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Jewish World Review March 27, 2002 / 14 Nisan 5762

Bill Tammeus

Bill Tammeus
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Consumer Reports

Can corporations behave ethically? | The genius of capitalism is also its Achilles heel: The profit motive can lure people and their companies into cutting ethical corners.

More sad proof is the recent collapse of the Enron energy company. That implosion and the attendant criticism of its see-no-evil accounting firm, Arthur Andersen, has caused President Bush to propose clearer and stronger corporate ethics standards.

As appealing as the Bush approach is - and his ideas make some sense - it fails to raise the more fundamental question of whether it's even possible for corporations to maintain high ethical standards. To do that, companies must battle human nature's seemingly perpetual attraction to misconduct as well as the fact that the free market is "as mindless as a ball bearing" - the apt description applied to it recently by Lewis Lapham, editor of Harper's magazine.

Improved corporate ethics are needed - and can be achieved. But no amount of tinkering, no army of consumer advocates, no swarm of schoolmarm regulators ready to apply hickory switches to wayward CEOs and their auditors will ever eliminate economic corruption. It's foolish to expect that.

So consumers, employees, stockholders and others must consider the possibility that businesses are cheating. But dishonesty isn't new. It didn't begin with Enron or with the 19th century robber barons. Indeed, ancient holy writ is full of admonitions about what we might call business ethics. In the biblical book of Leviticus, for instance, G-d is quoted as saying: "You shall not cheat in measuring length, weight or quantity. You shall have honest balances, honest weights ... "

What's ethical and what isn't, thus, has long been clear - even though there still may be arguments about nuances and specific situations arising from new technology.

Then what was new about Enron, which hid corporate debt and misled investors, proving itself financially and morally bankrupt? If anything, it was the extent of the deceit and the surprise so many people felt about it. It was a shock that such a huge corporation could be led by people with the morals of a vacuum cleaner. The stock market, lulled to complacency and credulity by the booming 1990s, was aghast. Its immediate reaction was to punish companies whose finances seemed Byzantine.

What was hard to believe was that responsible corporate officials, supposedly independent auditors, the press and the government's regulatory machinery all fell down on the job. What must emerge from current reform efforts is a system that consumers, investors, employees and others have more reason to trust.

It will never be possible to wring all sin out of the system, but surely there are ways to prevent corporations from overstating earnings by $586 million, which is what Enron admitted to doing. This just three weeks after Kenneth Lay, then company chairman, issued a press release that said: "Our 26 percent increase in (profits) shows the very strong results of our core wholesale and retail energy business and our natural gas pipelines." He made that deceptive statement just a few months after declaring that the "company is probably in the strongest and best shape that it has ever been in."

Will Bush's ideas on corporate ethics work? Well, they're a reasonable place to start, even if they seem squishy and lacking in details. As Rep. John LaFalce, a Democrat from upstate New York, noted, the Bush plan "falls short of what is necessary. I would hope that the president would work with the Congress on a bipartisan basis to put real teeth into his proposal so we can guarantee substantive reform, not mere cosmetics."

But the danger in relying too much on reform is that no corrections can yield a fool-proof system. And reform that simply produces a new collection of naive employees and investors who rely on the dubious wisdom of gullible Wall Street analysts and perfidious company executives will lead only to more heartbreak, more sad stories of loyal employees who bet their retirement security on company stock.

All over the country, people who teach corporate ethics have been asking college students to study the lessons of Enron. For instance, Gerald L. Miller, who teaches in the executive fellows MBA program at Rockhurst University, says he is seeing "seasoned business executives really trying to grapple with the impact" of Enron.

The case, he says, has "got them into looking into justice versus ethical and responsible behavior. Many of the things that Enron did were not even unjust - technically - and yet many of them obviously were unethical and not responsible from a larger point of view." The problem, he says, comes when corporations equate what may be legal with what is ethical.

All of this may sound as if corporations are incapable of morally laudable behavior. Not so. Many good companies produce reliable and useful products at fair prices through the honest work of decently paid employees - companies that have a social conscience and a good bottom line.

Such companies have existed for a long time. Before 1911, for instance, match sticks were made by using white phosphorous. It lit fires but was a deadly poison. Among other things, it made large numbers of people sick. Match factory employees got bone poisoning. And it was said there was enough white phosphorous in one pack of matches to kill a person.

In 1911, the Diamond Match Co. (still in business today as Diamond Brands Inc.) patented the first nonpoisonous match that used a harmless chemical instead of white phosphorous. In view of public health concerns, President William Howard Taft quickly asked the company to surrender its patent voluntarily. Diamond did so - even though it meant giving up opportunities for huge profits. Not only that, but Diamond then taught other matchmaking factories how to make nonpoisonous matches.

Nowadays, however, the focus of the press and public - here and abroad - seems less on such public acts of good than on scandals directly or indirectly involving corporate negligence or malfeasance (sometimes linked with government failure). These range from the savings and loan scandals of the 1980s to faulty Firestone tires in 2000, from the Challenger space shuttle disaster to the Chernobyl nuclear catastrophe, from the Exxon-Valdez oil spill to the poisonous gas leak at a Union Carbide plant in Bhopal, India, that killed 2,500 people.

Can reform ideas from a president who has been criticized for his own previous business dealings change any of this? Yes. But the marketplace is driven by profit, not by ethics codes proclaiming virtuous intent. Whoever forgets that will be disappointed again - and surprised by our continuing need for jails.

JWR contributor Bill Tammeus' latest book is "A Gift of Meaning." To order it, please click on title. To comment on his column, please click here.

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Reprinted by permission, The Kansas City Star, Copyright 2002. All rights reserved