The ethics patrol.

A solid ethics program can yield long-term rewards, such as customer allegiance, a reputation for honesty, and better compliance with federal guidelines - all of which benefit the bottom line. Responsibility to make programs work begins at the top.

Imagine driving into work one morning and finding FBI agents wheeling file cabinets out of your corporate headquarters while TV cameras record the scene. That was the situation I confronted in August 1993, just three months after I took over as chairman and CEO of National Medical Enterprises, a hospital owner and operator, and predecessor of Tenet Healthcare, the second largest proprietary hospital company in the U.S.

NME was under investigation for illegal payments to physicians at its psychiatric hospital arm. The company eventually settled the case with the government and re-established its integrity, partly through a rigorous examination of business practices and the foundation of a formal ethics program that includes a full-time staff; training for all 68,000 employees; and board- and management-level oversight groups.

Some 93 percent of Fortune 500 companies run similar programs, including Nynex, Hewlett-Packard, Northrop Grumman, Federal Express, and Johnson & Johnson. Our experience - and theirs - has led to some conclusions about what works and what doesn't. The price of entry isn't cheap: Tenet spends $1 million annually on the program. But there are long-term, tangible returns on this outlay, ranging from stronger customer allegiance to more effective compliance with federal guidelines.

CEO INVOLVEMENT

The most compelling reason to establish an ethics program - and certainly the most difficult to quantify - is that a company's reputation has a direct impact on its success. The United Way learned this lesson the hard way: When its president stole more than $600,000 from the charity's coffers to support a lavish lifestyle, it took three years after his resignation for donations to rebound.

There are other pragmatic incentives to create an ethics program: Federal Sentencing Guidelines mete out stiffer punishments to firms without such initiatives. According to Gary Edwards, president of the Washington-based Ethics Resource Center, companies convicted of federal crimes - fraud, insider trading, or bribery - can have their fines reduced by as much as 95 percent if they show due diligence in attempting to prevent such misconduct through compliance programs. Conversely, an organization that has no compliance program in place - and that took no steps to prevent wrongdoing - could have its base fine multiplied. Managers also may be found personally liable for the actions of subordinates. The healthcare industry, like the defense and financial-services industries, increasingly is being held under a regulatory microscope. We designed our program to be a model for health care and, in fact, the U.S. Department of Justice has described our program as groundbreaking in its scope. However, our program is not industry-specific, and other companies could easily adapt it to their needs.

As with most aspects of corporate culture, establishing an ethical environment starts at the top. You, the CEO, must be personally dedicated to the program and invest your time in it. Companies known for their ethics and social responsibility are led by CEOs who are personally committed to the mission. For example, Gun Denhart, CEO of children's clothing manufacturer Hanna Andersson, based in Portland, OR, believes in participatory management and generous employee benefits, including child-care allowances. The company is known for its social activism, especially a program in which customers return used Hanna Andersson clothing for a discount on future purchases. Hanna Andersson then gives the clothes to charity. Starbucks, Ben & Jerry's, and Patagonia, too, have leaders with strong social convictions, and they know employees will follow their examples.

The ethics program in itself can be a good management tool. Short-term business goals often can collide with ethical concerns, but when employees are equipped with a thorough understanding of their company's values, they can respond to dilemmas more appropriately. You can, in effect, create an environment in which breaches of ethics are not tolerated, and employees who are basically ethical are given the resources to make the right decisions.

The best ethics programs include employee orientation and training, evaluation, and internal checks and balances. Tenet, which was created in March 1995 when NME merged with American Medical International, considers the $1 million it spends annually on its ethics program money well-spent. Included in the investment are four, full-time ethics office employees, ethics training workshops or review sessions for all Tenet employees, program consultants, an ethics orientation video, and "Standards of Conduct" guidelines distributed to every employee. Tenet's vice president of corporate compliance and ethics has broad authority and reports directly to our senior vice president for administration. A confidential, toll-free, ethics telephone line receives about 75 calls monthly, half of which we categorize as employee issues - callers with questions or complaints about compensation, scheduling, sexual harassment, etc. The other half is callers who are looking for clarification on company ethics policies, or who have questions or complaints about management style, conflict of interest, potential ethical misconduct, patient care, or other matters. Routine calls are resolved by our ethics staff, who look at company policies and procedures or direct the caller to existing company resources. The ethics staff has the authority and resources to investigate serious issues.

Tenet hosts intensive, participative ethics workshops at which employees wrestle with tough questions and explore the murky area where business and medical ethics overlap. Here's one situation Tenet employees have examined: A physician performs an abortion for a teenage patient and then, to fulfill a promise to the patient and her family for complete confidentiality, keeps the abortion out of her medical records by billing for a different procedure that is equal or lesser in price. Although the doctor's intent was to protect his patient, and the insurer was not overcharged, was the physician right to misrepresent the procedure on the bill? Traditionally, doctors are trained to put the patient's interests above all else. Would the doctor be wrong to disregard the wishes of the patient in this case? Tenet employees face these types of dilemmas daily. Our ethics workshops stress the company's position: Although this appears to be a small, humanistic concession, any type of misbilling is clearly wrong. The hospital must let its doctors know this up front before they make any promises to patients.

If you are truly committed to your ethics program, give your managers a compelling incentive to follow it - tie their compensation to the program's success. For all Tenet employees, knowledge of our ethics program and compliance with it are part of annual performance reviews that determine salary increases. As of this year, compliance with the Tenet ethics program became an important criterion in our annual incentive plan for all company executives and managers.

Tenet is not alone. Federal Express, for example, administers a yearly attitude survey that asks employees their perceptions of the company's ethics and work atmosphere. Managers' bonuses are tied directly to survey results.

DILEMMAS FOR MANAGEMENT

There are challenges to running a successful ethics program. Upholding ethical codes can be cumbersome, business sometimes can be lost, and employees often fear retaliation for blowing the whistle on unethical conduct.

For example, Tenet has a corporate policy against employees' receiving any gifts worth more than $35. At one hospital, a physician gave a CEO an expensive computerized watch and refused to take it back. The hospital ended up accepting the watch, but as hospital property to be shared by all the administrative staff.

We also have lost the business of physicians when we refused to make concessions on ethical matters. But as we demonstrate how seriously we take our ethical code, doctors and other business partners understand our position and even applaud it. We believe that in the long term, our ethical stance will only improve these relationships.

Employee fear of retaliation for reporting possible violations is natural, and good ethics programs work hard to reassure them that there will be no retribution for reporting abuses. At Tenet, we promote open communication between employees and management, requiring managers to meet personally with those under their supervision to review our firm no-retaliation policy.

Even with outstanding ethical leadership, a company can never be complacent. Johnson & Johnson has had an ethics credo since 1947 and has been praised for holding its business practices to those standards in its exemplary handling of the Tylenol tampering crisis. Still, early this year, J&J senior management admitted that some workers had shredded thousands of documents related to a federal investigation of its promotion of Retin-A. J&J again acted quickly by reporting the shredding to the Justice Department and firing three senior employees.

Today's tough regulatory and legal environment demands that your company have an ethics program. The question is: Do you want to just put the posters and processes in place, or do you really want to make a commitment to corporate ethics? If you want a commitment, be ready for some aggravation, lost revenues, and demands on your time. On the other hand, you probably will discover the primary benefit to making ethics part of your company's fiber: Good ethics is good business.

Jeffrey c. Barbakow is chairman and chief executive of Santa Monica, CA-based Tenet Healthcare, a $5.1 billion company that owns and operates 83 acute care hospitals and related businesses.