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Jennings
How Ethical Culture Affects Decisions
Marianne M. Jennings
Emeritus Professor of Legal
and Ethical Studies
W.P.Carey School of Business
Arizona State University
Ethical Lapses Student loan lenders:
Sallie Mae and 17
universities
Adelphia
Boeing
Cendant
Computer Associates
Tyco International
General Electric
Global Crossing
Merrill Lynch
Global Research
Oracle
Johnson & Johnson
BNY
Duke Energy
Reebok
Lehman Brothers
Goldman Sachs
Mellon Bank
Novartis
Biovail
Apple
Chase
Barclays Bank
Diamond Nuts
Merck
Chiquita
World Bank
BP
Madoff Investment
Securities
AT&T
Titan
Xerox
Kmart
Citigroup
Lucent
ImClone
Arthur Andersen
HealthSouth
Royal Ahold
Parmalat
Apollo Group
AIG (again)
Lehman
Google (again)
Olympus
MF Global
GlaxoSmithKline (3)
Wells Fargo
Wal-Mart
Stanford Investments
Bank of America
Galleon Hedge Fund
New Century Financial
Toyota
Downey S & L
WorldCom
Royal Shell
Nortel
Krispy Kreme
Refco
UnitedHealth Group
IndyMac
WaMu
Bear Stearns
Citigroup
Allergan
Eli Lilly
Cardinal Health
McNeil (J&J)
Penn State
Chesapeake Energy
Morgan Stanley
Standard Chartered
HSBC
Dell Computers
Tyson
Marsh & McLennan
AIG (twice)
Putnam)(Mercer)
Fannie Mae (twice)
KPMG (twice)
GM
Prudential
Options scandals (200
companies)
HP
Universities and sports
Siemens
Countrywide Financial
Société General
Milberg Weiss
Bear Stearns
Satyam (India)
Deloitte
Pfizer
Taylor Beane
AstraZeneca
Bristol-Myers Squibb
Bayer
Nortel
Peregrine Financial
Avon
Aon
Stanford Financial
Government Issues Illinois – Gov. Ryan
Illinois – Blago
Nevada - Ensign
Baltimore‟s mayor
Detroit‟s mayor – Kwame Kilpatrick
San Diego – $1.1 billion pension
fund deficit; skimming to meet city
budget
Connecticut – Gov. Rowland
Chicago – Mayor‟s office and
contracts
Embezzlement – BLM
Former Delay aides and guilty
pleas
Abramoff
Duke Cunningham -- $2.4 million
from defense contractors
State crime labs and scandals
Tom DeLay
Clark County Commissioner and
the MyTai concession
Philadelphia mayor and the
pay-to-play contracting system
Darlene Druyun and Boeing
HR director of JeffCo County and
the $32,000 in personal expenses
on county credit card that began
at Starbucks
Ninth Circuit‟s Hawaii meetings
USDA employees and the
$100K for visas
Dept. of Interior and forged
documents
Graduation rate manipulation
VECO and Alaska officials
Ted Stevens, former senator,
Alaska
Prosecutors in Ted Stevens‟ case
Ethics officer for U.S. Marshall
Rep. Charles Rangel, taxes,
donations
Rep. Maxine Waters and access
Timothy Geithner and the SS taxes
VA spending
VA docs and research $$
Gov. Mark Sanford & hiking
Oil for food UN scandal
Post-Katrina corruption in contract
awards
Iraq contract awards
Solyndra
Fast and Furious
Governors engaged in business
relationships with those who
receive state contracts
Arizona‟s Fiesta Bowl
Henry Cisneros
Taser and law
enforcement officials’ conflicts
Colorado and the $1,500
office chairs
Contributions for changing the
no-touching rule at San Diego
strip clubs
Scottsdale School District and
the bids
New York assistant principal who
gave his son the answers to 35
questions on the Regents’ exam
Kerik and employment of illegal
immigrants
New York officials and use of
government funds for personal
services
SEC general counsel with interest in
Madoff funds recommending
distribution that benefited him
SEC and destruction of documents
SEC treatment of whistleblower
SEC and failure to investigate difficult
cases
Secret Service
GSA
Government Issues DMV employees who gave out licenses in
exchange for cash
William Jefferson and the cold cash
New York Eliot Spitzer, former governor
New York David Paterson Governor
Justice Department and monitors‟ conflicts
U.S. Postal Service and the Ruth‟s Chris dinners
The docs, research, and drug firms
Firing of an IG
British MPs and expense
accounts
The stock sell-off and
Rep. Durbin
Maricopa County official who failed to disclose
loans from nonprofit that was awarded county
contracts
University of Illinois and the donors‟ sons and
daughters
TSA nominee using records for personal info
Blumenthal and Vietnam service
Jan Brewer and father‟s WWII service
Anthony Weiner
Army‟s $17,000 drip pans
BLM chief in Monterey doctoring
invoices to embezzle
US Attorney, Max Baucus, and affair
Friends of Angelo at Fannie Mae
