If you care about company and career, business ethics matter. Top corporate executives dub formal business ethics within an enterprise “transparency” and increasingly point to it as a “wow factor” capable of improving business processes, employee morale, gross revenues and profit.
An old standard rediscovered, it is newly championed in the way KC area senior executives are rewriting the phrase “the business of business is business” to say “the future of business is doing business right.” Business ethics has all the appearance of staying power, not just a convenient fad to pay lip service, which is exactly what skeptics say it was in the wake of the dot.com bubble burst, the post-Boesky leveraged buyout wreckage or even when Theodore Roosevelt throttled the robber barons “as the malefactors of wealth.”
Business ethics as part of operations is a message being delivered by KC-area companies in policy statements, changes in board membership, additional committees and fewer dual titles for chief executive officers and presidents. It is a top subject of on-going conversation and under the scrutiny by Web strategists, who seek ways to use the Internet to deliver effective online training on right and wrong in pursuit of the almighty dollar (Hallmark Cards Inc., for one, plans to unveil this type of system in 2007). Fact is, failure to embrace this one idea—and all its ramifications—is more likely than at any time in the history of U.S. business to induce reprimand, discharge or even the necessity of self-imposed seclusion (which is exactly what former Enron Corp. executive Ken Lay was reportedly doing at his Aspen, Colo. home, awaiting an Oct. 23 sentencing date, before his death in the early morning hours of July 5).
“Just as Reaganism ‘changed the conversation’ on particular political issues, there are powerful signals of a shift in what we as a culture, society and people expect of business,” said Dr. Lee Bolman, the Marion Bloch, Missouri chair in leadership at The Bloch School of Business and Public Administration.
It is evident in the financial reporting and corporate governance requirements mandated by the toothier-by-the-day Sarbanes-Oxley Act—sweeping legislation imposed in the wake of the Enron accounting scandal that called for revamped corporate accounting practices, among other measures. It is palpable in the rising viability of corporate social responsibility as good business. And, if there was any doubt, it is underscored by the impossible-to-ignore $30.7 billion standard set by Berkshire Hathaway Inc. Warren Buffett to support Bill and Melinda Gates’ philanthropic health crusade.
"i went to that meeting prepared to be the villain from kansas city, but it turned out there were a number of others prepared to take the executive to task," Dunn said.
Many say business ethics will almost certainly dominate the rest of your professional life, just as it has already changed the U.S. economy. Sarbanes-Oxley swept through publicly traded companies at an estimated cost of $1.4 trillion as organizations struggled to define, address and comply with its mandated ethics, according to a report from the University of Rochester’s William E. Simon Graduate School of Business Administration. It has also been a springboard for self-examination through an enterprise, causing changes in everything from the way corporate board members prepare for meetings to telephone customer service clerks who excuse themselves for ethical reasons if by happenstance routed a family member’s call. Since inception three years ago, flatly, it has demanded as much attention as anything else.
“We saw a downturn in mergers and acquisitions and other transactional work,’’ said Polsinelli Shalton Welte Suelthaus attorney William Quick, a well-known local corporate governance and business ethics expert. “The focus was on the first cycles of meeting reporting requirements. Now, you can just tell that large amounts of funds have been released.”
The larger publicly traded companies are coping with Sarbanes-Oxley’s demands, but the impact on smaller companies is more up in the air than ever. By fiscal 2006 year end, the Securities and Exchange Commission expects publicly traded companies to be in compliance, and guess what? Many companies—especially those with revenues below $500 million—lack the personnel, information technology, networks and deep pockets necessary to comply. In coming months, those companies will likely seek solutions ranging from hir-ing the right accounting and legal consultants to bail them out to outright sale to in-compliance suitors, Quick said.
Privately held companies also swim against the riptide of righteousness. Over three years, Sarbanes-Oxley has affected the ability of many privately held companies to seek merger-and-acquisition and public offerings and could continue to limit options for years to come, said John Granda, chair of Stinson Morrison Hecker’s corporate finance division.
No organization or individual is left out. Increasingly, sound corporate governance and other standards of business ethics throughout the enterprise will be the primary selection factor when philanthropists decide how to spend time and money in evaluations of non-profit organizations, experts said.
