Rogue Corporations, Corporate Rogues &
Ethics Compliance:
The Sarbanes-Oxley Act, 2002
Breena E. Coates
School of Public Administration & Urban Studies
San Diego State University--IVC
Managed-mendacity arising
from a culture of corporate greed gave birth to the Sarbanes-Oxley Act of 2002.
Organizational malfeasance arises from deep within the culture of mega
corporations, and consists of the collective issues of complexity and
strategy; and, individual
forms of managerial mischief. The impact of unethical corporate behavior has
had wide-spread national and global ramifications for the economy and prestige
of the United States. This paper looks at survey results that shows that
stiffer penalties for wrongdoing embedded into the legislation are beginning to
have an impact on corporate social responsibility.
The Sarbanes-Oxley Act[1]
was one year old on July 30, 2002.
Promulgated by Congress as statute and signed into law by President Bush
after the corporate scandals of 2002, “this law says to every American: there will not be a different ethical
standard for corporate America than the standard that applies to everyone
else. The honesty you expect in your
small businesses, or in your workplaces, in your community or in your home,
will be expected and enforced in every corporate suite in this country.”
(President Bush, White House Press Secretary Release, 7/30/02). Its aim is deterrence--“[to] adopt tough
new provisions to deter and punish corporate and accounting fraud and
corruption”.[2] Sarbanes
Oxley is the most sweeping attempt to regulate and make ethical public markets
since the Securities and Exchange Act of 1934. The Sarbanes-Oxley Act has two
broad categories: accounting oversight,
and corporate governance. Within these
domains is regulatory guidance on CEO/CFO accountability, audit committees,
external auditor independence, corporate governance and increased financial
disclosure transparency. In setting these standards, this Act adopts a new
standard for corporate financial reporting accuracy. Titles VIII, IX, and XI,
which cover white-collar crimes are the criminal enforcement tools that attach
liability to senior leadership for violating reporting requirements[3].
While this is a necessary condition for corporate responsibility, it is
insufficient. Public policy, merely
addresses the manifestations of corporate social pathology. The cause itself lies in the stickier region
of institutional visions, values and beliefs, as modeled by the top executives
in corporations. Addressing these issues will be a longer-term effort to change
cultures, shared meanings about profit and loss, and social responsibility that
must be spearheaded by the highest levels of corporate governance.
How well has Sarbanes Oxley performed to
date to mitigate or outright prevent corporate fraud and create a climate for
corporate ethics? A look at the issue a
year later in this paper reveals complexities and unintended consequences of
trying to regulate morality in business.
II.
CORPORATE SOCIAL RESPONSIBILITY:
2.1.
The Problem of Leadership:
Leaders set the tone for the organization
and the culture of the organization develops primarily via the executive’s
vision, values, and morality (Leskela, 2003).
Sociologist Robert Jackall (1988) argues that characteristics of CEO
personality and behavior filter down all the way to the shop floor[4],[5].
Legal writing in this area is in agreement, “Top Management, and in particular
the chief executive officer … set the corporate ethical tone”.[6]
Also, in this context, Peter Drucker (1973) has suggested that managers being professionals,
must be guided by the “do no harm”
principle as their first responsibility. Drucker sees the executive as wearing
a “badge” of distinction and privilege.
As such, he or she can be held to a higher standard, and should expect a
heftier punishment for wrongdoing.[7]
2.2.
The Problem of Structure:
Corporations set up systems in which
certain practices are encouraged, and people are pressured to do things they
might not ordinarily do. For Manuel
Velasquez, the issue of corporate ethics is a systemic matter and not a
matter of individual character flaws.
“Unethical practices arise when corporations fail to pay explicit
attention to the ethical risks that are created by their own systems and
practices.” In such systems the culture is so structured that management
finds it easy to provide rationalizations for deviant demands. Lower functionaries feel pressured into doing
things (in the name of the business) that they would not otherwise do. The
problem is not a new one, nor is it limited to Enron, WorldCom, Quest, Adelphia,
etc. Because of the breadth and scope of
these recent scandals, one might easily forget that the last century was beset
with indictments of big business for ethical violations. [12]
Most of these arose, like Enron, from a “culture of corruption.” The
culture of corruption begins as a small act of stretching a fact or two about
products or revenues. “Little lies
grow into bigger ones (Elliott and Schroth, 2000) and such stretches of
truth eventually get out of hand and turn into big problems. “Corporate cultures condition people to
think that it’s alright to lie. One
little lie, deemed to be innocent, grows—and then one day an Enron happens.”
