The Federalist Society

Corporate Responsiblity, Business Ethics, and Professional Responsiblity

Corporations, Securities & Antitrust Practice Group Newsletter - Volume 3, Issue 3, Winter 2000

February 1, 2000

Anthony J. Horan, William Allen, Charles M. Elson, Edward Labaton, Frank Newman

Following are excerpts from a panel discussion on corporate governance from the Fourth Annual Conference on Corporate Governance, which took place late last year at the Cornell Club in New York City.

Mr. Horan (Moderator, Secretary of Chase Manhattan): This particular panel is entitled, "Corporate Responsibility, Business Ethics and Professional Judgment," and the description of it, I think you will recognize, covers a very wide realm, and our speakers are going to cover it from a number of different facets. We are going to approach it in a way which is both alphabetical and thematic.

William Allen will start this session and, as I am sure all of you know, he is currently the Director of the New York University Center for Law and Business, and from 1985 to 1997 served as Chancellor of the Court of Chancery of the State of Delaware, and authored many opinions that we are living with today.

Judge Allen: First I want to make five introductory points.The first point about business ethics in our market system, and how it impacts upon professional judgment, is the critical importance of a social environment committed to ethical action for our market system. The world has forcefully been reminded over the last 10 years of a number of political and economic facts: (1) that markets are enormously superior to systems of administered allocation of capital, labor, and goods and services; (2) that markets are embedded in law, and that law is embedded in social institutions and social norms; (3) efficient markets cannot exist and function without a great deal of social infrastructure.

The law supplies a lot of that infrastructure. As we see market economies, for example, in the former Soviet Union fail, fail to begin to develop, we see the effects of a lack of legal protections for property, the lack of clear property rights, the lack of law of contracts, the lack of a legal system governing monetary and banking relations. Especially, we see the lack of courts that are honest in applying announced procedural and substantive law. These are legal prerequisites to an efficient market economy, and they are social conditions.

Equally important to an efficient market economy are supra legal conditions of social solidarity. These conditions must allow individuals in the economy to make investments in relationships and in opportunities that are open to some degree of opportunism. We cannot perfectly contract and protect all risks, so that our investments are usually open to some degree of opportunism on the part of the counterparty. So what we socially need in order to have an efficient economy is an expectation of honesty and fair dealing. Thus, the cultural capital that makes markets work includes shared moral beliefs among the population.

Now, these supra legal constraints on action that are derived from concepts of right action are reinforced in lots of ways — at home, from religion, concepts of honor, concepts of civic duty, of religious, aspirational obligation. They come in many parts of our social life, but together, they constitute a moral background or an ethical background to the way that we do business, and it is important to us collectively that there be a appropriate moral atmosphere, not simply because we will then be better people in some deontological or moral sense, but because then our markets can produce goods and services more efficiently.

So what is the core ethical problem that we have in the economy? It seems to me it is this, in business and professional life, conflicts arise when we find conflict between the requisites of our social role and the demands of our individual morality. What is the extent to which I am obligated because I am judge or CEO to do what that role requires, as opposed to what I intuitively feel is right?

I think that for most business questions, there is one utilitarian answer, and it is for the most part, the answer that the law gives, and it allows individuals in a role to think about the longterm consequences of their choices. That answer recognizes that business as a social entity will only thrive in the longterm if it reflects in some fair way the moral conceptions of the various groups that support it, the various constituencies. So that if a business, if a CEO, makes shortterm profit maximizing decisions that are morally repugnant to the population that supports the institution, in the longterm that business is going to pay a price. Thus profit seeking and ethical conduct may coincide in the long run.

We seek to avoid a newspaper story about employing underaged workers for less than adequate wages in Third World countries in part perhaps because we have an inherent sense of moral constraint, but I think in large part for utilitarian reasons. We recognize that when that newspaper story discloses that our goods are manufactured in this way, we will pay a price in the market. Thus, there is a utilitarian principle open to most business people in looking to the long-term to solve certain kinds of ethical problems.

