Monday, March 07, 2005

Ethics - Public and Private

This evening as I was driving back from the airport, I was listening to Dennis Prager - who is often a thoughtful guy. But tonight he missed. He was upset that Boeing had fired their CEO - Harry Stonecipher. He kept referring to "corporate fascists."

Stonecipher and a senior executive were having a consensual affair and the board disapproved. Prager was bothered that a) the board took the action and b) the unnamed female was not also terminated. As someone who has served on several boards I understood the action immediately. To understand the situation one needs to understand at least three things. First, Boeing's previous CEO (Phil Condit) was terminated, in part, for some ethical issues. Second, there is a difference between the CEO and every other position in a company - the CEO to be successful needs to operate on a higher level. Third, transparency demands some things of companies that were not demanded even a couple of years ago - and that is ultimately positive.

Let me explain. First, Boeing's last CEO was terminated and two others were sent to prison for some serious ethical lapses less than 18 months ago. Image here is important and the board understood that. For a company that operates on many public contracts, this kind of breach needed to be responded to clearly and without equivocation. Stonecipher was hired as the company's chief ethics enforcer. He admitted he had screwed up. But the board had to take action. Not acting would have further jeopardized the fortunes of the company.

Second, the CEO position requires different standards of behavior. Prager decried that a CEO whose success was reasonably clear (stock price and profits up) could be fired for private (and consensual) acts. Unfortunately the CEO needs to operate in a way that does not call into question either his company or his team. Indeed, the female did not report directly to him - but his relationship with any senior employee brought into question his judgment in other areas. My suspicion is that if this had been between the CEO and a woman outside the company the board would not have acted. But this kind of breach was just too much to bear.

Third, the examples of Adelphia, Enron, and a raft of others has brought us to higher standards of disclosure and to establishing some penalties for behavior which might have been accepted in earlier times. Last Fall I attended a Price Waterhouse Coopers seminar for board members of public and private company audit committees. There were lots of discussions about the higher standards of disclosure required under law (Sarbanes Oxley or SOX or SARBOX for example) - but even more important was the standard for key personnel to operate on a higher ethical standard. There is still a lot of confusion about how to work in the new world - reporting is perhaps too onerous for the cost benefit of what society gets. But remember the example of Benjamin Graham - who began to call for higher levels of disclosure while still at Columbia in the 1920s and 1930s. Those accounting standards - which ultimately evolved with the development of standards boards like FASB and government agencies like the SEC - encouraged the democratization of investing. Firing a CEO who has such poor judgement as Stonecipher seems to have had is not "corporate fascism" it is more a recognition of current standards of behavior and sound judgment by a board.

The oddest thing about this affair (pun intended) is that it seems that a higher standard was applied to Stonecipher than to Clinton. But what else is new. Think of all the laws that Congress exempts itself from.

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