Business

RESOLVING ETHICAL BUSINESS CHALLENGES*

As Jerry looked around at the other members of the board, he wondered if it was too late to resign. How could he have been stupid enough to get dragged into this ethics audit quagmire? It had started innocently enough. With the passing of the Sarbanes–Oxley Act, everyone was aware of the consequences of accounting problems and their potential negative impact on a company, its board members, and its employees. So when Jerry’s friend John Jacobs, the president of Soumey Corp., asked him to be on the company’s board of directors, Jerry had checked out the company. It wasn’t that he didn’t trust John; he just felt that he should never take unnecessary chances. But when Jerry’s investigation of Soumey uncovered nothing unusual, he accepted the board position.

Besides Jerry and John, Soumey’s board of directors included Alan Kerns, a retired Soumey executive; Alice Finkelstein, a retired executive from a similar company; and Latisha Timme, a consultant within the industry. After Jerry joined the board, one of its first tasks was to conduct an ethics audit. The directors decided to contract the task to Teico, Inron, and Wurrel (TIW), an accounting firm highly recommended by Latisha. A few months later, TIW filed its final report of the audit with the board. The report indicated that, with a few exceptions, Soumey was doing a good job of monitoring ethical issues. Among the recommendations that the report offered were that the company should appoint a person with high managerial authority to be responsible for its ethical compliance program, that it establish a confidential hotline for employees who had ethical or legal concerns, and that it create an ethics committee to address ethical issues in the organization.

At the next board meeting, John suggested that Alan be the ethics compliance officer because he lived close to the main offices and had time to do it. Alan quickly agreed, provided there was substantial remuneration for his time, which John affirmed. Jerry asked a few questions, such as whether Alan had sufficient managerial authority.

Alice responded, “Jerry, this industry is rather small. There are only a few large players, Soumey being one of them. Trust me when I say that Alan, as a retired president of the company, will definitely have the respect of the employees.”

Jerry had no more questions, and Alan became Soumey’s new compliance officer. The confidential hotline was quickly installed, and announcements about its existence were widely distributed around the various offices and plant buildings to ensure that it reached each of the firm’s several thousand employees. The board also discussed TIW’s final suggestion for an ethics committee, and all but Jerry agreed that the board could handle that task as well.

Jerry pointed out, “I don’t think this is wise, John. This is a conflict of interest for you, isn’t it?”

After a moment of hesitation, John replied, “You’re right, Jerry, it is a conflict of interest for me to serve on the ethics committee.” After another bit of silence, John suggested, “Wouldn’t you agree that I should not be on the committee, Alan, Alice, and Latisha?” They all discussed the matter and agreed that Jerry’s suggestion made perfect sense.

Time passed, and the board held its quarterly meetings. Nothing unusual was brought up, just the same old issues that any publicly held company must deal with relative to shareholders, lawyers, regulators, and the public. Alan had suggested that the ethics compliance committee meet twice a year so that he could fill everyone in on what was happening. At these meetings, Alan would usually report the number of calls to the hotline, the status of complaints, and whether there were any serious allegations such as sexual harassment or any reported forms of race, sex, or age discrimination in hiring personnel.269270

After two years of quarterly board meetings and semiannual ethics meetings, Jerry suggested to Alan that they conduct another ethics audit.

“Why would we want to do that, Jerry? Things are going smoothly with the approach we’re taking. Why have another outside audit? Do you think that we’re doing a bad job?”

Jerry hedged. “I’m not saying that, Alan. What I’m saying is that we may need to have an outside audit just to make sure everything looks good to the public. Why don’t we discuss this with Latisha and Alice this week?”

Alan agreed, but when the ethics committee met that week it was obvious to Jerry that Alan had spoken to Alice and Latisha about his and Jerry’s meeting. He wasn’t surprised when the committee decided that another audit would diminish confidence in Alan’s performance as ethics compliance officer. Several weeks later, John sent all the board members a letter announcing an increase in their pay as board directors as well as doubling their pay as ethics committee members. The letter stated, “Soumey Corp. has decided that your service to the company has been exemplary, both as board members and as an ethics committee.”

