It isn’t a new revelation that ethics seem to be dying in corporate America. But it’s a little surprising how far unethical behavior has spread. After the revelations of David Sokol’s actions at Berkshire Hathaway
But this isn’t something new in the boardroom. Ethics have played a role in shaping corporate America and the laws governing it for well over 100 years. And while today’s ethical conundrums may create more headlines, they’re not any more egregious than their predecessors.
The biggest name in business
John D. Rockefeller, one of America’s most famous businessmen and philanthropists, was also instrumental in leading the U.S. to create harsh antitrust laws because of his business practices. Railroad rebates, price discrimination, industrial espionage, bribery and unfair competition are among the things Rockefeller is remembered for. And some credit his Standard Oil for spurring the passage of the Sherman Antitrust Act in 1890, which led to the eventual breakup of the company.
More familiar names, including Microsoft
Likewise, if Sokol had disclosed his position but traded on the information first, that might have addressed concerns of insider trading, but still -- would it be ethical? On a more personal level, if I write an article about a stock I already own, saying why I think that stock is a great buy, is there an ethical problem about that -- even when I tell readers it's already in my portfolio? It’s an issue that can be viewed through many lenses.
It starts in the classroom
Ethics classes are now a staple at most major MBA programs, where many of the corporate elite are educated. But in my experience (as an MBA graduate), they're viewed as an exercise in justifying whether something is ethical or not, instead of a way to create an ethical corporate culture.
The joke during ethics class was that we were actually learning how to justify anything we may do. So don’t think that a highly educated executive like Goldman Sachs
It’s as easy as pie
The other problem is how easy it is for executives to behave unethically and escape punishment from shareholders. Voting in shareholder ballots can feel like an exercise in futility unless you have a big-name investor leading the charge. And much of the time, board members aren’t really independent parties; they’re often hand-chosen by the CEO.
Take, for example, DryShips
Then there’s the sticky situation that investors in China MediaExpress
Who, exactly, is at fault in these cases? The board, CEO, investment bankers, the SEC -- the buck never stops definitively with anyone.
Heads I win, tails you lose
Maybe the biggest problem in corporate America today is that it isn’t the management team’s money. Take almost any large cap stock, and you’ll see that CEOs typically hold a very small percentage of the company’s stock. Often, CEOs get substantial compensation in stock options (although this is changing). Stock options will be worthless if the stock trades below the strike price, but may be worth a fortune if the stock trades above the strike price.
If that sounds a little like a game called roulette, you’ve already identified one of the biggest problems in corporate America. If the CEO makes a bad call, shareholders lose their money, but CEOs still enjoy hefty paychecks. But if the ball falls on the CEO's number, an island in the Caribbean and a life of luxury waits.
Ethics is as dead as it ever was
As I see it, unethical behavior hasn't gotten worse over the last 10 or 20 years. It’s just that we’re able to find corporate schmucks much more easily than back in the Rockefeller days. Fake stock certificates even used to be traded on Wall Street, a fraud much easier than Bernie Madoff could have devised.
As ordinary investors, we may feel helpless to improve ethics on Wall Street. But we need to keep an eye out for ethical management that will keep an eye on our money. It’s not an easy task, but looking for a CEO with skin in the game and a credible history is a great place to start. Yet as Buffett's experience reminds us, even a CEO with an incredible history gets burned every once in a while.
Editor's note: A previous version of this story incorrectly stated that China MediaExpress had already been de-listed from the Nasdaq. The Fool regrets the error.
Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw. Berkshire Hathaway and Microsoft are Motley Fool Inside Value picks. Berkshire Hathaway is a Motley Fool Stock Advisor selection. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Berkshire Hathaway, IBM, and Microsoft. Alpha Newsletter Account, LLC owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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