(ibid.) (See Section III.A. of this paper for the results of a survey on
corporate structures that have formal ethics programs embedded in them.)
2.3.
The Game of Managed Mendacities:
Business has long been likened to a
game. This game played out in the
competitive arena uses sports analogies and other gaming activities, with rules
of its own, say analysts. In his 1968 Harvard
Business Review classic, Albert Carr suggests some businessmen believe that
since all players know the game, and if bluffing is part of the game, then
bluffing is ethical in this context. Like bluffing in a game of poker, such
deception does not “[seem to] reflect on the morality of the bluffer.” British statesman, Henry Taylor suggested
“falsehood ceases to be falsehood when it is understood on all sides that the
truth is not expected to be spoken” (ibid). However, “all players” in
this context really means all the major players, and not necessarily the
rank-and-file employees who are the ones truly hurt by the deceptions. Robert
Jackall suggests that rules-in-use are contextual and situational guidelines
and are “the ropes to skip and ropes to know”
(Ritti and Funkhauser, 1989) in a modern corporation. These become the
social morality, or the business ethic that guides the organization through its
quandaries and vicissitudes. In a
multinational global environment, most of these quandaries involve competition,
success, and marketshare. Bluffing, and
other deception in this environment become everyday rules-to-know.
Nevertheless, misleading statements about financial losses twist reality and
damage the public trust. The sour mood
of the investment market can only be reversed when the public get concrete
examples from CEOs that they are moving from hoaxing to honesty, “along with
real changes in corporations that address compensation and accounting”
(Cripps, Legg Mason, 7/22/2002)[13]. Looking at this dynamic through a Johari
Window[14]
the cell showing Public Information (openly disclosed information) would be
miniscule in Enron’s case. In contrast the same Johari Window would show the
Private Information Window (Known to Self and Unknown to Others) as a vast
domain, wherein managed mendacity typical nestles down. Carr’s argument
concludes by arguing that bluffing is another way of saying that someone is
lying, and such deception is to be avoided in business at any cost[15],[16].
The NBES survey asked employees in
the 48 contiguous states to share their views on ethics within their
corporations, using specific questions.
These have been combined to show how organizations distinguish between
ethical and non-ethical behavior, management actions and influence,
decisionmaking, and values like honesty and respect. The survey of 1,500 participants specifically
focused upon the following categories:
|
Year
|
Mgt. Kept
Promises
|
Observed Mgt.
Misconduct
|
Mgt. Pressure/
For Compromise
|
|||||||
|
2003
|
82%
|
22%
|
10%
|
|||||||
2000[17]
|
77%
|
31%
|
13%
|
|
|||||||
Interpretation of Findings:
Management appears to
have become more ethical in 2003 as
compared to 2000. The difference could
be imputed to the Sarbox policy intervention. Employees also noted that “actions count”,
i.e., when management actually models ethical behavior, versus just simply talking
about ethics. Here observed misconduct
was shown at 15% when management is proactive, versus 56% when management
merely paid lip service to ethical standards.
--------® 78%
Ethics Advice/Counseling
Anonymous Report Channels
Table 2.A.3:
Impact of Organizational Size on Ethics
Programs, 2003
|
Categories |
Large Orgs. (500+) |
Small Orgs.(-500) |
Training
|
67% |
41% |
|
Anonymous Reporting
Mechanisms |
77% |
47% |
It must be acknowledged at the outset
that complex organizations face issues that are ill-structured in nature
(Mitroff and Sagasti, 1973)[21]
with choices that are intransitive (Dunn, 105, 1988). Here we find simultaneously in existence
multiple competing issues whose outcomes are uncertain. Any given choice could
lead to immediate disaster. Taken in combination, this puts any organization,
in tenuous equilibrium, teetering like a see-saw. Into this volatile mix also, throw in
unethical, self-serving leadership, and dangerous invalid, not to mention
immoral, organizational practices. One
is then confronted with an Enron, a Worldcom, an Arthur Andersen, and the like.
