The Ethisphere Institute unveiled its “100 Most Influential People in Business Ethics,” an annual list of individuals who have made a significant impact in the realm of corporate citizenship over the course of the previous year.

Some are world famous and some are little unknown. Here are some that caught my attention:

#48 Stephen Colbert – Satirist, The Colbert Report
Category: Media and Whistleblowers

#64 Jack Dorsey – Founder and Executive Chairman, Twitter
Category: Business Leadership

#77 Chris MacDonald – Author, Business Ethics Blog
Category: Media and Whistleblowers

#85 Dick Cassin – Author, FCPA Blog
Category: Media and Whistleblowers

#91 Matt Kelly – Editor-in-Chief, ComplianceWeek
Category: Media and Whistleblowers

This morning, the Ethisphere Institute is ringing The Opening Bell at the New York Stock Exchange with some of the NYSE-listed 2011 World’s Most Ethical Companies. I guess the NASDAQ companies are not invited.) The purpose is to recognize the connection between ethical business practice and increased business performance.

NYSE-listed 2011 World’s Most Ethical Companies that will ring the bell with Ethisphere include

• AECOM
• Ford
• General Electric
• International Paper
• Jones Lang LaSalle
• Marriott
• PepsiCo
• Salesforce.com

The Bell ringing is followed by Ethisphere’s NYSE Bell Ringing & Ethics Drives Performance™ Conference.

The World’s Most Ethical Companies, if indexed together, have significantly outpaced the S&P 500. I found it interesting that the companies outperform going forward once they are recognized, not just leading up to the recognition.

Ethisphere numbers seem to take the current list of companies and look at their performance. I expect that companies getting onto the list are well run and should perform well. But would it last going forward? I took the companies from the original 2007 and tracked them forward.

• Should You Invest in the World’s Most Ethical Companies 2011 Edition
• Should You Invest in Ethical Companies? (2010 edition)

The companies on the 2007 list, as a group outperformed the broader S&P 500 and Dow Jones Industrial Average.  They were not all winners.

Ethisphere is now accepting nominations for the 2012 World’s Most Ethical Companies. To learn more about the World’s Most Ethical Companies recognition and selection process and to nominate your organization for consideration visit:http://ethisphere.com/nominations/.

The Madoff scandal is one of the low points in the history of the Securities and Exchange Commission. Every Congressional hearing or SEC-basher inevitably uses the failure to catch Madoff as evidence of the ineffectiveness of the SEC.

In a continuing journey down the rabbit hole, the SEC’s Inspector General David Kotz released his 123-page report (.pdf) on former SEC General Counsel David Becker and his involvement with Madoff. Kotz has made a referral to the Department of Justice under a criminal conflict of interest provision.

Mr. Becker’s late mother had an account with Madoff. If Mr. Becker were to be involved in mopping up the Madoff matter, there would be potential conflict of interest.

David Becker seems to have done the correct thing. He sought an answer from the SEC Ethics Counsel as to whether he should work on Madoff matters.

“I did precisely what I was supposed to do. I identified a matter that required legal advice from the SEC’s Ethics Office. I sought that advice, received it, and followed it.” Testimony of David Becker September 22, 2011

He fully disclosed the fact that he had been a beneficiary of his mother’s estate which had invested in Madoff funds. The Ethics Counsel told him he did not need to recuse himself. His boss, SEC Chair Mary Shapiro, knew of the investment.

Nonetheless, the SEC’s Inspector General is referring its results to the Department of Justice for criminal investigation.

Personally, I don’t think Mr. Becker actually did anything wrong. I believe he joined the SEC as a white hat, wanting to resume his role in public service.

The problem is that it looks like he did something wrong. That’s the problem with conflicts of interest. Even if you do the right thing, it will look like you were improperly influenced or tainted.

Becker did seek guidance from the SEC’s Ethics Counsel. Unfortunately, the Ethics Counsel is part of the Office of the General Counsel. As General Counsel, Becker was the advice-giver’s boss. Another conflict.  I’m not saying that Becker actually unduly influenced the Ethics Counsel. It’s just looks bad and layers another conflict of interest onto the existing conflict of interest.

