PAINE: The company’s executives were stunned when they learned of early findings from a major study suggesting a possible risk of cancer from fiberglass. They immediately went into crisis mode. They gathered information from a wide array of stakeholders and debated every option extensively — even the possibility of exiting the business. They decided that even if the risks were still unproven, the company needed to disclose them to customers and employees. But they didn’t want to scare people either. Working with their lawyers, they came up with a creative program to indemnify the company’s customers against court judgments and legal costs associated with fiberglass-related injuries. In other words, Manville agreed to foot the bill for such claims. This example shows that lawyers can play a positive role in dealing with ethical challenges. The problem comes when you have lawyers who focus only on prohibitions and punishments, and don’t appreciate broader questions and different situations.
Earlier we were talking about the process by which soft norms become legally enforceable standards. The law department can help by anticipating this. So often you find lawyers asking, “Why should I care about ethics? Isn’t the law what’s really important?” My response is, are you talking about today’s law or tomorrow’s law? In many cases, today’s ethics are tomorrow’s laws, and if a lawyer sees what’s coming, the company can be better prepared, and then maybe it won’t be so overwhelming.
S+B: You were a member of the Conference Board’s Blue-Ribbon Commission on Public Trust and Private Enterprise. What were some of its key recommendations?
PAINE: In June 2002, we set to work trying to identify steps the private sector could take to restore confidence in U.S. capital markets and corporate America. We issued two sets of recommendations. The first, which came out in September of 2002, addressed the matter of executive compensation.
The second set, on corporate governance and auditing and accounting, came out in January 2003. Here we focused on board structure, including the controversial question of separating the role of chairman and CEO, ethics oversight, and the importance of independent advisors. For example, when a board engages lawyers for an investigation that might implicate company executives, it should not hire the company’s regular outside counsel, or any law firm that gets a material amount of revenue from the company. This sounds like common sense, but it’s not always the way things are done. We also suggested that boards should in some cases consider changing auditors; not just individual partners, but the entire audit firm.
Another big theme was how to encourage a longer-term focus in management and also among the investor community.
S+B: What are some ways we can accomplish this?
PAINE: One recommendation is that companies do more to cultivate investors that already pursue long-term holding strategies, such as pension funds. We also advised companies to put more emphasis on longer-term corporate goals and strategies in their investor communications. Although we did not get into specific proposals, we did recommend that policymakers consider tax policies to encourage longer-term investing. And we advised institutional investors to establish compensation systems that reward portfolio managers for taking a longer-term focus.
S+B: It is interesting how the desire to get people to become less focused on the short term is being addressed in a dialogue on restoring trust in our financial system.
PAINE: Do we want to live like short-term traders? That is an ethical question.
Measuring Ethical Performance
S+B: In the August issue of Business Ethics, Marjorie Kelly wrote: “…all the things CSR [corporate social responsibility] has been measuring and fighting for and applauding may be colossally beside the point.” For example, she admitted supporting Enron as a regular on the list of “100 Best Companies to Work For,” based on its policies on climate change, human rights, and even corruption. What do you think this says about the priorities of CSR advocates?