The ethics patrol - Management

Chief Executive, The, July-August, 1995 by Jeffrey C. Barbakow

A solid ethics program can yield long-term rewards, such as customer allegiance, a reputation for honesty, and better compliance with federal guidelines - all of which benefit the bottom line. Responsibility to make programs work begins at the top.

Imagine driving into work one morning and finding FBI agents wheeling file cabinets out of your corporate headquarters while TV cameras record the scene. That was the situation I confronted in August 1993, just three months after I took over as chairman and CEO of National Medical Enterprises, a hospital owner and operator, and predecessor of Tenet Healthcare, the second largest proprietary hospital company in the U.S.

NME was under investigation for illegal payments to physicians at its psychiatric hospital arm. The company eventually settled the case with the government and re-established its integrity, partly through a rigorous examination of business practices and the foundation of a formal ethics program that includes a full-time staff; training for all 68,000 employees; and board- and management-level oversight groups.

Some 93 percent of Fortune 500 companies run similar programs, including Nynex, Hewlett-Packard, Northrop Grumman, Federal Express, and Johnson & Johnson. Our experience - and theirs - has led to some conclusions about what works and what doesn't. The price of entry isn't cheap: Tenet spends $1 million annually on the program. But there are long-term, tangible returns on this outlay, ranging from stronger customer allegiance to more effective compliance with federal guidelines.

CEO INVOLVEMENT

The most compelling reason to establish an ethics program - and certainly the most difficult to quantify - is that a company's reputation has a direct impact on its success. The United Way learned this lesson the hard way: When its president stole more than $600,000 from the charity's coffers to support a lavish lifestyle, it took three years after his resignation for donations to rebound.

There are other pragmatic incentives to create an ethics program: Federal Sentencing Guidelines mete out stiffer punishments to firms without such initiatives. According to Gary Edwards, president of the Washington-based Ethics Resource Center, companies convicted of federal crimes - fraud, insider trading, or bribery - can have their fines reduced by as much as 95 percent if they show due diligence in attempting to prevent such misconduct through compliance programs. Conversely, an organization that has no compliance program in place - and that took no steps to prevent wrongdoing - could have its base fine multiplied. Managers also may be found personally liable for the actions of subordinates. The healthcare industry, like the defense and financial-services industries, increasingly is being held under a regulatory microscope. We designed our program to be a model for health care and, in fact, the U.S. Department of Justice has described our program as groundbreaking in its scope. However, our program is not industry-specific, and other companies could easily adapt it to their needs.

As with most aspects of corporate culture, establishing an ethical environment starts at the top. You, the CEO, must be personally dedicated to the program and invest your time in it. Companies known for their ethics and social responsibility are led by CEOs who are personally committed to the mission. For example, Gun Denhart, CEO of children's clothing manufacturer Hanna Andersson, based in Portland, OR, believes in participatory management and generous employee benefits, including child-care allowances. The company is known for its social activism, especially a program in which customers return used Hanna Andersson clothing for a discount on future purchases. Hanna Andersson then gives the clothes to charity. Starbucks, Ben & Jerry's, and Patagonia, too, have leaders with strong social convictions, and they know employees will follow their examples.

The ethics program in itself can be a good management tool. Short-term business goals often can collide with ethical concerns, but when employees are equipped with a thorough understanding of their company's values, they can respond to dilemmas more appropriately. You can, in effect, create an environment in which breaches of ethics are not tolerated, and employees who are basically ethical are given the resources to make the right decisions.

The best ethics programs include employee orientation and training, evaluation, and internal checks and balances. Tenet, which was created in March 1995 when NME merged with American Medical International, considers the $1 million it spends annually on its ethics program money well-spent. Included in the investment are four, full-time ethics office employees, ethics training workshops or review sessions for all Tenet employees, program consultants, an ethics orientation video, and "Standards of Conduct" guidelines distributed to every employee. Tenet's vice president of corporate compliance and ethics has broad authority and reports directly to our senior vice president for administration. A confidential, toll-free, ethics telephone line receives about 75 calls monthly, half of which we categorize as employee issues - callers with questions or complaints about compensation, scheduling, sexual harassment, etc. The other half is callers who are looking for clarification on company ethics policies, or who have questions or complaints about management style, conflict of interest, potential ethical misconduct, patient care, or other matters. Routine calls are resolved by our ethics staff, who look at company policies and procedures or direct the caller to existing company resources. The ethics staff has the authority and resources to investigate serious issues.