The SEC knew that Madoff was toxic and high-profile. They should have been more vigilant and not allowed Becker to participate. I would guess that Becker was so good at his job and so enthusiastic to help that he and the SEC failed to see his weaknesses. It would be hard to make him sit on the sidelines while the Commission was trying to clean-up after one of its biggest failure. But that is what they should have done.

They let the conflict of interest stay in place. That should have known that it would subject them to a later review and attack on their decision to keep Becker involved. They should have known that it would have led to something like the Inspector General’s report.

I don’t think Becker should be subject to criminal charges and hopefully the Department of Justice will drop the matter after a brief investigation.

Sources:

• SEC IG REport: Investigation of Conflict of Interest Arising from Former General Counsel’s Participation in Madoff-Related Matters (.pdf -123 pages)
• Testimony of David Becker September 22, 2011
• Testimony Concerning “Potential Conflicts of Interest at the SEC: The Becker Case” by Mary L. Schapiro September 22, 2011
• David Kotz’s testimony on Thursday September 22
• A letter from dozens of prominent member of the securities bar sent this letter to the Congressional subcommittee 
• Conflict of Interest: the SEC Doesn’t Get It by Chris MacDonald in The Business Ethics Blog
• For Good Reason: Prominent Lawyers Support David Becker by Broc Romanek in the Corporate Counsel blog

A group of Kentucky men would prefer to spend time in jail time rather comply with vehicle safety rules.

As you can see from their booking photos, the men are Amish and belong to the Old Order Swartzentruber Amish group. They say their religious beliefs forbid the placement of bright orange safety triangles on the backs of their buggies. They believe that displays of “loud” colors should be avoided, along with the use of “worldly symbols.” Swartzentruber Amish believe such symbols indicate the user no longer trusts fully in God.

The orange triangles are required on all slow-moving vehicles, according to Kentucky state law. The Swartzentruber Amish use along with lanterns and red reflector lights, but refuse to use the orange triangle.

Is this a case of a bad rule, over-zealous enforcement, or criminal behavior? The compliance aspect of the situation caught my attention. The ethical, religious, and legal aspects of the situation are numerous.

The goal is to make sure that all vehicles on public roads are visible, especially slow-moving vehicles. That seems to be a reasonable goal.

This is not the first time the Amish community has clashed over this issue. In 2003, the Swartzentruber families in Nicktown Ohio successfully appealed after they refused to put orange reflective triangles on their horse-drawn buggies. They were allowed to mount less gaudy gray tape. Other states already accommodate the religious beliefs of conservative Amish groups by allowing the use of reflective tape instead of triangles.

I fall on the side of the Amish on this one. Suppose the rule was not for a triangle, but a six-pointed star. SOme would argue that it is merely an icon. Others will argue that it has obvious religious implications. The triangle symbol does not mean much to me, but it does to this Amish sect.

They don’t like bright colors. That seems to conflict with the need for visibility. One of the failings in the orange triangle rule is that the regulators had no studies to show that the orange triangle decreased the rate of collisions more than gray reflective tape the Amish were willing to use.

From a compliance perspective, it’s always better to have a clear, simple rule. When the situation gets complicated by deeply held beliefs that conflict with the rule, it’s time to revise the rule or allow deviations from the strict rule.

Sources:

• Amish men jailed over refusal to use orange safety triangle on buggies By Kim Hutcherson in CNN’s Belief Blog
• Meet The Eight Amish Guys Jailed For Refusing To Attach Orange Safety Triangles To Their Buggies in the Smoking Gun
• 8 Amish men jailed for not putting orange safety triangles on their buggies in 22 Words
• Mugshots of Amish who won’t put orange triangles on their buggies by Mark Frauenfelder in Boing Boing
• Religious Freedom vs. Sanitation Rules by Sean D. Hamill in the New York Times
• Pennsylvania Superior Court Rules: Amish Can Stick With Reflective Tape on Buggies
• The Pennsylvania Superior Court Decision in Pennsylvania v. Swartzentruber

Dan Ariely continues to find small, easy ways to change behavior. This time it was his students running the experiment instead of him. Two students sent an email to everyone in the class that included a link to a website that was supposed to contain the answers to a past year’s final exam.

