Corporate responsibility

With scandals involving companies like Enron, WorldCom and HealthSouth screaming from the pages of the business section, it’s no wonder that firms of all sizes — and across all industries — are turning their attention to corporate responsibility and ethics.

“It’s a huge issue right now, due to the failures of some very large organizations,” says Jerry Strawser, Ph.D., dean of Mays Business School at Texas A&M University in College Station. “And while the scandals involved some very large corporations, there were some fundamental issues with their governance structures that would have been prevented with the kind of best practices that any company should have in place.”

Smart Business spoke with Strawser about how to create an ethical, responsible corporation in today’s business environment.

What’s the first thing a company should know about corporate responsibility?
No matter how large or small the firm is, the first step is to set up a good system of controls. In the past, small to midsize companies have thought of these controls as only being for the big guys. Smaller firms thought they knew all of the elements of their operations, employed trusted workers and had effective processes in place. So while the fraud that makes the headlines did take place at large corporations, fraudulent activities occur in companies of all sizes.

How can a company ensure that it’s operating responsibly?
It all starts with hiring. If you bring in people of character and integrity to start with, a huge part of the battle can be fought and won at the outset.

Technology is making this easier.

Before so much information became available on the Web, a company would have to hire a consultant or group that could help conduct background checks on prospective employees. Now, this can be done in a much faster, convenient way that helps unveil any ethical or work issues that employers should be aware of.

A good whistleblower program is also necessary, as is protection for people who report unethical conduct and breaches in the code of ethics. It doesn’t do any good to have a whistleblower program if management doesn’t act on it, and it doesn’t do any good to have that if people get punished.

Where do businesses run into challenges with corporate responsibility and ethics?
The expense is a challenge. To put controls and governance mechanisms in place costs money. Right now, for example, the nation’s largest companies are saying that the costs of Sarbanes-Oxley compliance outweigh the benefits of it by a large multiple. For smaller firms, it can be even more expensive, relative to their revenues.

What are the benefits of running a responsible, ethical firm?
The main benefit is almost impossible to measure. Compare your stock price today to what it would be if you didn’t have an auditor who examined your internal controls and said that they were effective. Compare what your company would look like and operate like if your management didn’t go through and do the required assessment of controls compared to what it looks like and operates like now. The problem is we don’t have that other information. Ultimately, research will probably find that the value of Sarbanes-Oxley for organizations will translate into higher public confidence in the stock market.

A company that’s looking to go public, for example, could likely get a higher offering price for its securities because of the increased confidence of investors brought on by Sarbanes-Oxley.

How are business schools teaching these values?
One model is for students to take courses in humanities (particularly philosophy courses) to understand how ethical reasoning works and what factors contribute to different types of ethical behavior.

Other models are used by schools that are doing a course in business ethics that addresses various ethical dilemmas. Our school devotes a week to ethics education as it relates to specific areas within business in each of our core courses (such as accounting, finance, management, management information systems, and supply chain). That means students in finance courses learn about the issues that have happened in the investment industry, while those in marketing courses will discuss issues such as products and product warranties, and so on.

This type of education reinforces to the students that ethics isn’t just something that happens in one area, and that it’s critical across the board. It also teaches them about the fraud that has taken place at large organizations, and the criminal prosecution and job losses that took place as a result of those fraudulent activities.

JERRY STRAWSER, Ph.D., is dean of Mays Business School at Texas A&M University in College Station. Reach Strawser at (979) 845-4172 or [email protected].