SEC staffers and pornography
MMS relationships with oil companies
IRS employees using tax credits for
fraudulent home purchases
Samuel B. Kent –federal judge
impeached for lying to investigators
Rob Reiner using his favorite
companies for California commission
contracts and
political purposes
Arlen Specter‟s aide‟s spouse
gets earmarked funds
4
Colleges and Universities Apollo and the University of Phoenix
DOE audit on recruiting and advising
Stock options back-dating investigation
The student loan scandals
Student financial aid offices and the gifts
and perks to staff
Colorado State and the financial
accounting questions
University of Illinois and the two-track
admissions
Ohio State, the players‟ tattoos, and the
coach‟s nondisclosure
Falsified data by management scholar
Poor safety culture in campus
laboratories
Fraud in online courses
Increasing number of retractions of
journal articles due to scientific
misconduct
Penn State and the failure-to-report
issues
Law school candor in recruiting and
salary disclosures
Manipulation of Title IX numbers
Maricopa County Community College
Bond issue
Funding for campaign materials
Relationships with builders and others who
stood to benefit from the approval
Cornell and the research on lung cancer
conflicts
ASU and president‟s wife
Harvard researchers and relationships
with pharmas
Academics‟ falsified research
Heisman trophy winners
20 students arrested for ACT cheating
Vaccine researcher accepting funding
from anti-vaccine groups and
nondisclosure of source
Mistreatment of graduate students (co-
authorship, threats)
Professors allowing their names to
appear on articles ghost-written by
pharmaceutical firms.
Questions about quality of instruction
and quality of education
University of Arkansas coach
University of Michigan and research
conflicts
5
Colleges and Universities
A nine-month internal investigation into the
Department of African and Afro-American
Studies at The University of North Carolina at
Chapel Hill revealed unauthorized grades, forged
signatures, and other irregularities.
Between 2007 and 2009, grades for 59 students
in nine courses were submitted to the registrar
with forged signatures of professors who said
they never taught the course. During that same
span, “several faculty members” stated that there
were unauthorized grade changes and they were
not aware of who authorized the adjustments.
6
7
What can we learn?
a. These Were Not Close Calls:
Clear Ethical Lapses
Conflicts of interest
Lying to employees
Withholding information from investors
Lying about products and commissions
Misuse of funds or embezzlement
Alteration of documents
False reports and stonewalling auditors
False resumés
Office affairs
8
b. Those involved were aware of their ethical lapses.
9
Gregg Williams – New Orleans Saints
"It was a terrible mistake,
and we knew it was wrong
while we were doing it.”
-on the bounty program he coordinated
Citigroup: The “London Whale Trader”
“Why has he been at work for three
days in the same clothes?”
●Employee in operations at the London
office who wondered if something was
going on that was untoward
11
Penn State
“How can you justify not filing a
report on this?”
●Question raised to campus public safety
office on the treatment of a Sandusky
complaint
12
Thoughts on common threads among the collapsed organizations and antidotes for prevention
Managing Layers
14
Individual
Ethical
Lapses
Company/
Organization
Ethical Lapsesses
Industry
Norms Ethical
Lapses
Cultural/
Societal
Ethical Lapses
Individuals make decisions without
externalities.
Inflated travel expenses, computer use issues,
embezzlement, blaming others for mistakes,
falsification of records, appropriation of trade
secrets, insider trading
Individuals make decisions but company
forces (OB) contribute to the psychology.
Incentive systems reward visible metrics without
examining long-term consequences; culture of
fear and silence rewards those who go along
Individual/company/organization makes
decision but feels justified because societal
norms have shifted.
Cheating on exams, speeding, infidelity, worker
documentation, conflicts of interest, grease
payments, bribes?, not paying taxes? “Everybody
does it!”
Company/organization policy/strategy makes
the decision for individuals due to industry
practices.