But that principle doesn't solve the toughest ethical problems, and those are problems in which the utilitarian answer does not answer for the individual. For example, if you are a business person in the Third Reich, or if you are business person in a society that recognizes the legality of slavery, that may reflect the fact that the general population really doesn't think that slavery is morally wrong, or that incarcerating and killing Jews is morally wrong. So that a strictly utilitarian perspective in such a place may not dictate what we think of as ethical action. It may not hurt your institution in the longterm to engage in behavior, that you personally find it difficult or impossible to accept.

These are the deep ethical problems to which utilitarianism doesn't offer an easy answer. I thought when I was a judge: what happens if you are confronted with a case in which the law requires answer A and you feel very strongly that answer B is the right answer? And the fact of the matter is that the law, as the other lawyers will attest, the law is sufficiently opentextured that this rarely happens in practice.

But when such a case arises, what does a moral person do? What are your obligations to your role and what are your obligations to your self? And if they conflict, how can you resolve them? Well, this is a question for a saint or a philosopher. As a judge, it occurred to me that the only thing that you could do with fidelity to both roles is to resign. If you cannot do that which the role demands of you without offending your personal morality, you have to evaluate what other course is open to you. You might be willing to sin against yourself at some level, but at some other level, if you can't, then resignation is the only answer.

The last point I want to make is that we cannot legislate the resolution of these problems. These problems are inherent in language and in the complexity of our moral beliefs. It is foolish, or it seems to me foolish, to try and legislate them with highly detailed codes of conduct.

Look for example at the legal profession, which I am a member.

At the beginning of the century, or at the end of the last century, we lived in a different social world, largely only men were lawyers, only white men were lawyers. They largely came from the same social class, it was a closed profession. And there was a lot more social solidarity in that profession than there is today. Ethical questions were dealt with by very general principles, the way a "gentleman" would behave, which left a great deal to discretion and working out.

Throughout the course of the 20th Century, the legal profession has moved more and more towards a set of rules for "ethics" that begin to look like the Internal Revenue Code, and they trigger conduct of the same type as people who are engaged in tax avoidance. That is, people seek to read them technically and understand their technical thrust, but don't engage them on a deeper philosophical level. We lose something when we turn ethics into "rules." Legislating these ethics tends to rob people of autonomy and ethics at its real core.

Mr. Horan: I think that sets the stage for some interesting further discussion, and there is even a political point that comes about in that commentary, because to the extent that one might be living with more generalized rules, and one has an oversight structure, one has to rely upon a group of people who act in a review capacity, be they judges, or be they high school principals who would administer general standards in a way that would not be encompassed by detailed rules. And are we comfortable as a society relying upon that type of discretion being devolved to various power groups, or do you want lots of detailed rules set more centrally?

Charles Elson is our next speaker. He is Professor of Law at Stetson College in St. Petersburg, Florida. He is of counsel to the Tampa law firm of Holland & Knight. He has been active in a wide range of corporate governance activities, and has written extensively on the subject. He has served on the National Association of Corporate Directors and on number of different commissions. He is also director of three different corporations, Circon Corporation, Sunbeam Corporation and Nuevo Energy Company, all of which gives him a particular perspective on this issue.

Dr. Elson: First of all, I will start with some fundamental assumptions. Firstly, there is absolutely nothing wrong with a corporation being ethical and complying with the law. Nothing wrong with it, it is absolutely the right thing to do. It is one's responsibility as a citizen, and a corporation is, in effect, a citizen, more or less. And, secondly, from an economic standpoint, interesting enough, ethical behavior is good for business and, ultimately, shareholder return. A quick profit to be made by acting unethically, or illegally, in the long run is offset by legal penalties, obviously, and the bad will that ultimately affects the business' ability to attract and retain suppliers and customers.

Fundamentally, bad behavior, unethical behavior is bad for the business in the long run. You might get a shortterm kick from the unethical behavior, but in the long run, it makes it much more difficult to conduct business. People don't like to deal with unethical people. Why? Because the fear is that the unethical behavior will be directed towards those with whom you deal, and you end up the loser in that relationship.

