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Bill George

Harvard Business School Professor, former Medtronic CEO

CNBC: Are Corporate Ethics Sliding Again?

From CNBC.com, posted September 15, 2015

Just when we thought we were past the corporate scandals of the past decade, two new crises have emerged at large global companies – Toshiba and United Airlines.

Last week, Toshiba announced an “accounting adjustment” of $1.9 billion, more than four times the original estimate in April when the problems initially surfaced. Toshiba’s problems extend back for seven years, and have cost CEO Hisao Tanaka and two key executives their jobs. They have acknowledged awareness of the improper accounting, which they attribute to short-term profit pressures.

Jeff Smisek in May 2015

These adjustments are not just accounting errors, they may be indications of potential fraud. If Toshiba was an American company operating under Sarbanes-Oxley, its CEO and CFO could be subject to criminal penalties.

That was followed by United Airlines announcing the resignation of its chief executive, Jeff Smisek, for his involvement in the corruption scandal with David Samson, former chair of the Port Authority of New York and New Jersey, involving special flights from Newark to Columbia, SC, where Samson has a home. In addition to Smisek’s resignation, two other top United executives involved in the scandal have also departed.

The former CEO of Continental Airlines, Smisek led the merger of United and Continental in 2010. As CEO for the past five years, he has been confronted by a host of operating problems from delays, computer problems and breakdowns in the reservation system plus difficulties with merging the unionized workers of the two airlines. This has led to enormous pressure on Smisek from United’s shareholders.

What is even more shocking about Smisek’s departure is that the United board has granted him a $4.9 million termination settlement plus 60,000 shares of stock worth more than $3 million. He was also awarded lifetime flying and parking privileges, this year’s bonus and his company car. This calls into the question whether the board exercised its responsibility to set a high bar on ethics for the company.

Scandals like these have no place in today’s world. They tarnish all corporations in the eyes of the general public. In both cases the CEOs were well aware of the rules and yet engaged in inappropriate and potentially illegal activities. For what reason? It appears they were responding to pressure from investors to improve short-term performance. That’s no justification for engaging in corruption, nor should we blame investors for demanding better results. And both scandals involved their subordinates as well. Will it turn out that the corruption at the top levels of United and Toshiba goes much deeper?

The CEO’s role is to develop sustainable strategies that enable their companies to perform in the near term while investing for long-term growth. In sharp contrast to Smisek’s leadership, Delta CEO Richard Anderson has done just that since the company emerged from bankruptcy and acquired Northwest Airlines in 2008. Delta’s employees are engaged and focused on their customers, its computer systems work well, and the majority of its flights arrive early. This has led to very strong bottom-line results.

These days the public and investors are entitled to demand that companies have integrity in their accounting and their dealings, and operate with openness and transparency. Neither Toshiba nor United did so. As a consequence, their reputations are deeply scarred.

Asking board members who presided over these debacles to take over as CEO is not right either, other than on an interim basis. Rather, the boards of Toshiba and United Airlines need to bring in high integrity leaders who can restore the confidence of their customers, employees and shareholders. Failing that, expect both of these giants to continue to decline.

The only good that can emanate from these situations will be if other companies’ boards and CEOs learn from them. Capitalism only works when its leaders put first their moral responsibilities to the company and society.