Summary

Do you want to make sure you Don't invest your money in the next Enron? Don't go to work for the next WorldCom right before the crash? Identify and solve problems in yourorganization before they send it crashing to the ground? Marianne Jennings has spent a lifetime studying business ethics---and ethical failures. In demand nationwide as a speaker and analyst on business ethics, she takes her decades of findings and shows us in The Seven Signs of Ethical Collapsethe reasons that companies and nonprofits undergo ethical collapse, including: Pressure to maintain numbers Fear and silence Young 'uns and a larger-than-life CEO A weak board Conflicts Innovation like no other Belief that goodness in some areas atones for wrongdoing in others Don't watch the next accounting disaster take your hard-earned savings, or accept the perfect job only to find out your boss is cooking the books. If you're just interested in understanding the (not-so) ethical underpinnings of business today, The Seven Signs of Ethical Collapseis both a must-have tool and a fascinating window into today's business world.

Author Biography

MARIANNE M. JENNINGS is a professor at Arizona State University and the author of A Business Tale. She speaks often on business and ethics. Her weekly columns are syndicated around the country, and her work has appeared in The Wall Street Journal, Chicago Tribune, The New York Times, The Washington Post, and Reader's Digest. She lives in Mesa, Arizona.

The Seven Signs of Ethical Collapse

CHAPTER ONE

What Are the Seven Signs? Where Did They Come From? Why Should Anyone Care?

Predicting rain doesn't count; building arks does.

--Warren Buffett, from his 2001 letter to Berkshire Hathaway shareholders

It was just after the collapse of Lincoln Savings and Loan and Charles Keating's criminal trial that I began to notice a pattern. Tolstoy wrote that all happy families are alike and all unhappy families are unhappy in their own ways. The inverse appears to be true when it comes to ethics in organizations. All unethical organizations are alike; their cultures are identical, and their collapses become predictable. More than once I have been interrupted with a correction as I have told the story of General Motors, its redesign of the Malibu, and the memo from the young engineer who expressed concern that the car's gas tank was too close to the rear bumper and not insulated sufficiently in the event of rear-end collisions.

As I explain the young engineer's fears that the cars would explode too readily and upon the slightest rear-end impact, someone usually raises a hand and says, "Excuse me, but don't you mean Ford and the Pinto?" I gracefully assure them that I am aware of the Ford Pinto case and how its gas tank was also positioned too close to the rear bumper, but that I really do mean GM and its Malibu. History repeats itself when it comes to ethical lapses and collapses.

The pattern is the same. Pressure to design a new car and get it out on the market to meet the competition. A flaw in the design. A young engineer who sees the flaw. A supervisor who doesn't want bad news. A management team counting on no bad news. A shortsighted decision to skip the expense of the fix to the flawed design. Then the cars are in flames, the lawsuits begin, and those involved have the nerve to act surprised that all this is happening to them. The Malibu and Pinto stories include ethical-culture issues that are common tocompanies that endeavor to postpone or hide the truth about their products. As the problems with the gas tanks and explosions in the Ford Crown Victoria police cars (the Crown Vics, as they are called) emerge, the same story is likely to be repeated in the company that brought us the Pinto thirty-five years ago. You could substitute Johns-Manville and asbestos, Merck and Vioxx, or any other product-liability case and find a similar pattern. New-product problem arises, employee spots the issue, company hides the problem, press releases equivocate, and officers postpone public disclosure as they try to control the truth about that problem and continue to hope for the best. The strategy never works, but these companies have created a culture destined to follow this failing strategy.

Almost daily there is a breaking story about another company or individual who has fallen off the ethical cliff. In 2006 Nortel had to postpone the release of its 2005 earnings because of questions about its accounting that arose while it was still in the process of restating its earnings for 2001 through 2004. In 2005 the company announced earnings restatements for 2004, which followed a 2004 announcement of earnings restatements for 2003 that would cut half of the company's $732 million in profits. For those of you still keeping score, that's three restatements in three years. As one analyst noted, these kinds of accounting issues make it difficult for investors to trust the company. Further, the fallout for employees and company size is significant. A company that had 95,000 workers in 2001 will have 30,000 workers once it completes its latest 10 percent downsizing. Somewhere during the humiliation of the restatement activity there must have been one or two employees who thought that perhaps correcting the problems of the past required that they not be making the same mistakes presently.

In this Nortel story and so many others about companies and executives, we find ourselves shaking our heads in wonder. Martha Stewart and her broker tried to use Knicks tickets to persuade her broker's assistant to join ranks and stick with their story about a stop-loss order as the reason for their sudden sale of her ImClone shares one day before the company announced that FDA approval would not be forthcoming for its anticancer drug and star product, Erbitux. Add to this amateur tool of persuasion the altered phone logs, changed stop-loss-order date, and inconsistent stories among these three musketeers of manipulation, and the whole scenario has all the sophistication of elementary-school children caught lifting cookies from the cafeteria line. The conduct, whether over shares of stock or Toll House cookies, is wrong. When the SEC or school principal steps in, the fallout is always the same. One of the amateur conspirators breaks ranks on the concocted, unimaginative story.

This behavior is not exactly the stuff of the so-called gray area. Nor are any of the activities of the companies and their officers we will look at be nuanced. Former Tyco CEO Dennis Kozlowski and his $6,000 shower curtain for hishighfalutin apartment, all at Tyco expense, is not the kind of story that causes us to ponder, "Wow, that was really a subtle ethical issue. I never would have seen that." Maurice "Hank" Greenberg, the former CEO of AIG, found a board waiting with his walking papers when revelations about creative insurance policies and even more creative accounting for such became public. The board had no difficulty in spotting the ethical lapses there. Nor should those in the company--or Greenberg, for that matter--have had any great mental or philosophical strain in spotting the issue. Somehow, however, the issue trotted right by very bright and capable employees and executives who are well trained in accounting, insurance, and where the two meet.

What we have seen and continue to witness is ethically "dumb" behavior. There was no discussion of gray areas as these stories unfolded. When WorldCom was forced to reveal that its officers had capitalized $11 billion in ordinary expenses, no one slapped his forehead and said, "Gosh, I never would have seen that ethical issue coming!"

When Enron collapsed because it had created more than three thousand off-the-books entities in order to make its debt burden look better and its financial picture seem brighter, no one looked at the Caribbean infrastructure of deceit and muttered, "Wow--that was really a nuanced ethical issue."