Starting from that premise, that unethical behavior is not good for the conduct of the business, the big question then comes up: if it is bad business, why is there so much unethical behavior going on in business today? Or is there all that much? And, more importantly, how do you make a corporation ethical?

Traditionally, the answer has been the threat of legal liability to the corporation and now, potentially, the directors themselves, who manage the corporation on behalf of the shareholders. Like anything else in life, we have law and the violation of a law results in a penalty. The penalty here for violation of law is the penalty to the corporation and, potentially, those who steward the corporation. There have been two major developments in the area in the past several years. First, the federal sentencing guidelines were developed, about ten years ago now, that suggest that if a corporation engages in illegal conduct, the way to avoid substantial penalties to those involved, or one way to reduce the penalties to those involved is the presence of some program to prevent illegal conduct on behalf of the corporation: a compliance system, in effect, within the organization that was designed to prevent the company from acting illegally.

The second development in this area legally has been the Caremark decision. That decision was authored, of course, by then Chancellor Allen. The Caremark case, which was a landmark in this particular area in Delaware law, and certainly has become a landmark in the general corporate law, suggests that boards of directors have the obligation to ensure that those corporations on whose board they sit comply with the law, that they establish a mechanism within the organization to assure that the corporation is acting in compliance with applicable statutes and standards.

The point of Caremark, I think, or at least the way I have read Caremark, was that there were effectively two obligations in Caremark, one was aspirational and one was liability related. The aspiration was that there should be compliance systems created within organizations by the board to ensure legal conduct. Liability for failure to set up those systems was pegged at a slightly different level. The aspirational obligation created a business judgment, if you will, within the organization with respect to how much compliance one should establish. On the other hand, liability for the directors was pegged on the absence and complete failure — sustained and systemic failure, as I recall from the ruling — of establishing any sort of compliance program. So you had effectively a liability standard which was much, much tougher to get at than the aspirational standard.

I think the difficulty has arisen in the interpretation of the Caremark ruling. The practical response to the ruling has not been to separate aspiration from liability, but in fact to merge the two. Managers and directors have panicked over the threat of liability, and have gone on sort of a compliance binge, so to speak, within the organization. A number of businesses have been set up just to aid corporations and boards in their compliance programs, with the idea being that setting up the systems within the organization will potentially avoid liability for violation of law for the board. In other words, this threat of liability to a director created within the organization giant compliance mechanisms to, in effect, prevent illegal conduct and, some would suggest, even more importantly, to protect the directors from liability for the illegal conduct.

The question, though, that comes up is whether this threat of external force, be it from an interpretation of Caremark or from the federal sentencing guidelines, and the resulting liability for the corporation or its directors, actually works to alter behavior. Are corporations more ethical today than they were before? I think the answer is, unfortunately, no, it really hasn't worked.

I think what has happened instead is the creation of a very large scale checklist because of a fear of legal liability. In other words, if we go through these various procedures, we will have protected ourselves from liability later on if, in fact, there is a violation of law. Many, many hours, thousands of employee hours, certainly thousands of consultants have been devoted to this particular task. We have seen the rise of large scale corporate compliance bureaucracies in many corporations, and the question is, has it worked? And I think a lot of people would say, no, the impact of this bureaucracy hasn't been all that substantial.

I think the point of a lot of these bureaucracies in a number of organizations is to limit the directors' and the corporation's liability for ethical and legal violations. The presence of the mechanism protects the corporation and the directors, but it doesn't necessarily stop the unethical behavior, and that is the real problem.

I think that is where the system, in fact, kind of has broken down a bit. If something goes wrong, the director can say, "Well, look, we had a compliance system, we did our job. Sometimes things just happen." In other words, the system was created not necessarily to ferret out the fraud, but to protect the company from potential liability.

