Research

The bigger they are: Ethical challenges of the rich and famous

Think twice about accepting a job with an organization headed by a renowned industry captain, a technological wunderkind or a visionary philanthropist, warns an expert who's studied the downside of charismatic leadership. Business icons become more susceptible to disastrous ethical lapses as their workplace fame spreads, says Marianne Jennings, JD, a professor of legal and ethical studies at the W. P. Carey School of Business. When the gurus crash and burn, the careers of those around them falter, too.

2007-10-24

Think twice about accepting a job with an organization headed by a renowned industry captain, a technological wunderkind or a visionary philanthropist, warns an expert who's studied the downside of charismatic leadership.

Business icons become more susceptible to disastrous ethical lapses as their workplace renown spreads, said Marianne Jennings, JD, a professor of legal and ethical studies in the Department of Management and Entrepreneurship at the W. P. Carey School of Business and author of A Business Tale: A Story of Ethics, Choices, Success (and a Very Large Rabbit) and The Seven Signs of Ethical Collapse. When the gurus crash and burn, the careers of those around them falter, too.

Speaking before an audience of Arizona State University first-year students and their parents, Jennings explained that charisma turns corrosive when an iconic leader rules unchecked. It was an auspiciously appropriate topic, since the students attending plan to major in business.

"Being a business icon isn't bad in and of itself. But they are so fabulously charismatic and successful that they become famous for their leadership. Over time, their reputation grows, and no one disagrees anymore with the icon's decisions, because he or she is always 'right,'" Jennings explained.

"Eventually everyone around the icon becomes sycophantic, from the boards of directors to employees, analysts and the media. And there is nothing worse for leadership than surrounding oneself with people who will not voice dissent or raise important issues, especially when it comes to business ethics," she continued.

When that happens, the organization begins a sad slide that can end in public disgrace and financial ruin. Sometimes, the icon ends up penniless and/or in prison.

When charisma turns crooked

Tyco International chairman and CEO Dennis Kozlowski is a prime example. For 27 years, Kozlowski poured his heart and soul into building the Princeton, New Jersey industrial conglomerate into a massive powerhouse.

A gifted chief who threw extravagant company parties, he is credited with a brilliant series of mergers and acquisitions that hugely boosted profits. For instance, in fiscal 2000, Tyco sales leapt 28 percent and earnings, before extraordinary charges, increased 46 percent, to $3.7 billion.

While his Tyco annual compensation climbed to $100 million, Kozlowski reportedly began surreptitiously siphoning company money — some $400 million — into his pockets. He didn't hide his enormous wealth, either, throwing his wife a million-dollar 40th birthday party, indulging in a $6,000 shower curtain for their Manhattan home and buying acres of prime real estate in pricey Boca Raton, Florida.

Government investigators caught up to him in 2002, after his resignation from the company. They proved that Kozlowski had gone wildly astray, grabbing $150 million in unauthorized bonuses, selling Tyco stock after artificially driving up share prices and in general, looting the company. After the first prosecution ended in a mistrial, a second jury convicted him of almost two dozen counts of grand larceny, among other crimes.

He was sentenced to an 8-to-25-year sentence in 2005, and is serving his time at Mid-State Correctional Facility in Marcy, New York. His wife, Karen Kozlowski, filed for divorce in July, 2006. Like the multitude of stockholders who have made civil-court claims against him, she is suing Kozlowski, now 60, for alimony and half their marital assets. She also filed a lien against their Boca Raton mansion.

Kozlowski, who insists he is innocent of wrongdoing, blames jealous jurors for his prison term. During a March, 2007 interview from Mid-State, Kozlowski told 60 Minutes' Morley Safer that he was "a guy sitting in a courtroom making $100 million a year [and] I think a juror sitting there would just have to say, 'All that money? He must have done something wrong.'"

A downward journey of many steps

Jennings pointed out that Kozlowski was able to rationalize his cupidity because there was probably never a single moment when he morphed from a corporate shepherd to a ravenous wolf. Instead, he inched along ethically, cheating a wee bit here, falling back on a useful white lie there, and as the years went by, the cheating grew and the lies multiplied.

The journey into dishonesty is easier if, like Kozlowski, leaders surround themselves with brash young hustlers who lack business seasoning and, anxious to ride the boss's coattails, hesitate to challenge him or her. "This is a gradual, step-by-step process. A CEO doesn't wake up one day and say, 'Gee, I think gigantic fraud is the way to go.' It's not a fast crash and burn," she added.

