TOPICS > Economy

Money and Ethics

June 26, 2002 at 12:00 AM EDT
Paul Solman presents the first in a series of reports on ethics in corporate America.

PAUL SOLMAN: For six years, the University of Maryland’s business school has been sending its MBA students to prison, for a “scared straight” field trip in white-collar crime. Suppose your boss asks, “Can’t you fudge the financials?

DANIEL COLTON: Can’t you pick up a million dollars so we can do this?” And your answer should be, “unequivocally, absolutely, no.”

PAUL SOLMAN: Just say no, advises former developer Daniel Colton, or you may wind up like him, serving a three-year sentence for conspiracy. His audience, students just days away from entering a business world where morals may be looser than ever.

BARBARA TOFFLER, Business Ethicist: The big joke is that business ethics is an oxymoron. You can’t simply talk about ethics when you’re talking about business. There are none.

PAUL SOLMAN: Barbara Toffler is a professor of business ethics, and thus thinks it isn’t a contradiction in terms. Though she admits, stock scams like the ones that have made Enron a household name, are as old as the market itself.

Consider this poem: “Some inclandestine companies combine, erect new stocks to trade beyond the line, with air and empty names beguile the town and raise new credits first, then cry ’em down, divide the empty nothing into shares, and set the crowd together by the ears.” That’s Daniel DeFoe, of Robinson Crusoe fame, writing in the early 1700s.

Here’s the French artist Daumier, in the mid-1800s, depicting a speculator in the stock market planting false rumors to manipulate prices. And we’re all old enough to remember the insider trading and junk-bond scandals of the late 1900s, starring Ivan Boesky, Mike Milken, and the like. But Barbara Toffler thinks ethics now are actually worse than ever. At least the 1980s, she says…

BARBARA TOFFLER: It was a big-boys’ game. And in fact, much of the history of unethical behavior, if you will, in business has been kind of a big-boys’ game.

PAUL SOLMAN: So, in a sense, it was them against themselves.

BARBARA TOFFLER: Exactly. And obviously stock prices were affected, obviously the stock market was affected, obviously the institution and the individual investor were affected, but we did not have the kind of impact on you and me and the general population that we now do.

PAUL SOLMAN: Where more vulnerable investors are the ones getting disproportionately hurt, like the blue-collar phone workers we interviewed recently at Global Crossing.

The modern business ethics industry was born in the late 70s, part of the post-Watergate reform movement. Business ethics became so hot, a firm like Arthur Andersen — yes, that Arthur Andersen — spent millions to be identified with the topic, making and distributing videotapes to explain why morality was vital to U.S. corporate success. Here’s one of their stars, Stew Leonard Sr., CEO of a discount dairy chain.

STEW LEONARD SR.: The most important thing of success in business is to build your house on a solid foundation of integrity, on a solid foundation of ethics.

PAUL SOLMAN: One hint that things were getting worse, though Andersen hired Barbara Toffler in 1995, it was to help them make money, not clean up their act.

BARBARA TOFFLER: They hired me to sell services to clients; they didn’t hire me to do work with them internally.

PAUL SOLMAN: So you were going to sell –

BARBARA TOFFLER: I was hired to set up a consulting practice in ethics and responsible business practices. I was not hired to do internal work at Arthur Andersen.

PAUL SOLMAN: Did you ever expect that Arthur Andersen’s internal culture would be at odds with what you were trying to teach?

BARBARA TOFFLER: I learned that as I was trying to sell services, and found people asking me if Arthur Andersen was doing internally those things that I was trying to sell to them, and they weren’t.

PAUL SOLMAN: Meanwhile, the ethics of Arthur Andersen, once the purest of pure auditors, sank to new lows. Why? Well, perhaps we should use the famous words of Watergate: “Follow the money,” or as white-collar criminal Daniel Colton puts it:

DANIEL COLTON: Money is the hugest intoxicant there is.

PAUL SOLMAN: Barbara Toffler says that intoxicant became the drink of choice even for the top accounting firms.

BARBARA TOFFLER: Everybody was making money. They were jumping on the bandwagon. They forgot what they were supposed to be doing. They forgot that they were watchdogs; they forgot that they were protectors of the investor; and they became hotshot firms. You know, we’re a big name, we can play with the big boys and we can make big money. And they did start making big money. So they, too, were seduced. I’ll be honest with you – I stayed at Arthur Andersen probably longer than I would have, because I liked the money that I was making.

PAUL SOLMAN: By the late ’90s, Andersen’s ethics consulting had petered out for lack of clients. And Andersen’s ethics tapes, despite their lofty ambitions and earnest hosts, don’t seem to have had much impact.

MAN IN VIDEO: Over the years, our family, our religion, our community, schools, have helped to shape our values. “Thou shalt not steal.”

PAUL SOLMAN: But maybe it’s a good thing that these tapes never became bestsellers, seeing as how the one with Stew Leonard might be a better guide to sin than sincerity.

STEW LEONARD SR.: People that look for the short cut, the prisons are filled with them.

PAUL SOLMAN: But just two years after this tape was sent to schools all over the country, Stew Leonard Sr., pleaded guilty to skimming $17 million in profits, much of which he carried, the government reported, on tens, if not hundreds, of trips to St. Martin, in the Caribbean, in amounts ranging from $10,000 to upwards of $250,000, in suitcases or even wrapped as baby gifts.

It was the largest tax fraud in Connecticut history, and Leonard was sentenced to 52 months in prison. Two brothers-in-law received sentences. Son Stew Jr., the store’s president, also admitted involvement, but was granted immunity as part of his dad’s plea bargain. Which makes the ethical rule-of-thumb, with which this tape ends, almost surreal.