In half of the emails they included this statement:

P.S. I don’t know if this is cheating or not, but here’s a section of the University’s Honor Code that might be pertinent. Use your own judgment:

“Obtaining documents that grant an unfair advantage to an individual is not allowed”

Using Google Analytics, the students tracked how many people from each group visited the website with the answers. Overall, about 69% of the class visited. However, when the message included the reminder about the honor code, only 41% accessed the website.

Of course 41% is a big number. So the honor code message did not prevent cheating. But it did cause a big drop from 69%.

From a qualitative perspective, the replies to the email message indicated that those who received the honor code message were often upset and offended. And those that did not see the code were generally thankful.

Again, Ariely shows the powers of reminders when it comes to instilling ethical behavior.

Sources:

• Classroom Ethics 101 by Dan Ariely
• Does it Matter Where the Signature Is? – prior post on Compliance Building

The Ethisphere Institute announced its fifth annual selection of the World’s Most Ethical Companies, highlighting 110 organizations that lead the way in promoting ethical business standards. Of the 110 companies honored this year, 74were on the 2010 list. (If you need help with the math, 36 are new to the list in 2011 and 26 companies dropped off from the 2010 list.)

As they did with the 2010 list, Ethisphere is emphasizing the better financial performance by the companies on this year’s list.

“The World’s Most Ethical Companies, if indexed, would have significantly outperformed the S&P 500 by delivering a nearly 27 percent return to shareholders since 2007, compared to the S&P’s negative 8.5 percent shareholder return during the same period, proving there is a strong correlation between a company’s ethics program and its performance,” said Alex Brigham, Executive Director of the Ethisphere Institute.

Personally, I think its bit misguided to judge the past performance of companies on the 2011 list by looking backwards, especially for the new companies included in the list. As we hear for all investments, past performance is no measure of future performance. A good investor would want a tool to help decide whether to invest in a company, not whether they should have invested 5 years ago.

Is inclusion on the list of Most Ethical Companies an indicator of future performance?

Last year, I looked at Ethisphere’s 2007 World’s Most Ethical Companies and tracked their performance forward to determine whether you should invest in ethical companies. The answer was “yes.” That first class, as a whole, did outperform the broader markets.

I decided to update my study and see if it still held true. The answer is still “yes.”  Those public companies on the 2007 list significantly outperformed the broader markets. If you bought one share of each, you would have realized a 3.96% return. That compares to a -12.36% loss on the S&P index and a -9.1% loss on the Dow Jones Industrials.

You can see my calculations in this spreadsheet (in Google Docs):
https://spreadsheets.google.com/ccc?key=0AuuCq02eKVqldDhydERtRmVsdVo2X0NfOUdXbkZTcmc&hl=en

They are not all winners. About half outperformed and half underperformed. But as a whole, you came out ahead. Salesforce is the bigger gainer on the list with a 126% gain. Nokia is pulling up the rear with a 70% loss.

The weak spot in my analysis is that it leaves out the effect of dividends on the returns. In looking through the Ethisphere list, they seem to be a broad mix of companies so I assumed the dividends of these companies would be similar to the dividends from the companies in that broader indexes.

My conclusion is that the companies on the 2007 list of the most ethical companies were a good investment. I may just put some money on some of those new 26 companies on the 2011 list.

White-collar crime has a strong influence on business ethics. Joseph Heath uses a criminological perspective to help illuminate some traditional questions in business ethics in his paper: “Business Ethics and Moral Motivation: A Criminological Perspective”

Heath starts off with the premise that the ‘‘ethics scandals’’ in the early years of the twenty-first century was not a business ethics failure. What really took place at companies like Enron, Worldcom and Parmalat was high-level, large-scale white collar crime. Their illegal acts were probably surrounded by unethical conduct. But their core actions all involved a failure to comply with the law.