There have been so many of these not-so-subtle corporate ethical missteps: HealthSouth's fabricated numbers that had it meeting its earnings goals for a phenomenal forty-seven quarters in a row; Royal Dutch's overstatement of reserves; Adelphia officers' personal use of company funds for family and personal projects; and Marsh & McLennan's illegal fee arrangements in exchange for insurance bids. No one looked at Frank Quattrone and Arthur Andersen and their document shredding and wondered, "Would I have been able to see that coming?" Even when there is no criminal behavior, the magnitude of the ethical lapses finds us shaking our heads as companies and careers crash and burn. Smart and talented people make career-ending decisions as they lead their companies and organizations to ethical collapse. Quattrone's and Andersen's verdict reversals tell us their conduct was legal. Why, however, take the risk of document destruction when your company faces regulatory scrutiny? Finding the solution to this seemingly inexplicable march to self-destruction should be the focus of all ethics programs.

These ethical missteps are not the stuff of complexity or even debate. They were downright gross ethical breaches. Indeed, in many of the cases there were blatant violations of laws and basic accounting. But if the problems and missteps were so obvious, how come those involved--bright and with years of business experience--let them slip by or joined in on the fraud festivities? Why didn't someone in the company step up and correct the behavior? And how come no one in the company told the board? Perhaps mentioned it to aregulator? Was there not a lawyer in the house? Why does it take so long before the charade of solvency is dropped? What makes people with graduate degrees in law and business come to work and shred documents or forge bank statements? Why do good, smart people do ethically dumb things?

When Martha Stewart was indicted--and her indictment followed on the heels of the Enron, WorldCom, Adelphia, HealthSouth, and Kozlowski indictments--a reporter asked me, "What is the difference between you and me and a Martha Stewart or a Jeffrey Skilling of Enron or a John Rigas of Adelphia?"

My reply was "Not much."

The reporter was taken aback, outraged that I would not portray these icons of greed as one-eyed Cyclopes with radically different, mutantly unethical DNA.

Sure, Martha and her obstruction, Andrew Fastow and his spinning off debt, and Dennis Kozlowski and his chutzpah with the corporate kitty are the end of the line for ethical collapse. Yes, yes, they descended quite far into the depths of ethical missteps, but no one should assume a perch detached and above this type of behavior. No one wakes up one day and decides, "You know what would be good? A gigantic fraud! I think I'll perpetuate a myth through accounting fraud and make money that way." Nor does anyone suddenly wake up and exclaim, "Forgery! Forging bank documents to show lots of assets. There's the key to business success."

These icons of ethical collapse did not descend into the depths of misdeeds overnight. Nor did they descend alone. To be able to forge bank documents, one needs a fairly large staff and a great many averted eyes. To drain the corporate treasury for personal use requires many pacts of silence among staff and even board members. Overstating the company's reserves requires more than one signature. Those who are indicted may have made the accounting entries, approved the defective product launch, ordered the shredding, or skirted the law. But they were not alone. They had to have help, or at least benign neglect from others in the organization.

Which leads to these questions: How does an organization allow individuals to engage in such behavior? What goes wrong in a company that permits executives to profit and pilfer as sullen but mute employees stand idle?

The latest federal reforms on accounting, corporate governance, and financial reporting, in the form of the Sarbanes-Oxley Act of 2002 (SOX, as it is fondly known among executives), have lawyers and accountants scrambling to meet requirements for ethics programs and other statutory mandates. The demands of SOX represent the third great regulatory reform I have witnessed in my nearly three decades of detached academic observation and research. When Boesky, Milken, and junk bonds stormed Wall Street and then collapsed, wepassed massive reforms and we all swore, in Edgar Allan Poe fashion, "Nevermore."

But then came the savings and loans, real estate investments, appraisers with conflicts of interest, Charles Keating, and the inevitable collapse that follows self-dealing and enrichment, as well as the accompanying damage to the retail investors in these enterprises. So we passed more massive federal reforms on S&Ls, accounting, and appraisal, swearing and quoting, once again, "Nevermore!"

Yet here we are, five years after Enron's collapse, still debating all the rules and regulations that should be applied and grappling with the complexities and demands of Sarbanes-Oxley, and this time we swear that we really mean it when we say, "Nevermore!"

But it will all happen again as the cycle continues, because we keep trying to legislate ethical behavior. There are not enough lawyers, legislators, sessions, or votes to close every possible loophole that can be found as we continue to regulate business behavior. Professor Richard Leftwich has offered this description of the relationship between accounting rules and standards and business practice: "It takes FASB [The Financial Accounting Standards Board] two years to issue a ruling and the investment bankers two weeks to figure out a way around it."

The penalties increase with each massive regulatory reform, but so also does the size of the frauds and collapses. This latest go-round of ethical collapses has brought us several of the top ten corporate bankruptcies of all time. Although that list is a tough call. I am reluctant to name these companies to the list because I have to rely on their numbers for that ranking. Who could say how big their bankruptcies really are?

These massive legislative and regulatory reforms cannot solve the underlying problems. They are not the cure for the disease of fraud. The audits, the corporate governance, and the accounting focus on getting good numbers are superficial fixes. Legal changes create artificial hope that massive regulations will stop ethical lapses. But these facile solutions of how to count, when to count, and even how many board members count as independent and which ones qualify as experts in finance have not worked in the past and will not work to prevent similar collapses in the future. The focus on detailed rules makes us overlook the qualitative factors that have more control over the ethical culture of organizations.

Prevention is the key. Stopping the inexorable march to that ethical cliff demands something more than a look at ROE (return on equity) and other financial measures and promised deliverables that are so easily quantified. There are qualitative characteristics to look for in companies that can provide insight into the organizations that produce the external facade of financialreports, fund-raising, and shuttles launched. There are marking points in that descent from financial reports with integrity to the shredding and forgery. In fact, after performing decades of research and studying three great ethical collapses, I've identified seven of them.

An Overview of the Seven Signs

The seven signs became clear as I prepared to participate in a 2003 symposium on corporate governance and ethics. My presentation there was published in the more formal format of a seminal law review article titled "Restoring Ethical Gumption in the Corporation: A Federalist Paper on Corporate Governance--Restoration of Active Virtue in the Corporate Structure to Curb the 'Yeehaw Culture' in Organizations" in the Wyoming Law Review. The title describes the culture and nature of companies that ethically collapse. These companies have a culture best reflected by the Wild West battle cry when things in the town got a bit out of the local sheriff's control, "Yeehaw!" "Yeehaw!" was also the battle cry of Billy Crystal's cohorts, actually the citified dentists, when they headed out to their first cattle drive in the film City Slickers. Either source of the term "yeehaw" connotes trouble ahead.

Building on that work, I can now answer the following questions: What do you look for in a company or organization that can provide insight into whether it is at risk for ethical lapses? And what happens to us that allows us to descend to these bizarre forms of conduct? Finally, what can be done to curb these problems and flaws?

