As I was saying, it’s the system

Imagine, if you will, a bank, in which the managers decide that maintaining a vault is costly and inconvenient. After all, it takes up space and someone has to lock it every night and unlock it every morning. Instead, they just pile all the bank’s money in a giant heap in the middle of the bank and look the other way.

It doesn’t take a lot of imagination to figure out what happens next. People will start helping themselves to sums of cash, whenever they get an opportunity. Now, we could focus on the people who take the cash, and we could — and should — hold them responsible for their actions. But you don’t need an MBA to tell you that the easiest and best solution is to get a vault — and use it. The bank has a lousy system and needs to fix it.

When I wrote about corporate scandals several months ago (see ” Finding the culprits in Enron ” ), I said I thought that “the system” was broken and needed fixing. For that daring remark, I took quite a bit of criticism from some readers. It was the fault of a few individuals, they said, and I was trying to excuse those who had done something wrong. Of course, I had said nothing of the sort.

In a perfect world, we wouldn’t need to worry about the system. People would act from nothing but the purest ethical motives. We’d need no locks, no regulations, and no jails. But in case you haven’t noticed lately, we haven’t yet arrived in that perfect world. Even churches, after all, lock the poor box.

Human nature with all its failings is pretty much of a constant. Even in the best situations, we can expect some failures. Some people just won’t measure up. However, when we create a system that not only permits but actually encourages misbehavior, we can expect the failure rate to skyrocket. I think the current situation demonstrates this adequately.

Ethical assessment — assigning blame and praise — isn’t a zero-sum game. To say that one person is guilty or that the system is at fault doesn’t exculpate the other participants. There is often more than enough blame to go around.

But beyond determining who is at fault, who should bear the brunt of the blame, we need also to look at why they did what they did. If human nature is a constant, then we may want to change the conditions under which people operate.

I don’t pretend to have all the causes, or the answers, for the scandals we’ve seen in the last few months, or for those that are sure to come in the future. But I think we need to recognize that there have been systemic failures. Among them are the following:

Personal greed: Greed not only on the part of the guilty executives, which is a big factor, but also on the part of all those who buy stock with an expectation of large returns over the short term. This distorts the meaning of stock ownership and the purpose of the company.

Stock price expectations: Related to personal greed, this holds executives hostage to market conditions and disguises the real purpose of the company: providing goods and services and making a fair profit. Forced to “perform,” executives are under incredible pressure to meet the numbers or face the consequences. As I’ve said many times before, the market does not reward ethical behavior per se. It rewards only financial performance. When ethics and profit diverge in a publicly traded company, profit wins every time.

Interdependence: When auditors are judged not by whether they do a competent audit, but rather whether they can sanction questionable deals — and their future income depends on that — you already have a recipe for an ethical disaster. Profit wins every time.

Cronyism: When the regulators are “buddies” with those they regulate, their decisions, even if right, will always be suspect. In a worst case scenario, the friendship between the watchdogs and those they are watching will color how things are viewed. Add to this the revolving door between companies and the agencies that regulate them. This year A is regulating B. In the next administration B might be regulating A. This doesn’t lead to watchdogs with very sharp teeth or a very aggressive attitude.

I’d like to be the one to cast the first stone here, but I’m not so sure I have the right to do that. Granted, I’ve never done anything as egregious as some of the things we’re learning about these giant corporations, but then I’ve never been in a position to have to make that big a decision. Call it moral luck.

But I’m probably not the only one who has kept quiet during a meeting when I thought I should have spoken up. I’m probably not the only one who has made an objection, been upbraided for it, and then kept my mouth shut, not wanting to rock the boat. And I’m probably not the only one who has had a queasy feeling about something being done by a company for which I worked, and managed to continue to work for despite that queasiness.

We have an alarming ability to see the world through glasses colored by our own self-interest. And sometimes we quiet the little voice that tells us something just isn’t right way too easily. All too often, personal profit — or a regular paycheck — wins out over ethical qualms.

When the system is rigged against us, it becomes that much easier to do all that. Most ethical lapses come in increments and develop over time. Each lapse makes the next one easier, and people can delude themselves that the net result is not corporate crime, but rather just “aggressive accounting” or a “complicated transaction.”

As I write this, the Bush administration is proposing that we double the penalties for corporate crime, and I’m not sure how that is going to solve the situation. I have this humorous vision of a CEO wanting to cook the books, and deciding that he’d risk it for five years in jail, but that 10 years is just too much. That doesn’t make sense.

The biggest problem is that the real wrongdoers are seldom caught, and if they are, they are fairly certain that they won’t be convicted. As with most other crime, people often think that what they’re doing isn’t wrong or think they won’t be caught. The remedy is not the severity of the punishment, but rather whether punishment is swift and certain. That’s our worst systemic failure: Really rich and well-connected people very rarely go to jail. Until we change that, the system will still enable and encourage personal failure.

Do you have a solution? Join our Ethics Matters forum at www.infoworld.com/forums/ethics or write to me at [email protected].

Source: www.infoworld.com