In
this paper for the purposes of simplification, the issue of corporate ethics is
being broken down into two very distinct realms. On the one side, we have management ethics—or
individual values, standards, and beliefs of corporate executives. This
raises issues of rights and responsibilities of executive personnel as well as
their propensities for malfeasance and mischief. On the other side, we have the notion of
corporate values and standards. These
are the collective values of the juristic, yet living, entity—the mega
corporation. These are the standards
that have accrued to it via time, tradition, and day-to-day
decisionmaking. The nature of
economic means-ends chains relating to
competitiveness and productivity are also important as a springboard for
discussion, as are organizational structural imperatives.
Together these individual and collective
behaviors and policies form what we recognize as the “culture” of the
organization. All of the issues
stemming from individual and the collective wrongdoing--involve ontological,
epistemological and methodological choices that were made. In the case of the
rogue corporations, the methodology of producing the information was
deliberately flawed. Complexity and rapid change then led to entropy.
Furthermore,
it must be stated that “law is but a ‘moral minimum”’ (Madsen and
Shafritz, 1990). Law cannot legislate corporate morality completely. It can and does, however, as the title of
this paper suggests, restrain or inhibit the propensity to immorality. Sooner
or later under the hands of clever accountants and lawyers the intent of the
law will be thwarted by the greedy and self-serving that have economic access
to millions of dollars. Even the most
carefully prepared legislation is less than comprehensive and optimum and
simply satisfices[22]—or
is merely sufferable[23].
4.2.
Impacts on Human Resource (Intervening[24] Variables):
Wholesale
destruction of a corporation’s major capital resource—its personnel—has been a
disturbing trend of mega corporations in the last decade. Hersey and Blanchard, 2002, describe this as
the destruction of organizational “intervening” variables. Intervening
variables are the human resources of the organization—its very nuts-and-bolts,
so to speak.[25] In the drive to show short-term profits that
form the end-result, or output variables of a company, leaders
manipulate the input variables (the causal or stimuli variables—in this
case false reporting of profit and loss. In the process, the intervening
variables, the people and the plant, which take a long time to develop and to
build up are unprotected, and often are destroyed. In the cases under discussion, short-term
self-interest over long-term corporate interest was the modus operandi.
At Enron, this form of selfish manipulation was done by “moneymakers” on a “‘five
year’ mission. Their goal was to manage
an initial public offering, take over a solid publicly-traded company, push the
stock to the sky, and cash out.” (Elliott and Schroth, 2000). Thousands of
intervening variables—i.e., employees, communities and lives were thus
destroyed.
4.3. The Reagan Legacy
of Corporate Covetousness: Corporate
selfishness, evident in the mantra perpetuated in the Reagan years of the
1980s, is captured in the refrain in the film Wall Street –“greed is good”.
Even the lip service given by the former generation of the 1950s, 60s and 70s,
to ethical values and standards became muted during the 1980s. It is not surprising, therefore, to see big
lapses in business ethics, such as the insider trading scandals in the Reagan
years. Professor Lawrence E. Mitchell
has likened the Reagan credo to be the “rough equivalent of telling an
alcoholic that The New England Journal of Medicine had reported the health
benefits of excessive consumption of liquor “(Forum, Jurist, 2002).
We go back to the days of “honest graft” practiced by politicians of the Boss
Tweed era.[26]
4.4.
Reform the Via New Policy Instrument:
The
Sarbanes-Oxley Act calls for improved financial reporting, independent audits
and accounting services for public companies.
In addition it also attempts to short-circuit individual and collective
wrongdoing in the following ways:
·
Creates
a Public Company Accounting Oversight Board to enforce professional codes,
standards, and ethics for the accounting profession and its professionals.
·
Strengthens
the independence of firms that audit public companies.
·
Increases
corporate responsibility and the usefulness of corporate financial disclosure.
·
Increases
penalties for corporate wrongdoing.
·
Protects
the objectivity and independence of securities analysts.
