Hedge fund manager Martin Shkreli became one of the most universally despised business leaders of all time last year when he bought the drug company Turing Pharmaceuticals and announced he would raise the price of a previously affordable AIDS drug, Daraprim, by 5,000 percent. Even fellow pharmaceutical executives denounced the move — from $13.50 per dose to $750 — as greedy, with the Pharmaceutical Research and Manufacturers of America publicly condemning the price hike.
Shkreli was ultimately arrested by the FBI not for his conduct with Daraprim, but for allegedly running a ponzi scheme with a previous hedge fund. But what was to stop Shrkeli from pursuing ruthless business tactics, such as massively hiking the price of drugs, as long as they were inside the bounds of the law?
Many professions have codes of ethics that prevent its members from engaging in harmful, though legal actions. Every doctor takes the Hippocratic Oath, which requires them to have compassion for their patients and act in their best interests at all times. It reads, in part: “I will remember that I do not treat a fever chart, a cancerous growth, but a sick human being, whose illness may affect the person’s family and economic stability. My responsibility includes these related problems, if I am to care adequately for the sick.” (The oath does not, as popularly conceived, include the exact phrase “First, do no harm.”)
If Shkreli had been a doctor and he had similarly threatened the wellbeing of patients for his own benefit, the professional organization to which he belonged could have censured him or stripped him of his license to practice medicine.
Even lawyers have codes of ethics that obligate them to be honest and fair to all parties involved in a trial. Every bar association has its own oath, but they are all similar. Camden County’s reads in part: “I will never knowingly misstate facts or law, and will consistently act in such a manner that other lawyers and judges can trust in and rely upon my oral or written word.”
But what code of ethics restrains the actions of a business leader? While many companies have created their own codes of ethics, there is no code governing business people in general. The MBA graduation ceremony has no equivalent of the Hippocratic Oath.
That’s something that has never sat well with James Abruzzo, co-founder of the Rutgers Institute for Ethical Leadership. “There are certain things that define a profession, and business doesn’t have those,” Abruzzo says. “We need some kind of agreed-upon set of principles by which we can make decisions. One of the things that defines professions is a code of ethics, and there are hundreds of them.”
Abruzzo is part of a small but growing number of academics who believe it’s time for business to join librarians, software engineers, and massage therapists in having codes of ethics to guide the moral compasses of their practitioners.
It was an article in Harvard Business Review that got Abruzzo thinking about the need for a formalized code of ethics for business. He believes there should be an over-arching code that applies to all business leaders.
“Each company has a code of ethics, and we all have our own personal codes of ethics that we learn from our parents and our church and our instincts,” he said. “And when you join a company, there is usually some kind of code of ethics or standard that you have to live up to. Then, there is the professional code that should supersede the individual code.”
For example, a secretary and a journalist working at a large newspaper would have different codes of ethics. Both would have to abide by their individual codes and the company code, but only the reporter would have to live by the code of the professional organization for journalists to which he or she belonged.
“I think that if we could adopt a code of ethics for business, then ultimately the reputation of the business leader would improve. It would have an effect on younger people who are aspiring to be business leaders because there would be a level of rigor imposed on their thinking that doesn’t exist now,” Abruzzo says. For example, a person in the finance industry will likely have their performance judged by how much money they are bringing in. It doesn’t matter if the deals they made were ethical or not. The result is that many members of the public view Wall Street institutions as greedy and amoral.
“Businessmen and women aren’t rewarded for being the most ethical people; they’re rewarded for return on investment for shareholders and the amount of money they make for their bosses. I’m contending that the whole reputation of businesses would change if there were some kind of code of ethics that business people as a group abided by,” Abruzzo says.
He also advocates changing the entire value system of corporate America. He says many companies have the philosophy that corporations exist for the benefit of their shareholders only and that everything else, from customers to the environment to employees, are worthy only of secondary consideration. Abruzzo says that kind of thinking has led companies to pollute the environment and engage in short-term thinking for the benefit of shareholders. An over-arching code of ethics would help bring more companies around to a broader view of right and wrong that was less narrowly focused on profits.
“If you’re a company that says our job is to maximize profits and not break any laws, and it’s not illegal in Bangladesh to use children as laborers, why do you not do it then? You don’t do it because it’s fundamentally not right to take advantage of children. You have to make a decision that is more complicated than ‘is this the best business decision?’ If your ethical principal is to maximize shareholder value then it is the right thing to do. But if it is to be a responsible corporate citizen, then you know it’s the wrong thing to do.”
Abruzzo knows that this is a tough sell. Many business managers feel obligated to maximize the owner’s or shareholders’ value. When a course of action begins to veer in the direction of unethical business practices, the manager may not find any easy way to balance the competing interests.
