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.

CHAPTER ONE

--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.

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.