SEC Speech: The Right and Wrong of Board Oversight(P. Roye)
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Speech by SEC Staff:
Today's Ethics Yield Tomorrow's Behavior

by  Lynn E. Turner

Chief Accountant
U.S. Securities & Exchange Commission

Executive Ethics Forum
Gonzaga University
Spokane, Washington

September 29, 2000

The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of Mr. Turner and do not necessarily reflect the views of the Commission, the Commissioners, or other members of the Commission's staff.

I want to thank President Spitzer and Professor Walter Teets for inviting me and for the kind introduction. It is indeed an honor to participate in this inaugural Executive Ethics Forum of Gonzaga University’s Tilford Institute of Interdisciplinary Ethics. The University and its leadership are to be commended for assembling an outstanding group of speakers on this important topic.

Before I begin, I must of course state that the remarks I make to you today express my views only, and do not necessarily reflect the views of the Commission, the Commissioners, or other members of the Commission’s staff.

As I prepared my remarks, I glanced at the titles of the remarks of the various speakers: Breakthrough of Champions; Good Ethics Pay Off; Banking on Good Practices; Ethical Decisions Count; and Good Ethics is Good Business, to name a few. It struck me that these are statements that go without saying. They are what proven leaders take as a given, something that is common sense and engrained in our daily life. They are principles that have stood the test of time, as have the principles this great country was built upon.

Let me note a story about one of our country’s great leaders, President Abraham Lincoln. Abe Lincoln is supposed to have thrown a man out of his office after the man offered Abe a bribe. The bribe involved a substantial sum and Abe was really angry. His anger was directed at the man in question, but also at himself. He is reputed to have said,  "Every man has his price and he was getting close to mine."

Abe’s insight is worth remembering. None of us are immune to every offer of individual benefit. Unfortunately, unlike Lincoln, there are those who do not recognize that their price has been met until it is too late.

And that is why there are concerns about a culture that exists within some parts of the business community, concerns that bring us together at this and other conferences on ethics. It is a concern that there are those who choose individual economic gain at the expense of fundamental principles. There are those who feel a need to stereotype people and the roles they are put into. There are those who take advantage of the public, and inflict irreparable damage on the public trust; a trust that has been fought for and earned through the commitment and the work ethics of others. Indeed there are those whose moral compass reminds me of the captain of the Titanic. The compass on the bridge of his ship was shifting in direction, thereby signaling a warning that if a change in course did not occur, a tragedy surely would follow; yet he failed to recognize and heed the warning.

Most importantly, I have a grave concern that this emerging culture is creating an example that the youth of this nation is starting to follow.

Let me cite a few examples to put it in a proper perspective. Our economy in the United States is in a period of unprecedented growth and prosperity. And that economy is heavily dependant on the unequaled success of our stock markets, where one-third of this country’s wealth, 16 trillion dollars, is invested. Many Americans are dependent on their investments in that market, including young couples just starting out, single working moms trying to make ends meet and providing for their families, those who are retired as well as the average wage earner. That investment is in no small part due to the trust the public has placed in the business community and its leaders.

And yet a CFO Magazine poll, reported in October 1998, should give us pause when it comes to our comfort with the ethical behavior of some of our business colleagues. Asked about the need for action to address accounting abuses, two-thirds of the survey respondents agreed that something should be done. This despite the finding that current problems have less to do with fraud than with aggressive business practices. A good proportion – 45 percent – had been asked by a business executive to misrepresent financial results. Fully 38 percent of that group did so. But a whopping 78 percent had been asked to use accounting rules to cast results in a better light. Half of that group acceded to the request. Although that survey represents a small sample, the results substantially back up a survey conducted at a Business Week magazine CFO conference, which found that 55% of CFO’s had been asked to misrepresent results. Seventeen percent agreed to satisfy the request.

These numbers are astounding. The fact that such a high proportion of those surveyed had been asked to misrepresent financial results is distressing. That 78 percent were asked to use accounting rules to misrepresent the number is even more distressing for all of us. Requests to manipulate the accounting rules to misrepresent financial results appear to be considered a lesser evil. Such requests are apparently not viewed as somehow wrong, if you only "use the rules."