The bulk of the paper is spent looking at the techniques of neutralization that offenders use to deny the criminality of their actions. When white collar crime is viewed from the perspective of techniques of neutralization you can see why bureaucratic organizations such as large companies and the market, might constitute “peculiarly criminogenic environments.”

These are institutional contexts that generate a very steady stream of rather plausible (or plausible-sounding) excuses for misconduct. This is the result of a confluence of factors: first, corporations are typically large, impersonal bureaucracies; second, the market allows individuals to act only on the basis of local information, leaving them in many cases unaware of the full consequences of their actions; third, widespread ideological hostility to government, and to regulation of the market in particular, results in diminished respect for the law; and finally, the fact that firms are engaged in adversarial (or competitive) interactions gives them broader license to adopt what would otherwise be regarded as anti-social strategies.

Denial of responsibility

The offender claims that conditions of responsible agency were not met: it was unintentional; he was insane, he was provoked, he had ‘‘no choice’’ but to do it, it was all an accident, etc.

In a company, an employee can blame his boss for telling him to do something wrong. The boss can pass the blame back down to the worker saying they acted independently.  The competitiveness of the marketplace and the workplace means that if one individual refuses to perform an illegal act, he may feel that he could simply be replaced by someone else who would.

Denial of injury

The offender seeks to minimize or deny the harm done.

Most white collar criminals never meet or interact with those they harmed.  In many cases they wouldn’t even know how to find their victims.  “In these cases, there is potential confusion as to the identity of the individuals who are harmed by the criminal’s actions. In other cases, the mere fact that there is diffusion of the harm over a very large number of persons is appealed to as grounds for denial that anyone was injured by the person’s actions.”

Denial of the victim

The offender acknowledges the injury, but claims that the victim is unworthy of concern because he deserved it.

The underpayment inequity is common. It’s hard to find an employee who believes that an enhancement of  justice in society would require a reduction of his compensation package. On the other hand workers may feel undercompensated, ignoring the difference between the ease with which they can be replaced that determines their wage rate, and their contribution to the company.

It is really easy for workers to convince themselves that they are not stealing. Instead they believe they taking what they are owed, or they are punishing the company for treating employees poorly.

Condemnation of the condemners

The offender attempts to ‘‘turn back’’ the charges by impugning the motives of those who condemn his actions.

The classic examples in corporate crime are the charges fired back at Eliot Spitzer during his time as Attorney General when he exposed a wide range of  practices in the financial services industry. His political ambitions were often discussed side-by-side with his prosecutions.

Appeal to higher loyalties

The offender claims that the action was done out of obedience to some moral obligation that conflicted with the law.

You often hear “I did it for my family.” The offender can see the company as a proxy and serve as an object of higher loyalty. One theory with Ken Lay and Jeffrey Skilling at Enron is that they misled investors for the sake of the company, insisting that it was a great company. There is also the more common business ethics excuse that it was done for profit and the benefit of the shareholders.

Everyone else is doing it

The mere fact that others are breaking the law is used to suggest that it is unreasonable for society to expect compliance.

This is an excuse for all kinds of crime, but it is very common in a business context because of the competitiveness of the business environment.

Claim to entitlement

An offender claims he was acting ‘‘within his rights’’ and that the legal prohibition of his conduct constituted unjust or unnecessary interference.

One of the big differences between corporate crime and street crime is how often white collar criminals deny the authority of the laws that they have broken. The argument is that the government should not regulate certain forms of private transactions.

Folk Tales of Moral Motivation

Heath argues that the focus on these techniques of neutralization are more effective in addressing business ethics and corporate crime than theories of “moral motivation.” The field of criminology has largely discredited those theories as folk tales. It’s not about character, greed, and values.

A criminologist does not think it’s mysterious that some people commit crimes. They find it mysterious that more people do not commit crimes. Only a small percentage of people chose to advance their interests through criminal activity. Even though criminal activity is punished, the chances of getting caught are usually small and the threat of punishment distant.

