Business ethics

Corruption is unacceptable, yet sometimes unavoidable.

That was the message Forbes magazine Senior Editor Neil Weinberg conveyed Monday evening (March 24) in his discussion on white-collar crime. There is a way around getting caught up in corporate scandals—and it starts with students like the 200 assembled that night in Chico State’s Bell Memorial Union Auditorium to hear Weinberg speak.

“The application of ethical theory can be difficult in the fast-paced world we live in, especially for college graduates looking to impress and achieve,” said Shirley Hopkins, who teaches the one-unit Business Ethics Initiative class that brought Weinberg to campus with funds from alumni donations. The course is dedicated to preparing its students to become effective and principled leaders, Hopkins said, so real-world examples go a long way.

Using the story of Walter Pavlo Jr., with whom Weinberg co-authored the book Stolen Without a Gun: Confessions from inside history’s biggest accounting fraud—the collapse of MCI WorldCom, Weinberg compared the pressures that encourage workers to engage in white-collar crime, the rationalizations they use to justify their acts and the devastating consequences to the looming subprime mortgage market.

Stolen demonstrates how corporate corruption slides down the ladder from CEO to even entry-level employees.

Once Pavlo started cooking the books to please his bosses, he hatched a plan to embezzle $6 million for himself into tax-exempt accounts in the Cayman Islands using some “creative accounting.” Eventually the MBA became just another spider in the web of lies that was MCI WorldCom and is now the biggest bankruptcy story in history. Pavlo copped a plea with the federal government, ended up spending two years in jail and lost his wife and two children.

“If people knew ahead of time what their crimes would do to their families, they wouldn’t commit them,” Weinberg said after reading a passage from the book in which Pavlo explains to his two sons that he’ll be “going to work for the government” for two years.

Pavlo’s experience was a textbook case of what experts call the “fraud triangle,” Weinberg said. Pressure at MCI to achieve unattainable results for his superior led him to set aside his own ethics to “make the numbers.”

Pavlo rationalized this because it was the tone set by his bosses and others at MCI were doing the same thing. If he was acting unscrupulously for his bosses, he saw no reason to leave himself out.

His position as debt collector and his scheme to post credits before receiving payment allowed him the opportunity to set up the Cayman Island accounts where the money would be redirected.

This same formula of pressure, rationalization and opportunity fueled brokers, lenders and Wall Street after the dot.com bust, 9/11 and the subsequent interest-rate cuts by the Federal Reserve.

White-collar crime and the subprime mortgage crisis are similar in that both are results of companies offering “financial incentives to do bad things instead of good things,” Weinberg said.

Just as Pavlo was paid to cook the books to please his bosses and ultimately defraud MCI’s shareholders, the compensation for brokers and lenders to make poor loans to people with even worse credit made it very tempting to give home loans away like tootsie rolls at a parade. Further, they knew that the loans would be packaged and sold as a security to Wall Street’s investment banks, then given an artificially high bond rating by Moody’s or Standard and Poor’s to be sold to investors.

“Everyone assumed the housing market would keep going up,” Weinberg said. “When the foreclosures started, it began to unravel.”

Just how much effect the subprime mortgage crisis will have on the economy isn’t yet foreseeable, but Weinberg made comparisons to the Great Depression and the savings-and-loans crisis of the 1980s.

Correcting these lapses starts at the top, Weinberg said. By creating a “do the right thing” mentality and then compensating employees accordingly, business executives have the power to create change. Education opportunities like the one Weinberg offered are another way to sensitize the business leaders of tomorrow to the ethical dilemmas they will undoubtedly face.

“By exposing students to real-life scenarios like this, we hope to sensitize them enough to be able to identify an ethical dilemma then make the correct choice when it occurs,” Hopkins said.

One of those students is business major Neil Steiner, a senior.

“The situation with subprime mortgages is a colossal crisis, so I came to learn any additional background information,” Steiner said about Weinberg’s talk. “I liked that he said, ‘Rather than taking the position of regulation, let’s become accountable.’ “

Part of accountability will rest on the shoulders of people like Steiner. In hindsight Pavlo should have held his ground, told his boss he wouldn’t engage in “creative accounting” and left MCI if need be.

“People lose perspective, especially those worried about creating a positive self image,” Weinberg said. “If you’re pressured or have the opportunity to go down that road, you have to have the intestinal fortitude to quit and say, ‘I’m outta here.’ “