Preventing Misconduct in Business Will Prove Elusive, Report Says

By Steve Bates Nov 17, 2010

Making substantial improvements to U.S. corporate ethical behavior will require carrots and sticks, according to a new report by the Ethics Resource Center (ERC), a nonprofit organization.

The effort will require partnerships between government and private-sector compliance officials, as well as the recognition that regulators and enforcers must try harder to prevent and punish violations of U.S. laws, said the report Too Big to Regulate? Preventing Misconduct in the Private Sector.

The report grew out of the ERC Fellows Program. A group of senior ethics professionals meets twice a year to study and discuss issues that will affect businesses and the relationship between the federal government and corporate America. The phrase “Too Big to Regulate?” in the report’s title “refers not to company size but to a broader question: whether the U.S. government’s regulatory and enforcement mechanisms can keep pace with the lightning fast pace of change,” the report noted. The report focuses on the U.S. financial industry, but its scope includes other sectors with track records of misdeeds.

A variety of approaches will be necessary to deter illegal behavior and prevent employees from straying into the “gray area” of borderline conduct—and beyond—the report authors said. These approaches likely will never be as effective as desired. But there are steps that the government and business leaders can take to limit the damage.

In recent years, U.S. businesses have been involved in many high-profile misdeeds and scandals, including Enron, the financial meltdown, the West Virginia mining disaster, the BP oil rig explosion and many more.

There will always be bad actors, the report acknowledged, but corporations can do more to police their organizations and to minimize the need for the government to intervene.

“No amount of regulation or enforcement resources will eliminate all wrongdoing,” the report stated, “but there is little doubt that government and business share an interest in ethical conduct that gives investors confidence in the market’s inherent integrity.” Private-sector organizations and the government entities that regulate them can act in partnership to “help build ethical cultures in the private sector and reduce errant behavior.”

The report cited the government’s disadvantages in battling unintended ethical oversights as well as deliberate fraud. And it recognized that few criminal charges and almost no jail time have resulted from investigations into the actions that brought on the financial system collapse of 2008-09.

“There’s just too much fraud,” the report quoted a former U.S. Securities and Exchange Commission (SEC) attorney as saying. “The SEC could be 10 times as big and there would still be fraud.”

The report noted that in high-profile litigation and regulatory proceedings, government lawyers frequently are far outnumbered by the lawyers mobilized by the business being targeted. It noted the phenomenon of “regulatory capture,” in which “regulators begin to serve the interests of those they are supposed to regulate rather than represent the public interest.”

An inspector general’s report on the shortcomings of the former U.S. Minerals Management Service, now called the Bureau of Ocean Energy Management, Regulation and Enforcement, which is supposed to be responsible for inspection and oversight of energy companies, said that many government inspectors routinely accepted and discussed job opportunities with those they were supposed to monitor. Some inspectors even allowed industry representatives to fill out their own inspection forms.

A particularly thorny problem is that many business practices that Americans find abhorrent are not illegal and might never be. Practices that seem unethical, including actions by some mortgage brokers and investment managers to enrich themselves at the expense of uninformed home buyers or equities purchasers, likely won’t go away based on calls for higher ethical standards. “Behaving badly, it turns out, is not always against the rules.”

The report makes the following recommendations:

  • The U.S. Department of Justice should create an advisory group of ethics and compliance experts to provide counsel on ethics and compliance issues, and should establish a public-private partnership to identify measures to enhance corporate self-evaluation and reporting on ethics and compliance.
  • The SEC should create a similar advisory group and should work with business ethics officers to explore the possibility of annual ethics reports, similar to corporate social responsibility reports.

Steve Bates is manager of online editorial content for SHRM.

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