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A Federalist Paper on Corporate Governance - Restoration of Active Virture in the Corpaorate Sturcture to Curb the Yeehaw Culture in Organizations

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A Federalist Paper on Corporate Governance - Restoration of Active Virture in the Corpaorate Sturcture to Curb the Yeehaw Culture in Organizations Wyoming Law Review Volume 3 Number 2 Article 4 January 2003 Restoring Ethical Gumption in the Corporation: A Federalist Paper on Corporate Governance - Restoration of Active Virture in the Corpaorate Sturcture to Curb the YeeHaw Culture in Organizations Marianne M. Jennings Follow this and additional works at: https://scholarship.law.uwyo.edu/wlr Recommended Citation Jennings, Marianne M. (2003) "Restoring Ethical Gumption in the Corporation: A Federalist Paper on Corporate Governance - Restoration of Active Virture in the Corpaorate Sturcture to Curb the YeeHaw Culture in Organizations," Wyoming Law Review: Vol. 3 : No. 2 , Article 4. Available at: https://scholarship.law.uwyo.edu/wlr/vol3/iss2/4 This Article is brought to you for free and open access by Law Archive of Wyoming Scholarship. It has been accepted for inclusion in Wyoming Law Review by an authorized editor of Law Archive of Wyoming Scholarship. Jennings: Restoring Ethical Gumption in the Corporation: A Federalist Paper WYOMING LAW REVIEW VOLUME 3 2003 NUMBER 2 RESTORING ETHICAL GUMPTION IN THE CORPORATION: A FEDERALIST PAPER ON CORPORATE GOVERNANCE - RESTORATION OF ACTIVE VIRTUE IN THE CORPORATE STRUCTURE TO CURB THE "YEEHAW CULTURE" IN ORGANIZATIONS MarianneM. Jennings* IN TRODUCTION ............................................................................................ 389 Debacle One - Enron ........................................................................... 393 Cultural Factor 1 - Pressure to Maintain Those Numbers and That Perform ance .................................................................... 394 Cultural Factor 2 - Fear and Silence ....................................... 397 Cultural Factor 3 - The Young 'Uns and Bigger-than-Life CEO S........................ ............. 400 Cultural Factor 4 - W eak Board .............................................. 402 Cultural Factor 5 - A Culture of Conflicts ............ 406 Cultural Factor 6 - A Culture of Innovation Like No Other .. .409 Cultural Factor 7 - A Culture of Social Responsibility ........... 410 D ebacle Two - WorldCom ................................................................... 410 The Company H istory ............................................................. 410 What Went Wrong: The Story of the Fall From Grace .......... 412 What Went Wrong: Fancy Accounting and Mergers ............. 417 What Went Wrong: Not So Fancy Accounting and Expenses422 What Went Wrong: The Management and Operations of World- C o n ......................................................................................... 4 27 • Marianne M. Jennings is a Professor at the Arizona State University College of Busi- ness, Tempe, Arizona, 85287-4706. This paper was presented at a Symposium entitled, Ethics in Corporate Governance, held at the University of Wyoming College of Law, on April 11-12, 2003. Published by Law Archive of Wyoming Scholarship, 2003 1 Wyoming Law Review, Vol. 3 [2003], No. 2, Art. 4 WYOMING LAW REVIEW Vol. 3 What Went Wrong - The Underlying Causes of What Went Wrong: The WorldCom Culture ............................................... 430 Cultural Factor I - Pressure to Maintain Those Numbers ...... 430 Cultural Factor 2 - Fear and Silence ....................................... 433 Cultural Factor 3 - The Young 'Uns and Bigger-than-Life CEO. ................................................................................................ 4 3 5 Cultural Factor 4 - W eak Board .............................................. 441 Cultural Factor 5 - A Culture of Conflicts .............................. 445 Cultural Factor 6 - A Culture of Innovation Like No Other ...449 Cultural Factor 7 - A Culture of Social Responsibility ........... 453 Tyco International: Another Challenged Culture................................ 454 W hat W ent W rong at Tyco ...................................................... 454 What Went Wrong: The Accounting Issues ........................... 457 What Went Wrong: A Profligate Spender and Cheapskate CEO. ............................................ 461 What Went Wrong - The Yeehaw Culture of Tyco .................. 464 Cultural Factor 1 - Pressure to Maintain Those Numbers ...... 464 Cultural Factor 2 - Fear and Silence ....................................... 466 Cultural Factor 3 - The Young 'Uns and Bigger-than-Life CEO. ................................................................................................4 6 9 Cultural Factor 4 - Weak Board .............................................. 475 Cultural Factor 5 - Culture of Conflicts .................................. 