Dabbling in the gray areas as industry moves in
that direction, analysts’ behaviors, subprime
mortgages, CDOs, expert networks, steroid use in
sports, stock options, etc. “If we don’t do it . . . “
Common Traits in Ethical Collapse
1. Pressure to maintain numbers
2. Fear and silence
3. Young „uns and a Bigger-Than-Life-CEO
4. Weak board
5. Conflicts
6. Innovation like no other company
7. Goodness in some areas atones for evil
in others
1. Pressure to Maintain Numbers
Outperforming everyone else in the
industry
Double-digit growth, etc.
Pledges to continue the
performance
Incentive and bonus plans with no
parameters or checks and balances
18
Short-Term Focus and Pressure
1. Deadlines: Think goals!
2. Revenue: Think results!
3. Budgets: Think costs!
4. Personal goals: Think mortgage!
5. Think rankings/ratings
6. Think donors!
7. Think Sacramento!
8. Think TV revenues!
9. Think all of the above!
Pressure‟s Influence
Claremont McKenna and inflating SAT
scores to maintain #9 rank
Ratings games at networks
− “Ensure key performance indicators were
made better by adjusting data.”
Facebook and the stock offering
46 of the 71 runners at the New York City
Marathon
19
Pressure: Probability from the Financial Analysts Institute
P = f(x)
P = probability of an ethical outcome
x = amount of money involved
Balancing permissible and prudent
Monticello and lubrication beyond
manufacturer specs
The Milgram and Burger Studies:
What we do for supervisors
The Madsen studies on accident rates
and profitability (airlines)
Findings on BP Atlantis problems (2009): Pressure Affects Process Safety Decisions
“put off repairing the pump in the
context of a tight cost budget.”
“leadership did not clearly question
the safety impact of the delay in
repair.”
Employee safety officer: “You only
ever got questioned on why you
couldn‟t spend less.”
21
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.
22
Pressure Antidotes
In your meetings, what time frame(s) do
you discuss? Is there a five- or ten-year
plan in place?
Would an employee tell you, “I have too
much on my plate right now.”?
How important are performance
indicators? How often are they compiled
and reviewed?
Are issues that should be addressed
postponed on the basis of budget
constraints only?
Emphasizing REAL results, not
nonsustainable manipulations
23
Pressure Antidotes: Emphasize the “Why” Behind the Rule
Helping employees understand that
behind every law, rule, and company
policy, there is a wise reason
●The Yosemite accident
●The Yale student in the lab
Understand that compensation and evaluation systems can wreak havoc on ethics in companies and other organizations.
25
Incentives “I come not to deny that they work; I just worry when the goals are wrong or misaligned.”
26
The Tale: Atlanta Public School System (APS)
Test scores increased steadily for 10
years
System and superintendent
recognized for their remarkable
achievements
Pervasive cheating from giving
students answers to coaching during
exams to “test clean-up parties”
Consequences
38 principals and 178 teachers
charged with changing answers after
students took tests and dismissed
Nearly all students are significantly
below grade-level ability
Superintendent resigned
Costs of remedial work
28
El Paso Public School District
“Los Desaparecidos”
381 students enrolled as freshmen
at Bowie High School in the fall of
2007
In the fall of 2008, there were 170
sophomores
The calls to home the day before
testing
29
Defining goals carefully!
30
EDUCATED YOUNG PEOPLE
vs.
TEST SCORES
FINDING WHAT WORKS/HOW THEY
LEARN
vs.
TEACHING TO THE TESTS
TEACHING
MEASURE KNOWLEDGE AND SKILLS
vs.
GIVING ANSWERS/ALTERING ANSWER
SHEETS
TESTING
What do they reward? Cintas and Conveyor Belt Cases
The dangers of incentives plans
contradicting training and rules
31
Defining the goal carefully and staying focused in all pressure moments
32
KNOWLEDGE AND SKILLS FOR A CAREER
vs.
GPA AND DEGREE
Earnest and equal effort
vs.
Slacking
TEAM PROJECT
Research and writing skills
vs.
Purchasing and/or cut and paste
TERM PAPER
2. Fear and Silence
There is never a problem with
employees missing the ethical issues
Always a problem of not raising the
issue, being ignored, not having an
avenue for raising the issue, or
being fired for raising the issue
Analyst on her concerns about how little information they had to evaluate CDOs and other mortgage-backed securities
“It could be structured
by cows and we
would rate it.”
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.
The Sandwich Effect
Those at the top assume employees
would tell
Those at the bottom assume that
those at the top don‟t want to hear
about it
Flatlining: 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.”
37
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.
