Sarbanes-Oxley, Leadership, and Ethics
Peter Koestenbaum, Patrick J. Keys, and Thomas R. Weirich
2005 - The current lack of confidence in corporate financial
reporting has been a contributing factor to the recent slowdown
in U.S. capital markets. Congress’ response, the Sarbanes-Oxley
Act of 2002 (SOA), has created a new system of checks and
balances that will have a significant and long-lasting impact
on corporate America as well as on independent public accountants.
implement SOA, various bodies, including the SEC and the
Public Company Accounting Oversight Board (PCAOB), are developing
many new rules and guidelines. Nonetheless, SOA compliance
will not by itself ensure that corporate scandals do not
recur. Legislation rarely stops unethical acts or immoral
behavior; rather, it provides a way to deal with such behavior
within the legal system. Individual professionals and businesspeople
have an enormous stake in preventing future corporate scandals.
trust is premised on a strong and viable corporate control
system. At its foundation is a code of ethical behavior
that aligns the long-term interests of the corporation with
the long-term interests of the shareholders. In a 2002 CNN/USA
Today/Gallup Poll, 73% of respondents said that CEOs could
not be trusted.
the Tone at the Top
important challenge to corporations and CEOs is the creation
of a “tone at the top” that promotes ethical
conduct and permeates the corporate culture. Such an environment
would ideally deter misconduct before it takes place rather
than punishing it after the damage has been done. A major
determinant of such a proactive ethical environment is strong,
high-quality leadership provided by senior executives. We
need a new business model in which ethics and profitability
are treated as complementary rather than as mutually exclusive.
SOA underscores this need by requiring public registrants
to have corporate codes of ethics.
a comprehensive solution to mitigate an organization’s
exposure to unethical activity will be difficult. A comprehensive
solution should address more than one fundamental issue
or cause. We must resist the temptation to implement quick
fixes. Current and future business leaders are products
of business schools, which often teach that money always
comes before ethics. Because the foundations of the business
establishment have been shaken by the examples of insider
trading, manipulative accounting, and blatant fraud, any
solution must address and rebuild those foundations. Sustainable
solutions will involve profound paradigm shifts and self-improvement.
with SOA and punishment for noncompliance are critical parts
of the solution. The remainder consists of components that
The role of leadership;
Behaviors and attitudes throughout the corporation; and
of directors will still demand results that meet or exceed
past performance. Stock analysts will continue to focus
on bottom-line results. Shareholders will continue to demand
return for their ownership of the company. In fact, one
could argue that the post-SOA scrutiny has put more pressure
on executives to drive outstanding corporate results. There
is certainly more scrutiny from the press and the SEC. Customers,
investors, the government, activist groups, and the media
are all more aware and involved than before.
to determining the components of a sustainable solution
is determining the fundamental causes of the scandals. The
fact that the perpetrators did not follow established processes,
or that the established process and procedures were weak,
is not the fundamental issue. Regardless of how much pressure
the perpetrators experienced from company leadership, the
board of directors, and the marketplace, the fundamental
issue is that the perpetrators chose to participate in unethical
as a Corporate Asset
company must develop a mechanism for successfully communicating
and integrating appropriate ethical values into the corporate
culture. Treating ethics as a corporate asset will permit
investors and customers to distinguish between companies
that have truly embraced an ethics-based approach to business
and those that have not.
can no longer easily fake credibility through advertising
and public relations “spin.” The public has
learned that there is recourse against unscrupulous manipulation.
The public will be increasingly skeptical of executives,
like those at Enron, WorldCom, and Andersen, that staked
out the ethical highroad through lip service to public codes
of ethics they were apparently unable or unwilling to follow
themselves. The sooner business executives understand this
message, and realize that it embodies an enduring axiom
about human behavior, the quicker confidence in the capital
markets will return.
to deal with all aspects of human and corporate responsibilities
is the recipe for meltdown. Barbara Toffler, author of Final
Accounting and former partner of Arthur Andersen’s
Ethics and Responsible Business Practices consulting division,
traced the roots of Andersen’s ethical missteps and
revealed the gradual decline of a major accounting firm
and its once-proud culture. She reported that ambition,
greed, and a lack of internal ethics were the firm’s
Challenge and the Solution
human beings become defective managers. Surviving in an
ethics-less corporate culture requires executives to pursue
their full potential. The first step is to embrace ethics
through effective and appropriate leadership actions and
of this magnitude is seldom easy. The hard truths that accompany
this new paradigm are challenging. The solution consists
of a multifaceted approach that incorporates the following:
Process compliance and the price of nonconformance.
