Markkula Center of Applied Ethics

Stopping Corporate Fraud

Arguing that complexity is the enemy of good corporate governance, Joseph Grundfest, professor of law and business at Stanford University, suggested that the regulations mandated by the Sarbanes Oxley Act of 2002 were too complex to be effective in avoiding business scandals like those of the past decade.

Speaking before the Business and Organizational Ethics Partnership of the Markkula Center for Applied Ethics, the former SEC Commissioner said there was a simple, two-word explanation for what went wrong at companies such as Enron: Winona Ryder.

The behavior of the actress, who was sentenced to three years probation and community service for shoplifting, is easily explained, Grundfest said, as "a version of a cost-benefit analysis." According to Grundfest, Ryder certainly understood that theft was both morally wrong and against the law. She assumed, however, that her odds of getting caught were low and that "nothing terrible would happen to her" if she was discovered, he continued.

A sensible public policy response to Ryder, Grundfest argued, is not to pass more laws against shoplifting, but to "change the calculus" by increasing the likelihood of apprehension and the adverse consequences.

The same, he said would be true for the majority of corporate wrongdoing. He analyzed the fraud that occurred at such companies as Parmalat, WorldCom, and even Crazy Eddie's. In all cases, he maintained, the fraudsters were well aware that what they were doing was wrong. Often, he said, small frauds spiraled out of control as the people involved tried to cover up what they had done previously.

As a solution, he proposed more resources for government efforts to "catch [wrongdoers] faster and then make sure there's hell to pay."

"If people would simply obey the law, it would solve 80 percent of the problems in business ethics," he argued. Where the ethical issues are more difficult, another "98 percent" of the problems could be addressed by transparency.

In that context, Grundfest suggested that a focus on teaching ethics at colleges and graduate schools may not be the best investment as he doubted the possibility of having much impact on the morality of people over 18.

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