NewsNotables – Issue 36

Boeing Co. Hires an Ethics Watchdog

Wall Street Journal, 5/04/2004
Boeing Co., trying to recover from a series of ethics scandals, has hired an outside ethics watchdog to alert the government about any future transgressions by the aerospace giant. Boeing agreed to an Air Force demand as part of a broader administrative settlement still being negotiated with the Air Force. Industry and government officials said they believe such a requirement never has been imposed on such a large Pentagon supplier.

Boeing was stripped of $1 billion in Air Force rocket orders last summer as a result of possessing boxes of rival Lockheed Martin Corp.’s propriety documents. Boeing remains barred from bidding on any new government rocket business.

The special compliance officer, or independent monitor, will be answerable to both the government and Boeing and will oversee Boeing’s revamped ethics-compliance programs, file regular compliance reports with the Pentagon, and flag any questionable activities or missteps by company officials. Boeing plans to hire four others to fulfill the task.

The Gap Details Mistreatment at Overseas Plants

Associated Press, 5/13/2004
In an unusual display of corporate candor, Gap Inc. acknowledged that many of the overseas workers making the retailer’s clothes are mistreated and vowed to improve often shoddy factory conditions by cracking down on unrepentant manufacturers.

The San Francisco-based owner of the Gap, Old Navy, and Banana Republic stores made the comments in its first ever “social responsibility” report—a 40-page document that mixed contrition about the past with promises to do better in the future. “We feel strongly that commerce and social responsibility don’t have to be at odds,” Gap CEO Paul Pressler told a small gathering of shareholders at the company’s annual meeting.

Workplace activists who have long chided Gap for making its clothes at so-called sweatshops praised the merchant for shedding light on rampant abuses that have been haunting the clothing industry for years. Wal-Mart Stores, Inc., the world’s biggest company and a frequent target of sweatshop critics, plans to review Gap’s report to get ideas on how it might improve conditions at the factories supplying its merchandise, said company spokesman Bill Wertz.

Comment: Our first reaction is that Gap appears to be acting in a noble manner and may prod other U.S. companies to do the same. But what is the responsibility of a multinational company to the internal regulations in other countries?

Spitzer Files Suit Seeking Millions of Grasso Money

Wall Street Journal and Seattle Times, 5/25/2004
New York Attorney General Eliot Spitzer sued the New York Stock Exchange, former exchange Chairman Dick Grasso, and the Wall Street executive who headed its compensation committee. He wants Mr. Grasso to return more than $100 million for the $200 million-plus in salary, retirement pay, bonuses, benefits, and potential severance payments that the Big Board gave or promised him.

Spitzer said Grasso had “absolute power” to name the members of the NYSE board responsible for setting his pay and was able to reward or bully many of them because he regulated their businesses on Wall Street.

Comment: Should a board and compensation committee be comprised of people that the chief executive regulates?

Sarbanes-Oxley: Is the Price Too High?

Wall Street Journal, 5/27/2004
Restoring investor confidence is the most important issue today for the U.S. equity markets. Improving investor confidence also goes hand-in-hand with higher standards of corporate governance and with better economic performance. What today may seem to be competing priorities can become complementary if we set our sights on two goals: first, meeting high ethical standards and corporate accountability; and second, making certain that regulatory burdens do not harm U.S. competitiveness and the ability of our capital markets to fulfill their central role.

As the forces of competition and technology accelerate change and the mobility of capital, the willingness of investors to commit their capital will be influenced by how well capital is treated. Sarbanes-Oxley and other disclosure requirements ensure that companies have solid governance structures, that corporate financial performance is audited, and that all relevant facts about companies are disclosed.

These important reforms, however, have come at a cost—both in the expenses companies must incur and in senior management time and effort to comply with the new rules. Clearly, the ethical breakdowns in the recent corporate scandals broke fundamental bonds of trust with investors, and illuminated the need for a new commitment to higher standards.

We also need a sense of perspective. I’ve spent a great deal of time in conversations with leaders of NYSE-listed companies, as well as with executives from abroad hoping to do business here. I continue to hear a refrain. They are saying, “The pendulum has swung too far. The costs of compliance are too high. The risks of litigation are too great.” And thus, “We’ll avoid the risks. We’ll defer our decisions. We’ll delay our investments.”

Comment: Is the cost of Sarbanes-Oxley greater than the perceived benefit? See the comments from U.S. Senator Susan Collins in the IBTE Conversation starting on p. 6.

Fund Probe Broadens to IPO Allocations by Money Managers

Wall Street Journal, 5/27/2004
The SEC is investigating whether money-management firms, including Wellington Management Co. harmed certain clients by giving lucrative investments to more-favored customers.

The effort represents another front in the mutual fund scandals, which already has led to $2 billion in penalties and sanctions against 12 of the top 25 fund companies. The actions so far have focused on fund-company practices that allow some favored investors to take advantage of others through special trading privileges, and the often poorly disclosed incentives that funds pay brokers to sell their products.

The SEC is looking at whether the trading desks at big money-management firms that advise mutual funds also give an edge to certain clients, perhaps because they pay higher management fees. Regulators are especially interested in how shares of initial public offerings of stock are doled out, because they often soar on their first day of trading.

The SEC wants to know how limited blocks of available stock—either in an IPO or other publicly traded available shares that the manager believes soon will rise sharply in value—are divided among different classes of clients. Regulators suspect funds may end up receiving more than their fair share of coveted IPOs or other shares.

Comment: Should money-management firms have the right to allocate IPO shares in a disproportionate manner to favored clients?

Edited news clippings and comments by Roger Eigsti, Chairman and CEO, SAFECO Corporation, Retired.

Wal-Mart Ties Bonuses to Fairness for Employees

Wall Street Journal, 6/4/2004 and Seattle Times, 6/5/2004
Wal-Mart Stores, Inc., facing lawsuits for alleged gender bias and unfair treatment of workers, pledged to work harder to promote women to management and announced a new pay system for hourly employees at their annual shareholder meeting. Details aren’t clear but the move is sure to be closely watched.

Wal-Mart’s pay and benefits have been under fire on several fronts, and comes at a time when Wal-Mart’s image has been battered by lawsuits and fierce competition from communities trying to block the company from building stores. Labor unions and political activists accuse Wal-Mart of working to reduce employee compensation and benefits, which pushes competition to do the same. (Refer to “Costco Pays Workers Too Much?” in Ethix issue 35).

Conerning women in management, CEO Lee Scott said, “If 50 percent of the people applying for the job of store manager are women, we will work to make sure that 50 percent of the people receiving those jobs are women.”

Comment: At first blush, it appears Wal-Mart is acting responsibly, but is the quota system for women in management the right thing to do?

By Roger Eigsti
Board President,
Institute for Business, Technology, and Ethics