38
The Rote Fixes
Code of ethics (98%)
Ethics training (75%)
Hot lines (90%)
Third-party reporting systems (50%)
Recognition for throwing down a
flag (10%)
Inclusion of ethics as a performance
evaluation measure (7%)
40
The Role of the Individual and the Flat Organization
Individual
Action
Organizational Regulations
Government and Systems Regulations
Real Steps for Remedying Fear and Silence
The Challenge Question/The
Challenge Meeting
Ethics officer (profile of the new ethics
officer)
Ethics discussions: disparity in time
allocation
How do we respond to employees who
raise issues?
How do we respond to employees who
miss targets?
Drawing out the individuals and issues
Are you the last one to speak in a
meeting when you are in charge?
Do you draw out those who have
remained reticent during the meeting?
Do you watch attrition, terminations, and
turnover?
What is your level of unscheduled and
unplanned interaction with employees?
Are those who raise concerns promoted?
42
3. Young „Uns and Bigger-than-Life CEO
CEO a full generation older than
direct reports and/or lack of depth
in direct reports
MBAs (senior management)
“I hire them just like me: smart, poor
and wants to be rich.”
Dennis Kozlowski
Former CEO, Tyco
BusinessWeek’s CEOs of the Year
Dennis Kozlowski
– Tyco
Dick Fuld –
Lehman
Ken Thompson –
Wachovia
William McGuire –
UnitedHealth
Group
Jamie Dimon –
Chase
Hank Greenburg --
AIG
In prison for
embezzlement
Bankruptcy
Acquisition
Stock options
scandal
The $5 billion bet
Bailout of AIG 44
How did the hedge fund investor do so well on short sales? He did background investigations on
personal lives of the CEOs of the
companies.
Bad judgment is bad judgment,
whether in life or business.
45
That “Tone at the Top” Thing
The Power of Example – The 75%
source of employee integrity
standards
Gordon Gee, President of Ohio State
University and $550,000 in travel in
two years; $2 million in salary; and
“spendthrift ways.”
“Enforcement is to an organization what integrity is to individuals. You cannot have an ethical culture without enforcement.”
Remember this principle:
When decisions on disciplinary actions
harm the culture
“I would respectfully ask that you do something to stop this atrocious behavior before this team and an entire generation of Penn State students leave here believing that this is appropriate and acceptable behavior within a civil university community.”
● Dr. Vicky Triponey, head of standards for Penn State, in an e-mail to the now-departed university president about her concerns following assaults by football players on other students and the resistance from the athletic department to discipline the player – in 2007.
● Dr. Triponey resigned shortly after. 48
Fixes for Executives
Applying a more stringent standard
to themselves
The “Schlub” factor
Candid, unscheduled conversations
Compensation
Watching for slippage
50
“Yes, but no one likes a whistle-blower.”
Whistle-Blowers - The Lonely and
Dysfunctional Myth
The Anti-Snitch Campaign:
“Snitches Get Stitches and End Up in
Ditches”
1. The importance of resolving conflicting
values
2. The importance of building consensus
3. Giving your co-workers a chance
The omnipresent danger
Complacency and high self-esteem
(at least when it comes to ethics)
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
52
Guess who said it!
“Maintain transparency so
as to avoid even the
appearance of a conflict of
interest.”
53
Professor Sidney Gilman, M.D.
Director, Michigan Alzheimer‟s
Disease Research Center, University
of Michigan
Paid $234,000 to federal authorities
as a penalty for serving as a financial
adviser to financial firms on their
pharma investments as he headed
the clinical trials on the drugs of the
companies in which the firms paying
him held investments
54
55
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.
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
56
The 98/1/1 %: The Dan Ariely Matrix
Ab
so
lu
tely d
ish
on
est
1% Ju
st a little d
ish
on
est
98%
Ab
so
lu
tely h
on
est
1%
57
The little things
“Got too much change back and
didn’t return the difference.”
“Didn’t ship an item I sold on eBay
because I thought it was worth more
than it sold for.”
“Sold a car without telling the buyer
everything that was wrong with the
car. They were small issues, but it
still bothers me.”
Too much trouble – But, . .
“I saw a woman stealing from the 7-
11 and she saw me too. I decided
not to get involved but mentioned it
to her that she was wrong.”
“I took a bath towel from Marriott
because the room and service was
horrible.”
What Affects Honesty? Dishonesty?
Honor pledges
Signature placement
Moral Reminders
Supervision
Culture that gives
examples of
dishonesty
Watching others
behave dishonestly
Others benefiting
from our dishonesty
Previous immoral acts
Creativity
Conflicts of interest
Ability to rationalize
Mentally depleted –
it‟s just too hard to be
honest
4. Weak Boards
Experience: Impressive credentials but
little industry knowledge
Age: Too young to understand even
cyclical nature of economy
Conflicts: Everywhere
Time: Did not devote the time necessary
for effective governance
Robert Rubin, Chair, Citigroup
“I tried to help people as they
thought their way through this.