The fact that as many as half of my accounting colleagues, who were asked, "…use [d] the accounting rules to cast the results in a better light" is truly depressing.

Another troubling business practice is the issuance of incomplete earnings releases. These include earnings announcements that state earnings were $XX dollars, but that $XX dollar amount excludes a list of items management calls unusual or non-recurring. But since when are marketing costs, losses from new businesses on the costs of acquisitions unusual, nonrecurring or not relevant to a company’s financial picture and its stockholders?

And how about analysts who seldom, if ever, put a sell recommendation on a stock because to do so might cause a loss of the next opportunity for an underwriting or business opportunity? Analysts who perhaps don’t always do their homework but are more than willing to punish a company’s stock value if earnings estimates are missed by a penny.

And how about names like Cendant, Livent, W.R.Grace, and others that you are no doubt familiar with. Names that have been highly respected in the past but today you are more likely to associate with press reports describing massive restatements and investor losses running into tens of billions.

And finally, in recent years we have watched too often on television as business leaders are called before Congress and we learn of business practices that put the interest of a company and its management before its customers, before the public and in some cases before the welfare of our children.

Is it any wonder then that William Gomberg, Emeritus Professor of Management at the Wharton School of Business has observed that:

"The modern age is unique in that economics is allowed to override every other value…. [I] T is economics, whether we like it or not, that defines the life of the Western world today.  People may praise religion, but they work and pray for money. They argue politics, but they "vote their pocketbook."  And in a society whose primary value is money, economics, inevitably turns out to be ethics…."

But let me get to the point I want to make and why these examples are cause for serious reflection by each and everyone of us.

It is all too frequent today that you can attend a sporting event at one of your children’s schools and witness some pretty astonishing unsportsman like conduct. But the students have seen their role models on T.V. spit in the face of referees, or fans injuring players when they throw an object and hit them. So, it must be OK.

You see reports of cheating at our major universities, even the service academies, at a time when honesty, truth, and integrity no longer seem to be a priority.

A surprise? Not really. In America we have developed an educational system where our youth learn quickly and they learn their lessons very well. And from whom do they learn? From those in their peer group and those within their sphere of influence. And that sphere of influence includes all of us in this room.

When a student is taught how to use rules to their advantage, they are going to do so. When students read about a survey of Deans of Business Schools where the Dean would take an applicant whose family makes contributions over a student who earned the right to admission by working hard to make the grade, the student learns how to change black and white into gray, right and wrong into "every one does it." When a new college graduate goes to work and sees the CEO and CFO manage the numbers, that new employee has learned a lesson on what is acceptable in business.

Indeed, today’s ethics will yield tomorrow’s behavior. And that is what bothers me about a small, but seemingly growing culture in our business and financial community today. We are teaching the future business leaders of this country that a practice of nods and winks may very well be acceptable. Some believe that the "New Economy" brings with it "new ethics"; that covering up a problem is a viable option to fixing the problem and maintaining the public’s trust, when economic costs are involved.

The good news, however, is the young people of this country provide all the encouragement we need to believe that the future will be better, that the American model and bedrock principles will continue to work. An outstanding example of how our young people are showing us the way occurred on April 23, 1999, within days after the Columbine shooting. 70,000 young teenagers gathered in Michigan. They joined together to discuss how they could improve and contribute in a meaningful way to our daily lives and society. In that regard, let me share with you some of their sobering and striking written statement:

  • "When so many leaders of our society refuse to lead in truth,
  • When those who sell us goods do so solely for their own financial gain, despite the toll their "goods" might take on us,
  • When those who have shaped our society often hold no moral compass through which to guide us into the future,"

Let me stop for a moment before I continue. Who do you think these 70,000 teenagers are talking about? Doesn’t it include all of us in this room? Let’s continue.

  • "When the majority with celebrity influence take no responsibility for their position as role models and influencers,
  • When honesty and truth are scorned and manipulated by many leaders in high offices and integrity is regarded as weakness,
  • When character is mocked by the media and our leaders are afraid to take a moral stand because it might be unpopular,
  • When rebellion is the norm and seen as a right to be demanded,
  • When corruption in society threatens the very foundation upon which it was built,

It is necessary for us, as teens, to redefine our society and lay claim to our right to bring truth to our generation.

