Legal Compliance and Ethical Blunders at Ford/Firestone

Strategic Finance, Oct, 2000 by Curtis C. Verschoor

A COUPLE OF MONTHS AGO, FORD AND FIRESTONE MADE THE NEWS WHEN THE treads started to peel off of several varieties of Firestone tires. At least 88 Americans died before Firestone recalled the tires, which were installed on new Ford Explorers and other SUVs. Most troubling from an ethical standpoint is that both companies may have known of the defects in 1993, when an overseas recall began. The decisions in this case provide the latest horrific example of how unethical actions can result in enormous losses.

Short-term, Bridgestone's estimate of tire replacement costs amounts to $350 million. Fines and punitive damages that will undoubtedly be tacked onto lawsuit settlements may run the total cost into the billion-dollar range. Both Ford and Firestone will pay huge sums.

More important, the long-term cost to their brands is incalculable, and the historical Ford-Firestone relationship is cloudy. Potential prison sentences for executives' criminal negligence add to the mix of corporate misery. Bridgestone took over a weakened Firestone as a result of its last recall. This time perhaps Bridgestone itself could be vulnerable.

Adding to or perhaps even causing the tragedy was the choice to cover up problems based on a narrow legal interpretation. In early 1999 the Bridgestone/Firestone legal department was successful in convincing Ford to avoid a broad program to replace defective Firestone tires found abroad. Later evidence of high lawsuit claims and warranty costs was dismissed as "not a safety problem." If not solved properly, ethical dilemmas always seem to compound.

Apparently, Ford's new slogan of "Customers Are Job One" has failed to sufficiently influence its decisions. Rather than putting customer safety first, it appears Ford chose to try to save a few dollars for shareholders. This shortsighted attempt may go down as one of the classic blunders of American business.

On several occasions this column has discussed the benefits of a values- and stakeholder-oriented corporate culture. Several research studies in addition to my own have shown favorable outcomes from a commitment to a values-based code of conduct. These outcomes include better profitability, a higher market value added (the Stern Stewart metric), a superior reputation (the Fortune survey), and excellent human resources experiences.

Continuing studies of 400 public companies by consultants Watson Wyatt Worldwide show a strong link between better shareholder returns and companies having superior stakeholder practices. The best practices include a focus on clear accountability and related rewards, a collegial and flexible workplace, and integrity of communications. Recent shareholder returns for companies having best practices averaged a 70% gain, while those with poor practices suffered an average 6% loss. In a previous study, the five-year return to shareholders averaged 50 percentage points higher for companies with superior practices.

The cornerstone of an ethical corporate culture is an appropriate code of ethics or conduct. Concern for stakeholders like employees, customers, and vendors can be expressed in a values-based statement of management's commitment. Intangible values like trust are critically important in today's global and technology-oriented environment.

Research shows that many codes of conduct are written and enforced by attorneys. They are mainly concerned with compliance with laws and regulations, rules, hierarchy, and sanctions. This fosters a mind-set that any behavior not specifically forbidden is acceptable. Legalistic codes of conduct are unlikely to provide the leadership necessary to attract superior employees, motivate loyal behavior, and result in long-term retention of favorable relationships with suppliers, customers, and other stakeholders.

On the other hand, a code that emphasizes proper values deals with setting examples, interpreting ethical principles, and structuring appropriate reward systems. But the code has to be well understood throughout the organization and not just be a slogan as appears was the case at Ford.

An ethical culture starts with clear and unequivocal goal setting at the top, spreads throughout the organization, and is reinforced through frequent use in everyday decision making. It results in improved goal orientation, higher productivity, superior teamwork, openness, and mutual trust. This kind of culture fosters decision making with a long-term perspective that avoids costly blunders like those at Ford and Firestone.

When was the last time your organization had an ethics audit or reviewed its ethics code and underlying values statement? When did it modernize them to reflect the changes in today's global and technology-oriented world?

Curtis C. Verschoor, CMA, CPA, CIA, CFE, Ed.D., is the Ledger & Quill Research Professor, School of Accountancy, DePaul University Chicago.