“Just as Warren Buffett has always studied companies, he looked into the management of foundations before deciding where he wanted to invest,” said Prof. Richard De George, co-director of the International Center for Business Ethics at the University of Kansas. “He decided that the Bill and Melinda Gates Foundation is structured in such a way to do good work. Buffett’s work to look into the policies of the foundation in the same way he’d evaluate any other organization will have influence (on the ways others donate).”
In pursuing business ethics, Kansas City companies have standard bearers to emulate. One at the top of the list is JE Dunn Construction Co., which can count a long-established but recently formalized Minority Contractors Business Development Program among myriad ways it pushes the do-right envelope. (On the Sprint Campus project, an amazing $100 million in contracts went to businesses owned by women and minorities.)
In philanthropy, J.E. Dunn annually donates 10 percent or more of its pre-tax net income to causes.
Corporate business ethic governance can be formalized and sustained more easily when a company knows what it believes in and applies commonsense, said chairman emeritus Bill Dunn. The five outside directors on its board were selected for business skills and reputation, not as window dressing, he said. “None of these people are rubber stamps,” he said. “They are highly regarded in the community, ask the tough questions and expect us to treat everyone fairly.”
Being comfortable with challenges from outside directors comes easily when you can be challenging yourself, Dunn said. As director on the board of an undisclosed publicly traded company, Dunn once participated in the ouster of a senior-level executive who for personal financial gain favored one potential merger partner over another, even though the second suitor carried a more attractive offer, he recalled. “I went to that meeting prepared to be the villain from Kansas City, but it turned out there were a number of others prepared to take the executive to task,” Dunn said.
Moreover, more than 30 years ago, the company faced down potential legal challenges by introducing structural design peer review at the general contractor level—an unheard of practice at the time, more widely adopted today.
Dunn’s reputation for high standards in business ethics helps the company win marquee projects every year, said Steve Dunn, chairman of JE Dunn Construction Kansas City. On more difficult projects, where the building can be as much art as edifice, there’s more risk involved. Knowing that Dunn will hit all its marks with “something that will hold up” to vision, ambition and the test of time often proves to be the tipping point when new and repeat customers are making final decisions, he said.
| l-r Richard De George, co-director of the International Center for Business Ethics at the University of Kansas; Peggy Loyd, VP of Corporate Compliance at Westar Energy, Inc.; Laura Ozenberger, Inergy VP general counsel and secretary; John Granda, Stinson Morrison Hecker. |
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Corporate governance of business ethics also benefits relationships with business partners, Bill Dunn reminded. “Being a general contractor, we do 15 percent of our work with our own people and are entirely dependent on our subcontractors to do the rest,” he said. “When subcontractors know they will be treated fairly, they submit the best bids.”
As a company, Dunn is standard bearer but not the norm. It continues to grow independent of public-market liquidity, and as such operate devoid Sarbanes-Oxley pressure. For those in the yoke, the pressure is great. Nicknamed SOX, Sarbanes-Oxley caused delays in more than 300 annual reports in its first year and costs an average company $4.3 million to implement, according to the Financial Executives International, an association of chief financial officers.
Scandal, including the irresponsibility of executives at Enron, Tyco International, Worldcom and the KC-area’s poster boy for senior-level largesse David Wittig, gave rise to the challenge. Since most dirty deeds involved accounting practices, the SEC responded to the mounting instances of lost retirement accounts, unemployment, bad debt and plummeting public trust with SOX—sweeping reform aimed at improving corporate governance, management practices and independent auditing procedures. Some KC-area companies have faced down the government requirements, and are discovering improved internal auditing as one way to instill business ethics through the enterprise.
Nowhere has SOX been a bigger plunge than Topeka-based Westar Energy Inc., where former president and chief executive officer Wittig and former corporate strategy vice president Doug Lake were tried and convicted for looting the company. For his part, Wittig now resides at the Federal Correctional Institution in Sandstone, Minn., spending most of his time wrangling over every legal technicality, including a recent effort that could win him temporary release until he’s sentenced on a second set of charges.
Meanwhile, Wittig’s replacement James Haines Jr., an energy-industry veteran and respected business ethics academic, has taken the helm. He’s retained the chief executive title but soon after arriving shed the dual title of president—a move mandated by SOX reform and reflecting a general consensus that distribution of power reflects a sound organization.