Abruzzo thinks that business schools like Rutgers are the ideal place to start. He believes that a code of ethics should come along with an MBA. That way, the degree would be a way of guaranteeing that the person who has one lives up to certain standards of behavior. “I think that would impose on business a level of professionalism that doesn’t exist now,” Abruzzo says. He further proposes a “certified business professional” status that had to be maintained, and which could be taken away for breaches of ethics.
Although a business person’s code of ethics may be just an idea at this point, Abruzzo and Judy Young, executive director of the Rutgers Institute for Ethical Leadership (see story below), are taking steps to instill corporate citizenship in Rutgers business students. The school now has a wide ranging program designed to teach a strong ethical foundation that includes courses and other activities.
Abruzzo started his career in the arts, earning a bachelor’s degree at Brooklyn College and earning an MFA there and a master’s in music at Queens College in 1974. He performed as a concert pianist and taught music and arts management at City University of New York and Columbia. He currently teaches nonprofit leadership at Rutgers in addition to leadership ethics. He is also executive vice president and managing director of nonprofit practice for DHR International, an executive search company.
Abruzzo co-founded the institute together with Alex J. Plinio, the former president and CEO of FS-USA, a nationwide exchange student program. Plinio came from more of a business background, with a corporate career that included a stint as head of Prudential Annuity Services and positions in marketing, operations, administation, and start-ups.
Abruzzo hopes that the institute will have a role in shaping the next generation of business leaders to have a stronger will to do good rather than just make money, but he is up against powerful cultural forces.
“You would not believe the misconceptions that students have,” he says. “You see business leaders lionized on the cover of Forbes who have actually paid millions in fines for unethical things and still make billions of dollars and are heads of corporations flying private jets.”
— Diccon Hyatt
Institute for Ethical Leadership, Rutgers Business School — Newark and New Brunswick, 1 Washington Park, 10th floor, Newark 07102; 973-353-1134; James Abruzzo, co-founder. www.business.rutgers.edu/iel.
#b#Why Ethics Are In Everyone’s Interest#/b#
If you are a leader in the healthcare industry, you are most definitely going to encounter ethical dilemmas. The question is, will you handle it like an amateur, or like a pro? Judy Young, executive director of the Rutgers Business School Institute for Ethical Leadership, wants to make sure that you and your team are well trained to handle ethical matters.
Young organized the Rutgers Institute for Ethical Leadership’s Conference on Ethical Leadership that took place in April, 2015. “Ethics and respect are really a cornerstone to developing effective organizations,” she said at the time. “This conference brings to the core a lot of things I did in my past, and it certainly brings together my core values. Ethics is something I’m very passionate about.”
Young developed a passion for ethics over her 25-year career working in leadership development at various hospital systems, management consulting firms, and Johnson & Johnson. Young was raised in Point Pleasant. Her father worked for RCA in Harrison as an associate engineer and her mother spent her time raising Young and her five sisters, and ran a part-time babysitting business. She majored in communication at Montclair State University and got a master’s degree in corporate communication from Seton Hall.
Young had to deal with ethics early in her career when she was working for hospitals. “I was new to a position, and I was only there for about 30 days,” she says. “The organization that I worked for had a regulatory agency coming in to do a site visit. When you’re in training and development, you have to show regulatory agencies that you have done a certain amount of programs, safety programs, and a variety of different programs. Before the inspection, my boss walked into my office and she had an attendance sheet in her hand. She had all these signatures on it and said, `You need to sign this.’ I looked at it, and there were classes on it that I did not conduct, which she wanted me to sign saying I had conducted the classes.”
The inspection was important for the organization, and by not signing the document, Young was sure to displease her boss, who had the power to fire her on the spot. The hospital needed to have had a certain number of classes conducted to pass the inspection. “Physically, I felt heat up and down my body,” she says. In that moment, she thought back to what her parents had taught her about being honest. “I handed her my pen and paper back and said I didn’t feel comfortable doing that,” she says.
Young says it was the boss who lost her respect that day, not the other way around. “She had shown me exactly what kind of a leader she was, and a leader who does not act with integrity is not somebody I want to follow.” A day later, she was looking for another job. It took her two years to find one, but Young says she was happy to leave an organization where she could not respect the person she was working for.
Young says learning good ethics is an important part of any business leader’s education. Rutgers requires business students to take a course called Business Forum, and ethics training is a big part of the course. The institute Young works for also holds frequent forums on ethical leadership, and operates an “ask the ethicist” hotline for students and staff.
