Essay: Internet Creating "Small Town" Accountability for Business?

Robert L. Bunting was CEO of Moss Adams, a West Coast auditing and accounting firm, until he stepped down from that role in 2004. He continues as an active partner in the firm. He was chairman of the board for the American Institute of Certified Public Accountants (2004-05). He was recently appointed deputy president of the board of the Inter-national Federation of Accountants (IFAC), and will assume the position of president in 2008.

These comments are excepts from the Baldwin Distinguished Speaker Series talk Bunting gave to students and faculty at the School of Business and Economics, Seattle Pacific University, October 31, 2006.

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I was raised in a small town in Idaho where everyone knew everyone else’s business. You had to assume that everything you did would eventually become public knowledge, usually with some creative additions to spice it up. Your reputation was directly related to the choices you made every day.

I was the beneficiary of this phenomenon when I was 12 years old. The town version of what happened was that I heroically saved a little girl who was drowning. I was the first to hear her panicked cries. As I swam out toward her, she went down for the last time, and I was forced to dive repeatedly into the murky depths of the lake. Miraculously, I found her and dragged her to the surface and took her to shore where eventually she was resuscitated.

Now here’s what really happened. I was standing in the lake, waist deep in water, when the little brat waded in over her head. She was thrashing and sputtering about three feet from me. I waded over, I grabbed her arm, and I dragged her to shore. The story grew from that, and it has not stopped growing. Three weeks ago one of my 91-year-old father’s contemporaries insisted on retelling the heroic story, but instead of saving one 3-year-old, in the updated version I had saved three 1-year-olds.

Improving Ethical Behavior?

Today, the professions and corporate America live in the digital version of that little town I grew up in. Everyone knows their business, and stories of their good and bad dealings grow with every telling. As businesses understand this simple truth, they are beginning to accept their increased accountability for citizenship and ethical behavior.

This may seem hard to accept, given the almost daily new stories that occur about some corp-oration that has been misleading or de-frauding its investors, polluting the environment, or abusing its employees. The most recent of these allegations involves the apparent problems with management and employee stock options, with the alleged practice of companies giving employees hindsight in executing their options by backdating them. Today more than 100 companies are under investigation by the Securities Exchange Commission (SEC) related to stock-option abuses. So you might reasonably ask, how can I suggest to you the corporations and the profession are rising up to their responsibilities for corporate and social responsibility?

Since the crisis of Enron, there has been a groundswell of corporate interest in not only complying with, but also going beyond the standards that represent public and regulatory accountability. Drivers for this change have not all been altruistic, but they are definitely rooted in self-interest. Companies have come to understand the damage scandals do to their credibility in the stock market, but even worse related to their brands and consumer trust in their products and services. After all, a company that cheats its investors might just as easily cheat its customers and its employees. Senior officers and corporations have learned that they can be brought down by practices in their companies that they were not even aware of, but for which they are rightfully held accountable. Independent board members have seen their reputations go up in smoke due to their negligence or complicity in corporate wrongdoing. The rise of self-directed retirement saving plans has resulted in more than 80 percent of adult Americans holding stock, either directly or indirectly, in public companies in the United States, tying the individual’s interests to that of corporations.

The Role of the Internet

The Internet has empowered public interest groups such as Greenpeace, Human Rights Watch, Amnesty International, and many others to keep track of the behaviors and incidents relating to thousands of companies, with a minimal investment of resources. This creates a new level of de facto regulations on corporate behavior. The Internet has also empowered bloggers and the traditional media to better monitor the behavior of corporate citizens across the broad spectrum of stakeholder issues. A jogger running by a factory in the morning, spotting a small oil spill, might be blogging about it before the TV or radio news even come close to reporting it.

In short, public accountability is being driven by a public that has more important reasons to care about corporate behavior than ever before, and access to more information than ever before.

Personal Example

Let’s look at what has happened in my own firm. I have always believed that CPAs’ value in the marketplace is based on two critical attributes. The first is a reputation for technical proficiency in auditing, accounting, and tax. The second is a written code of conduct designed to ensure that we ply our trade with integrity and serve the public interest.

