Corporate Ethics Rankings and Contractor Responsibility

Ethisphere Magazine is a publication dedicated to promoting best practices in business ethics, compliance, and corporate governance and citizenship (its motto: "GOOD. SMART. BUSINESS. PROFIT."). The magazine is widely read by Fortune 500 executives and compliance officers. (Full disclosure: Last year, Ethisphere named POGO's executive director, Danielle Brian, one of the "100 Most Influential People in Business Ethics.")

The second quarter issue contains its annual "The World's Most Ethical Companies" ranking. These are companies Ethisphere trumpets as "the ones that go above and beyond legal minimums, bring about innovative new ideas to expand the public well being, work on reducing their carbon footprint…and won't be found next to the words 'Billion Dollar Fine' in newspaper headlines any time in the near future."

Did any of the companies in our Federal Contractor Misconduct Database make this elite ranking? Yes: SAIC, General Electric, Honeywell and Fluor. No billion-dollar fines among this bunch, although there are quite a few eight- and nine-figure penalties, and a combined total of 83 instances of misconduct since 1995. (And, just last week, the Justice Department filed a False Claims Act lawsuit against Honeywell for allegedly selling a material used in bulletproof vests that the company knew was defective.)

Ethisphere's team of reviewers looked at only the last five years of a company's history. Coincidentally, this also happens to be the time frame set by legislation pending in Congress that proposes a government-maintained contractor responsibility database modeled on the FCMD.

Ethisphere's previous issue had a ranking of the top federal contractors' ethics programs. As you can see, there is no correlation between the contractors' ethics program rating and their misconduct history. If anything, there's a strong negative correlation. Contractors with many misconduct instances (i.e. General Electric, Honeywell and Fluor) have surprisingly high ethics program ratings.

While rankings compiled by business publications like Ethisphere are useful in some respects, POGO hopes that contracting officers who read Ethisphere's rankings get a second opinion, because they're only getting part of the story. "Best" and "Worst" surveys and rankings tend to focus on companies' managerial structures and processes and ignore their actual conduct, especially conduct that occurred more than a few years ago.

-- Neil Gordon

Comments

[KSBR]

Re Andrew's point and with the righteousness of a former smoker:
BAT makes a product that is known to kill hundreds of thousands of people around the world. There isn't much they can do in the "business" or "consumer" layers of their corporate activity that can compensate for that. As BAT is fundamentally evil for dealing death, ethics are irrelevant. Make sense?

[Andrew]

Neil,

As much as I believe ethical rankings tables are a wonderful tool for companies in terms of benchmarking ethical performance, as well as being useful to the general public in terms of holding corporations to account, they have their limitations, and in some cases, may prove to be misleading.

One example is British American Tobacco. For six years running, the company has been included in the Dow Jones Sustainability Index, based on social and environmental performance. In 2007, it achieved a third place ranking out of the FTSE 100 companies in the Ethical Bonus Index 2007, as well as a gold ranking in the "Companies that Count' 2007 list of the United Kingdoms most responsible companies, published by the Sunday times.

One could look at such a record and conclude that British American Tobacco was a responsible company. That would be misleading. In South Korea, a tax office investigation recently found that the company had engaged in tax evasion to a value of about $USD 60 million over a five year period from 2001-2005. The investigation found evidence of falsified invoices as well as evidence that the company had paid bribes to a tax official to 'overlook' the problems. In Nigeria, the government is taking legal action against the company for allegedly promoting cigarettes to underage smokers. In Hungary a consumer protection agency fined the company for breach of advertising regulations, and in 2003, the company was fined for involvement in a price fixing scandal in Italy.

Ethical rankings tables are a useful tool for measuring the ethical performance of companies. But, as you note, readers should exercise considerable caution in interpreting the results of such tables.

Cheers

Andrew