So, where do we go from here? How do we create ethical behavior within an organization? I am not saying anything is terrible about Caremark (I think it was a great ruling). But the difficulty is how it has been interpreted.

I think you have to go back to our first premise: that unethical behavior is just plain bad for the business in the long run. Unethical behavior isn't terrible because it is unethical; it is terrible for the corporation because it damages the corporation in the long run.

But who is the corporation? Who creates this unethical conduct? A corporation isn't an organism that you can feel or touch. A corporation is simply a collection of human beings. How do you make the employees of the corporation ethical and vigilant?

I don't think it is going to happen through the creation of large scale bureaucratic mechanisms. If you look to recent history, you had an entire nation predicated on large scale bureaucratic mechanisms: The Soviet Union. It didn't work. You can have large scale mechanisms in place, but they don't necessarily create the conduct you are looking for.

Ethical conduct is something that comes from within. It is not something that you can create through the threat of a liability on the outside. It has got to be a part of an entity's cultural underpinning. It must be something that exists within the ethos of the organization itself. It is not something that you can legislate; it has to come from within the individual employees.

A corporation must make it in the employees' interest, personal interest, proprietary interest, to act ethically and, more importantly, not to tolerate fraud within the organization. If there is someone who is acting unethically, there needs to be someone saying, wait a second, this person is acting unethically, we have got to do something about it.

But how do you do that? How do you create a culture where people (a) act ethically, and (b) expect others to act ethically? I think you have got to make them proprietors with something in the longterm to lose if the corporation itself or fellow employees act in an illegal or unethical fashion. How do you make them proprietary? I think it comes down to broad- based ownership within the organization. In other words, those who work in a company shouldn't necessarily just be employees, but they should be proprietors, too, owners of equity in the organization

I don't think that equity ownership by employees is necessarily the solution to unethical behavior; it has existed since the beginning of humankind. I do think, however, it is a start in changing or reforming the culture within the organization itself a little bit.

The National Association of Corporate Directors commissioned a blue ribbon panel on coping with fraud and other illegal activity on which Ed Labaton and I served, and in which Chancellor Allen was a helpful participant. This panel came up with some recommendations in this area, and one of them, interestingly enough, on preventing fraud. It was, I think, a little controversial at the time. It recommended creating within the organization an ownership mentality through equity ownership.

I think that we need at this point to rethink a little bit the federal sentencing guidelines, and I think we need to rethink the present view, present popular view of Caremark. We need to go back to Chancellor Allen's original intent in Caremark as opposed to how, in fact, it has been interpreted today and those who have tried to comply with it, and go back to what I think he was doing initially in the opinion, in thinking about ethical behavior.

Mr. Horan: Next we are delighted to have Edward Labaton who has been practicing in the corporate world for many years. He has been active in a wide range of professional activities and in many different bar associations. He is an elected member of the American Law Institute, and he will comment from that particular perch of experience on this topic.

Mr. Labaton: I might note for those who don't know me, I also primarily act on the plaintiff's side, and my firm was one of the lead counsel in the Caremark case. This case came up, in case you did not know, on a settlement and a fee application. I confess that the first thing I read was the last paragraph, which is the fee awards. I think the Caremark opinion was terrific in all respects, including that one.

As Tony stated, I have been actively attending American Law Institute meetings for about 15 years, and I was present in 1990 during one of the most important debates in the corporate governance project, which is probably the most important project undertaken by the ALI in the last 20 or 25 years.

The debate took place on May 16, 1990. There was a motion made and the sponsor indicated that it was difficult to understand why his simple motion had not been readily accepted by the reporters. At the end of the debate, which consumed most of the morning, the motion carried by a vote of 193 to 160, which was a very large audience for the ALI, despite the fact that the reporters stood fast on their proposal. Four of the five very distinguished reporters actually spoke in opposition to the motion.

The motion appeared to be almost trivial. It sought merely to provide that, in response to an unsolicited tender offer a board could block the tender offer, unless such action would disfavor the longterm interests of the corporation, in addition to the interests of the shareholder.

