher
asked students to talk about their grandfather.. "He didn't want to
say his grand dad was in jail," says Wolfram, quietly. "How much
time would a man have to spend in prison for the misery he's caused his
family?"
—QE.