478 Cultural Factor 6 - A Culture of Innovation Like No Other .. .480 Cultural Factor 7 - A Culture of Social Responsibility ........... 481 A FEDERALIST PAPER: RESTORING VIRTUE AND ELIMINATING THE YEEHAW CULTURE ........................................................................ 482 Fixes for the Yeehaw Culture ............................................................... 487 Layer One - Internal Controls for the Yeehaw Culture .......... 493 Internal Changes: The Hotline ................................................ 494 Internal Changes: The Ethics Officer ..................................... 495 Internal Changes: Codes of Ethics .......................................... 496 Internal Changes: Curbing Culture ......................................... 498 Internal Changes: Ethics Training .......................................... 499 Internal Changes: Example ..................................................... 500 Internal Changes: Terminations ............................................. 500 Internal Changes: Curbing the Social Responsibility Equation ... ..............................................501 Internal Changes: Hire Over 40 .............................................. 502 Internal Changes: The Role of Counsel .................................. 503 Internal Changes: Controlling Employee Investment in Compa- ny Stock ................................................................................... 503 Internal Changes: Curbing Aggressive Accounting ............... 504 Quasi-Internal Changes: The Board ....................................... 504 Quasi-Internal Changes: Separating the Chairman and CEO Po- sition s ....................................................................................... 50 5 Quasi-Internal Changes: Auditors .......................................... 506 E xternal C hanges ......................................................................... 507 https://scholarship.law.uwyo.edu/wlr/vol3/iss2/4 2 Jennings: Restoring Ethical Gumption in the Corporation: A Federalist Paper 2003 RESTORING ETHICS IN THE CORPORATE "YEEHAW" CULTURE 389 External Changes: Healthy Skeptics in All Quarters .............. 507 External Changes: Academics ................................................ 509 External Changes: Investor Demands and Attitudes .............. 509 Changes for All - Watch for the Warning Signs Evidenced by T hese C ollapses ............................................................................ 510 C O N CLU SION ............................................................................................... 511 And further, the life of active virtue is essentiallypleasant. - Aristotle INTRODUCTION The Sarbanes-Oxley Act of 20022, variously known, as it swept through Congress, as the Public Company Accounting Reform and Investor Protection Act of 2002, Corporate and Auditing Accountability, Responsi- bility, and Transparency Act of 2002, Corporate Responsibility Act, the Corporate Fraud and Accountability Act, Justice for Victims of Corporate Fraud Act, the Corporate and Criminal Fraud Accountability Act, the Public Company Accountability Act, and just generally as "What on earth were you people thinking when you decided to engage in this kind of financial report- ing and analysis? Act."3 Sarbanes-Oxley marks the third great regulatory reform for publicly held companies during the span of my 25-year career in First, there were the new laws and reforms on insider trading the academy. 4 and junk bonds following the Ivan Boesky and Michael Milken debacles. 1. ARISTOTLE, NICOMACHEAN ETHICS 41(H. Rackham trans., Harvard Univ. Press 1992), hereinafter ARISTOTLE, Nic. Note for non-philosophical types, "Nic" was not Aristotle's first name. The "hereinafter" citation method with "Nic" distinguishes Ari's ethical discussions that are explained further. See infra note 6 and accompanying text. 2. Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745. 3. The various names are found throughout sections of the Act, the result of different versions of the bill being floated in the House and Senate, with the last name listed herein, admittedly, a commentary by the author. There were six versions of the Act, including the one finally passed. For complete details on the names of the bills and the history of its final passage, see http://thomas.loc.gov/cgi-bin/bdquery/z?d107:HR03763:ITOM:/bss/dI07query. html (last visited April 8, 2003). A more accurate name would be the, "Where were your minds when you decided to try and hide $9 billion or so in expenses? Act." The latter refers to the WorldCom collapse in which the CFO and underlings in the company decided to boost revenues by reporting expenses in a creative accounting fashion, i.e., they took current ex- penses and capitalized them, or they took reserves and tossed them into earnings. By the time all was said and done, WorldCom's book looked as if a "D" student from a
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