There are lots of lessons to be learned from this paper by compliance professionals.

Sources:

• “Business Ethics and Moral Motivation: A Criminological Perspective,” Journal of Business Ethics, 83 (2008): 595-614.
• Joseph Heath Bio and CV

Having someone else write you college term paper is cheating. There is no ethical debate. If you use one of these services you are passing off another person’s work as your own.

Since I was in college and law school before the rise of the internet, these services were not easy to find during my school years. Occasionally you would find an 1-800 add in the back of a magazine. Maybe you heard through the rumor mill that someone could help.

Now, it’s easy to find hundreds of services to help you with your paper. I’m sure they are tempting after blowing off a class all semester.

The Chronicle of Higher Education recently ran an essay from one of the people working for a term paper mill. What caught my eye was not the topic of term paper mills, but the subject of the paper discussed in the story: business ethics.

The student used the term paper mill to help with the proposal for the paper, then came back for the seventy five page report, for a response and revision based on the professor’s criticisms, and finally used the ghost writer to produce the 160-page graduate thesis. All of it written by the term paper mill and none by the student.

Clearly, the business ethics professor did not get through to this student.

In an different story from another term paper writer, that writer when given an open topic assignment on ethics, would “write on the ethics of buying term papers, and even include the [term paper mill] broker’s Web site as a source.”

Sources:

• The Shadow Scholar by Ed Dante in the Chronicle Review
• The Term Paper Artist by Nick Mamatas in the The Smart Set
• This pen for hire: on grinding out papers for college students by Abigail Witherspoon
• Adventures in Cheating by Seth Stevenson in Slate

A cynical look from Dilbert at corporate culture creation:

Some of the comments to the comic reinforce this cynical view of corporate values (and ethics):

kmulchandani:

Just Brilliant! i had a boss who always preached in a code of ethics and values, but when it came to him he was always excused. Quoting him it was – “for the greater good” or “my experience tells me that in this case it can be ignored”. “Values” are a subjective term, flowing down a corporate hierarchy, with the ones on top enforcing them onto their “minions”.

It’s not about stating what values and ethics should be. It’s what values and ethics are evidenced by the actions of your company’s employees at all levels in the organization.

One of the classic statements in a compliance program is “don’t do something if you would be embarrassed to see a story about it on the front page of the newspaper.” Just because something is legal, it does not mean it’s ethical or a good thing to do.

A recent example popped up in Massachusetts politics involving Middlesex County Sheriff James V. DiPaola. (I just voted for him in November.) He was planning to retire, even though he had just been re-elected. Retire, but continue working as the Sheriff.

It turns out there is an exception in the Massachusetts Pension Law that allows retirees to run for paid elective office without losing their pensions.

DiPaola was a Malden police officer for 18 years before being elected a state representative in 1992. He then became Middlesex sheriff in a 1996 and was re-elected three times (including 2010). If he had kept working his pension would have remained mostly flat, since he has enough years of service to receive the maximum benefit allowed.

It turns out, if he retired before the election and didn’t collect his salary for the rest of 2010, he could collect his pension and receive his salary as Sheriff. A legal, but ethically troubling position.

Instead, he did the right thing.

“I’d always be remembered for this, for double-dipping, that that would be my legacy,’’ … crediting a Globe reporter’s question for his spark of conscience. “From a financial perspective it was great. It was legal. But I tossed and turned all night. I did put myself first this time, and I don’t want it to end that way.’’

In part his decision was forced by reporter from the Boston Globe. Sean Murphy had confronted DiPaola. With the real threat of having his action end up on the front page of the newspaper, DiPaola changed his mind.

Unfortunately, the revelation ended tragically when DiPaola died from apparent suicide this past weekend.

Sources:

• A cunning scheme, a spark of conscience by Andrea Estes and Sean P. Murphy in the Boston Globe
• DiPaola’s letter to Middlesex residents
• Middlesex County Sheriff DiPaola dies from apparent suicide