Black & white fever: the state of business ethics; Ethics programs have been implemented widely in recent years, but there's still widespread skepticism about how well they are working. And, building a viable ethical culture inside a company is still a daunting challenge.

Tone at the top has long been a mantra in discussions of business ethics, but apparently, tone at the top isn't enough. In an era where the average CEO tenure is five years or less, what's needed may be more tone that resonates at the bottom and in the middle.

"I've been working in corporate accounting for 40 years, and I've found a lot of cheating and stealing that's gone on, but never at top levels--never," insists Bryan Roub, senior vice president and CFO of Harris Corp. and a former Financial Executives International (FEI) chairman.

Prosecutors usually target the heavy hitters at the top, of course. What about the bottom? There's been a 7 percent drop since 2003 in "the evaluation of employee performance based on ethical conduct" and only a 4 percent increase in the disciplining of employees for breaking ethical standards, according to a study released last fall by the Ethics Resource Center (ERC), a nonprofit organization dedicated to the study of business ethics. In economic terms, it seems that that the personal costs to business people, especially those below top management, who break ethical rules may be falling.

Yet, if ethics programs are any clue to how ethical business is, it should be the most ethical institution in society. The ERC's 2005 survey--the fourth iteration of its National Business Ethics Survey since 1994--showed double-digit increases in the use of ethical codes, ethics training programs and ethical information channels by business over the past decade. The problem is that the codes, programs and channels don't seem to have made business much cleaner.

Says ERC President Patricia J. Harned, "If you're looking at whether employees are behaving better than five years ago, we have not seen those outcomes changing substantially." For example, though more than half of employees have seen misconduct in the workplace, fewer than half who saw it blew the whistle and reported it to management. That's a 10 percent drop from the previous survey, and puts the whistle-blowing level as low as it was in the year 2000, just before the sleaze dam burst and the dirty truth about Enron Corp., Tyco International and other business frauds, cheats and scams gushed into the headlines.

Some critics say that the only way to break business from its allegedly bad ethical habits is to keep beating up on it. "The problem we have here is there are relatively few prosecutions," says Richard Cebula, Shirley and Philip Solomon's Eminent Scholar in the economics department of Armstrong Atlantic State University in Savannah, Ga. "If there is a sufficiently large financial gain from less-than-ethical behavior, it may be worth the risks."

However, Cebula argues that just as drivers are less likely to speed when they've just seen a police car--a syndrome called "black-and-white fever"--business people are less likely to behave unethically when they know they'll pay a price for misconduct.

Of course, those people who do get caught, or even unjustly accused, by the Securities and Exchange Commission (SEC) or Justice Department pay a steep price. Prosecutors have been so busy that Judges are lambasting them for overzealousness. In March, a judge in the trial of former KPMG partners said he was "bothered" by allegations that the government had been using strong-arm tactics to get the testimony and cooperation it wanted. "I think it's shameful, and it may be worse than that," the judge said.

KPMG was only the latest in a series of cases in which government prosecutors may have gotten a bit carried away in their pursuit of suspected white-collar criminals. A U.S. Chamber of Commerce report this spring spotlighted numerous cases of questionable prosecutions. "The real question is: what cases should be criminal?" asks Bruce Hiler, chair of the Securities and Financial Institutions Regulation department at law firm Cadwalader, Wickersham & Taft and a former associate director of the SEC's Division of Enforcement. "The government is almost presuming bad faith."

The Stick, and the Stick

A purely economic analysis suggests that a regime of tough love--prosecutions and penalties--may be just what business needs if it is to stay the ethical course. After all, every time business ethics has come to the foreground in the past two or three decades, it's been against a background of prosecutions or threats of prosecution. Old hands in the ethics and compliance field trace the origin of the field itself to the defense procurement scandals of the early 1980s.

"My mother called me from Pittsburgh to ask if I was a crook, because the paper said that all defense contractors were crooks," recalls Pat Gnazzo, senior vice president of business practices and chief compliance officer at CA Inc. (formerly Computer Associates), who was at that time an attorney for a defense contractor. Led by such luminaries as Jack Welch, the defense firms put together a Defense Industry Initiative mandating codes of ethics and compliance programs to win back the public trust.

Keith Darcy, president of the Ethics and Compliance Officers Association, cites two other events that made ethics a business priority. In 1991, the Federal Sentencing Guidelines for Organizations said ethics and compliance programs would be a mitigating factor in sentencing corporations convicted of crimes. Then, in 2004, an amendment to those guidelines stressed the need for companies to "promote an organizational culture that encourages ethical conduct." The result, says Darcy, has been a much-needed shift from mere legal compliance to deeper cultural transformation.

What's the difference between compliance and culture? Darcy explains, "One could argue that Enron was in substantial compliance with the law (obviously not so in terms of accounting practices), but you could argue that there was a culture of greed, and at the end of the day, culture trumps compliance."

