Barry Shapiro Quoted in Compliance Week, "Sex, a CFO, and a Corporate Ethical Dilemma"

Media Source: Compliance Week

It is a corporate ethics dilemma made in New York City tabloid heaven. Take one Brazilian native arrested on charges of prostitution, narcotics and money laundering. Accuse her of running a brothel out of her Manhattan apartment. Let the gossip columns have a field day, printing salacious details of the “sugar daddies” providing her gifts of cash and clothes.

And if you’re Time Warner, brace yourself—because your chief financial officer, Wayne Pace, has been identified as one of the men most prominently helping the Big Apple’s newest madam, Andreia Schwartz, to fund her lifestyle and activities.

“In the research we do, leadership has a huge influence on employees’ belief that standards really matter in an organization,” says Patricia Harned, president of the Ethics Resource Center.

Like virtually every public company, Time Warner has a code of conduct for all employees as required by Section 406 of Sarbanes-Oxley—in this case, called the Standards of Business Conduct. Senior executives and financial officers must also obey an additional Code of Ethics. Among the standards executives agree to follow is to “engage in and promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships.”

Values do play a role in deciding how to address a situation like Pace’s. In 2004, consulting firms Booz Allen Hamilton and the Aspen Institute surveyed senior executives at 365 companies. Nearly 90 percent reported that their company had a written values statement, and that ethical conduct was a principle in those statements.

The survey also found that 85 percent of respondents said their companies rely on explicit CEO support to reinforce values, and 77 percent said such support is one of the most effective practices to maintain a company’s ability to act on its values.

Most times, the company must also tread carefully; firing an executive for cause is a delicate matter. Often, Annex says, if an executive demonstrates bad moral conduct, yet the behavior did not affect the company, it’s difficult to fire the executive without paying severance. For those like Pace at the stratospheric heights of Corporate America, that can get expensive: Pace’s 2005 compensation totaled $6.8 million.

Other Poor Judgments

Time Warner is not the only company forced to deal with a high-level executive’s personal behaviors spilling into public view. In March 2005, Harry Stonecipher, then president and chief executive officer of Boeing, resigned after the disclosure of an extramarital affair he had with a female executive at the company. At the time Boeing was praised for its swift action and tough commitment to ethical behavior, as Stonecipher was considered a good CEO professionally.

And in May, IT consulting firm Keane ousted Chief Executive Officer Brian Keane—son of the company’s founder—after one current and one former employee made allegations of sexual harassment against him. A subsequent press release identified the current employee as Georgina Fisk, vice president of marketing, who was paid $1.14 million in a settlement with the company and resigned last month.

In making the announcement that Keane stepped down, the company asserted that his conduct “reflected poor judgment.” As a result, the company said the board concluded that “Keane could not continue to provide the leadership that [the company] requires and that his continued service as CEO would not be in the best interests of the company.”

Annex believes that in today’s environment, ultimately Pace or others who find themselves in similar situations will cut a deal where the company will pay him to leave.

But Shapiro at Meyer, Suozzi, English & Klein stresses that this does not mean the Puritans have taken over Corporate America. “If every company had an executive with an adulterous relationship get fired,” he says, “there would be a lot of resumes out there.”