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April Breakfast Meeting Recap |
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Joe DiStefano, David Skeel, Dave Thomas, CPCU
Thursday, April 21
BUSINESS PRACTICES:
WHAT’S ETHICS GOT TO DO WITH IT?
"great program"
"the best meeting program of the year"
"very knowledgeable speakers"
"very informative, I learned a lot"
"the stuff about Reliance was fascinating"
"very interesting – not at all boring, and this is a subject that could be very dry"
"we continued the discussion when I got back to the office"
"good mix of opinions and perspectives"
"too bad we didn’t have several more hours – these guys were terrific, and I would have asked a lot of questions"
On Thursday morning, April 21, 2005, chapter breakfast meeting attendees heard a panel session on business ethics from: Joseph N. DiStefano, award winning business writer for The Philadelphia Inquirer; David A. Skeel, Jr., S. Samuel Arsht Professor of Corporate Law, University of Pennsylvania Law School; and David Thomas, CPCU, Marketing Director, NE Region & Director of Sales American Institute for CPCU - Insurance Institute of America.
Programs Director Lilly Cowan, CPCU, introduced each panelist and also served as moderator. Dave Thomas led off by describing the "legitimacy gap," which is the difference between "talking the talk" and "walking the walk." For example, Enron had a state-of-the-art Code of Ethics, but a corporate culture that sent a conflicting message. Enron got into trouble because they did not follow their own ethical guidelines and put them into place in the workplace.
Lilly posed the question: "Can we teach ethics?" Dave felt that training is essential so that ethics becomes ingrained into the corporate culture, from the top down. He emphasized the need for an enforcement component that demonstrates that the organization is serious about its ethical code. Ethical training, he says, should not be a one-time thing, but an ongoing plan, reviewed and renewed on a regular basis. To answer Lilly’s question, Dave suggests that not only can employees be trained in ethics, but also they must be. Professor Skeel posed the choice of teaching ethics as a separate course in an academic setting, or using a pervasive method to embed an ethical component in every course. While the debate is ongoing, he suggests that because in the real world ethics cannot be separated from business, it may be better to teach it pervasively. Dave closed his segment by describing the fourteen genuine insurance cases used by the American Institutes to demonstrate ethical dilemmas when teaching ethics in an interactive setting. Learn more about the Insurance Institute for Applied Ethics at http://www.aicpcu.org/about.htm#IIAE.
Professor Skeel then spoke about the factors that encouraged risky corporate behavior in the 90s and ultimately led to ethical and financial meltdowns such as WorldCom and Enron. First, he cited the “rank and fire” best-to-worst employee grading, by which the bottom performers each year were fired. This emphasis on performance regardless of ethics encouraged risky corporate behavior. Secondly, he noted the CEO as “superstar,” analogous to big name sports free agents seeking the most lucrative payday. According to Professor Skeel, the method to becoming a CEO superstar required a lot of risk. Lastly, he described the use of stock-option based executive performance. While he sees the value of tying executive pay to the organization’s performance, the downside is that this system works as a “one-way ratchet” on behavior. In other words, compensation rises if the stock price does, but compensation does not fall with the stock price. Thus, the CEO is rewarded for risky wins but not punished for risky failures.
Professor Skeel goes on to note that with all sorts of new hedging devices and financial instruments, it was easy to take such risks at the same time that those who should have been watchdogs were paying too little attention. Hence, CEOs felt all kinds of pressure NOT to “walk the walk” regarding ethical behavior. Too few put ethics ahead of profits. To help solve this problem, Skeel would eliminate the corporate deductibility of stock options paid to executives in excess of $3 million. He cited another’s observation that “a good indicator of how likely it is that a corporation will need to restate earnings is what percentage of the CEO’s pay is in stock options.”
Joseph DiStefano opened with this quip: “News is what somebody, somewhere, wants to suppress. Everything else is advertising.” He spoke of the judgment that those in the press must use on which stories to run. As hard as it is to be objective, the simple choice of what is important enough to report may itself reveal a bias. He went on to speak about the financial collapse of Reliance Insurance. When he first looked at this old line company, he found little of interest to write about. But during its rapid decline, he spoke to regulators in Florida and Texas who complained that the company had been in trouble for years with bad underwriting practices. When he followed up with the PA regulators, he was told that Reliance was “no problem” and had $2 billion in surplus.
Joe described the investing advice that spurred Saul Steinberg. The notion was that insurers were sitting on large amounts of underutilized capital, so the directive was to buy them up and roll them into a holding company and use the capital to build a financial empire. He concluded by noting that the last ten years of Reliance’s existence were the most interesting, with the formation of the Reliance National subsidiary in New York, which apparently took a different approach to underwriting than did the traditional arm here in Philadelphia. The audience then had time to ask questions, which spurred some animated discussion of business and ethics and the forces that drove municipal governments to grant monopolies to cable providers. Mr. DiStefano was available to sign copies of his book “Comcasted.” Members and friends may learn more about Professor Skeel’s book “Icarus in the Boardroom” at http://www.oup.com/us/catalog/general/subject/Law/BusinessLaw/?view=usa&ci=0195174712. OR SEE DISCOUNT OFFER BELOW!
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Discount on David Skeel's Book |
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