Human Resources: Executive Summary: Ethics in Business

The first two years of this century were notable for corporate scandals that took down major companies and their leaders, damaged pensioners and stockholders, and rocked the U.S. public's confidence in corporate integrity. Although corporate leaders are still being charged, the past year and a half has been especially notable for the fallout of some of the early scandals that first grabbed public and media attention, including criminal convictions, multimillion-dollar fines and vastly increased expenditures to comply with Sarbanes-Oxley requirements. But the ethics issues that occupy corporate minds these days go beyond the legal. Some companies are seeking new ways to do good works, not necessarily for purely altruistic reasons.

The U.S. government reacted forcefully to the improprieties committed by the likes of Enron and WorldCom, more than doubling the enforcement budget of the Securities and Exchange Commission (SEC) between 2000 and 2004. By the first three quarters of 2005, the SEC "police force" was beginning to see convictions, such as Bernie Ebbers, former head of WorldCom, who was accused of fraud, conspiracy and filing false documents. The SEC has negotiated huge settlements, including the whopping $715 million from Adelphia Communications Corp. to settle charges that founder John J. Rigas and his three sons inflated earnings and hid liabilities from shareholders.

Most corporations and their leaders, mindful of the stiff penalties of poor behavior, have tried to comply with rules promulgated under Sarbanes-Oxley, the 2002 law designed to increase corporate accountability. But compliance has stiff costs, too. One 2004 survey of 200 companies showed that businesses overall were projected to spend about $5.8 billion in 2005 to comply. Much of that spending is expected to go to outsourced services and technology. Another survey shows companies have spent 20 times what was predicted - or about $35 billion - on compliance. And audit fees have jumped an estimated 40%, to $3.5 billion in the 2004 fiscal year, according to a USA TODAY analysis of the audit fees paid by companies listed in the Standard & Poor's 500. Those fees do not include productive time lost in complying with Sarbanes-Oxley.

While audit fees are the most obvious costs of compliance, companies are seeing other expenses, such as the training of employees. Some Sarbanes-Oxley critics have centered their criticism on those types of hidden costs, which include diverting financial and human resources from other activities, such as research and development. One critic argues that Sarbanes-Oxley dampens creativity and risk-taking and pits members of boards of directors against each other.

The disdain for Sarbanes-Oxley is not universal. Private companies are also beginning to comply as the law becomes the preferred way of doing business. Some executives are discovering benefits to the reforms, including the ability to attract more desirable job candidates and to sell themselves to consumers who, they think, consider corporate reputation when deciding which brand to buy.

A consumer preference for products produced by companies they believe are responsible corporate citizens is only one factor fueling an increased interest in social responsibility. The push can also come from other corporations. Taco Bell, for example, has responded to boycotts by agreeing to force its suppliers to pass on increases in tomato prices to pickers. Suppliers who do not comply will lose Taco Bell's business. And, if increased sales and better publicity are not enough, corporations are finding they can attract higher-quality employees if the corporate reputation is good.

But all is not rosy. Lying is on the upswing, according to three recent surveys on workplace ethics and conduct. Some workers report they feel pressured to violate their principles in order to maintain their jobs. Others say reporting bad behavior would harm their careers.

In an attempt to stop unethical behavior, some companies have developed ethics policies. The best learn from other businesses but remain true to their own corporate identity while including employees at all levels.

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The Institute for Corporate Productivity (i4cp, inc.) improves corporate productivity through a combination of research, community, tools and technology focused on the management of human capital. With more than 100 leading organizations as members, including many of the best-known companies in the world, i4cp draws upon one of the industry’s largest and most-experienced research teams and Executives-in-Residence to produce more than 10,000 pages annually of rapid, reliable and respected research and analysis surrounding all facets of the management of people in organizations. Additionally, i4cp identifies and analyzes the upcoming major issues and future trends that are expected to influence workforce productivity and provides member clients with tools and technology to execute leading-edge strategies and "next" practices on these issues and trends. i4cp is a for-profit company with offices in St. Petersburg, Florida.