“It’s important for leaders and for all people in healthcare, whether it’s providers, manufacturers, or community members receiving healthcare, to discuss the issues, make sure they are ahead of the innovation curve so they can be competitive, and to make sure they can positively influence their healthcare system,” she says.
“We really hope that folks will have the opportunity to construct their own plan for ethical leadership in any of the work they do,” Young says. “We want them to walk away with an action plan. We want to connect with professionals and students committed to ethical leadership and help them when it comes to critical thinking and critical decision making. It’s not a matter of if, but when, an unethical situation will come across someone’s desk.”
— Diccon Hyatt
Reprinted from the April 29, 2015, issue of U.S. 1.
#b#Healthcare Ethics: Theory vs. Practice#/b#
Ethical problems in healthcare aren’t always so obvious as whether or not to falsify records. More often administrators are faced with the job of allocating scarce resources. A budget for any healthcare organization can be viewed as a moral document, in which leaders decide who gets treatment, where they get it, and at what quality.
Jennifer Velez faced many such tough decisions as commissioner of the state’s Department of Human Services from 2007 until her retirement in 2015. She has gone on to become senior vice president of strategy and planning for Barnabas Health, a West Orange-based hospital network that boasts 4,600 doctors and 18,200 employees (about the same size as the Department of Human Services).
Velez doesn’t see the issues she faced as ethical ones. “I think the largest issue we faced was de-institutionalization,” Velez says. “We closed a psychiatric hospital and two developmental centers. It’s really a cultural shift in moving our institution-based care to community-based care.”
Velez oversaw the closure of the Hagerdorn Psychiatric Hospital in Hunterdon County, and two institutions for developmentally disabled people: the North Jersey Developmental Center in Passaic County, and the Woodbridge Developmental Center in Middlesex County. There were 415 residents at the two developmental centers, and about 255 mostly geriatric psychiatric patients at Hagerdorn.
In most cases, the clients of the facilities were transferred to group homes where their routines were less controlled than before. “It was phenomenal. The institutional setting is very regimented out of necessity. But when they’re living in their own home or in a group home with other individuals, they can pick the color of the bedroom, sit outside in their own yard, or in neighborhoods with plenty of support from providers and agencies. It’s one of the most gratifying things I experienced in my role as commissioner.”
Many families of clients of the institutions did not see it that way. Velez faced consistent criticism over the closure of Hagerdorn and the two developmental centers from activists, as well as relatives of developmentally disabled people and psychiatric patients. Critics noted that the waiting list for residential facilities was thousands of people long, and that Velez’s department had done little to clear the backlog. They also questioned the rationale for closing the centers, and whether group homes would truly be prepared to take care of people who had spent most of their lives in institutions.
Velez defended her decision, saying that maintaining the institutions on campuses that sprawled over hundreds of acres was prohibitively expensive. “If you could take that money and invest it in community-based resources, the quality of life for people improves dramatically,” she says.
But theory often differs from practice. “The devil is in the details and that’s where things get problematic,” Velez says.
Velez says she has saved letters from families who had started off as critics, but who had been won over by how the transfer had turned out. “Those letters don’t come in droves, to be honest,” she says. “But it can happen, and it does happen as long as investment follows closures, or if it occurs in advance.”
Throughout the closures, and the budget crises that ensued from the Great Recession of 2008-’09, Velez says she maintained a good relationship with the governors she worked under. She was appointed by Jon Corzine, a Democrat, and finished her tenure under Chris Christie, a Republican. She praised Christie for expanding Medicaid under the Affordable Care Act, a move that benefited the largely low-income clients served by the DHS.
Velez knows what it is like to provide those services, but also knows firsthand what it’s like to rely on them. She grew up in South Hackensack, where her mother, a secretary and her father, a blue-collar worker, lived in a trailer park, for a short time on welfare and food stamps. She majored in economics at Drew University, and earned a law degree at Rutgers, but never forgot how she grew up. She left a law career for the state government, partly out of a desire to help families in similar circumstances to her own.
“Many of the programs my department was responsible for were the same ones I benefited from growing up,” she says. “It was very meaningful for me to get there. I never imagined being commissioner, but the two are very tied together.”
— Diccon Hyatt
Reprinted from the April 29, 2015, issue of U.S. 1.
#b#Do Big Nonprofits Serve the Public, Or Their Founders?#/b#
Stanley Katz, a Princeton professor, is an expert on philanthropy, and is one of the few scholars who has written a comprehensive history of philanthropic foundations. And what he sees in today’s billionaire-run megafoundations (the Bill Gates Foundation is one example) is not pretty.