Through the three great collapses and reforms over the past twenty years, I have had both the luxury of detached perspective of an academic and the time for studying common traits. Are there similarities between Charles Keating and his Lincoln Savings and Loan and John Rigas and his Adelphia? Are there common factors between junk bonds and the telecoms and dot-coms? What happens in a company that allows a CEO to loot the organization? How does a company persuade bright and capable individuals to stand at the shredding machine?

There is a pattern to ethical collapse--that descent into truly obvious missteps that make us all wonder, "Where were their minds and what were they thinking when they decided to behave this way?" The simple answer is that they failed to see and heed the seven warning signs of ethical collapse:

1. Pressure to maintain those numbers

2. Fear and silence

3. Young'uns and a bigger-than-life CEO

4. Weak board

5. Conflicts

6. Innovation like no other

7. Goodness in some areas atoning for evil in others

These seven signs are easily observable from the outside, and almost always discernible even without one-on-one interviews with employees. But give me a one-on-one with an employee and I can tap a vein. I always offer companies: "After I do my outside research, using the signs listed above as the focus, give me just five minutes alone with a frontline employee and I can tell you the culture of your organization and whether it is at risk."

While it is true that every company has one or more of the seven signs, not every company is at risk of ethical collapse. The difference between a company at risk and one that collapses lies in curbing the culture and controlling the worst of the seven signs. A little fear of the CEO is not a bad thing. The fear of telling the CEO the truth is. Antidotes for curbing the seven "yeehaw" factors abound. Managers, executives, and boards just need to learn the signs and work to counterbalance their overpowering influence in an organization.

The signs can also be seen in government agencies and nonprofits. The Yeehaw Culture has invaded churches, the United Way, and newspapers. The signs are universally applicable and offer a checklist for managers, trustees, shareholders, donors, and anyone else who wants to prevent or curb the Yeehaw Culture. Analysts who seek to get their arms around those qualitative and often controlling factors in a company can find insight here. Investors who want to know if their investment is at risk because of potential ethical collapse can look for these signs. The seven signs can help employees who want to preserve an ethical culture in their companies and can offer insight and suggestions to employees at companies that are at risk for the Yeehaw Culture.

The chapters that follow detail the seven signs, as well as give examples of the companies, agencies, and nonprofits that have had them all and their resulting fates. Along the way you find the tools for curbing the behaviors that give rise to the seven signs and for preventing ethical collapse.

By studying the qualitative factors that lead to obviously wrong behaviors, individuals learn when they are unwitting, or perhaps even witting, accomplices to the collapse. They learn when to be agents of change in an ethically risky culture, or when to hold 'em and when to fold 'em. Very bright people are now serving sentences as a result of guilty pleas. They made the accountingentries their executives asked them to. An understanding of the seven signs offers individuals guidance on how to choose among companies and when they have hit an ethical wall.

My former students often call me to find out what company will be the focus of seven-sign analysis by my current students on the midterm and final. They call because they want to position themselves short on the companies. Applying the seven signs and finding them missing in a company means a good investment. Applying the seven signs and finding them all present and accounted for means the company is headed for a drop. In the fall of 2004, the students focused on Krispy Kreme. Any company that tries to attribute a downturn in its revenues to the pervasiveness of the Atkins low-carb diet has a problem. "We hit a low-carb wall" was the explanation of former CEO Scott Livengood. By January 4, 2005, Krispy Kreme had announced that it would be restating its earnings.

At the start of the work on this proposal in the summer of 2004, Greg Dinkin, my agent, asked me if there was any company I would point to at that time that had seven-sign risk. I responded that it was Coca-Cola. Following our discussion, Coke had a series of legal and ethical issues. But Coke may now be a company to study for its ability to pull back and, with tough introspection, make the changes needed to reform a culture that led them down the path of trying to dupe both its shareholders and even one of its own customers. The channel-stuffing charges it settled in April 2005 resulted, according to the SEC, from the pressure at Coke to meet earnings expectations and continue that long streak of phenomenal earnings that hit a wall in 1998 via an economic downturn, particularly in foreign markets. The Burger King debacle discussed in Chapter 4 may have saved the company from worse. From management to policies to products, Coke has been changing, thinking, and working to avoid the damage that comes if companies don't use the checks and balances on the signs of ethical collapse. When Neville Isdell took over as CEO, he spoke bluntly to employees about "personal accountability" and challenged them to rise above the personal politics and get back to developing what it takes to succeed. The charge to employees was a classic one designed to send the message of hard work and innovation, not manipulation or deception. Coke settled its accounting issues with the SEC in April 2005 even as the Justice Department dropped its investigation into the Burger King incident (see Chapter 9 for more information). And it paid its former employee Matthew Whitley, who questioned the reimbursement of the marketing consultant for the Burger King test market, a total of $540,000 to settle his wrongful termination suit. Coke also shifted to focusing on long-term goals over quarterly earnings targets. The pulling back is neither cheap nor easy, but it does avoid the financial fallout of continuing to operate with an ethically challenged culture. Coke's Burger King division even had the guts to have meand my bluntness in to help them analyze what went wrong with the slip into "adjusted" market studies.

Study a company with the seven signs and you spot risks that analysts have not begun to understand. The analysts were describing Tyco as a phenomenon and crowning its then-CEO, Dennis Kozlowski, as the next Jack Welch. In fact, Business Week named now-convicted CEO Dennis Kozlowski one of its top managers for three years running. I said, "Run away! Run away!" You will learn why. An isolated look at one company or one collapse does not provide tools for application and prevention. A study of three eras of ethical collapse provides signs and principles for curbing the atmosphere that leads to ethical collapse. And ethical collapse is not just applicable in hindsight. I can see it coming.

In a speech at AstraZeneca, the international pharmaceutical company, in the fall of 2004, an employee, during the Q&A, asked me what I thought of the Merck and Vioxx situation. The timing of my speech was just days after Merck had announced it was halting sales of its arthritic pain medication, Vioxx, because of increased risk of heart attacks and strokes. I responded that I had no thoughts on whether the statements about the drug and its effect on heart patients were true or false, but I did predict how the case would unfold: there would be hints of a problem early on and internal e-mails or memos would reflect concern on the part of some scientists and employees; as the concerns began to increase and those outside the company began to discover the same problems with Vioxx, there would be evidence of the living-in-denial phase along with the usual instructions to employees and others to hold firm and fast on a drug that generated $2.5 billion in sales in 2003. I explained that the pattern, so evident in other companies that face such a public crisis, would hold true: Merck would hope for the best to come if they could just hold the issue back from scrutiny long enough. The irony is that a great product suffers from the postponement of full-blown disclosure.

There is no best to come because concealment never works and is a strategy chosen by those bound and consumed by a culture of ethical collapse. Within one month following that speech, The Wall Street Journal reported on page A1 that the e-mails I predicted did exist, that some of those within the company were hopeful that scientists challenging Vioxx would "flame out," and that instructions for new trainees on questions about Vioxx included, in capital letters, this instruction: "DODGE!" The pattern holds true because all companies travel the same road down the slippery slope of ethical collapse.

