Slipshod Business Ethics a Poor Example for Youth

If you think ethical standards of business management are low today, just wait. The current crop of high school students admit to cheating, lying and stealing on a scale unmatched over the last decade.

So says Michael Josephson, whose Marina del Rey-based Josephson Institute of Ethics has just surveyed 12,000 youngsters on the subject.

In the latest survey -- the fifth the institute has conducted in the last 10 years -- researchers found that 74% of the students said they had cheated on an exam in the last year. That compares with 61% who admitted to cheating on the 1992 survey and 71% on the 2000 survey.

Totals for stealing from stores (38%) and lying to teachers and parents (83% and 93%, respectively) also were up substantially over the 10-year period.

Most appallingly, many of the students weren’t ashamed of such conduct. Rather, they seemed downright proud of it, as 43% of the respondents agreed with the statement “A person has to lie or cheat sometimes in order to succeed.”

To Josephson, a lawyer and onetime teacher, the survey reflects a general decline of ethics in America, as demonstrated most vividly by the scandals rocking one corporate executive suite after another. And it portends dark days ahead.

“The implications for business are great,” he says. “The atmosphere of deception is destructive to the economy.”

In recent years, ethics has become an industry in and of itself. Attorney Charles Samel, a partner in the Washington law firm of Howrey Simon Arnold & White, notes that there now are some 800 members in the Ethics Officers Assn., which is made up of vice presidents and corporate counsels of such firms as Raytheon Co., Caterpillar Inc. and New York Life Insurance Co.

Josephson’s institute has grown into a $4-million-a-year nonprofit business with 40 employees. It holds ethics training programs for major companies as well as the U.S. armed forces.

Given that, it is in Josephson’s interest to paint a dismal picture of America’s moral climate. Yet there is no hype here. The self-proclaimed ethicist’s assessment is, woefully, right on the money.

Investment pros certainly see it. Robert Arnott, chairman of First Quadrant, a Pasadena fund-management firm, has calculated that outright fraud and deceptive accounting falsely inflated earnings by nearly 50% in recent years for the Standard & Poor’s list of 500 of America’s largest and best-known firms.

That had consequences. The fact that the widely watched S&P; 500 index reported that its companies had aggregate earnings of $52 a share instead of a more accurate figure of $35 a share drove the whole stock market higher.

But as scandals broke in 2001, investors turned a suspicious eye on spurious accounting, and the great majority of stock prices have been down sharply ever since.

Investors now “require a credibility premium” when they buy stocks, says Arnott, whose firm manages $28 billion in pension assets. “That higher cost is exerting a drag on stock prices.”

Many people would say that we’re on the road to reform now, with the passage of new laws and regulations that govern corporate management. The securities law sponsored by Sen. Paul S. Sarbanes (D-Md.) and Rep. Michael G. Oxley (R-Ohio) requires chief executives to certify the profits their companies are reporting under penalty of fines -- or worse. And the law has created a board of oversight for the accounting profession in an attempt to restore trust in corporate numbers.

New York Stock Exchange rules now require boards of directors to assert more authority over company management while giving shareholders a greater voice on policy.

Josephson, however, believes that this is not nearly enough. He is looking for a remedy that is far more fundamental. “Laws and coercive regulations are all necessary,” Josephson says, but without a basic change in the culture, “laws only create new loopholes and ethics become situational.”

Josephson cites the case of optical company Bausch & Lomb Inc., which acknowledged recently that Chief Executive Ron Zarrella had lied on his resume, claiming to have earned a master’s degree in business from New York University. It wasn’t so much the offense that bothered Josephson as it was the company’s response.

At first, the board of directors called the lie an “unfortunate mistake” and declared its support for the CEO. Then on Tuesday, the board said it would withhold Zarrella’s $1.1-million bonus and called his resume inflation “a serious matter.” But at the same time, the directors refused to accept Zarrella’s resignation and reaffirmed that he was “the right person to carry on the resurgence of the company.”

Josephson was appalled. If someone in the mailroom had told such a big lie, Josephson says, he or she surely would have been fired. “It seems the higher you go in the company, the lower the moral expectation,” he says. “What kind of message does that send to the company’s employees and to future employees?”

What’s more, he asks, what message do episodes such as this send to the young people he has been talking to of late?

For all their cynicism in admitting transgression, Josephson reports, the vast majority of students who responded to his survey acknowledged that their parents wanted them to do the right thing. They also said that their teachers consistently set a good ethical standard.

That means there is a glimmer of hope.

But unless the corporate world begins to shape up and reward integrity, the kids now coming up will continue to think that cheating, lying and stealing are a formula for success.

James Flanigan can be reached at jim.flanigan @latimes.com.