At the same time, Westar has implemented continuous monitoring of such areas as accounts payable, payroll and employee expense accounts through a SOX effort led by 28-year Westar veteran Peggy Loyd, who reports directly to the company’s audit committee chairman instead of the chief financial officer. “The fact that my position was created at an officer level was intentional to shows employees the importance of the role,” said Loyd. VP of corporate compliance. Repairing the company’s reputation with employees, customers, vendors and other stakeholders comes down to accountability, communication, leadership and encouraging standards throughout the enterprise, she said.
In 2003, Inergy LP, a propane distributor and master limited partnership, tapped a former assistant corporate secretary from Sprint as general counsel—a move driven by the overarching idea of compliance to business ethics. Laura Ozenberger, Inergy VP general counsel and secretary, initially outsourced much of the accounting and legal work. In fact, demand for consultants in the wake of SOX has insiders calling it “the act that turned accountants into rock stars.” Though still outsourcing on a limited basis, Inergy now has four people managing SOX in house.
“In part, we did that to cut costs,” she said. “It also gives us an opportunity to have people who are building knowledge year over year. We’re looking to leverage their expertise so SOX compliance is not just a cost but also a way to give us strategic benefit.”
Inergy recently formalized governance and business ethics standards, including a code of business conduct, securities trading policies and systems for protecting company information, Ozenberger said. The company also established ethics and whistle-blower telephone hotlines for its 2,818 employees, a more active audit committee and more formal board committee charters, she said.
The hard-and-fast aspects of SOX take up the greatest time and expense but the “soft” components of compliance—generally defined as aspects of business ethics that don’t involve lots of financial detail—hold just as much promise, said Lynn Fountain, VP risk assessment and audit services for Aquila.
“The internal audit profession has leaped forward 10 years in two,” said Fountain, adding that hard-earned expertise in managing control groups enables Aquila to be more comfortable reviewing business processes involving ethics.
Financial institutions were better prepared for SOX than most companies because many of the detailed reporting procedures were mandated by other regulatory law, but Commerce Bancshares Inc. still found room to adjust, said controller Jeff Aberdeen.
Many say business ethics will almost certainly dominate the rest of your professional life, just as it has already changed the U.S. economy.
For example, insider trading is reported in two days instead of 30, the structure of its governance committee was redefined and more disclosure than ever before is posted to the Internet, he said. What SOX has really done within Commerce Bancshares is spark discussion and communication, he said. The side benefit is “the culture has improved. Where it was always high, it is now at a higher level,’’ Aberdeen said.
Embedded business ethics governance can help even small businesses, said Jake Schloegel, president of the 26-year-old Schloegel Design Remodel Inc., Kansas City, Mo. The 20-person company, with $4 million in annual revenue, adopted an industry trade association’s code of ethics and added additional policies of its own many years ago. Today, it orients new employees in the organization’s code of conduct and maintains a five-person Board of Ethics, including outside membership. In the era of the empowered consumer, this governance helps sustain positive brand awareness and delivers competitive advantage, he said.
“Our clients have changed in big ways,” Schloegel said. “They are more aware of what a brand stands for than ever before. And, the information available to them (everything from design elements to building materials) is unbelievable. The challenge for us in relationships is our capacity to guide good decisions. When you have reasons to be trusted, that process becomes a lot easier.”
If unconvinced that business ethics matter in KC’s business community, take a look at leaders signing off on the idea with their checkbooks. Inergy chief executive officer and president John Sherman, former Gold Banc Corp. chief executive and president Mick Aslin and SCS Transportation Inc. chairman, chief executive and president Bert Trucksess are among Schloegel’s references.
As powerful as it is throughout the economy, SOX promises even greater impact on such Midwestern markets as Kansas City, where prevailing community standards mesh with what the law says, experts said.
“The most intense ‘go-go’ and ‘do-whatever-it-takes-to-make-a-buck’ business attitudes are less popular culturally here than in places like New York,” said Bolman, the Bloch School of Business and Public Administration chair. “When you ask business leaders and other affluent folks in KC why they stay, they’ll not say it is the weather but instead a work ethic and sense of responsibility.”
Ongoing focus on business ethics can be beneficial to companies based in the region, agreed Stinson Morrison Hecker’s John Granda, a former counsel to the SEC commissioner who has seen his practice area grow from 25 to 40 associates in recent years in large part due to increased demand for SOX services. “The Midwestern ethic of working hard and doing the right thing generally serves the area well, and some impulses to do wrong may not be as evident here,” Granda said.