The debate was, in tone and in manner, courteous and civil. It was erudite and articulate, but it reflected a deep division within the Institute. Ernest Sergeant, who was a distinguished Boston corporate lawyer, and a partner in the firm of Ropes & Gray, set forth the case against the motion, and I will quote. He said, "Our capitalist system of corporate accounting is predicated upon directors being held accountable for acts contrary to the interests of stockholders. It is also a principle of our corporate governance that shareholders have the right freely to dispose of their shares and to respond as they see fit to tender offers presented to them. To give directors the unbridled authority to block a tender offer because of their individual views as to the role of the corporation — as to the role the corporation should play with respect to social, business, economic, environmental and other matters that are not related to the interests of existing stockholders is, I believe, illadvised."

Beavis Longstreth, a man not given to overstatement, who had served on the SEC before becoming a partner with the Debevoise & Plimpton firm, said that the adoption of the motion would, in years to come, be viewed as a watershed event, the point at which the traditional orthodoxy of the corporate purpose in the U.S. shifted away from the primacy of corporate gain.

As I said, the motion carried. In fact, the principle underlying the motion had been fundamentally endorsed one year earlier by Chancellor Allen and the Delaware Supreme Court in the Paramount-Time case.

Insertion of the words "the corporation" was, of course, not superfluous. If it were, it would have been unnecessary and the motion would not have been proposed. It clearly had the effect of creating a dual obligation on the part of directors, placing them in the position of a possible conflict. What happens when the interests of the corporation diverge from those of its shareholders? Can directors owing an obligation to the corporation also represent the interests of the shareholders?

In the 1989 Paramount-Time case, which I think most of you are familiar with, Chancellor Allen and the Supreme Court emphasized the corporate interest in effectively preventing Time shareholders from deciding for themselves whether to take the opportunity to receive $200 for their share, a price that Time Warner did not achieve until 1998. In that 10 year period from 1989 to 1998, the Dow Jones Industrial Average quadrupled, and Time Warner stock remained below the price that Time shareholders had been offered by Paramount. In other words, the cost to the shareholders was billions upon billions of dollars.

The primary concern expressed by Time's outside directors was to preserve what they phrased as the "Time culture," which they felt was built on a foundation of journalistic integrity. They feared that a merger with an entertainment company like Paramount would divert Time's focus from news journalism and would threaten the "Time culture." So they bought Warner, installed Steve Ross as President and, as we all know, Time Warner has remained focused on news journalism.

I would like to make an analogy to another event that happened in the 1980's. The New York Post had been a staid, consistently liberal newspaper, but its owner got tired of losing money and sold it to Rupert Murdoch, who immediately changed the paper's culture to a splashy newspaper, anything but liberal. Many New Yorkers, including myself, have regretted that sale. But no one suggested that Mrs. Schiff, the owner, did not have the right to decide how to dispose of her interests. The difference with the Post situation is that there was one owner, whereas Time was owned by thousands of shareholders, including pension funds and other institutions, all of whom were told that the directors could deny them the right to decide what to do with their stock, and it cost them, as I noted, billions of dollars.

The impact of this has been felt in many state statutes since then. The New York statute was adopted and in addition to the interests of the shareholder, the corporation can now, in response to a tender offer, consider the corporation's current employees, the corporation's retired employees, the corporation's customers and creditors, as well as the ability of the corporation to provide goods and services to the community. Pennsylvania has a statute which gives directors equal power. The result of this is that a shareholder's interests is now substantially diluted and as a result, the value of their shares in corporations is less than it would be otherwise.

Another section of the principles of corporate governance is dealing with the right of shareholders to decide for themselves whether a derivative suit should go forward. The ALI principles comment that recognition must be given to the fact that shareholders are the owners of the corporation, and as such cannot be excluded from decisions in matters that affect them.

The aforementioned state statutes and ALI principles as adopted effectively deny shareholders from having a significant voice in the matter that is most important to them, what they do with their money, and it makes the corporation, in effect, a new sovereign. A shareholder's right to sell their stock is much more important than the right to decide whether a derivative action should be dismissed.

