iPods, business ethics, and sleeping well at night

Healthcare Financial Management, Nov, 2003 by Kevin T. Ponton

My teenage son came to me, digital music player in hand, with the question, "Do you think Apple would replace this old iPod with a newer model if I sent it back broken?"

We discussed his question. Then I suggested an answer to the bigger question he had not asked--after all, his machine works perfectly; its sole "defect" was its age--with a fatherly introduction to the concept of fraud.

Then I turned to the front page of the New York Times Business Day section, where three of the five headline articles dealt with the New York Stock Exchange salary scandal, the arrest of a former Ernst & Young audit partner, and the HealthSouth scandal. The real irony was that the front page lineup wasn't all that surprising; reports or financial mismanagement are becoming more frequent, reaching into a widening range of business areas. As this goes to press, a dark shadow has been sighted over the mutual fund industry.

My reaction is always the same: "What was he (Richard Grasso, Richard Scrushy, Thomas Trauger, mutual fund late-market traders, who ever) thinking? Was Gordon Gekko's 'greed is good' speech in the film Walt Street so far off the mark?"

Would I have behaved differently in their situation? Would any of us? I think so. I hope so. But how differently? Why?

Howard Schilit's classic book Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports offers a theory on why fraudulent schemes continue to exist: they're financially rewarding, they're easy" to pull off, and the perpetrators are unlikely to get caught. Recent news headlines suggest a fourth reason: Those who do get caught tend to receive a relatively light penalty. Such incentives are so powerful that one could be forgiven for asking why anyone given the opportunity wouldn't participate.

The businesses we are all in--hospital administration, investment banking, financial advisory work, strategic consulting--offer myriad opportunities that force a person to decide between alternatives that occupy different places on the range of ethical behavior. The alternatives are not all black or all white, and those in the gray area cause the most anxiety and sleepless nights--at least for those of us who have an active moral compass.

I discussed that gray area with Jerry Widman, retired senior financial executive who spent two decades with a large not for profit healthcare system and who now serves as director for a number of privately held and proprietary companies in the healthcare sector. His observations parallel those I have heard from John Meehan and Mike Cottrell at Bon Secours Health System, Mike Kelly at Christus Health, and Jerry Judd at Catholic Healthcare Partners. Their years of experience in the business of healthcare delivery make their observations and comments particularly valuable in discussing the fine line between ethical business behavior and financial shenanigans.

Our discussions surfaced several rules of thumb that may help decision-makers sleep more soundly at night.

If a proposed issue or action gives you ethical qualms. discuss it with advisers you really trust. These advisers may be personal or professional, but they must be independent enough from you--personally and professionally--and strong enough, to disagree with you on the big and tough issues. Cultivate those advisers for their abilities, experience, and frankness. Don't hesitate to consult a "devil's advocate," someone who will rigorously shake and test your assumptions.

When in doubt about whether to disclose certain information or actions, choose disclosure. From an ethical standpoint, err on the side of more disclosure rather than less. Often the very act of disclosing an issue will reveal its nature and make the final decision easier.

If you are repeatedly seeking legal opinions to support regularly recurring business activities, you need to reconsider those activities. An activity based on solid ethical grounds usually doesn't need to be constantly reaffirmed. You shouldn't have to think excessively about whether an action is right or wrong; the right path isn't usually obscure.

Always listen to your gut. Force yourself to identify--actually write a list--the three or four questions about the issue that you find most difficult to answer: the ones you fear the most being asked by someone else. Then answer them. If your answers convince you, try them on your adviser. If they don't convince you, don't go any further.

Act in the organization's best interest. Set aside your personal self-interest if it is in direct conflict with what's best for your organization.

If your management and governance structures lack an inherent integrated ethical decision matrix. develop one. An embedded culture of ethical business practice usually encourages correct decisions throughout the organization's hierarchy, allowing mistakes to be addressed before they happen.

At the end of the day. you're the one who needs to be able to sleep peacefully. Regardless of what Sarbanes-Oxley says or doesn't say, regardless of what your legal advisers say, regardless of what your financial adviser says, if you can't sleep soundly, something is probably awry and needs to be remedied.