Myself, at that point, I had no
familiarity with CDO’s.”
Shawn Tully, “Wall Street‟s Money Machine
Breaks Down,” Fortune, November 26,
2007, p. 65, at p. 68.
So? And? A Summary of Duties for Boards
Hold the meetings
Attend the meetings
Get materials in advance
Have quality discussions
Have independent discussions
Raise issues that are percolating elsewhere
Create and follow monitoring reports: turnover
Balance with the overarching role of strategic guidance
Know the numbers and how you got to the numbers: If
it sounds too good to be true . . .
Ask questions, ask questions, ask questions, especially
if you do not understand
Taking enough time on major decisions
Taking time (at least once per year) for a bigger picture
view by interaction with the employees
− Observing meetings
− Informal and unscheduled interactions
5. Culture of Conflicts
Hiring family and friends
Failure to file consulting forms
Those expert networks
Serving on each other‟s
nonprofit boards
University of Michigan Physician/Researcher
Paid by expert networks for
appearing at meetings to discuss his
clinical trials research
Became a consultant to hedge funds
and traders
Released information on his studies
to them early
They avoided substantial losses and
he continued to be paid as an
adviser
Conflicts Culture Antidotes
Believe in conflicts of interest!
Remember the two ways to manage
a conflict:
−Don‟t
−Disclose
Establish definitive rules and follow
them
Lots of non-SEC stuff here that
contributes to dysfunctional and
non-functional boards
Antidotes for Conflicts
Dig deep on Conflicts: Not a
majority of independent directors
−A. Consulting contracts
−B. Related parties
transactions/interests
−C. Philanthropy interconnections
−D. Complexity of relationships
−E. Develop a chart!
67
6. Innovation like no other
On being above the rules
“. . . standard accounting rules [are]
not the best way to measure
Computer Associate’s results
because it had changed to a new
business model offering its clients
more flexibility.”
Sanjay Kumar, former CEO, now in prison
A belief that mundane rules don‟t apply to them!
Dot-com mantra of EBITDA, “You
know, if we hadn‟t had all those
expenses, we would have had
earnings!”
It all boils down to cuts in line!
Truth and Consequences
Lance Armstrong
David Petraeus
University of Illinois law school–
published 6 years of false data on
GPAs and LSATs of entering class
−$250,000 ABA fine
−Salary of assistant dean for admissions
went from $72,000 to $131,000 during
the time of the “improving” data
71
Truth has such a way
Peter Crist, a background check
expert, said, “You can‟t live in my
world and cover stuff up. At some
point in time, you will be found out
if you don‟t come clean. It doesn‟t
matter if it was 2 days ago or 20
years ago.”[1]
University of Arkansas coach and the
affair
[1] JoAnn S. Lublin, “No Easy Solution for Lies on a
Resume,” Wall Street Journal, April 27, 2007, p. B2
7. Goodness in some areas atones for evil in others
Culture of philanthropy
Culture of diversity
Culture of safety
Culture of environmentally
conscious operations
Culture of volunteerism
Education: The nature of our work
“The Changing Lanes” Phenomenon
of Moral Schizophrenia
Antidotes for the Good/Evil Balancing Act
Rethink popular notions of social
responsibility and business
Rethink company activities,
perceptions, realities
Be very skeptical about “doing well
by doing good”
Rely on virtue ethics and simplicity:
Truth, Honesty, Fairness,
Egalitarianism
75
What if the cameras were
running? Would you be proud
of the discussion? Would you
worry about what you are
doing being made public?
Front-Page-of-the-Newspaper Test
Jennings‟ National Enquirer Test
Make up the worst possible headline
you can think of
“HP CEO Accused of Sexual
Harassment by Soft-Porn Actress”
76
Fighting Shifting Norms
Ethical analysis: The definition of an
ethical mind is the ability to
understand how individual conduct
affects the lives of others
1. Who‟s affected by my decision?
2. What if I were on the other side?
3. What if everybody behaved as I am
doing now?
4. Over the long term, will I feel as good
about this??
78
Other Models
Blanchard/Peale
a. Is it legal?
b. Is it balanced?
c. How does it make me feel?
Laura Nash
Could you discuss your decision with your supervisor, co-workers, friends, family?
