Choosing Whether to Cover-Up or Come Clean

By JOHN SCHWARTZ   New York Times

What were they thinking?

The former Tyco International chairman, L. Dennis Kozlowski, pulls a crucial document out of a box of papers bound for investigators, according to the criminal indictment for evidence tampering. Executives at WorldCom hide billions of dollars in expenses through almost blatant accounting tricks, reportedly to meet increasingly distant profit projections. And there lies Arthur Andersen, devastated by the Enron fiasco and its guilty verdict for obstruction of justice.

Why do so many smart people appear to be doing so many boneheadedly dishonest things? Even Martha Stewart is being investigated over whether she lied about the circumstances surrounding her sale of ImClone stock just before it took a tumble. Ms. Stewart and Mr. Kozlowski may eventually have their names cleared. But former chief executives shake their heads at the growing crowd of tarnished business leaders. Roger A. Enrico, the former chief executive of Pepsico, said that during his tenure, "The rule was when you run into bad news, get to the bottom of it quickly as possible and get it out right away" so the company could move on.

Corporate governance experts express astonishment at recent tales from the executive suite. "Shredding documents, distorting the most basic accounting practices, pressing subordinates to become part of the conspiracy — how did they think they would get away with it?" asked Jeffrey Sonnenfeld, an assistant dean at the Yale School of Management who also runs the Chief Executive Leadership Institute. "Is it a strange sense of denial? Cynicism?"

Mr. Sonnenfeld and other experts suggest that the tendency among some chief executives to cover up instead of coming clean stems from some of the very traits that made them successful.

Members of the burgeoning chorus of critics of the corporate scandal wave generally say that most chief executives continue to run their companies in an honest way. "A few people have suddenly sunk the confidence in American business and American C.E.O.'s," said Lewis E. Platt, who ran Hewlett- Packard from 1993 to 1999. "It's unfair, frankly."

There is, in fact, a long history of chief executives acting decisively to own up to problems and fix them, as James Burke did in facing the 1982 scare over Tylenol capsules laced with cyanide.

The most obvious historical example of a leader doomed by his own cover-up comes not from the world of business, but from politics. After the Watergate break-in, "quick action, resolution on the spot," could have saved President Nixon, said Prof. Michael Useem, an expert in business ethics at the Wharton School of the University of Pennsylvania.

"It was the inaction, the cover-up, that absolutely ruined his reputation in history forever," he said.

Since the Nixon administration, a mantra repeated during many scandals has been, "It's not the crime, it's the cover-up." But many in the world of business have been slow to learn the lesson.

If the allegations against Mr. Kozlowski are proved true, they would provide an example. The indictment alleging that Mr. Kozlowski tampered with evidence said that the document was a fraudulent bill of lading, part of a scheme to avoid paying more than $1 million in sales taxes on six paintings, which he bought last fall, by shipping empty painting crates to the company's New Hampshire headquarters.

In the case of Ms. Stewart, the controversy is over whether she sold her ImClone stock based on inside information about bad news that the company was about to announce, or whether, as she says, she had a standing order to sell the ImClone stock if it dropped to $60 a share. Federal investigators are now asking whether she or her broker, Peter Bacanovic, pressured the broker's assistant to lie about having a verbal agreement.

Both executives have denied wrongdoing. But when such allegations against top executives are increasingly common, experts in corporate governance are asking why any executive — especially chief executives, with such heights to fall from — take such risks.

Robert Solomon, a consultant on business ethics and professor of business and philosophy at the University of Texas at Austin, explains it by saying: "People assiduously avoid the risks they readily envision and remain all but oblivious to those they don't. It's easy for a C.E.O. to envision losing his job or losing face among his peers but all but unthinkable that he would get indicted, much less go to jail." He compared the wayward executive with an alcoholic who "chooses to drive home to avoid having to admit to his friends that he's too drunk, but risks arrest — not to mention his life — in doing so."

"The question," Mr. Solomon said, "is, `Why is the C.E.O. acting like a drunk?' "

Even when no crime is alleged, many chief executives exhibit a stubbornness that can seem self defeating. Some cite John F. Welch Jr., the former General Electric chairman and his long-running fight with the Environmental Protection Agency over pollution of the Hudson River with P.C.B.'s by the company's plants. An agreement to proceed with the cleanup while still denying the agency's contentions about the case could ultimately have saved the company money and good will.

That same stubbornness is woven into the qualities that make effective chief executives such tough negotiators and fierce competitors. "They're used to seeing obstacles as opportunities," Mr. Sonnenfeld said. "They don't listen to the sources of resistance that tell them things that they should be learning."

In his interviews with 250 chief executives for his book, "The Hero's Farewell" (Oxford University Press, 1989), Mr. Sonnenfeld was struck by what he saw as a "heightened concern for their own mortality" and a corresponding yearning "to leave a lasting legacy." In the right balance, those traits can be a formula for greatness; taken to extremes, he suggested, they could lead to reckless and even illegal behavior.

And there is always greed. The notion that "`money is the only way to keep the score' is a big part of what's causing all the problems," said Mr. Enrico. Despite the fact that "at the end of the day, you're likely as a C.E.O. to have more money than you can spend," many executives seem to want more. "If the only way an individual sees his self worth is what his net worth is, the other things that come into a person's view — about his role in the world, his role in the corporation — go out the window."

John J. Fahy, a New Jersey lawyer who has served as a federal prosecutor, said he believed that very few chief executives intended to cover up losses or misdeeds for the long term. "They think if they can get through this crisis, whatever it is, they will be able to make things better" when conditions improve, he said, "like a bookkeeper who goes into the petty cash drawer for expenses, always thinking he'll put it back."

"But eventually," he said, "things get out of control because the sums get too large."

He warned, however, that the seemingly mystifying inability of many chief executives to quickly extricate themselves from troubles could be a sign that the problems have developed through long habit: "The way it is with corruption, at first you get away with a little, you get away with a little more and you get away with more still."

That sense of rule-breaking can trickle down, said Mr. Platt, underscoring the importance of integrity at the top. Because business has become so complex, "It's probably easier than ever before to make a mistake," he said. The vagaries of the business cycle can increase the temptation to fudge or cover up. "That's where the tone from the top becomes important," he said.

Attitudes at the top must change, said William W. George, the former chairman and chief executive of Medtronic, a leading manufacturer of medical instruments. "When you're C.E.O. of a public company, you become a steward of a lot of people," he said, including the employees, shareholders, and customers. "If the stewardship attitude isn't there, if you're in it to make money, all bets are off." Corporate boards should be looking for chief executives who show the same passion for integrity that they show for enhancing shareholder value, he said.

But to correct the "values crisis," Mr. George said, the need for change is not limited to the executive suite. Investors in general need to look beyond quarterly earnings. "We need to stop making heroes out of the fly-by-nights, and start venerating the heroes who build long-term businesses," he said.

The shock to the system from recent scandals could send companies looking to reestablish the values of integrity and trust, said Mr. Useem. He has heard from several chief executives who have promised to root out any ethical problems and disclose them. "There is kind of a cultural renewal going on," he said, but added, "We'll see if it takes."

Deciding to change is the easy part, Mr. Useem said, but added, "It's not enough to give a speech."

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