Why Read This Book? What's Different?

This is a book for everyone who has looked at these fallen executives and their crashing-and-burning companies and wondered, "Why did they do it?" or"How does someone sink so low?" Some observers conclude that bad people (think "rogues") ran the ethically collapsed companies. They assume, with a great sense of calm and comfort, that such a monumental collapse could never happen to them because they are, of course, not rogues. There is a tendency in human nature to take away immunity from any analyses of ethically collapsed companies and conclude, "Well, it was greed," or "They were just awful people." We fancy ourselves to be different from these rogues and hence not susceptible to monumental ethical collapse. Perhaps we are nothing like any one individual rogue, but the better analysis and questions are "What do companies with rogues have in common?" and "How do rogues obtain such a grip on a company or organization?" This book will teach us not to dismiss these "bad seeds" so readily as being different from us. Given enough pressure and culturally induced myopia, we are all vulnerable. The checks and balances come from being able to recognize when you are at risk. This book helps us spot the slippery slope, the ethical cliff, and any other physical and philosophical metaphors for doom. We need to be able to recognize the danger signs before we come too close to that slope, edge, cliff, precipice ... .

Because the focus of this book is on preventing ethical collapse, it charts new territory. A quick glance down the extensive list of books on business ethics finds a plethora on two themes: (1) Ethics is important in business and (2) the story of individuals and companies that collapsed. We are at a point where we know that ethics is important. In this post-Sarbanes-Oxley world, everyone from executives who sign off on financial statements to employees who must sign off on ethics codes and attend ethics training is inundated with ethics programs and training. Every publicly traded company must have ethics codes, ethics training, and all ethics all the time. Sometimes I worry that the zeal for compliance with federal law will blind us to really working on a solid ethical culture. Would we really know if we were headed down the same path as those companies whose stories dominate the business bestseller lists?

Most companies and their ethics programs fall short of taking the steps necessary to create a culture in which employees come forward with concerns and feel comfortable making ethical choices and in which ethics is paramount in decision making. There are magnets, pens, pads, and even Slinky toys and Rubik Cubes with the ethics hotline information on them, and everyone talks a good game. There are help lines, hotlines, always-tell lines, honesty-first lines, and all manner of what employees often perceive to be the career-ending rat-fink telephone lines to report a legal or ethical issue. But more executives, boards, and ethics officers themselves are asking, "We know what we're supposed to do and what the law requires, but how do we do it?" This book represents the next generationof business ethics book--this is the action and prevention book. This book takes ethics from philosophy and being simply a remote goal to making it a critical part of a culture and, ultimately, successful. The principles on ethical culture and ethical collapse are, like management books' discussions about service, greatness, and quality, universally applicable--for companies, nonprofits, and government agencies. This book is a how-to: how a business should create and sustain an ethical culture.

Most books on ethics in business tell businesspeople to be ethical. This book presumes that we understand that part of the equation and moves on to the next phase: How do we do it? Therein lies the key question; and once we do it, how do we sustain it? There are traits, habits, and cultural factors that actually get in the way of ethical decisions. There are also ethical checks and balances that can serve as stop signs when unethical conduct is proposed.

This book also provides the tools for addressing the rising need in corporations for evidence that they and their employees are focusing on ethics. The real issue in all the hand-wringing over ethics and Sarbanes-Oxley is how to ensure not only that we have core values but that they survive and thrive once we have them. Enron had core values. Arthur Andersen had core values, as did WorldCom, Adelphia, and Tyco--they all touted them. The problem was in implementation and maintenance: creating and sustaining a culture in which those values could survive and thrive. How do we know when we are drifting? How do we curb the drift? What allows us to drift? Enron did not have "push the envelope on accounting rules" as a core value. How did it get to a point where that value consumed its executives and staff? In the chapters that follow you will learn how to determine if you are on course and whether your culture allows you to practice and live the ethical standards we now know are a critical factor in a company's financial success. In a 2004 study from the Journal of Business Ethics, employees stunned most academics by saying that the code of ethics for their company had very little influence on whether they made ethically correct choices. It was the culture of their companies and the examples set by their leaders that influenced their conduct. We understand that ethics is important; we have not yet taken the time to nurture it and create an atmosphere of ethical leaders and influences. This is a positive "How do we prevent it?" tome, not a negative "I can't believe they did this!"

It is tragic when we witness these stunning organizational collapses. These collapses are pervasive, and the passage of Sarbanes-Oxley has not halted them. Refco's creative accounting came four years after the legislation despite its resemblance to the Enron approach to financial reporting--get that debt off the books. Royal Shell's reserves overstatements were revealed two years after the harsh warnings on financial statements. Even religious organizations,such as the Baptist Foundation of Arizona, have fallen victim to ethical collapse, taking down their faithful investors who had given their life savings to an organization they trusted. Initially, the Baptist Foundation of Arizona was an organization that had values and could be trusted, but its initial great success, a weak board, and investors equating social good with accounting honesty allowed it to slip until eventually the accounting practices consumed even its outside auditor. CBS was once the Tiffany network, the standard for television journalism. Yet during the 2004 presidential campaign it was reduced to issuing press releases explaining Dan Rather's 60 Minutes II stories on President George W. Bush's National Guard service as follows: "This story is true. The questions we raised about then-Lieutenant Bush's National Guard service are serious and legitimate." The documents on which we based the story may have come from a questionable source, but the underlying story is true? The New York Times used this incredulous headline on the same story: MEMOS ON BUSH ARE FAKE, BUT ACCURATE. And The New York Times itself found that one of its important reporters, Jayson Blair, was fabricating and plagiarizing stories. The nature of the leadership in these news organizations, the pressures, and the structure all demonstrate that the Yeehaw Culture can be found even in the media as they pursue the idealistic goal of uncovering and reporting the truth. Even the Times itself noted "a rich supply of scandals at news organizations, including the New York Times."

What happens to reduce a company, an agency, a foundation, or a news organization to such defiance of ethics--indeed, of logic? There is a pattern of devolution, and warning signs that tell us when we are headed toward the slippery slope of ethical collapse.