We take it upon ourselves to rise up and call our generation to a higher standard. A standard:

  • Not built by polls, but on principle,
  • Not based on what feels good, but on what is good,
  • Not built on what is cool, but on what is correct,
  • Not built on what is convenient, but on character,
  • Not based on what is easy, but on what is excellent,
  • Not based on what is popular, but on what is prudent,
  • Not built on Hollywood, but on honor."

This simple and yet profound "Teenage Bill of Rights" sets forth a standard that challenges those of us from the financial community, who are in this room today.

It tells us that our sons and daughters question our compass headings. That some of our leaders have created an image they do not like. But with leadership, the ship’s course can be changed and a collision with destiny avoided.

Some speakers before me have spoken of the need for leadership. That’s a great starting point. We need some fearless leaders who are willing to take action ensuring their own corporations have model codes of conduct and that they are more than written words. We need leaders who put the interests of their employees, customers, investors and the public first; leaders who deal with tough decisions with integrity and forthrightness.

And we need leaders who challenge those whose actions impair the credibility of the many who "do it right." Ones who, despite criticism they no doubt will receive, are willing to condemn those whose actions reflect on the credibility of the ENTIRE business community. And ones who are quick to admit a mistake when they make one, and then confront it and fix it.

We need to include in each and every code of conduct what Merrill Lynch Chairman Daniel P. Tully called the "New York Times Test" when he asked his employees, "… is there anything you do that you would not want displayed on the front page of the New York Times?" I can't say it strongly enough, if you are faced with a tough decision, do what is right the first time. It will never get easier to do the right thing, only more difficult. Oh, you might get away with it, but ask yourself, could you pass the "Mom Test." Could you call your mom and tell her what you are about to do and feel good about it? If not, then give her a call.

We need to see more private sector self-governance and ethical responsibility by those in the business community. For example, auditors and management constantly ask me to take some action to fix "the problem" with analysts. But why should the SEC be required to implement government regulations when the analysts should care enough about the serious loss of credibility some may be experiencing to fix their own problem? Or, why should Congress or the SEC have to adopt new guidelines when financial and business executives themselves should take a lead in stopping practices such as whispering your numbers to a select few analysts, or providing incomplete earnings releases to your owners, the investing public?

I believe as business leaders, you should take the lead in addressing these issues that confront us. This is not about what the government can do for you, it is about what you can do for your community and country.

Ethics and social responsibility are also about an obligation to play an active role in your community. The youth in this country are looking for business leaders they can admire and who provide a good example. They are looking for role models who are willing to take them under their wings and push them to be better citizens. I tell you they are looking for someone to extend a hand with something other than a gun or drugs in it.

And those of you in this room are just the people who can do it. You wouldn’t be here if you hadn’t already been recognized as leaders in your own businesses! But I challenge you to reach for more than that.

As a former business executive, I have known what success feels like in the business world, to be admired by your peers. But it pales in comparison with the feeling I had when I taught at a junior high school in a disadvantaged neighborhood. Going into that class and seeing the eyes of those youngsters, who were so eager to learn, and with whom I had a great time, left me with a feeling of accomplishment well beyond any successful business deal. And while the businesses I have been associated with have been sold or merged, those kids I worked with are still around, still having an impact on society.

And make no doubt about it, if as business leaders we fail to reach out, to set examples that the kids feel good about and can look up to, the chances increase that the hands the kids take will be ones that cost those kids dearly. And in the long run, it will cost you, me, our communities and our society dearly. Unfortunately, not so dearly as it will cost our youth.

Let me switch for a moment to one of the principles that has made this country great. That is that we are a nation of diverse people, from diverse backgrounds with diverse opinions. Yet for over 200 years we have been able to bridge the gaps that exist amongst us, taking the best ideas each of us offer, to build a stronger nation.

And yet in recent years, I have picked up the morning newspaper only to read about a young college student, tied to a fence and beaten to death, just because he is gay; the story of an immigrant who is gunned down at a bus stop, or the stories of children, right here in this country, who survive some days without meals, and who seldom receive the healthcare many of us take for granted.

