Enron lapses and corporate ethics

New questions surface about corporate leaders as Kenneth Lay testifies before Congress today.

By , Staff writers of The Christian Science Monitor , Staff writers of The Christian Science Monitor

One of the hotter items at the moment on e-Bay, the online auction service, is a 64-page paperback that won't be mistaken for a Stephen King novel. Or perhaps it will. It's the Enron corporate code of ethics. "Never been opened," proclaims one seller, a former employee.

The dark humor surrounding the book points to a larger issue in the wake of the company's spectacular collapse: the state of business ethics in America.

And former Enron chairman and chief executive Kenneth Lay's sudden refusal to appear today before a congressional committee does little to quiet new questions that have surfaced about the ethical rigor of America's CEOs, in particular, and how much money they make.

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Much of the new scrutiny stems directly from the Enron case and the very public way in which it is being played out. Yet the impact is usually magnified when it comes at a time of economic downturn.

"I think a lot of CEOs are down on their knees right now, thankful that Enron got caught before they did," says Marianne Jennings, a professor of legal and ethical studies at Arizona State University in Tempe, Ariz.

Neither Enron's standing nor the larger focus on business practices will be helped by a report released over the weekend by an internal Enron committee. It concluded that company executives intentionally manipulated Enron profits and reaped huge personal gains in the process.

Perhaps worse, it outlined a culture of deception and self-enrichment that permeated the highest levels of management.

Inevitably, a landmark corporate scandal, which Enron has quickly become, tends to force businesses to reexamine their behavior. In the 1980s, for instance, many companies vowed to change their practices concerning insider trading after a series of scandals erupted on Wall Street.

In the 1989, corporate chieftains professed their interest in being better environmental stewards after the Exxon Valdez oil spill in Alaska. The tragic leak of a poisonous gas at a Union Carbide plant in Bhopal, India, killing at least 2,500, brought similar promises of better corporate "citizenship."

Today the questions are focused more on financial integrity - and the admonitions for change are coming from the highest levels. Without naming Enron, President Bush last week challenged business to set a better example.

"Through stricter accounting standards and tougher disclosure requirements, corporate America must be made more accountable to employees and shareholders and held to the highest standards of conduct," he said in his State of the Union address.

While the president had good reason to make such a plea, given the administration's close and controversial ties to Enron executives, the sentiments he was expressing resonate with many Americans.

A recent Business Week/Harris Poll, for instance, found that disenchantment with corporate America is on the rise. Perhaps the most telling finding: 79 percent of those surveyed felt the CEOs of large companies put their own interests ahead of workers and shareholders.

Corporate altruism

This is not to say that all corporations are greedy or engage in shady conduct. Experts agree most don't. At various times throughout history, some have even taken dramatic steps to show corporate altruism.

Take the Diamond Match Company. In 1910, it obtained a patent for the first nonpoisonous match. That product was so critical to the public's health that President Taft made a plea to the company to voluntarily surrender its patent rights.

Despite the enormous moneymaking potential of the idea, Diamond Match did so. It even sent employees to other matchmaking factories to show them the process.

"They surrendered that patent for the good of the whole and said, 'We are going to find another way to compete in the marketplace.' And they did," says Ms. Jennings, who with her colleague, Louis Grossman, has just written a book on longterm business survival.

In fact, one theme they found in looking at US companies that have managed to pay dividends without interruption for 100 years or more is the candor in their financial statements.

For instance, one annual report by Ludlow Inc. around the turn of the century described a contract it was able to get with the US Post Office.

Because one of its main products at the time was packing string, the Post Office was quite important to its business. The annual report described, in almost journalistic-exposé bluntness, how "darn close" they had come to not getting the contract.

"They didn't want anyone to get overconfident," says Jennings. "They wanted to let shareholders know that they couldn't continue to rely solely on the Post Office for their business."

Some companies are even willing to put their philosophy ahead of Wall Street. That's been the case at various times with Starbucks, the Seattle-based coffee chain, which was under pressure to stop paying 75 percent of the cost of health-care benefits for part-time workers.