When we look at many of the scandals and the backdrop of the decisions of companies that hit ethical road bumps--such as Ford and Firestone and the Explorer tires, Al Dunlap and Sunbeam's accounting, price-fixing at Archer Daniels Midland (ADM) and Marsh & McLennan--we know that those decisions were flawed and the fallout from those decisions destructive. Bad decisions and ethical missteps will continue as long as human beings run companies. The ethical issues at Ford and Firestone existed long before executives faced the questions of what to do about the tires or the Ford Explorer, to recall or not to recall, to litigate or not to litigate, to report accidents in other countries to the Consumer Product Safety Commission or not. The questions that should have been answered long before the stories in USA Today appeared were: How on earth did the data on both the Explorer and the tires go unheeded for so long in these companies? What made good engineers dismiss the data on peeling tires for so long? Why didn't lawyers report the overseas incidents of rollovers and tire problems to the Consumer Product Safety Commission? The price-fixing at ADM and the decision of executives there to involvethemselves in this activity were just plain wrong. What makes bright, capable people think they can get away with such behavior? But the better questions are: What went wrong and what happens in a company that allows employees to even think about engaging in price-fixing? This book teaches individuals how to avoid the ethical issues, problems, and collapse by studying when, where, and how the managers went wrong and why they did what they did. Assume that the managers and employees in these companies realized then, as we do now in hindsight, that what they were doing was wrong. Where were the checks and balances to help them make the obviously correct choices instead of the damaging, wrong choices? What kinds of conditions exist in organizations that allow the employees and officers to devolve from a point of being decent people to becoming diabolical? Presuppose human nature and learn to avoid the pitfalls even as you create gates and gatekeepers to save us from our natural selves.

This is not a book for the ethically fainthearted. Too few books have offered moral judgment and, as a result, have fallen short in giving guidance on the difference between right and wrong. For example, a classic dilemma in business ethics books and discussions is whether an executive should launch a questionable product. The ethical dilemma is not whether to launch; the ethical dilemma is why does a debate on launching a questionable product ever gain traction? More relevant, what is in your company's culture that encourages you to even think about launching a questionable product? By portraying everything in shades of gray, we create an ethical culture that leads to a constantly moving line of propriety that takes executives from shades of gray in accounting right into fraud. In other words, this method of analysis, in which there is no right or wrong, is part of the problem with corporate cultures and contributes to collapse.

There are also those who want to posture all business ethical dilemmas as a right vs. right context. "Do I take a vacation, or save the money for my children's college tuition?" "Do I log, or do I preserve the spotted owl?" These types of decisions are complex ones and require an examination of values, intentions, and alternatives. They are not, however, the issues that affected Enron, WorldCom, Adelphia, AIG, Fannie Mae, and Tyco. Indeed, WorldCom and Adelphia always saved the spotted owls; they just had a great deal of difficulty with their accounting, executive loans, and that fluctuating line (as they saw it) between company and personal property. Altruistic salve for the executive conscience--there is no right or wrong, just good analysis. Creating a culture that prevents ethical collapse means looking beyond whether we are good citizens, in our corporate and organizational worlds as well as in our communities. We have to determine whether we have raised difficult obstacles and pressures and created an atmosphere in which employees and executives reflectin the company accounting that orders have been filled so as to meet their quarterly numbers when they know that the orders cannot physically be filled by the end of the day. What makes employees trot down this path of fudging numbers, a practice that leads to outright cooking of the books? Why was no one comfortable reflecting on this decision and questioning whether it was ethical? And why wasn't anyone in the company available to listen to employee concerns about the decision? To whom do they turn for help? Were there systems in place for voicing their concerns? What if they experience resistance? What makes it difficult for executives to do the right thing in this accounting dilemma? We work and live among groupthink, incentive plans, pressure from supervisors, and a host of other environmental factors that must first be controlled before we have the personal luxury of right vs. right.

Some have argued that all we need is moral courage, people who stand up to accept responsibility and take the consequences. It's tough to argue against moral courage. But reality and my studies of organizations show that moral courage doesn't face nearly as many hurdles and is exercised more frequently when employees are not in an environment of fear, retaliation, and incentives for doing the wrong thing. Getting sacked for raising ethical issues does not build moral courage. Yet, in the companies that experienced ethical collapse, the terminations were fast and furious for those who pointed to the naked emperors, whether in accounting and financial reporting or product flaws. We do indeed need more individuals with moral courage. Putting checks and balances in place to curb the seven signs can help with the systemic problems that inhibit the exercise of moral courage. The realistic issue is whether an organization has created barriers to entry into the magnificent field of the morally courageous. Even the stoutest of heart falter when the consequences of exercising moral courage are too great.

One must never presume that we have created an atmosphere appropriate for moral courage. That assumption is wrong. Too few organizations foster forthrightness and moral courage. However, an ethical culture that allows and then nurtures moral courage can be created and fostered. We can work at the other end, curbing the seven bad habits, to provide and sustain an ethical culture. Further, identifying the seven signs allows those who are seeking employment or a change in positions to examine the company's culture and decide if they really want to work in an environment that will not permit ethical dissent. Investors can examine companies and decide if they want to own part of something that has a culture ripe for moral compromise. We know companies need moral courage, and the seven signs measure whether it exists or even can exist in the organization and whether management's tolerance allows its exercise.

How do you find companies that nurture moral courage? How could so few people see the cultural problems at Enron, WorldCom, Adelphia, and Tyco?Are there warnings signs? Prospectively, how do we put into place the checks and balances that prevent us from labeling everything gray and crossing over those fine lines into unethical behavior? Can we spot trouble before it is too late? The answer is unequivocally yes. I want people, including managers, employees, and investors, to be able to spot the risk before the company takes the step to front-page news. Using the tools presented in the chapters as the signs are explained, prevention is possible. With these tools, we can examine companies for the qualitative signs that often determine success or failure. When all the ratios are calculated and the economic forecasts completed, we are left with the question of whether we can trust companies to exercise their stewardship with investor funds in an ethical manner. A close look at the factors common to those who have not exercised that stewardship yields new insight and foresight.

The pattern that we discover carries with it a list of prevention tools. Relying on the rich business history presented by looking across these scandals of nearly three decades, anyone can make the case for change in his or her own organization. Showing the collapse of organizations that did not self-correct makes the case for any organization to change. Now we have the red flags to look for. Think how many people were aware of what was happening in these organizations! Tapping into that resource provides a means for halting the march to collapse. Long before companies collapse, with the accompanying front-page embarrassment, there are definitive cultural factors to watch and the areas in which self-correction can curb ethical decline that leads to the well-publicized and financially devastating collapse.

In this post-Sarbanes-Oxley world, with all of its focus on ethics training, companies must be able to demonstrate to government regulators that they have produced an ethical culture. Such proof offers insight into the creation and maintenance of an ethical culture by avoiding the pitfalls that destroy such an environment. CEOs and CFOs must certify that their firms' financial statements are accurate, but more important, they must certify that their companies have the right checks and balances and culture to ensure that the numbers and reports were prepared according to high ethical standards. Those certifications can be offered without as much anxiety when there is a comfort level with the culture that produced the numbers in those reports.