And so I challenge you to be leaders who are supporters of diversity. As a former business executive, and auditor, I know that you can challenge those you work and live with in your communities, to treat those with a different skin color or different accent or a handicap, with the respect every American is entitled to.

Take the lead through your actions, not just words. Challenge those who stereotype classes of people rather than reaching out to them. Don’t be the bystander who silently watches a tragedy in the making. If you are, how can you not shoulder at least some of the responsibility for what you have seen?

I remember learning about a trash man in New York, who rode on the back of the garbage truck each night, but who felt he was a lower class person because of how people treated him. In the City, garbage men were stereotyped and looked down upon by many as being inferior. Yet I also remember when the trash haulers went on strike. The trash piled up in the streets for days and all of a sudden the citizens of New York really learned how bad it could be walking down the streets with the pungent smell and sight of trash everywhere. Almost overnight these people who had been treated like they weren’t worth all that much, like they were inferior, had the attention of the nation. In fact, they had a key and important role to play in New York, just like many others. While their job was different, it was necessary and just as important as the Mayor’s. Each job had to be done to keep the city working.

Everyone has a role, from the Chief Executive Officer to the clerk in the copy room. And everyone is entitled to respect for the job they do. Many an executive has been brought down when they lost sight of the contribution of others to the organization.

A second challenge I have for you is to reach out in your communities to those who need help, who are less fortunate. This is especially true today, as we seem to have fallen into times of a "me" generation. Everything is about "me," and how I get my wealth. There seems to be too little consideration for those who are less fortunate, at the same time that we as a nation have more wealth than ever before. More wealth, but less inclination to help those who need it.

Please, get involved with public service in your community, be it through the PTA, the city council or planning committee. Be a contributor and participant. Don’t be a passive bystander who whines and complains about the system but isn’t willing to make the sacrifice to find solutions or work toward a better way. Over twenty years in business have taught me that whiners and complainers achieve neither their potential, nor the level of happiness they could. And when they look around and find others have passed them by, they only have to look in the mirror for the reason why.

Your ethics and morals are not a light switch you can turn on and off as you choose. Rather they are a foundation upon which our values are built. Once a crack develops, it is only time before the house crumbles.

One thing you have not heard from me today is a discussion about "Business Ethics". That’s because the term "Business Ethics" conveys to the public and our youth that in business we practice a lesser level of ethics than is acceptable in general. And that is not a perception we want to convey, for perceptions become reality. Business ethics becomes a slippery slope, a slow trickle. It is like the dam on a lake where I used to go boating. Ten years ago the engineers noted a deviation in the lakebed. A few years later a small leak was found below the dam. The one small leak turned into several and eventually a wetlands. Today, the lake is drained, and the dam undergoing major reconstruction.

And that is just what happens to those in business who choose to make just a minor deviation to fix the current problem. Your actions begin with a trickle that invariably turns into a burst dam. And at that time there will be only devastation for you, your family and those who you have hurt. So let’s not think in terms of business ethics, but only the highest set of ethical standards that we all should strive for.


In closing, I want to return to a basic theme. Our first responsibility is with the young – school children, college students and young professionals. Our best teaching tool is our own example. If we do not set a tone of behavior that is convincing through our actions, we cannot expect those who follow us to do any better. In fact, they likely will do worse. If we are not good exemplars, we are the problem. If we cut the corners, why shouldn’t we expect the next generation to cut even more corners? If we demonstrate that "greed is good," we should expect the young to learn that lesson well. These lessons are, after all, easily learned because the payoff is so immediate and, today, so large. It is more difficult to learn and internalize that a correct ethical choice may lead to lost income or a lost job.

A willingness to consider participating in questionable business and accounting practices cannot be eliminated completely. Institutional structures can help those who want to take the right path, but they cannot eliminate the ability to violate principles if someone sets out to do so. None of the institutional structures will be enough to preserve either ourselves or our financial markets unless we commit ourselves to making the ethically sound choices when faced with difficult decisions.

I believe that most of us are able to recognize the right path. Even when we choose the wrong path, I believe we know what we have done. The later rationalizations ring false not only with others, but with ourselves as well. We need the "spine" to choose right over wrong and need to create institutional structures to help us make those choices.

Thank you very much.