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Steal Big, Steal Little

December 20, 2005
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Related Topics: Ethics, Featured Article, HR & Business Administration
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With the onslaught of headline-grabbing scandals involving top executives in recent years--including the criminal trials in January of Enron top officers Kenneth Lay, and Jeffrey Skilling, it’s easy to become fascinated with lurid details of extravagant living and corporate looting.

    But ethics experts and anti-corruption consultants say the transgressions of white-collar criminals like Dennis Kozlowski, Bernard Ebbers and John and Timothy Rigas--all of whom have been sentenced in recent months--aren’t the real issue.

    "We’ve gotten so used to the high-profile scandals, with billion-dollar costs and executives with flashy lifestyles, that we’re missing the real point," says Chris Bauer, a psychologist and author in Nashville, Tennessee, who gives ethics training to corporate workforces. "We’ve slipped into thinking that ethics problems are caused by a small group of corporate psychopaths. The reality is that it’s going on all the time, at all levels of companies."

    In a 2004 study, the Association of Certified Fraud Examiners reports that the average American company loses 6 percent of its annual revenue to internal malfeasance, ranging from fraudulent financial statements to kickbacks extorted from suppliers.

    he total cost to the U.S. economy has increased by 50 percent over the past eight years, to a staggering $660 billion.

    Studies by major consulting organizations, academics and professional groups point to a far more pervasive--and costly--dilemma than the occasional crooked executive. In America’s top-driven corporate world, corruption apparently is flowing down from the executive suite into the cubicles, poisoning entire organizations with dangerous doses of bad behavior, dishonesty and a results-justify-the-means mentality.

    As companies increasingly understand the cost of shoddy values and malfeasance, however, the tide is turning.

    Computer Associates International, for example, was rocked by an accounting scandal in which the company agreed to set aside $225 million in a restitution fund and former chief executive Sanjay Kumar was indicted in 2004 on federal securities fraud and obstruction charges. (He has pleaded not guilty.)

    Since then, the Long Island, New York-based business software firm has worked to bolster its ethics, hiring Patrick Gnazzo, a veteran ethics expert with experience as a Navy litigator and executive at defense contractor United Technologies, as vice president in charge of ethics and compliance. Chief executive John Swainson, who was hired a year ago from IBM, spends a lot of time walking around the office to keep a closer eye on what is going on.

    Experts say the unethical culture festering inside too many companies started out with the quest for short-term gain, but the long-term damage can threaten corporate survival.

    While a big scandal can bring the risk of lawsuits and indictments, chronic dishonesty tends to have a corrosive effect on just about every aspect of human resources management--from recruiting to workplace morale.

    That’s why corporate America may be at the brink of an ethical revolution, built not just upon compliance with government regulations and corporate ethics codes, but upon promoting basic values. It’s a rebellion that human resources executives can lead by persuading companies to embrace change and revamp basic functions ranging from hiring to internal evaluations so that every area in the workplace promotes ethical behavior.

A pervasive--and costly--dilemma
    A study of more than 500 recent cases by ACFE revealed that while crooked top executives stole the biggest sums--on average, $900,000 per case--they were involved in a little more than 12 percent of internal wrongdoing. Thirty-four percent of corporate crimes involved managers, who on average pocketed ill-gotten proceeds of $140,000.

    In nearly 68 percent of cases, ordinary employees are in on the scam, draining $62,000 apiece from the corporate treasury.

    While allegations that executives have lied about corporate earnings to investors get the most media attention, two-thirds of the cases examined by ACFE involved the less glamorous crime of fraudulent disbursement, such as submitting phony invoices for payment or skimming revenue before it is recorded in the books.

    But it’s not only companies and their investors who get fleeced. A 2000 survey of 2,400 corporate workers by international consulting firm KPMG found that 56 percent said their companies scammed customers with deceptive sales practices, and nearly a third said that quality and safety tests of products had been altered or falsified. About the same number complained of antitrust violations or unfair competitive practices.

    The damage that dishonesty does to companies isn’t just measured in lost profits or angry shareholders, experts say. A recent Stanford University study of newly minted business school graduates in North America and Europe, for example, shows that companies with questionable ethics may be shooting themselves in the foot when it comes to attracting new talent.