“Foundations are setting out to set public policy,” he says. “The best example for me is K-12 policy, where there are five or six megafoundations working together to create a reform agenda for K-12, an agenda that the federal department of education has bought into. It’s a severely, not only dangerously undemocratic, but also antidemocratic thing, particularly in the field of elementary education.”
Katz spoke on “Private Wealth and the Public Interest” last January at the Princeton Public Library.
Katz bases his criticisms on his extensive scholarship in the history of foundations. He is one of the few academics to write an entire book on the subject.
According to Katz, the modern charitable foundation began with the robber barons — industrialists like Andrew Carnegie and John Rockefeller. These men, about a dozen of them, retired with more money than any one person could hope to spend, so they established charitable foundations to use their fortunes for the betterment of humanity. But the public was skeptical of their motives.
“There was widespread fear of these organizations and of these men,” Katz says. “And the reason was that these people were called robber barons. They had made all this money through ruthless employment of the techniques of modern capitalism and they created a lot of harm along the way. Standard Oil and U.S. Steel were not gentle and nice institutions, and the people who ran them had trampled on quite a lot of people in order to get them to where they were, even if you’re not thinking about the impact on the working man who was involved in these industries.”
The philanthropists argued back that all they intended to do was to serve the public good. The institutions they established — like the Carnegie Corporation and the Rockefeller Foundation — funded the arts, culture, university research, and medical campaigns against diseases. “Over the next 50 to 75 years, those foundations made that claim look good,” Katz says. Although their founders were long dead, their foundations won over their critics by doing lasting good to society. “The vast majority of people considered that what they were doing was good and that they were being administered in a responsible sort of way,” he says.
In the early 21st century, there was an explosion of wealth unlike anything that had been seen since the days of the robber barons. The new class of billionaires — the Bill Gateses and Mark Zuckerbergs of the world — have created what Katz calls “megafoundations,” which are foundations of more than $1 billion. There were four or five of them 10 years ago, and Katz says the last time he looked there were 38, though there are probably more by now. The megafoundations do things very differently than their predecessors.
For one thing, the titans of industry of the previous century nearly all built their fortunes over lifetimes, and set up their foundations to be run by boards of trustees after they died. By contrast, the new billionaires like to direct the efforts of their charitable giving personally.
“The foundations are different not only because of size but because in every case they have a living donor, and Rockefeller and Carnegie are long dead,” Katz says. “That donor, almost by definition, considers himself the smartest person in the world. And they are pretty smart, but they are arrogant and they see no reason why they shouldn’t use philanthropic money the same way they use corporate money — in order to change things and make people do what they think is the right thing to do. The long-term aversion of foundations to interfering in public policy has been badly eroded.”
While the old foundations took time to study the root causes of problems, Katz says the new generation of meddling billionaires is more likely to spend large amounts of money at a time in an effort at “strategic philanthropy.”
The “strategic philanthropy” approach, which has been adopted by some traditional foundations, means setting out specific, measurable goals, and trying to reach those goals in the relative near term.
The older foundations took a more long-term approach, and were more likely to invest in fundamental research that didn’t necessarily lead to practical results. The newer foundations are likely to fund researchers at think tanks and contract agencies, where the researchers will do exactly what they are told.
Katz had two pieces of advice for donors who want to use their wealth responsibly.
First, he says, think hard and take a lot of advice about the range of problems you want to address, and pick those for which there may in the foreseeable future be reasonable approaches that are not beyond the capacity of current resources and present conditions.
Second, be humble. “Take the advice of people who know a lot more than you do about whatever that problem is. Run possible approaches by a lot of people who don’t have an immediate stake in the problem, and try to establish what the most promising approaches would be.”
Katz holds up the Mellon Foundation and the Carnegie Corporation as examples of groups that are doing things the right way.
Katz grew up in Chicago, where his father was in business and his mother was a homemaker. He earned a bachelor’s degree in English history and literature at Harvard in 1955, and a doctorate in British and American history from Harvard in 1961. He also studied law after getting his doctorate. Katz’s academic career has brought him numerous honors, including the National Humanities Medal awarded by President Obama in 2011. A specialist in American legal and constitutional history, Katz is an author and editor of numerous books and articles.
He taught history at Harvard and Wisconsin, and taught law at the University of Chicago. He came to Princeton in the 1980s to teach legal history before resigning in 1986 to become the chair of the American Council of Learned Societies. He retired from ACLS in 1997 and returned to teach at Princeton.
Katz criticizes the strategic, data-driven approach to philanthropy, seemingly borrowed from the metrics-obsessed world of business.
