Building Economic Democracy

By Marjorie Kelly, Business Ethics. Posted September 30, 2002.

I've been waxing nostalgic lately over the ethics scandals of old. They seem always to come in waves. There was the early wave of government procurement fraud, then medicare billing fraud, then insurance sales frauds rippling out from Prudential's scandals. After reading about Prudential in the book "Serpent on the Rock," I would have voted it Most Fascinating Scandal -- were it not for the gold-standard scandals of the 1980s, when Ivan Boesky and Michael Milken were hauled away in handcuffs for junk bond fraud, insider trading, and stock parking. That era holds a special place in my heart as my First Ethics Scandal. I remember the urgency I felt as it unfolded -- I was certain such a major ethics crisis wouldn't be seen again.

Well. Here we are a decade and a half removed from the savings and loans scandals, in the midst of a perfect storm in ethics. Turbulence patterns are converging from Enron, Arthur Andersen, Global Crossing, Tyco, Dynegy, Adelphia, WorldCom and the rest.

It's not hard to trace the route from today back to the 1980s. The two eras are (un)ethical bookends to the greatest bull market in history. The management excesses that seemed so shocking back then -- hostile takeovers, massive layoffs, and exorbitant CEO pay -- became ordinary stuff in the 1990s. It was fuel for a hungry market, and as that market became more ravenous it demanded greater sacrifices. Thus minimally acceptable excesses gave way to outrageously fraudulent excesses, until the whole thing blew up in a kind of July 4 extravaganza, with the explosions of Kenneth Lay and Andrew Fastow, the flame-out of Bernard Ebbers, the detonation of Dennis Kozlowski, and the little mauve starburst of Martha Stewart.

The debris from the pyrotechnics has been drifting to earth day after day for months now, leaving the business press hot to talk about business ethics. At Business Ethics magazine we've been getting as many journalists' calls in a month as we used to get in a year. So there seems to be a role for corporate social responsibility (CSR) folks, though not the role we had in mind when we began. What we all wanted to do back then was change things.

Looking back over the years, I'm struck by how little change of real substance has taken root. Codes of conduct have sprouted like weeds. Ethics officers at major corporations have grown from a handful to hundreds. Business for Social Responsibility has become a multi-million-dollar operation. Social investing assets have swelled into the trillions. Business schools have added endowed chairs and required courses in ethics. Awards and best-of lists have grown in profusion. Through it all, as ethical decision-making was taught to MBAs, good companies were sought out for stock portfolios, or descriptions were compiled of best practices, the underlying assumption was that managers had genuine freedom to be socially responsible. We believed CSR was about separating the good guys from the bad guys, and that good guys could be spotted by their exemplary policies and programs and sustainability reports. But the lessons of the perfect storm tell a different story.

As professor Sandra Waddock of Boston College Carroll School of Management noted in an unpublished paper, "Fluff is Not Enough," Enron rang all the bells of CSR. It won a spot for three years on the list of the 100 Best Companies to Work for in America. In 2000 it received six environmental awards. It issued a triple bottom line report. It had great policies on climate change, human rights, and (yes indeed) anti-corruption. Its CEO gave speeches at ethics conferences and put together a statement of values emphasizing "communication, respect, and integrity." The company's stock was in many social investing mutual funds when it went down.

Enron fooled us. But that's not the real lesson here. The lesson is that all the things CSR has been measuring and fighting for and applauding may be colossally beside the point, because they fail to tell us what's really going on inside companies. What's going on is a single thing: unremitting pressure to get the numbers, by any means possible.

This is happening even at the "best" firms. I've had candid conversations with managers at top-tier firms among our 100 Best Corporate Citizens, and what I hear is disheartening.

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