    Seventy-seven percent of new MBAs said potential employers’ ethics were of critical importance to them, and 97 percent wanted to work for a company that was above reproach, even if it meant accepting a substantially smaller salary.

    Psychologist Bauer says that corrupt managers and employees tend to create silos to avoid scrutiny, thus wreaking havoc on interdepartmental teamwork and communication. Those pockets of dishonesty also harm the employee evaluation and professional development processes.

    "They’re looking to select and promote people who share their values, rather than the best people," he says. "They want someone who’s going to play along."

Why good people do bad things
    Contrary to the popular assumption that young people pose the highest risks, just 17 percent of corporate crooks were under 30, while nearly half were 40 or older. Tenure doesn’t increase trustworthiness, either. About three-quarters of corporate thieves had at least three years of experience, and a quarter had spent 10 or more years with the company.

    The employees who had been with the company the longest, in fact, also tended to be involved in the biggest frauds. Eighty-seven percent of those caught in illegal behavior didn’t have previous criminal records--a fact that’s likely to frustrate proponents of vigorous background checks.

    So why are these people doing wrong? While some people undoubtedly are just greedy or dishonest, research suggests that the tone set by ethically lax corporate leaders may be pushing otherwise honest people over the line.

    In the KPMG study, three-quarters of employees pointed to low morale and an atmosphere of cynicism as a major cause of ethical problems, while two-thirds said that top-driven pressure to meet unrealistic earnings goals and too-tight schedules was a cause.

    Worst of all, nearly four in 10 believed that leaders would authorize illegal or unethical conduct if they thought it was needed to meet performance goals. In an August 2004 survey by the Society for Human Resource Management, nearly one in three corporate employees viewed their management as "only mildly trustworthy" or "not at all trustworthy," and one in four employees didn’t think that their leaders were ethical.

    At companies with ethically compromised leaders, workers’ feeling of betrayal has a corrosive effect, says James O’Toole, a research professor at the University of Southern California’s Center for Effective Organizations and author of Creating the Good Life, a book on business ethics.

    "To discover that one has been manipulated is close to the ultimate in feeling disrespected," O’Toole says. "Nothing makes us feel so low as to learn that our superiors think so little of us that they feel free to use us to advance their own ends."

    Some companies exacerbate the problem by having a double standard, punishing some employees for ethical infractions but looking the other way when high performers flout the rules. A 2004 study by Arizona State University researcher Joseph Bellizzi, for example, found that sales managers treated their top salesmen more leniently, even when they clearly had violated company ethics rules.

    "If the unethical behavior of the top sales performers is seen as an important requirement for sales success, the poor sales performer may feel added pressure to do whatever it takes to bring in an order--especially after observing that sales managers have been known to look the other way," Bellizzi says.

Better values, not more rules
    The sentences meted out in September to former Tyco International executives Kozlowski and Mark Swartz are the latest among a series of high-profile cases. In the wake of so many corporate scandals, almost every company in America--98 percent, according to a 2004 survey by Deloitte & Touche, a New York based consulting firm--agrees that maintaining good ethics is crucial. But they’re less consistent when it comes to actually doing something about it.

    Deloitte found that 83 percent of companies had adopted codes of ethics and that 80 percent had a telephone hotline or some other anonymous process by which employees could report internal wrongdoing. Only 68 percent gave employees training on how to comply with the company’s ethics rules, and only 55 percent had a full- or part-time officer in charge of making sure the system worked.

    "I call it compliance confetti," says Joel Dziengielewski, director of forensic services at KPMG, who works with companies to bolster their ethical safeguards. "You know, like those little globes that you shake up, and the bits of paper fall all over the place. Organizations find it comforting to have all these thick binders full of regulations sitting on shelves someplace."

    Dziengielewski cites the example of an air-freight company he recently visited. "The executive in charge of HR kept telling me what a great ethics program they had," he says. When Dziengielewski actually looked at the details, however, he found that in job evaluations, human resources probed whether hourly workers adhered to the company’s code of conduct. Amazingly, they didn’t look at compliance by salaried employees--the ones more likely to be involved in costly wrongdoing, according to experts.

