The prevailing corporate culture is based largely on greed and pounding the competition into submission, making it easy for businesses to turn a blind eye to the legal and ethical consequences of their actions, according to Georgetown University law professor Donald C. Langevoort.
The current financial crisis, involving banks, investment firms, insurance companies and others engaged in high-risk, high-reward behavior, Langevoort contends, demonstrates that corporations learned little from the meltdowns suffered by firms such as Enron, Tyco and WorldCom earlier this decade.
“There was a market shakeup in the 1990s involving technology companies, resulting in a few big winners and many smaller losers. And that is what happened with the current crisis — there was a shift in judgment and decision-making in response to intense competition, with firms willing to risk damage in return for big rewards,” Langevoort, a former special counsel with the Securities and Exchange Commission, said in a lecture delivered at Sage Hall on April 13.
The nub of the current crisis is that institutions juggled their books, and the risk they withheld was not fully disclosed to shareholders or regulators, he said, raising legal and ethical red flags regarding the fiduciary responsibility and legal obligation to disclose potential hazards.
Meeting such obligations goes against corporate cultures, which favor “greasing” the profit-making machinery while limiting the “grit” applied by auditors, regulators and lawyers — especially those outside the inner circle, Langevoort said. “The faster a business moves, the more grease is necessary, because without grease the machine shuts down.”
And by diffusing fear, anxiety and risk — making threats less important — while rationalizing a questionable course of action, the culture is more productive. As a result, said Langevoort, businesses embrace “ethical plasticity,” hiding ethical and/or legal issues until it’s too late to deal with them in-house.
Among the justifications made by corporations and cited by Langevoort are “cheating is for the greater good,” and “we are doing God’s work” – an oblique reference to a claim made by former Goldman Sachs CEO Lloyd C. Blankfein in a Nov. 2009 interview with The Times of London. Some firms denigrate legal and ethical norms as outdated, ineffective, or stupid, while others promote a philosophy of “We have to get them before they get us,” in referring to competitors, Langevoort said.
So what can be done to get corporations to toe the line? Langevoort says outsiders such as lawyers or auditors, visiting a firm for the first time, should listen carefully to what they hear from executives. “How important are loyalty and cooperation?” he said. They can look good at first glance, but can be misleading by masking a broad belief that the ends justify the means, he adds.
Success can be misleading, too, Langevoort suggests, noting that high peer rankings are impressive but don’t include what has been ruled out, or rationalized, in the drive for supremacy.
On a more positive note, when asked by a member of the audience to describe an ethical, honest company, Langevoort said that this type of organization provides training in ethical behavior for its securities salespeople, brokers and other employees. “And while some rationalizations may be correct, there must be controls held by an outside group, such as lawyers, auditors or corporate directors,” he said.
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