I also suggest that institutional investors, some of whom are present today, ought to focus on the importance of protecting the rights of the shareholders and to refocus the obligation of directors, so that their primary, perhaps their sole obligation should be the interests of shareholders. These interests should be considered in both the short and long-term perspectives. The use of "the poison pill," developed by the Delaware Court, to protect shareholder interests is certainly appropriate. Other defensive measures which increase the powers of the shareholder are also appropriate. It is, however, ill conceived to have the directors wear several hats when determining to whom they are obligated. The result would be a violation of fundamental principles of the laws of agency and trust. Thank you.

Mr. Horan: We will move on to our last panelist, Frank Newman, who is Chairman and CEO of Eckerd Corporation, one of the largest drugstore chains in the United States, with almost 3,000 stores in 20 states.

He is a Director of Joanne Stores, and AmSouth Bank Corporation, among others, and active in educational and humanitarian efforts. He was the recipient of the AntiDefamation League's 1998 Man of Achievement Award. His experience in the business world includes the always strenuous effort of steering his company through a merger with, in this case, J.C. Penney, and so we look forward to his comments now from the perspective of the CEO.

Mr. Newman: You can come down with me from erudition to experience, since I believe my role on the panel is to represent reality rather than theory. I think of myself as the sacrificial CEO, if you will, of this group. The view from the competitive cauldron is not just personal experience, although, clearly, that is the perspective that I hope to give you, but also what I've gained as a director and through the network of CEO's with whom I interat.

Let me start off with some assumptions so that what I say will not be misconstrued, because there are some issues of degree that I think are very important here. But, overall, I think every CEO would agree that corporations as individuals must be good citizens. Failure to do so, in a very practical sense, invites legislation and regulation. And on a higher plane, in a capitalist, free enterprise system, corporations, rather than the state, become the primary institutions for providing much of the social fabric, including employment, investment, and very often health care and retirement pensions. They are the backbone of the system, the means by which individuals can collaborate to create value and build both personal and institutional wealth far beyond their ability to do so individually.

As the essential institutions of the system, corporations must also fulfill the same role as we expect from individuals with regard to legality, ethics, and personal constraint on their actions. Because of their size, they have the power to make either significant contributions or to detract significantly from the social fabric. This discussion of how well corporations perform that role is appropriate because it is a suitable role for corporations, and even more so, for how the other influences on corporate behavior, such as board influence or social pressure contribute to that appropriate corporate behavior.

The questions posed in the panel brief suggested that part of the purpose of this discussion was to attempt to benchmark what progress had or had not been made over the last decade on corporate ethics and responsibility. And so I am going to try to address the three specific areas in which that question was asked, and then talk about some of what I think are the disconnects that exist within the overall system that may inhibit progress.

First of all, on the issue of diversity, I think there has been huge progress made over the last decade and beyond, especially with regard to gender diversity. Management has absolutely bought in to the value of diversity. There is however, an important instructional element as to why management has bought in to this concept. I do not think management has bought in because of some firm adherence to a philosophical belief in the fact that diversity is simply right, even though most CEO's I think would believe that personally. Rather, as Judge Allen stated, management recognizes value in the utility part of their role. The buy-in has occurred because most corporations understand that they deal with a diverse customer base and that it is critical that both management and directors reflect the diversity of that customer base in order to make the effective decisions that will result in positive change within the business.

So the buy-in is there and the progress has been tremendous. It would be wrong, however, to construe that progress as having been simply adherence to some greater social good. It is more accurate to recognize that such progress exists because diversity has satisfied the personal and moral, as well as utilitarian roles of the CEO in terms of furthering the needs of the business.

With respect to the issue of community philanthropy, I have to object to the form of the question. I have to believe that my good friend Professor Elson must have written these, because these questions have a certain bias. Here is the question — In its zeal to, in quotes, "look good" under these standards, to what extent have companies created a whole new set of problems involving ethics and judgment? How does one strike a balance between board diversity and expertise? Or, and this is the one that got me, or between community philanthropy and management selfdealing or selfaggrandizement?