Culture is now a factor that prosecutors may consider not only in sentencing, but also in deciding whether or not to file criminal charges at all. The problem is that culture is such a vague concept that no one is sure how to measure it, or how to build it.

"The real challenge of the business ethics movement is not the black-and-white decision of obeying or violating the law, but the grey area of whether you made intelligent, rational ethical decisions," says W. Michael Hoffman, executive director of the Center for Business Ethics at Bentley College. Nancy Thomas-Moore, director of ethics and business conduct at the Weyerhaeuser Co., notes that the company's CEO called its first ethics handbook "gray for a reason."

At Weyerhaeuser, Tyco International and PriceWaterhouseCoopers (PwC), efforts to inculcate a culture of ethics acknowledge that much of ethical decision-making is impossible to capture in rulebooks. Both Weyerhaeuser and Tyco, for example, have developed training programs that offer employees scenarios of ethical challenges. Barbara Kipp, a partner in PwC's Governance, Risk and Compliance practice and the firm's global ethics leader, says the firm sets forth broad principles and leaves implementation up to the individual managers.

There seems no reasonable alternative in a company that does business in more than 100 countries worldwide, where differences in living standards, cultures and customs might make specific rules (such as a monetary limit on gift giving) impractical and perhaps even counter-productive.

But gray areas are dangerous when the stakes are high enough to include prison terms for making the wrong call. "You're not allowed to make an honest mistake," says Roub. "It's a violation of the law, you've ruined your career, maybe even ruined your life."

Changing Cultures

Ethics and culture, traditionally classed among the "soft" issues of business, have become the hard nut to crack. "In order to achieve compliance with the law, you have to build an effective ethics and compliance program and an effective culture of ethics and compliance," says PwC's Kipp. But that's easier said than done. The challenges to developing an ethical culture are great.

In the first place, cultural change takes time. Says Gnazzo, "Culture can't happen overnight. You can write the values overnight, but culture is not imbedded until you act on the values enough times that you're known for it." Nancy Thomas-Moore of Weyerhaeuser says her company's culture of integrity dates back to the day it was started on a handshake over a century ago. "One of the new things happening is we're all trying to figure out how you measure ethical culture," she says. "I do know it takes a long time for these messages and behaviors to filter through the company."

Weyerhaeuser's culture grew more slowly than its trees. Who has time for that anymore? Historic rates of merger and consolidation throw together disparate cultures and systems daily, and few companies can realistically plan their culture on a century-long scale.

In the second place, real culture change takes commitment. The best recent examples are in companies where the alternative to change was extinction.

Take Tyco, for example. Within a few months of accepting the top job vacated by disgraced Dennis Koslowski, CEO Edward Breen replaced the whole board and 290 employees.

One may well question the ethics of replacing people who may have had nothing to do with the malfeasance at Tyco. "It was a fairly draconian decision, but the decision was in the interest of speed, objectivity and fairness as we moved forward," says Eric Pillmore, Tyco's senior vice president for corporate governance. "Our highest priority was to move quickly, to save the company from bankruptcy and to preserve 240,000 jobs."

Tyco also made structural and operating changes, such as separating financial and operating management to emphasize that--while financial partnership is fine as far as it goes--the first responsibility of finance is controllership. It did something few companies have done by making Pillmore's governance position a direct reporting relationship to the board. "What I have is a voice at the table, and that really helps--versus a job lower in the organization," he says.

Listen to business people speak about ethics, and it won't take long before they say, as does Bryan Roub, "Good ethics is good business." They talk about the contribution of ethics to brand value, for example. They observe that most people basically want to do the right thing. To which Cebula retorts, "How do we know one way or the other?"

Very few things in the field of ethics are clear. However, when accused of misconduct, businesses and their executives face sentencing guidelines that will evaluate their success at building an ethical culture--a phenomenon that no one is quite sure how to measure, much less to build.

There is no straightforward pattern for ethics success, only experiments conducted in the dark. The outcomes of those experiments may determine the fate of executives and the companies they lead. Or they may sink into the background, supplanted by more urgent priorities, only to be remembered in a decade or so when the next crop comes in.

Gregory J. Millman ([e-mail]) is a New Jersey-based freelance business writer and author and a frequent contributor to Financial Executive.

RELATED ARTICLE: takeaways

* While research shows a considerable jump in formation of ethics programs in recent years, there is little evidence that employees are more ethical.

* Prosecutors have been criticized for overzealousness, however. Some critics argue that the government seems to presume bad faith before a probe begins.

* An ethical culture is a vague concept, and businesses have trouble deciding how to measure it or build it. But it can be a mitigating factor when sentencing violators.

* Companies like Weyerhaeuser and Tyco International have developed training programs that offer employees scenarios offering ethical challenges.