According to Jennings, a strong, independent-thinking board of directors — minus compromising conflicts of interest — is the only antidote for iconic contamination. An example: William McGuire, M.D., was the chairman and CEO of UnitedHealth Group Inc., parent of United Healthcare, the second-largest health insurance company in the U.S. He earned a reported $124 million in 2005.

"He was a cardiologist who did a remarkable job for the company, but the board was tied to him through philanthropic organizations, and one director even managed his family trust. This volatile combination of an iconic leader with a sycophantic board unwilling to exercise checks and balances is disastrous," she noted.

The company's board of directors failed to stop the illegal stock-option backdating, Jennings said, and by 2006, everyone from the Internal Revenue Service to the Securities and Exchange Commission was investigating reports of backdating at UnitedHealth.

Some icons become believers in their own legends, further endangering the organization. Take Jeff Dachis, co-founder, CEO and chairman of the now-defunct Razorfish, an Internet consulting firm. Founded in 1995, Razorfish quickly expanded to 1,800 employees in 13 cities.

The New York Times famously quoted Dachis as saying, "There are sheep and there are shepherds, and I fancy myself to be the latter." "He caught the dotcom tidal wave and was so well regarded, so successful, that people didn't question him. He basically said, 'I'm bright and know what I'm doing. What do I need a board for? It's a new era.' Then Razorfish fell apart," Jennings told students.

Casualties included Razorfish stockholders; company stock sank to around a buck per share. Also harmed were laid-off employees, who voiced personal complaints against Dachis' hubris on an Internet bulletin board called F----- Company. Back then, Wired magazine coined Dachis' meltdown a "brattitude adjustment." In 2007, Microsoft bought Razorfish, minus Dachis, who was long gone.

The dis-honor roll is impressive. It includes savings and loan executioner Charles Keating of American Continental; Hewlett-Packard CEO Carly Fiorina, who fell from grace after buying Compaq; Richard Scrushy, accused of telling Healthsouth Corp. employees to cook the books and Ken Lay, the former honcho at Enron Corp., who died in July 2006 a few months before sentencing on 10 counts of securities fraud and related charges. (An appellate court squashed the conviction because Mr. Lay did not live long enough to exercise his right of appeal and judicial review.)

At the other end of the spectrum are iconic leaders like Herb Kelleher of Southwest Airlines and Warren Buffet of Berkshire Hathaway, tough decision makers who continue to deliver shareholder results but rely on directors, employees and investors to stay on target. Airline co-founder Kelleher "feels comfortable with people objecting to what he thinks.

People have access and input, they feel comfortable raising and voicing concerns, which makes for a 'flat' culture. Despite his charismatic leadership, his self-deprecation makes him open to being questioned," Jennings said. You can spot a dangerously iconic leader by checking out the organization's executive perks, Jennings said.

If the company cafeteria is grungy but management offices are being redecorated yearly, take note. If the boss's family flies free on the company jet or rumors abound that the CEO's daughter's wedding was paid for with a corporate check, pay attention. These are all hints that an iconic leader has become isolated by privilege.

Handling an unethical situation

If you discover an ethically questionable situation at work, don't jump up at the next department meeting and say "I work for unethical morons," Jennings counseled. Instead, say something such as, "there are some issues here that we should be concerned about, and we probably ought to fix these problems before they get more serious. Our current approach to meeting goals may not be a sustainable economic model."

Thoughtful input — especially when grounded in the corporate histories we now have — works, she said. And you're better off quitting than getting sucked into a corporate culture of group think that is likely to make negative headlines at some point. If you feel subtly or blatantly squeezed to cross the line, it's probably time to update your resume. But if you're asked to do something illegal, type that resignation letter, Jennings continued.

Don't worry about explaining your resignation to potential employers, she adds. Get out now, because workers who go down with the ship often are tainted by the organization's implosion; then tell the truth, "that you had the wisdom to walk away from a bad situation."

"People tend to see this decision only in terms of what they are giving up by leaving — salary and benefits. But even if you're the sole provider for a family, you're still better off losing a job than getting caught up in falsifying financial information, for instance," she concluded.

Bottom line

• Tyco International chairman and CEO Dennis Kozlowski reportedly hauled home more than $150 million in unauthorized bonuses, prosecutors said at his trial.
• Jeff Dachis co-founded Razorfish as the dotcom phenomenon surged, then fell victim to his own hype; he was washed out of the Internet consulting firm within just seven years of start-up.
• Ethical icons exist, such as Southwest Airlines' Herb Kelleher.
• If confronted with an ethical lapse at work, point it out as an issue that needs to be addressed because of the business implications.
• If you find that the culture at your company supports unethical practices, resign and avoid the taint that comes with the inevitable exposure.

Management Economics Faculty