Chief Ethical Officer

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JUNE 13, 2002

NEWS ANALYSIS


If Only CEO Meant Chief Ethical Officer

Greed, hypercompetitiveness, isolation, and more have pushed too many top execs to cross the line without fear of consequences

On the surface at least, little explanation can be found for why so many high-profile CEOs have suddenly turned into such flakes. Granted, the economic downturn has subjected top executives to business pressures that most haven't experienced in a decade. Yet compared with nearly everyone else, they seem supremely well equipped to cope. The world has to dance to their tune, not vice versa. If they perform their jobs well, they become incredibly rich. If they mess up and get fired, they still get rich.

All these advantages notwithstanding, however, the past six months have featured a parade of corporate leaders who were irresponsible stewards of other people's money and trust. They were apparently so consumed by greed that they never dreamed of getting caught, ruining companies, and shaming themselves. In so doing, they have created what Al Vicere, a professor of strategic leadership at Pennsylvania State University's Smeal College of Business, calls a CEO "credibility crisis."

In just the last 10 days, two new stunners have surfaced: former Tyco CEO Dennis Kozlowski, who was arrested for tax evasion, and Samuel Waksal, the ex-CEO of ImClone, who has been charged with insider trading.

Things have gotten so bad that even CEOs untouched by scandal -- the overwhelming majority -- are feeling tainted. Career coach Paul Bernard recalls a small-company CEO he met recently who confided that it's now hard to wear his title with pride. "I feel like I went from being a superstar to being an enemy of the people," he told Bernard, president of New York-based Paul Bernard & Associates. Funny, but that's what happens when people feel betrayed.

OPENING CEO-GATE. "I don't know if CEOs are any smarter or more ethical than the rest of us," says Michael Hoffman, executive director of the Bentley College Center for Business Ethics in Waltham, Mass. "But I do know that they're being paid a lot to be smarter and to be better leaders, and I don't see that happening."

All of which raises the question: Why? What is it about the character of today's corporate chieftains that has led them into CEO-gate -- which at times prompts them to indulge in behavior more reminiscent of fallen TV ministers than of upstanding community leaders?

It's hard to know for sure, but experts in the CEO lifestyle suggest that the most obvious one is greed. How else to explain why Kozlowski, Tyco's ex-CEO, allegedly tried to evade $1 million in sales taxes on $13 million or so in art he purchased after raking in more than $300 million in compensation over the past three years? It's the same motive that landed Drexel Burnham's Michael Milken and his accomplice Ivan Boesky in jail in the early 1990s, thanks to junk-bond schemes that investigators say bilked investors out of more than $1 billion.

OPTIONS MADNESS. This time around, a new method goes with the motive: Executive compensation that depends excessively on stock options. Those were originally intended to align the interests of a company, its shareholders, and executives, on the theory that the fortunes of all three would rise in tandem. What everyone overlooked, however, was the incentive this structure created to manipulate a company's results so option holders are favored at the expense of everyone else.

And it apparently escaped compensation theorists that an exec who becomes fabulously wealthy may no longer feel beholden to the company that delivered that wealth. The attitude seems to be, "If I can sell my options when the stock is high and keep up a good face when the stock is plummeting, I can get out with enough money to worry over my ethical lapses once I've moved to the Bahamas," Hoffman says.

Other experts blame another distinctly human trait: A desire by hypercompetitive highfliers to win -- no matter the cost. The mantra of the late '90s was that companies (except for dot-com startups) had to produce ever-increasing profits in shorter and shorter time frames. Miss by literally a penny a share, and Wall Street would hose the company in doubt, possibly cutting short the tenure of an exec who had worked a lifetime to become a CEO.

FACE TIME. "You have a relatively short time to prove your worth and are being asked to do Herculean things with a very large company," Vicere says. "If you don't make a massive impact in a couple of years, you could be history." That's an invitation for CEOs who are short on discipline or vision to opt for expedience when trying to boost earnings and share prices, rather than exercising the type of leadership that depends on a strategy to deliver sustainable growth.

The top execs who now find themselves in trouble -- at Enron, Adelphia, Tyco, ImClone, and a number of other companies -- may have lost touch with their responsibility to actually run a company. "It used to be that a good CEO was a real insider who was a quiet, get-it-done kind of person," says Jeffrey Fox, CEO of an Avon (Conn.) marketing consultancy and author of How to Become a CEO. He adds: "Now, it's about getting a lot of exposure on [cable business news channel] CNBC and putting their face on a book jacket."

CEOs who operate in this milieu are celebrities more than business leaders, Bernard remarks. And the trappings of success persuade CEOs -- and, not infrequently, others who are equally as fortunate -- that the rules applying to normal people somehow no longer govern them. This status is made possible by ballooning compensation -- CEO pay in 2000 averaged $13.1 million, roughly 531 times what the average hourly employee earned. The job of simply managing such material wealth is a distraction from running a business day to day, Fox argues. Worse, he contends, CEOs "can start to think they're above not only the law, but also above the law of common sense."

PUSHING BACK. This perception is reinforced by the fact that the longer a CEO enjoys superstar status, the less likely it is that boards, shareholders, confidants, or underlings will push back. At that point, says Vicere, "CEOs are on their own" -- with no one to puncture their delusions of self-importance and invincibility.

One solution to this problem is to get corporate boards to push back more, experts say. Indeed, corporate-governance reforms that have just been proposed by the New York Stock Exchange would require that all Big Board-listed companies have a majority of independent directors. Today, some 39% of NYSE-listed firms don't meet that standard, says Alexandra Lajoux, senior research analyst at the National Association of Corporate Directors, an organization for board members.

The new proposals would also require that CEOs personally certify the accuracy and completeness of information provided to shareholders. If outfits failed to comply with the new rules, they would ultimately face delisting by the NYSE. "That forces a CEO to ask: 'Hmm, what's an off-balance-sheet partnership?' if he or she hears about it at a meeting," Lajoux adds.

"SERVANT LEADER." For true reform, compensation practices will also have to change, says David Lewin, a management professor at UCLA's Anderson School. When CEO pay is based on quarterly or annual results, it creates more of a temptation for "fraudulent practices," Lewin says. Tying compensation to a company's performance over a long period could be a cure, he adds. Currently, "a CEO who gets a bonus or profit sharing [worth tens of millions of dollars] in 1999 for good results doesn't have to give any money back when profits turn down in 2000 or 2001," Lewin says. "There's something wrong with that picture."

This year's CEO scandals could even end up changing what companies look for in a CEO as they attempt to restore investor confidence, management experts say. For instance, stakeholders are likely to become increasingly skeptical of highly aggressive CEOs who look good in front of analysts and the cameras, says Vicere, but aren't so hot when it comes to planning for long-term success. Bentley College's Hoffman goes so far as to suggest a new model where the CEO becomes a "servant leader" -- one who looks out more for employees, customers, and the company than for him or herself.

"I think boards of directors and search firms need to begin looking for people with a tremendous amount of integrity," Hoffman adds. "If you can't trust a business and you can't trust a person running it, you're probably not going to invest in it."

Wouldn't that be the biggest irony of all: If investors started to regard with suspicion companies whose CEOs vowed to pump up the stock.

 

The problem is if US government does not clean up the mess, people will be buying stock in foreign companies like Japanese...who if screw up have to kill themselves in shame....

It is really a serious problem.

 

Here is WCOM stock chart. They started having trouble in Nov 2000.

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