STEW LEONARD SR.: Would the boy you were be proud of the man you are? And I would say that the boy I was would be proud of the man I am, and I would wish that on anyone. If my dad were alive today, he’d say, “‘Atta boy, Stew.”

PAUL SOLMAN: Today, Leonard is out of jail and Stew Leonard’s chain is expanding. If any stigma remains, it hasn’t seemed to hurt business. But the biggest surprise may be that anyone did jail time at all, because according to Justice Department data, U.S. Attorneys prosecuted only 187 defendants over the last decade for white- collar crimes.

And while 142 were found guilty — a healthy 76 percent conviction rate — only 87 did time, usually at a minimum security, so-called “Club Fed.” Attorney Jake Zamansky believes lenient sentencing has helped create the current climate.

JAKE ZAMANSKY, Attorney: There needs to be some serious jail time for analysts who are caught committing fraud, CEO’s that are looting their companies. Until we send somebody away for a long period of time in real prison, nothing is going to change.

PAUL SOLMAN: Now, Zamansky used to represent defendants: Penny stock scam artists like those seen in the film “Boiler Room.”

ACTOR: Let me close the door to my office. One second, all right? ( Door slams )

ACTOR: I remember you saying something about wanting to buy a house, right?

ACTOR: Yeah.

ACTOR: Well, how would you like to pay for it tomorrow — in cash?

JAKE ZAMANSKY: I said I was the devil’s advocate. And I was revolted by my clients. I didn’t like going to work and doing what I was doing; getting brokerage firms away with murder, and it got to me.

PAUL SOLMAN: So in 1998 Zamansky switched sides.

JAKE ZAMANSKY: I am now representing public customers in claims against major Wall Street firms like Merrill Lynch and Smith Barney. And unfortunately, I have seen at major Wall Street firms the same type of boiler room tactics that I saw in the ’90s at these other firms.

PAUL SOLMAN: This is a business ethics class for MBA students at Babson College, in Wellesley, Massachusetts.

STUDENT: If they’re committing fraud, then that’s a crime and that’s punishable by five years, ten years, fifteen years.

STUDENT: If you go and you punish people just because the stock ended up tanking and the market ended up not performing, then you go punishing people for taking risks.

STUDENT: But I think where we get into trouble, and firms should pay the price, are when there’s ulterior motives and there’s other funding going on by the company.

PAUL SOLMAN: After several hours of heated, knowledgeable debate, I asked whether they would have touted stocks they didn’t believe in.

PAUL SOLMAN: How many of you would have knuckled under, essentially?

PAUL SOLMAN: Not a single hand went up. But then one student suggested pushing the hypothetical a bit further.

STUDENT: So, if you ask this question again, how many people would put that buy if it got them $20 million in the bank? I think you’d see a lot of hands go up.

PAUL SOLMAN: $20 million for one buy recommendation. How many people? Honestly, now. Honest answers.

PAUL SOLMAN: The class’s professor had been there for the vote. The Reverend Tom Sullivan is a Presbyterian minister.

PAUL SOLMAN: What would Jesus have thought of it?

REV. TOM SULLIVAN: ( Laughs ) Jesus would have said, “Oh, come on, you can’t do that, and you know you can’t do it.” He would have been a good Jew in saying that, he’d be a good Christian in saying that; he’d be a good Hindu, he’d be a good Buddhist; nobody who takes any kind of spiritual values seriously is going to say, “oh, yeah, that’s fine.”

PAUL SOLMAN: Indeed, spiritual values may explain the results of one last vote. How many of you would imagine that your parents think your generation is less ethical than theirs? Every single one of you?

PAUL SOLMAN: Now, not everyone thinks we’re going to hell in a hand basket. Ed Petry, who runs the nation’s largest group of in-house corporate ethics officers, says that in some areas, ethical standards have improved.

ED PETRY: Conflict of interest inside the organization, gifts and gratuities, time charging, sexual harassment issues, diversity issues, vast improvement on those fronts inside the organization.

PAUL SOLMAN: But nobody was paying much attention to things like corporate governance; reporting your financial statements.

ED PETRY: Well, I won’t say people weren’t paying attention to them. But part of the problem is, that the expectations are much higher than they used to be. And you also have far more employees who are willing to come forward with allegations. And you have the public who is… who is looking and eager to hold companies to a higher standard, and want them to be accountable.

PAUL SOLMAN: But is corporate America responding by hiring ethicists like Barbara Toffler?

BARBARA TOFFLER: Do I have a lot of work as a business ethics consultant? No.

PAUL SOLMAN: Instead, Toffler’s writing a book on her years at Arthur Andersen, and teaching ethics at Columbia Business School — easier, perhaps, than teaching them in the real world of recent years, since in economic terms, the bigger the payoffs became for playing fast and loose, the greater the cost of being ethical in terms of risks not taken, opportunities foregone.

Of course, that’s true of any boom, not just this one, suggesting that, in the end business ethics may just be at one of its cyclical ebbs. But whether we’ve hit new lows or not, Daniel Colton’s words ring equally true.

DANIEL COLTON: Please, please, be vigilant, be careful, be honest, be open. Do not expose yourself to these kinds of dangers.

PAUL SOLMAN: Words easier to say than to live by, it seems, when you get down to business.

JIM LEHRER: In coming reports, Paul Solman will look at the latest scandals involving stock market analysts, and he’ll talk about Wall Street and corporate ethics with a group of veteran business journalists.