Role of the Chief Executive Officer in preventing lapses in ethical standard

Posted by Terence Chua, Year 4 undergrad at the School of Business, Singapore Management University

I remember an article I read from Bloomberg, “AIG of Drugmakers Pfizer Is Too Big to Be Guilty” -http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ahodmf54hyPA
Brief summary: Pfizer sales personnels blatantly ignore negative health consequences to push drug with detrimental health consequences. Despite being fined repeatedly for such lapses in the past, regulatory authorities have found it difficult to come up with a strong enough punishment to prevent Pfizer from committing such a lapse because the bankruptcy of Pfizer will lead to greater detriments to society; if Pfizer is convicted of crime, they would face debarment from federal programs. And that would mean that Medicaid and Medicare patients would have to either somehow pay pocket for vital medicines the company produces or go without. With such a consideration, Pfizer’s senior executives continue to flout laws without much consideration of the consequences of their actions.

So what does the above article have in reference to accounting fraud?

In my view, the idea that a company cannot face the full weight of their consequence because it is too big to fail is a huge systematic flaw. The idea that some companies do not need to uphold as high an ethical standard in areas like human safety and accounting standards means that society is left the poorer. Ultimately, condoning lax standards in one area is not restricted solely to only one area. In order to prevent ethical lapses in the organization, CEOs have to take a strong view against such practices to prevent its occurrence; only then will society as a whole be better off.

A key point that most of the CEOs stress, is having in place a zero-tolerance policy towards corruption. I feel that the advocating and implementing of such a policy is crucial, as it demonstrates serious adherence to ethical principles, and duly recognises that there can be no place for graft and deceit in any self-respecting and sustainable business.

Often times, graft occurs because of some weakness in performance — it is an easy shortcut to take, to make up for mistakes and perhaps shortfalls in production (hence employees may resort to “creative” accounting to inflate profits, for instance, or start offering unsustainable bribes in order to secure contracts). However, graft or corruption cannot go on forever, undetected, as it always takes more effort to cover up wrongdoing than it is to do things right.

Therefore, besides running compliance trainings regularly, as most of the CEOs mention, they should also ensure that they are constantly training and motivating their employees to do their jobs successfully and productively. They must also emphasise during compliance trainings relevant reasons for being compliant (it is all very well to stress the importance of company culture and a code of conduct, but reality is such that people will not be on board unless they see how things are directly applicable to them). Hence, the company will need to demonstrate how compliance is good business, both for the employee and the customers — compliance strengthens the relationship between the two, making work easier for the employee, and compliance enables the employee to sleep easy at night, knowing that there is never a chance that something he/she did will come back to haunt him/her with serious repercussions.

Another strong factor in preventing corruption would be if the CEO and the management of the company do really lead by example, and truly believe in not taking shortcuts, even for the sake of the bottomline. ‘The CEO has to set the tone, walk the talk and ensure that senior management of the company does likewise, so that this integrity culture will permeate through the entire organisation’, and also ensure that they will attract the right kind of people to join them. This is also essential in ensuring that employees are protected from potential manipulation by their superiors, who may resort to corruption if they are facing undue pressure from the top. And this is also the only way a whistle-blowing initiative would actually work, as it would be useless if the ones in charge are only subscribing to such an initiative at face value, and thus disregarding any reports of potential wrongdoing that they may receive (see this for example — http://www.rollingstone.com/politics/news/the-9-billion-witness-20141106 — an account of one deal manager’s harrowing experience with securities fraud at JPMorgan Chase).

All in all, businesses exist to provide true value and service to society (and are duly compensated for this). However, if the situation becomes as such that businesses have to increasingly resort to graft and corruption just to survive, then perhaps something is fundamentally wrong with the system at large.