As CEO of my firm, I was fairly confident prior to Enron that my partners and other professionals in my firm understood and acted in concert with this important value proposition. I understood that there had been scandals related to the auditing profession, but I truly believe — and I believe my board believed — that they were aberrations rather than the norm. The series of corporate scandals in 2000 and 2001 that led to the failure of Arthur Anderson was a real wake-up call for my firm.

In 1998, well before Enron, my firm published its values. We talked about them in staff meetings, partners’ meetings, and in training sessions. We even changed our compensation and promotion policies so employees could not get raises or promotions unless they were in compliance and bought into our firm’s values. But the fall of Andersen convinced us that we were not doing enough to ensure that our day-to-day activities were in concert with our values. In fact, it became a firm safety issue. We decided to make a number of changes to strengthen compliance with

our values. One step was to hire an independent ethics observer. We gave him unrestricted access to our firm. His job was to watch us make decisions and tell us whether we were walking the talk with our integrity value. He addressed our partners’ meeting on business ethics that year, and we subsequently hired him to be our outside observer. He has given us four annual reports on our business ethics at our partners’ meeting since that time. We are not getting top grades, but we have learned a lot in the process about whether we actually do what we say we believe in as a firm, and it has helped make us better.

Industry Examples

What about the rest of the world? Since 2001, most major auditing firms in the United States have either hired inside or outside chief ethics officers. Today, over 1,000 public companies, the largest public companies in the world, publish corporate sustainability reports proclaiming their values as citizens of their societies and detailing steps they are taking to be more responsible corporate citizens. These steps cover the environment, community, and employees as well as stockholders. Corporations cannot take this step lightly because they are well aware of the fact that bloggers and the press can drill holes in false claims with great ease, and literally millions are watching.

Some companies, such as Starbucks, have these reports audited so their claims regarding social and environmental good works can be verified by outside auditors. Companies such as Wal-Mart and McDonald’s are now spending large sums of money to reduce their impact on the environment and even the nation’s health. Home Depot and Lowes, the largest sellers of lumber in the world, have moved from selling lumber that comes out of clear-cutting operations to sustainable-yield lumber or green lumber. By their actions, they have caused a huge conversion in the timber industry from clear-cutting practices to sustainable-yield production methods. They are among many companies that have found that green sells and creates friends for the company.

Companies in the auto industry, extraction, and heavy manufacturing are all investing in technologies to reduce their energy consumption and various forms of pollution. Even financial institutions have been forced to come to grips with some of their legacy practices. The most recent shift is away from activities that support environmentally harmful projects.

Today, larger companies that have statements about social responsibility on their website now far outnumber companies that don’t. Companies like Hewlett Packard, Advanced Micro Devices, Motorola, Agilent Technologies, Timberland, Cisco Systems, Dell, and Texas Instruments are among many companies that regularly receive awards or other kinds of recognition for the work they do in corporate and social responsibility.

Rising Expectations

We live in a time, and we will continue to live in a time, where corporate scandals are a daily event. It is not likely to change for two reasons. The Internet creates an environment where every corporate or professional misstep is likely to be made public. Something is worth noting about the 100 companies being investigated in connection with backdated stock options. These companies were not discovered by the SEC. They were not discovered by state attorney generals. They were discovered by Eric Lie, an assistant professor in the Department of Finance at the University of Iowa. He did so by using data commonly available to him on the Internet. One individual doing a little bit of research on the Internet discovered a scandal of significant proportions.

Secondly, as the notion of corporate and social responsibility gains traction, the bar will continue to be raised as to what good corporate behavior is.

My bottom-line message is that business in America today is probably more ethical and publicly accountable than it has ever been in American history. It will continue to be a more transparent, socially responsible environment for very practical reasons. There is a diminishing line between the average citizen and the owners of corporate America in part because the increase in self-directed retirement savings brings the two together. It is good business for business to be a good citizen. Expectations for professional and corporate accountability are growing, and we will all benefit from the results.