    Experts say that companies need to pay less attention to rules and more attention to transforming their cultures.

    "What we’re really talking about here isn’t a law enforcement or regulatory issue," Bauer says. "It’s a psychological issue--an absence of core values, confusion about what is the right thing to do. I see a lot of companies saying that they’re going to tighten their rules. I don’t see a lot of them saying that they’re going to work to be extremely clear about what their values are, and give people training on how those values translate into actual behavior."

    Here’s what the consultants and academics say companies can do to build an ethically solid corporate culture:

    Convince top executives that they have to set the ethical standard. A 2003 survey of chief executives by Korn/Ferry International, a recruiting firm in Los Angeles, found that 65 percent agreed that protecting the company’s reputation was their personal responsibility.

    But there’s work to do on the other 35 percent. Research shows that it’s crucial for management not only to talk about ethics, but to keep promises to workers and behave responsibly themselves.

    A 2003 study by the Ethics Resource Center found that in companies which do all those things, only 15 percent of employees observe misconduct by others. In companies where employees believe that their leaders talk a good game but don’t actually walk the walk, the observed misconduct soared to 56 percent.

    At Memphis, Tennessee-based auto parts retailer AutoZone, for example, all the company’s officers are required to certify the quarterly and annual financial statements, so that they take personal responsibility for keeping honest books.

    Make ethics part of the training and development process. Every employee should get ethics training, but it’s crucial to do it right. Instead of focusing on compliance with the Sarbanes-Oxley law or federal securities regulations, Bauer--who has given seminars at companies such as Northwest Airlines and New York-based hotel, travel and car rental conglomerate Cendant--says employees need to spend time clarifying their own ambitions and morals before they even start thinking about how to fit in with the company’s values.

    "I give people a sheet of paper and have them make three columns," he says. "In the first one, I have them list what they want their values to be, and then in Column 2, they list the ingredients for their ideal life--money in the bank, a flashy car, whatever. Then, in Column 3, I have them list the conflicts between Columns 1 and 2."

    Find a way to reward good behavior, in addition to performance. One big obstacle to reforming a morally troubled corporate culture is that it’s difficult to show the bottom-line economic benefit of avoiding ethical infractions--not just for the company, but for individual employees.

    Linda Trevino, a professor of organizational behavior at Pennsylvania State University, recommends that companies make ethics a part of their performance management systems and 360-degree evaluations, so that employees would have to meet standards for behavior as well as productivity to receive raises and promotions. In addition, she advocates rewarding exemplary behavior.

    Trevino cites the example of aerospace firm Lockheed Martin. When Lockheed vice president Ron Covais pulled the company’s bid for a multimillion-dollar foreign contract rather than pay a bribe in 2001, Lockheed not only backed his actions, but the company also recognized him with a Chairman’s Award.

    Teach managers at all levels to project fairness. Deborah Kidder, a management professor at Towson University in Maryland who has studied employee misconduct, says managers can promote good behavior by communicating effectively with employees about their decisions.

    "If they can explain the reason behind a policy or action, basically give the ‘why’ part to the story, this will go a long way towards minimizing the chances of having a violated psychological contract," she says. "The employee may still not be happy, but if they understand the rationale and believe it is reasonable, they are unlikely to take it out on the manager or the company." Dallas-based electronics manufacturer Texas Instruments, for example, gives its managers training so that they’ll be able to answer staffers’ ethical questions, or find someone in the organization who knows the answer if they don’t.

    But such culture change is possible only when workers, managers and executives at all levels recognize that they all must be part of the solution. Trevino says that rather than trying to root out a few bad apples, "business leaders need to be asking themselves, ‘What’s in the culture that’s rotting the apple?’ "

    Psychologist Bauer agrees. "It's extremely corrosive when you have a culture that doesn’t ask people to be ethically attuned in decision-making, where instead it’s wink, nudge, don’t ask/don’t tell, anything’s OK as long as no one gets caught."

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