Published: August 7, 2008
Column
By Patricia J. Harned, Ph.D., President, ERC
Occasionally people smile when I mention ethics, as if they think that corporate ethics, deep down inside, is a joke.
But some of the biggest institutional investors in this country would beg to differ.
Early last month, a major health insurance provider agreed to pay more than $900 million to settle a class-action lawsuit over the alleged back-dating of stock options for senior management.
A loss of almost $1 billion would put a dent in anybody’s bottom line. Oops.
The same alleged misconduct led to the ouster of the company’s then-CEO and general counsel, who are facing trial as individuals in September.
It wasn’t law enforcement that blew the whistle in this case but the California Public Employees’ Retirement System, or Calpers, one of the biggest public employee pension funds in the United States. Calpers has 1.5 million reasons – its pension and healthcare beneficiaries – to pay close attention to the corporate governance of companies in which it invests. And as a $40 billion behemoth investor [2006-07 revenue], it has the muscle to call corporations to strict account when it suspects alleged wrongdoing.
According to The Wall Street Journal, the corporate governance office at Calpers oversees a $7 billion investment program and manages the "Focus List" program that singles out companies Calpers believes are performing poorly.
The fund has reason to remain vigilant. “Since 2006,” says the Journal, “dozens of companies have been found to have manipulated the dates on which stock options were awarded. In retrospectively picking dates when stock prices were at low points, they allowed executives the chance to reap outsize gains. The scandal has led to more than 80 financial restatements, dozens of executive dismissals, and civil and criminal government investigations. In the second-largest backdating settlement to date, Brocade Communications Systems Inc. agreed a month ago to pay $160 million to settle a shareholder class-action suit.”
There is no question that ethical misconduct matters in the corporate world – that it can have serious, measurable consequences – whether it makes headlines in the national and global financial press or seeps into a company’s reputation and spreads by word of mouth.
In its ninth annual Reputation Quotient survey, a poll of 20,000 respondents released in late June, the research firm Harris Interactive reported that 71 percent of consumers have a poor general opinion of corporate America. But the survey also showed, said Harris, that “a strong statistical correlation exists between a company’s overall reputation and the likelihood that consumers will purchase, recommend or invest in a company or its products and services.”
Factors – or “reputation drivers” – weighed by Harris include financial performance, vision and leadership, social responsibility and workplace environment.
Here at the Ethics Resource Center, we have learned from our National Workplace Ethics Surveys that the most effective, affirmative course for a company to take with its employees (and its senior management) is to create and maintain an ethical culture, teamed with ethics programs that help make it easier to do the right thing. It is critical that directors and the CEO get with the program, as much as lesser mortals. Most employees are plenty adept at reading the boss’s body language.
So, it seems, are Calpers and other big institutional investors, who take corporate governance and ethics seriously.
That’s something to smile about.