“The downside is that not everything can be measured,” Katz says. “There are some really important things that are hard to measure. The metaphor for this is if you lose your keys on a dark street, and you only look for them under the lamppost, you are going to miss a lot. Nobody is arguing against effectiveness, but what you can measure most clearly may not be the most important thing to think about.”
— Diccon Hyatt
Reprinted from the January 14, 2015, issue of U.S. 1.
#b#When Good Workers Go the Wrong Way#/b#
The potential for fraud is an unfortunate fact of business life. Employee fraud can be particularly damaging as it is an act of deceit committed by a trusted worker or partner. It is not something many business owners like to think about. But a proactive business owner will have the right internal controls in place to eliminate the opportunity for fraud or make fraud less likely to occur, says Bruce S. Ludlow, CPA at Klatzkin & Company in Hamilton.
Opportunity is just one side of the “fraud triangle,” according to Ludlow, who addressed this subject at a forum presented in January, 2015, by the MIDJersey Chamber of Commerce.
“Pressure,” Ludlow says, is the first side of the fraud triangle. Pressure may be internal, such as the pressure to meet revenue quotas to earn a bonus, or external, such as the pressure to earn money to pay medical bills for a sick child. Such pressures can drive some employees to search for ways to supplement their income.
The second element usually present is “rationalization,” says Ludlow. Statements such as: “I’m worth it, I should be getting it, I’m underpaid” provide the rationale for employees looking to justify their illegal actions.
The third leg of the fraud triangle is “opportunity.” The person who feels pressured to obtain more wealth and has rationalized committing fraud must still find an opportunity to do so with little risk of getting caught. If the business has no internal controls, or worse yet “if the head guy’s doing stuff or fudging things,” the employee who is tempted to commit fraud will find an opportunity, says Ludlow.
What are some potential opportunities for employee fraud and what internal controls can prevent them? “Somebody in charge of payables could set up a fictitious vendor and have invoices paid to this vendor, and actually then they have access to that account,” says Ludlow. “So somebody’s paying something that looks like a bill, but it’s not a real vendor.” Similarly, “somebody who has payroll responsibility could set up a fictitious person or could have employees who were real but were terminated put back on the payroll and get that direct deposit into an account.”
Ludlow grew up in Feasterville, Pennsylvania. His father, a banker with a business degree from Temple University, served as a sergeant in the U.S. Army under General George Patton. His mother, also a Temple graduate, taught home economics before becoming a full-time homemaker.
Ludlow graduated from Shippensburg University in 1974 with a B.S. in business administration in accounting. He is a partner in Klatzkin & Company and has been a CPA for more than 35 years, certified to practice in New Jersey and Pennsylvania. He is a past treasurer and director of the Mercer Chapter of the New Jersey Society of CPAs.
Ludlow’s firm does accounting for nonprofit organizations and financial reports and taxes for commercial businesses. Internal controls, he says, are a key to fraud prevention for the business owner who wants to be proactive rather than reactive.
“Most things actually come as tips from employees seeing something. You have a kind of chain of command where a person can contact a higher-up person to say, `I just saw something here that didn’t seem right’ so they can give a tip. It should be anonymous so there can’t be retribution, but that’s a lot of times how things are done.
“With a bigger company, for internal control the bigger thing is segregation of duties, so that somebody’s not paying checks, collecting checks, and doing the bank reconciliation. Bigger entities can separate those duties. A lot of times a smaller entity can’t because they only have so many people. To hire somebody just to write checks, that’s not going to be feasible. So that’s when the responsibility would fall on the owner, the office manager, or somebody to make sure everything is done correctly.”
How can a small business owner use segregation of duties to prevent fraud? Ludlow says the owner can open the bank statement when it arrives in the mail instead of having it go directly to the person who prepares the bank reconciliation. This way the owner sees it before it can be altered. “With technology, if you have online access you could alter a bank statement so that it looks right,” he says. Most companies receive a statement in the mail, he adds, but for those who view theirs online, the owner “would be the only one to have access and print it out and let the other person do the bank reconciliation.”
While internal controls are important, someone needs to check that they are being implemented, Ludlow says. In a smaller company the chief financial officer would have an overview of all of the company’s financial practices, but in a larger company there might be other managers who also check them.
Employee fraud prevention all comes down to checks and balances, Ludlow says. “That takes the opportunity, or at least it will deter some people because they figure the opportunity’s not there because there are checks. A lot of times what happens is a person who might do this for the first time does something small, gets away with it, and they grow in confidence. And if there’s that initial fear that something’s going to be checked or be found, maybe they don’t even try it. So if you don’t have those controls in, they’d be more apt to try it.”
— Aleen Crispino
Reprinted from the January 28, 2015, issue of U.S. 1.