In Jerry’s third year on the board of directors, he was finally able to attend Soumey’s annual company picnic with his wife and children. They arrived late, after all of the introductions, and everyone was already in the buffet line. As a result, no one really knew who he was. The children were having fun, and Jerry and his wife, Rosa, were too. However, after a while Jerry began to overhear some interesting comments. In one conversation, a production worker spoke about a toxic spill that had occurred because of the lack of safeguards. He told his companion, “Yeah, I know it was pretty messy, but only a few of my crew were hurt.”

His friend asked, “Did they or you report it to management?”

He exclaimed, “Are you kidding? My guys don’t want to lose their bonuses. Remember what happened to Bob’s crew when the same thing happened and some of his guys complained? They had them filling out paperwork for a whole day, and the next week they were assigned a project with no incentives. They lost 40 percent of what they’d been making with all the overtime and performance-based stuff. The guys and I agreed not to report it for those reasons.”

Jerry couldn’t help interrupting, “So why didn’t the company fix the problem after it happened the first time?”

One of the men asked, “Are you new here?”

“Yeah, been here only a few weeks,” Jerry lied.

The production worker answered, “You want to boost your pay, right? So you cut a few corners to get by.”

Later that evening, after Jerry and his family had returned home, Rosa told him about a conversation she had overheard. “These women were talking about how unfair it is that most of the incentive-based pay seems to go to men with families. One woman said that she heard of a man over 55 who should have gotten a promotion, but who was turned down because his supervisor was told not to give it to him. Rumor was that this guy had bucked the last president of Soumey, and that was his payback. Jerry, you should have heard what they say about Alan—that he’s like Santa Claus and the Grinch. You never see him—and if you do, it’s not a pleasant experience. One woman told me that when she was working for him, he used to be a little too friendly. She said that’s why no one really uses the ethics hotline for certain issues. They know that the fox is guarding the hen house.”

A little later, one of Jerry’s sons bounced into the room and asked him a question about the picnic. “Dad, how come all the Spanish-speaking workers are on the night shift? It really makes it hard for a couple of my friends to get their parents to drop them off for soccer.”

The picnic opened Jerry’s eyes to an uglier side of Soumey. At the next board meeting, he indirectly addressed some of the problems he had noticed. But John responded, “We’re going into a recession, and we have to cut a few corners to keep our dividends up to the market’s expectations. Latisha has been watching and consulting me on the best way to keep ahead of the pack on this.”

Latisha and Alice both commented, “Thank goodness we have a large Hispanic workforce to 270271offset some price increases. They’re hard workers and don’t complain.”

“You’re absolutely right,” said Alan. “We don’t have the EPA, OSHA, or other agencies on our backs because these people know how to work and keep quiet. If some federal agencies do start to poke around, I have some contingency plans to prevent any type of ethical disaster.”

That evening Jerry and Rosa were talking about the situation. He told Rosa, “I think Soumey has some potentially ethical issues that need to be addressed—but what can I do?”

“Well,” sighed Rosa, “We’ve lived in this town for a long time. We know the families that are on the board. They’re good people. However, there’s one thing you didn’t hear at that picnic because of your lack of Spanish. I’ve told you that it’s important to learn it, even if it’s just for my family. A few of the people I overheard were talking about how the hotline isn’t really anonymous. That’s just not right, Jerry. You need to do something even if it does mean losing the extra income.” Rosa’s points struck a nerve because Jerry knew they were a little overextended financially.

“I’ll see what I can do,” he told her.

Still, she warned him, “That’s good, honey, but remember I don’t want you to make too many waves. We still have to live here, and you know we can’t swing a dead cat and not hit one of the people at Soumey.”

QUESTIONS | EXERCISES

1.

What areas of its ethics audit should Soumey change?

2.

Does Jerry have a duty to report any of the items that he has heard to an outside authority?

3.

Is Jerry responsible for the problems associated with Soumey over the last three years? Explain why or why not.

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