The patterns for good ethical cultures as well as bad are out there, and studying and understanding both gives companies a chance to keep the organization away from that slippery slope. By the time the company hits the slope, it is too late. The goal is to eliminate the slippery slope altogether by creating a culture that fosters and nurtures ethical choices. The only variation is the type of ethical or legal issue. For some companies, like so many of the Enron era, their ethical collapse comes over financial reports. For others, such asSotheby's, Christie's, and ADM, it is price-fixing. For still others, such as Boeing and Marsh & McLennan, there are collapses that come from unlawful means to circumvent the bid processes. The underlying pressure that causes the descent down the slippery slope and collapse may be different, but the cultures in the company or organization that allowed an issue to get to the point of "Where were their minds? What were they thinking?" are the same. This book helps us avoid that precipice through the use of a checklist of factors. Now we can all point to tangible organizational and individual signs and determine whether ethical risk exists, and if it does, make the changes necessary to halt the conduct and end the grip of the rogues who will take their organizations to ethical collapse without the intervention of those who understand and are willing to manage the Yeehaw Culture.

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Excerpts

Chapter One

What Are the Seven Signs?
Where Did They Come From?
Why Should Anyone Care?

Predicting rain doesn't count; building arks does.
--Warren Buffett, from his 2001 letter to
Berkshire Hathaway shareholders

It was just after the collapse of Lincoln Savings and Loan and Charles Keating's criminal trial that I began to notice a pattern. Tolstoy wrote that all happy families are alike and all unhappy families are unhappy in their own ways. The inverse appears to be true when it comes to ethics in organizations. All unethical organizations are alike; their cultures are identical, and their collapses become predictable. More than once I have been interrupted with a correction as I have told the story of General Motors, its redesign of the Malibu, and the memo from the young engineer who expressed concern that the car's gas tank was too close to the rear bumper and not insulated sufficiently in the event of rear-end collisions.

As I explain the young engineer's fears that the cars would explode too readily and upon the slightest rear-end impact, someone usually raises a hand and says, "Excuse me, but don't you mean Ford and the Pinto?" I gracefully assure them that I am aware of the Ford Pinto case and how its gas tank was also positioned too close to the rear bumper, but that I really do mean GM and its Malibu. History repeats itself when it comes to ethical lapses and collapses.

The pattern is the same. Pressure to design a new car and get it out on the market to meet the competition. A flaw in the design. A young engineer who sees the flaw. A supervisor who doesn't want bad news. A management team counting on no bad news. A shortsighted decision to skip the expense of the fix to the flawed design. Then the cars are in flames, the lawsuits begin, and those involved have the nerve to act surprised that all this is happening to them. The Malibu and Pinto stories include ethical-culture issues that are common to companies that endeavor to postpone or hide the truth about their products. As the problems with the gas tanks and explosions in the Ford Crown Victoria police cars (the Crown Vics, as they are called) emerge, the same story is likely to be repeated in the company that brought us the Pinto thirty-five years ago. You could substitute Johns-Manville and asbestos, Merck and Vioxx, or any other product-liability case and find a similar pattern. New-product problem arises, employee spots the issue, company hides the problem, press releases equivocate, and officers postpone public disclosure as they try to control the truth about that problem and continue to hope for the best. The strategy never works, but these companies have created a culture destined to follow this failing strategy.

Almost daily there is a breaking story about another company or individual who has fallen off the ethical cliff. In 2006 Nortel had to postpone the release of its 2005 earnings because of questions about its accounting that arose while it was still in the process of restating its earnings for 2001 through 2004. In 2005 the company announced earnings restatements for 2004, which followed a 2004 announcement of earnings restatements for 2003 that would cut half of the company's $732 million in profits. For those of you still keeping score, that's three restatements in three years. As one analyst noted, these kinds of accounting issues make it difficult for investors to trust the company. Further, the fallout for employees and company size is significant. A company that had 95,000 workers in 2001 will have 30,000 workers once it completes its latest 10 percent downsizing. Somewhere during the humiliation of the restatement activity there must have been one or two employees who thought that perhaps correcting the problems of the past required that they not be making the same mistakes presently.

In this Nortel story and so many others about companies and executives, we find ourselves shaking our heads in wonder. Martha Stewart and her broker tried to use Knicks tickets to persuade her broker's assistant to join ranks and stick with their story about a stop-loss order as the reason for their sudden sale of her ImClone shares one day before the company announced that FDA approval would not be forthcoming for its anticancer drug and star product, Erbitux. Add to this amateur tool of persuasion the altered phone logs, changed stop-loss-order date, and inconsistent stories among these three musketeers of manipulation, and the whole scenario has all the sophistication of elementary-school children caught lifting cookies from the cafeteria line. The conduct, whether over shares of stock or Toll House cookies, is wrong. When the SEC or school principal steps in, the fallout is always the same. One of the amateur conspirators breaks ranks on the concocted, unimaginative story.

This behavior is not exactly the stuff of the so-called gray area. Nor are any of the activities of the companies and their officers we will look at be nuanced. Former Tyco CEO Dennis Kozlowski and his $6,000 shower curtain for his highfalutin apartment, all at Tyco expense, is not the kind of story that causes us to ponder, "Wow, that was really a subtle ethical issue. I never would have seen that." Maurice "Hank" Greenberg, the former CEO of AIG, found a board waiting with his walking papers when revelations about creative insurance policies and even more creative accounting for such became public. The board had no difficulty in spotting the ethical lapses there. Nor should those in the company--or Greenberg, for that matter--have had any great mental or philosophical strain in spotting the issue. Somehow, however, the issue trotted right by very bright and capable employees and executives who are well trained in accounting, insurance, and where the two meet.

What we have seen and continue to witness is ethically "dumb" behavior. There was no discussion of gray areas as these stories unfolded. When WorldCom was forced to reveal that its officers had capitalized $11 billion in ordinary expenses, no one slapped his forehead and said, "Gosh, I never would have seen that ethical issue coming!"

When Enron collapsed because it had created more than three thousand off-the-books entities in order to make its debt burden look better and its financial picture seem brighter, no one looked at the Caribbean infrastructure of deceit and muttered, "Wow--that was really a nuanced ethical issue."

There have been so many of these not-so-subtle corporate ethical missteps: HealthSouth's fabricated numbers that had it meeting its earnings goals for a phenomenal forty-seven quarters in a row; Royal Dutch's overstatement of reserves; Adelphia officers' personal use of company funds for family and personal projects; and Marsh & McLennan's illegal fee arrangements in exchange for insurance bids. No one looked at Frank Quattrone and Arthur Andersen and their document shredding and wondered, "Would I have been able to see that coming?" Even when there is no criminal behavior, the magnitude of the ethical lapses finds us shaking our heads as companies and careers crash and burn. Smart and talented people make career-ending decisions as they lead their companies and organizations to ethical collapse. Quattrone's and Andersen's verdict reversals tell us their conduct was legal. Why, however, take the risk of document destruction when your company faces regulatory scrutiny? Finding the solution to this seemingly inexplicable march to self-destruction should be the focus of all ethics programs.