·
Increases
Securities and Exchange Commission resources.[27]
Already critics claim that like the
Patriot Act of 2001[28],
this bill too was passed in haste. This, they say, creates many uncertainties
that will have to be sorted out over the years.
All this comes about because the Sarbanes-Oxley Act is only partially self-executing
and it contemplates other executions via SEC or stock exchanges. (Krantz
and Strauss, Dodge Palmer Report, 8/2/2002). Thus the full impetus of
this legislation cannot be considered either by itself, or immediately, as it
is part of a broader effort that includes SEC rulemaking. The latter part is not effective immediately
but will be soon, as SEC adopts the relevant rules within a given time frame of
30 days to 12 months (Perkins Coie, 8/2/2002). Also required are DOJ input, stock exchange listing standards
proposals and private group actions.
The addition of Section 906 of the Act,
regarding certification of books by CEOs of large corporations was introduced
as an amendment by Senator Joseph Biden of Delaware. This is now catching some
companies by surprise, because it sweeps into the mix those corporations that were
not included in the SEC’s previous targeted list of 947 corporations that were required
to certify their books. CEOs scrambled
around to certify their books in compliance with the Act, because the
effectiveness of the Section 906 of H.R. 3763 was immediate. Some CEOs had just hours to certify their
books.[29]
To make things worse even companies
among the 947 targeted by the SEC perceive the section as requiring them to
re-certify books to satisfy the Sarbanes-Oxley Act, 2002. Additionally, critics
question whether validity and reliability of the documents will be compromised
by the broad statement that precedes the CEO’s signature: “to the best of my knowledge.”
To complicate the issue further, Section
906 is to be enforced by the Department of Justice, not the Securities and
Exchange Commission. The net immediate
result of the passage of this statutory law is to have regulators stepping over
one another.
4.5.
Influence of the Intellectuals:
One issue that needs to be addressed more
directly concerns the blind faith of neoclassical economists, clustered around
our universities and think-tanks, in the efficacy of markets--despite lack of
evidence. Here our neoclassical legal
brethren have also joined in, maintaining that the workings of capitalist
markets have built-in safety systems that would effectively punish corporate
pathogenetic-types who put their own self-interest over that of their
shareholders. This view naturally
suggests that government intervention is not needed. Such thinking, again arising from the Reagan
era, influences much of the relevant scholarly literature of the last decade.
It has proven itself wrong.
V.
RECOMMENDATIONS:
The hard-bitten French skeptic,
Montaigne, once argued: “Man is an amoral creature inevitably committed to the
moral enterprise.” Montaigne was
actually declaring that predatory and degenerate as man might be he cannot live
without certain ideals. These ideals could not have been developed had
there not been a germ of this idealism in the very make-up humanity itself. The capacity to feel shame and guilt when men
fail to live up to their moral codes demonstrates that men are creatures of
conscience. It is this sense of shame
and guilt that one can appeal to, not only
via public laws, such as the Sarbanes-Oxley Act, 2002, but also through
the urgings of our fellow citizens.
Earlier it was noted that the law can
only provide for moral minimums as far as rightdoing is concerned. Laws are but a caricature, or small
approximation of what is needed to correct social wrongs. Thus, in addition to
statutory disincentives to wrongdoing such as H.R. 3073, 2002, and other
regulations, some additional preventative inoculations that individuals and
groups can take are given below. They require that the sovereign people take a
proactive stand: 1) via their elected representatives, 2) via their corporate
votes as investors, 3) via their professional
and employee associations, and 4) their voiced dissent via the various forms of
the media. Some of the recent
recommendations that have arisen from town meetings throughout the country in
late summer of 2002 are provided below:
1. The public must resist further
de-regulations, which keeps the governmental watchdogs out of corporate crime
investigation because of the self-interestedness of corporate leaders.
2. In a regulated industry “watch the
watchdogs” so their independence is not compromised and captured by corporate
leaders.
3. Shareholders must exercise their power
more forcefully by demanding more disclosure and information-sharing, so as to
prevent mega corporations from running amok.
4. Employees must take proactive stands
through their professional and employee-based associations to demand corporate
responsibility.
5. Hold elected r