Are those the choices? It is either community philanthropy or management selfdealing? I think there is a shade of gray in between those two that probably has merit.

When it comes to community philanthropy, the traditional companies do a respectable job. By traditional, I am referring to established, mature companies with consistent giving programs. But there is one overriding issue that I think impacts most corporate involvement. Most use it as part of their public relations mechanism, and the reason they do that, again borrowing Professor Allen's term, is to satisfy their utilitarian responsibilities as CEOs, and it is one of those nice areas in which community needs and corporate needs come together. For a company to be seen as being a valuable and responsible participant in the community, and to be seen as supporting various charitable purposes, a CEO can justify the giving on the basis of this being good for our business because it enhances the brand, it enhances our reputation as an organization, and could, therefore, lead to more positive business prospects for us in the future.

But, again, as with diversity, I think it is important to understand that where this growth in participation exists. It is not simply the result of some higher calling. Rather, it is the happy result of a confluence between the needs of the community and the ability of the corporation to benefit from participating in those same needs.

There is an area, however, in which I think community philanthropy is notably lacking in our corporate community and that is with many of the very popular companies in many of the high tech industries. I recently chaired our community United Way campaign, and I can tell you that the high tech community, by and large, were noshows. Those are companies that are responding to a Spartan corporate ethic that , as it was was explained to me, believes that the purpose of the corporation is to make money and to satisfy its shareholders, and through that provide income and employment for its associates, so that those associates can then participate in charitable activities. But to have the corporation divert its funds from the reinvestment that will result in more jobs and more employment and higher wages, to divert that and put it directly into community philanthropic enterprises would be a misuse of the corporate funds. Essentially, their focus is on encouraging employees to contribute as opposed to taking its capital and contributing it.

The extent to which this philosophy becomes more commonplace as high tech companies make up a larger part of the corporate community remains to be seen.

With regard to ethical compliance, I would like to break this into two sections, because I think there are distinct nonfinancial ethics and financial ethics. And on the nonfinancial ethical compliance, I must, again, object to the question. Now, just listen, objectively, to the way this question is phrased. When does corporate "compliance" become technical lip service to avoid liability, as Charles suggested, as opposed to a serious effort to ensure ethical conduct? What this question essentially says, is that it is not enough to put the programs in place and it is not enough to make sure that your employees are ethically compliant, but it is only if I bare my heart to you and show you what is on the inside of my soul that this is a worthwhile pursuit.

But notwithstanding that, I think that there has been good progress made in this area and I want to make that same parallel between what is also good for the utilitarian role that the CEO performs and this happy confluence with what is good for the larger community. It is more than technical lip service, I can tell you. Management has bought into this. When I record sexual harassment and violence in the workplace training videos for our associates, or ethical standards or illegal payment videos, it establishes a standard not just for them, but also for me. Clearly, it becomes more than lip service. It is almost impossible, I believe, for a corporation to invest in the development of those programs without having an impact on their behavior. Corporations cannot be seen by their associates speaking out of both sides of their mouth. The mere act of putting together compliance programs does have a salutary impact on the organization and on the activities that occur within that organization. People are very rule conscious in organizations, and when you establish policies and procedures, they are typically followed.

The corporation's motivation stems not solely from the CEO's subscription to a higher calling. The impetus for the investments made in compliance programs are driven in part by the enormous cost and embarrassment that results from the failure to do so. I know of no legitimate corporation that would knowingly violate either the spirit or letter of the regulatory or legislative regulations under which they operate, not only because it is right, but also because the cost of not doing so is so significant. As you know, certainly those of you who have been on the opposing side of the plaintiff's bar, how even a small technical violation can result in significant financial damage to the corporation. It is, again, one of those areas in which there is a happy confluence of not only what is good, but what is also good business.


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