These ethical missteps are not the stuff of complexity or even debate. They were downright gross ethical breaches. Indeed, in many of the cases there were blatant violations of laws and basic accounting. But if the problems and missteps were so obvious, how come those involved--bright and with years of business experience--let them slip by or joined in on the fraud festivities? Why didn't someone in the company step up and correct the behavior? And how come no one in the company told the board? Perhaps mentioned it to a regulator? Was there not a lawyer in the house? Why does it take so long before the charade of solvency is dropped? What makes people with graduate degrees in law and business come to work and shred documents or forge bank statements? Why do good, smart people do ethically dumb things?

When Martha Stewart was indicted--and her indictment followed on the heels of the Enron, WorldCom, Adelphia, HealthSouth, and Kozlowski indictments--a reporter asked me, "What is the difference between you and me and a Martha Stewart or a Jeffrey Skilling of Enron or a John Rigas of Adelphia?"

My reply was "Not much."

The reporter was taken aback, outraged that I would not portray these icons of greed as one-eyed Cyclopes with radically different, mutantly unethical DNA.

Sure, Martha and her obstruction, Andrew Fastow and his spinning off debt, and Dennis Kozlowski and his chutzpah with the corporate kitty are the end of the line for ethical collapse. Yes, yes, they descended quite far into the depths of ethical missteps, but no one should assume a perch detached and above this type of behavior. No one wakes up one day and decides, "You know what would be good? A gigantic fraud! I think I'll perpetuate a myth through accounting fraud and make money that way." Nor does anyone suddenly wake up and exclaim, "Forgery! Forging bank documents to show lots of assets. There's the key to business success."

These icons of ethical collapse did not descend into the depths of misdeeds overnight. Nor did they descend alone. To be able to forge bank documents, one needs a fairly large staff and a great many averted eyes. To drain the corporate treasury for personal use requires many pacts of silence among staff and even board members. Overstating the company's reserves requires more than one signature. Those who are indicted may have made the accounting entries, approved the defective product launch, ordered the shredding, or skirted the law. But they were not alone. They had to have help, or at least benign neglect from others in the organization.

Which leads to these questions: How does an organization allow individuals to engage in such behavior? What goes wrong in a company that permits executives to profit and pilfer as sullen but mute employees stand idle?

The latest federal reforms on accounting, corporate governance, and financial reporting, in the form of the Sarbanes-Oxley Act of 2002 (SOX, as it is fondly known among executives), have lawyers and accountants scrambling to meet requirements for ethics programs and other statutory mandates. The demands of SOX represent the third great regulatory reform I have witnessed in my nearly three decades of detached academic observation and research. When Boesky, Milken, and junk bonds stormed Wall Street and then collapsed, we passed massive reforms and we all swore, in Edgar Allan Poe fashion, "Nevermore."

But then came the savings and loans, real estate investments, appraisers with conflicts of interest, Charles Keating, and the inevitable collapse that follows self-dealing and enrichment, as well as the accompanying damage to the retail investors in these enterprises. So we passed more massive federal reforms on S&Ls, accounting, and appraisal, swearing and quoting, once again, "Nevermore!"

Yet here we are, five years after Enron's collapse, still debating all the rules and regulations that should be applied and grappling with the complexities and demands of Sarbanes-Oxley, and this time we swear that we really mean it when we say, "Nevermore!"

But it will all happen again as the cycle continues, because we keep trying to legislate ethical behavior. There are not enough lawyers, legislators, sessions, or votes to close every possible loophole that can be found as we continue to regulate business behavior. Professor Richard Leftwich has offered this description of the relationship between accounting rules and standards and business practice: "It takes FASB [The Financial Accounting Standards Board] two years to issue a ruling and the investment bankers two weeks to figure out a way around it."

The penalties increase with each massive regulatory reform, but so also does the size of the frauds and collapses. This latest go-round of ethical collapses has brought us several of the top ten corporate bankruptcies of all time. Although that list is a tough call. I am reluctant to name these companies to the list because I have to rely on their numbers for that ranking. Who could say how big their bankruptcies really are?

These massive legislative and regulatory reforms cannot solve the underlying problems. They are not the cure for the disease of fraud. The audits, the corporate governance, and the accounting focus on getting good numbers are superficial fixes. Legal changes create artificial hope that massive regulations will stop ethical lapses. But these facile solutions of how to count, when to count, and even how many board members count as independent and which ones qualify as experts in finance have not worked in the past and will not work to prevent similar collapses in the future. The focus on detailed rules makes us overlook the qualitative factors that have more control over the ethical culture of organizations.

Prevention is the key. Stopping the inexorable march to that ethical cliff demands something more than a look at ROE (return on equity) and other financial measures and promised deliverables that are so easily quantified. There are qualitative characteristics to look for in companies that can provide insight into the organizations that produce the external facade of financial reports, fund-raising, and shuttles launched. There are marking points in that descent from financial reports with integrity to the shredding and forgery. In fact, after performing decades of research and studying three great ethical collapses, I've identified seven of them.

An Overview of the Seven Signs

The seven signs became clear as I prepared to participate in a 2003 symposium on corporate governance and ethics. My presentation there was published in the more formal format of a seminal law review article titled "Restoring Ethical Gumption in the Corporation: A Federalist Paper on Corporate Governance--Restoration of Active Virtue in the Corporate Structure to Curb the 'Yeehaw Culture' in Organizations" in the Wyoming Law Review. The title describes the culture and nature of companies that ethically collapse. These companies have a culture best reflected by the Wild West battle cry when things in the town got a bit out of the local sheriff's control, "Yeehaw!" "Yeehaw!" was also the battle cry of Billy Crystal's cohorts, actually the citified dentists, when they headed out to their first cattle drive in the film City Slickers. Either source of the term "yeehaw" connotes trouble ahead.

Building on that work, I can now answer the following questions: What do you look for in a company or organization that can provide insight into whether it is at risk for ethical lapses? And what happens to us that allows us to descend to these bizarre forms of conduct? Finally, what can be done to curb these problems and flaws?

Through the three great collapses and reforms over the past twenty years, I have had both the luxury of detached perspective of an academic and the time for studying common traits. Are there similarities between Charles Keating and his Lincoln Savings and Loan and John Rigas and his Adelphia? Are there common factors between junk bonds and the telecoms and dot-coms? What happens in a company that allows a CEO to loot the organization? How does a company persuade bright and capable individuals to stand at the shredding machine?