SOA has set the rules for compliance as well as the price
of noncompliance. The act itself impacts compliance in
addressing the issues of a code of ethics, the audit process,
whistle-blowing, and employee performance.
and attitudes throughout the organization. The second
element focuses on the behaviors and attitudes of top
management and the implications for lower-level employees.
The role of leadership. Any organization can
establish a code of ethics; however, without the proper
“tone at the top” (leadership), a compliance
program will fail.
example of a tool to enable the sustainability of such a
compliance program is presented in the Exhibit:
“Leadership Diamond Realisms,” as developed
by Peter Kostenbaum. A sustainable compliance program internalizes
ethical behavior and the proper role of leadership within
the organization. Without that internalization, Sarbanes-Oxley
becomes a nuisance to those unethical minds that will instinctively
look for ways around it. Sustainable compliance programs
like Leadership Diamond Realisms focus on key issues that
are fundamental to any leader: freedom, principle, realism,
grand strategy, and accountability.
The foundation of successful leadership is complete understanding
and application of the fact that human beings have free
will. Free will makes ethics possible. It is the source
of our power and the origin of our anxiety. Much of leadership
theory deals with influencing people’s thoughts, feelings,
and behavior. Leadership coaching helps leaders convince
personnel to think, feel, and behave in ways that help a
business’ bottom line. Leadership involves learning
and teaching the ascending ladder of freedom, free will,
consequences, responsibility, ownership, and accountability.
choose principle. Leaders choose to live by
principle. The 18th-century German ethicist Immanuel Kant
wrote, “Two things fill the mind with ever-increasing
wonder and awe, the more often and the more intensely the
mind of thought is drawn to them: the starry heavens above
me and the moral law within me.” Authentic leaders
reject greed and selfishness, narcissism and naïve
values, and embrace the things that matter most: what is
enduring, genuinely worthy, and honest and generous, and
what feels clean.
is a way of life. Being fully in touch with
the real world is one definition of mental health. Realism
is more than the numbers. It means never lying to oneself
or denying the truth about oneself, as threatening as that
strategy. One mark of an authentic leader
is the commitment to a grand strategy. An exercise that
develops this insight is to consider a major news story
and ask: What deep lessons does this have for you in how
you conduct your business and your life? What messages can
you derive from an enlarged perspective of this or other
monumental and historic events?
Being a true leader requires taking accountability
for one’s decisions and actions. What follows from
setting an example in both word and deed is holding other
people accountable for their free will–based decisions
Role of Leadership
catalyst for the implementation of the solution lies with
the leadership of the organization supporting those that
behave ethically both financially and in other ways. Every
conscientious businessperson should make it a priority to
explore ethical behavior, and learn how to make ethical
Bennis, business professor and founding chairman of the
Leadership Institute at the University of Southern California’s
Marshall School of Business, said that, “Exemplary
leaders create a climate of candor throughout their organizations.
They remove the organizational barriers—and the fear—that
cause people to keep bad news from the boss. They understand
that those closest to customers usually have the solutions
but can do little unless a climate of candor allows problems
to be discussed.” Exemplary leaders share information
about what’s going on in the organization, the industry,
and the world, and they treat candor as one measure of personal
and organizational performance.
involves not just doing the right thing, but doing the right
thing for the right reasons. When the leaders walk the talk
and fight the good fight, then the organization observes
and begins to follow. The first step, then, to becoming
whole lies in courageous decisions—to be open-minded,
to make self-transcending commitments, and to help create
a common culture.
What ‘ Ethical’Means for a Company
precede action. Leadership attitudes are ethical values.
How-to guides without right attitudes are empty gestures.
Doing right and doing well are not mutually exclusive; in
fact, doing right is an integral part of doing well. But
it is also possible to place too much emphasis on ethics
to the detriment of other important facets of leadership.
Balance is the key.
executive team should meet and discuss where ethical lapses
may exist within the company, incorporating input from stockholders,
employees, and customers. This discussion needs to be brutally
honest, even if it is also painful. The sought-for result
is an ethics statement that represents the kind of company
its leaders want it to be.
the word “ethics” means different things to
different people, its definition should be spelled out and
not left open for interpretation. The drafters must remember
that these policies are not carved in stone; time and experience
may reveal detrimental unintended consequences. Amending
the ethics statement is acceptable as long as it remains
true to the original spirit and intent. Implementing new
ethics-based policies and procedures requires more than
issuing a memo that says, “We’re all going to
be ethical now.” Proper training makes a world of
Koestenbaum, PhD, is the founder of Project Leadership,
Inc., Patrick J. Keys, is the president of
Project Leadership, Inc., and Thomas R. Weirich, PhD,
CPA, is a professor of accounting at Central Michigan
University, Mt. Pleasant, Mich.