"They said, 'If we take it away, it's not Starbucks anymore,' " says Chip Espinoza-Johnson, an assistant professor and consultant at Vanguard University in Irvine, Calif.

Nor are all executives just interested in enriching themselves. Warren Buffett, one of the nation's most successful investors, only gets paid $100,000 a year, despite his net worth of $36 billion. He still lives in the same gray stucco house he purchased decades ago for $31,500. His sole extravagance appears to be a corporate jet he calls "The Indefensible."

In the current recession, other executives have trimmed their pay as well. Michael Eisner, the chairman of Disney - who has been criticized in the past for excessive compensation - cut his pay to $1 million in 2001, down from $12.3 million the prior year. In San Francisco, Millard Drexler, CEO of the Gap Inc., cut his bonus by $2.4 million and his total pay fell 29 percent in 2000.

Executive pay

Still, for the most part, American executives get paid well - something that can make them look greedy in hard economic times. For example, Forbes lists Michael Dell, the chairman of the computer company, as the top earner last year with a total compensation of $235,912,000. And Sandy Weill, the chairman of Citigroup, has a five-year compensation of $785,227,000.

In hard times, the scrutiny goes beyond paychecks to the personal spending habits of corporate leaders. Last week, for instance, the Global Crossing telecommunications company declared bankruptcy. Only four years ago, the company's chairman, Gary Winnick, spent $60 million on a house in Bel Air, an exclusive part of Los Angeles. He then spent another $30 million in renovations.

"When it comes to executive compensation, it's almost like they are on another planet," says Timothy McMahon, professor of management at the University of Houston. "And people are stepping back, wondering how this kind of thing [bankruptcies such as Enron and Global Crossing] could happen when we are paying these people all this money."

The real salary gap

Indeed, the gap between CEO salaries and those on the factory floor is widening. In 1973, for example, the typical CEO made 45 times the wage of the average worker. Today, it's as much as 500 times, experts say.

"They've lapped the field 10 times," says Graef Crystal, a columnist at Bloomberg News and an expert on executive compensation. He says Japanese executives earn 20 to 30 times the lowest-paid worker while, in Europe, the ratio is about 40 times.

To some observers, it's not so much high salaries themselves that are a problem. The big dollars represent the going rate for top management talent. For example, Jack Welch retired last year with an intact reputation for stellar leadership at General Electric that, to his fans, makes him well worth big paychecks.

In terms of ethics, the larger issue is how often America's platinum compensation packages are actually buying better performance - creating jobs and new wealth beyond the corner office.

As experts debate the answer - pointing to examples on both sides - some companies are trying to keep the ratio lower. Ben Cohen and Jerry Greenfield, the quirky entrepreneurs behind Ben & Jerry's ice cream, kept the ratio of top to bottom earners at 7:1 - though that did not last after the two stepped down in 1995. They sold the company last year to Unilever, which sells everything from Lipton tea to Dove soap.

While the pay issue may never get resolved, many corporate boards have spent a lot of time on the issue of ethics or standards of conduct in the past decade. Many companies instituted new ethics programs in the 1990s, after a series of financial scandals.

But most were designed to protect the corporation from the conduct of the employee, says Michael Josephson of the Josephson Institute of Ethics in Marina del Rey, Calif.

The codes are not any indication of the ethics of a company, he says, and are usually written by the legal department or the human-resources department.

Ethics seminars

Still, many companies take ethics very seriously. Johnson & Johnson, for instance, holds a five-day leadership program for its senior management, including all directors. Included is five hours on ethics and values, led by one of the most senior people in the company.

Back in Houston, the questions surrounding of Enron's ethical practices still haunt the 4,000 laid-off workers. Some have resigned themselves to humor and are auctioning off company momentos, such as the code of conduct.

But Jennings, for one, is not disheartened by what she sees as "plain old-fashioned greed" in the Enron case. In fact, she thinks its collapse will be beneficial in the long run. "With the crash of the new economy and bankruptcies like Enron's, I see a return to that good old-fashion, down-to-earth business model," she says. "Companies are in business to make money, and there isn't anything wrong with that - as long as long as they are encased in a set of values and time-tested principals."

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