There is a pattern to ethical collapse--that descent into truly obvious missteps that make us all wonder, "Where were their minds and what were they thinking when they decided to behave this way?" The simple answer is that they failed to see and heed the seven warning signs of ethical collapse:

1.         Pressure to maintain those numbers

2.         Fear and silence

3.         Young 'uns and a bigger-than-life CEO

4.         Weak board

5.         Conflicts

6.         Innovation like no other

7.         Goodness in some areas atoning for evil in others

These seven signs are easily observable from the outside, and almost always discernible even without one-on-one interviews with employees. But give me a one-on-one with an employee and I can tap a vein. I always offer companies: "After I do my outside research, using the signs listed above as the focus, give me just five minutes alone with a frontline employee and I can tell you the culture of your organization and whether it is at risk."

While it is true that every company has one or more of the seven signs, not every company is at risk of ethical collapse. The difference between a company at risk and one that collapses lies in curbing the culture and controlling the worst of the seven signs. A little fear of the CEO is not a bad thing. The fear of telling the CEO the truth is. Antidotes for curbing the seven "yeehaw" factors abound. Managers, executives, and boards just need to learn the signs and work to counterbalance their overpowering influence in an organization.

The signs can also be seen in government agencies and nonprofits. The Yeehaw Culture has invaded churches, the United Way, and newspapers. The signs are universally applicable and offer a checklist for managers, trustees, shareholders, donors, and anyone else who wants to prevent or curb the Yeehaw Culture. Analysts who seek to get their arms around those qualitative and often controlling factors in a company can find insight here. Investors who want to know if their investment is at risk because of potential ethical collapse can look for these signs. The seven signs can help employees who want to preserve an ethical culture in their companies and can offer insight and suggestions to employees at companies that are at risk for the Yeehaw Culture.

The chapters that follow detail the seven signs, as well as give examples of the companies, agencies, and nonprofits that have had them all and their resulting fates. Along the way you find the tools for curbing the behaviors that give rise to the seven signs and for preventing ethical collapse.

By studying the qualitative factors that lead to obviously wrong behaviors, individuals learn when they are unwitting, or perhaps even witting, accomplices to the collapse. They learn when to be agents of change in an ethically risky culture, or when to hold 'em and when to fold 'em. Very bright people are now serving sentences as a result of guilty pleas. They made the accounting entries their executives asked them to. An understanding of the seven signs offers individuals guidance on how to choose among companies and when they have hit an ethical wall.

My former students often call me to find out what company will be the focus of seven-sign analysis by my current students on the midterm and final. They call because they want to position themselves short on the companies. Applying the seven signs and finding them missing in a company means a good investment. Applying the seven signs and finding them all present and accounted for means the company is headed for a drop. In the fall of 2004, the students focused on Krispy Kreme. Any company that tries to attribute a downturn in its revenues to the pervasiveness of the Atkins low-carb diet has a problem. "We hit a low-carb wall" was the explanation of former CEO Scott Livengood. By January 4, 2005, Krispy Kreme had announced that it would be restating its earnings.

At the start of the work on this proposal in the summer of 2004, Greg Dinkin, my agent, asked me if there was any company I would point to at that time that had seven-sign risk. I responded that it was Coca-Cola. Following our discussion, Coke had a series of legal and ethical issues. But Coke may now be a company to study for its ability to pull back and, with tough introspection, make the changes needed to reform a culture that led them down the path of trying to dupe both its shareholders and even one of its own customers. The channel-stuffing charges it settled in April 2005 resulted, according to the SEC, from the pressure at Coke to meet earnings expectations and continue that long streak of phenomenal earnings that hit a wall in 1998 via an economic downturn, particularly in foreign markets. The Burger King debacle discussed in Chapter 4 may have saved the company from worse. From management to policies to products, Coke has been changing, thinking, and working to avoid the damage that comes if companies don't use the checks and balances on the signs of ethical collapse. When Neville Isdell took over as CEO, he spoke bluntly to employees about "personal accountability" and challenged them to rise above the personal politics and get back to developing what it takes to succeed. The charge to employees was a classic one designed to send the message of hard work and innovation, not manipulation or deception. Coke settled its accounting issues with the SEC in April 2005 even as the Justice Department dropped its investigation into the Burger King incident (see Chapter 9 for more information). And it paid its former employee Matthew Whitley, who questioned the reimbursement of the marketing consultant for the Burger King test market, a total of $540,000 to settle his wrongful termination suit. Coke also shifted to focusing on long-term goals over quarterly earnings targets. The pulling back is neither cheap nor easy, but it does avoid the financial fallout of continuing to operate with an ethically challenged culture. Coke's Burger King division even had the guts to have me and my bluntness in to help them analyze what went wrong with the slip into "adjusted" market studies.

Study a company with the seven signs and you spot risks that analysts have not begun to understand. The analysts were describing Tyco as a phenomenon and crowning its then-CEO, Dennis Kozlowski, as the next Jack Welch. In fact, Business Week named now-convicted CEO Dennis Kozlowski one of its top managers for three years running. I said, "Run away! Run away!" You will learn why. An isolated look at one company or one collapse does not provide tools for application and prevention. A study of three eras of ethical collapse provides signs and principles for curbing the atmosphere that leads to ethical collapse. And ethical collapse is not just applicable in hindsight. I can see it coming.

In a speech at AstraZeneca, the international pharmaceutical company, in the fall of 2004, an employee, during the Q&A, asked me what I thought of the Merck and Vioxx situation. The timing of my speech was just days after Merck had announced it was halting sales of its arthritic pain medication, Vioxx, because of increased risk of heart attacks and strokes. I responded that I had no thoughts on whether the statements about the drug and its effect on heart patients were true or false, but I did predict how the case would unfold: there would be hints of a problem early on and internal e-mails or memos would reflect concern on the part of some scientists and employees; as the concerns began to increase and those outside the company began to discover the same problems with Vioxx, there would be evidence of the living-in-denial phase along with the usual instructions to employees and others to hold firm and fast on a drug that generated $2.5 billion in sales in 2003. I explained that the pattern, so evident in other companies that face such a public crisis, would hold true: Merck would hope for the best to come if they could just hold the issue back from scrutiny long enough. The irony is that a great product suffers from the postponement of full-blown disclosure.

There is no best to come because concealment never works and is a strategy chosen by those bound and consumed by a culture of ethical collapse. Within one month following that speech, The Wall Street Journal reported on page A1 that the e-mails I predicted did exist, that some of those within the company were hopeful that scientists challenging Vioxx would "flame out," and that instructions for new trainees on questions about Vioxx included, in capital letters, this instruction: "DODGE!" The pattern holds true because all companies travel the same road down the slippery slope of ethical collapse.

Copyright © 2006 by Marianne M. Jennings, J. D. All rights reserved.