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Markkula Center for Applied Ethics

Ethical Lapses During the Rite Aid Crisis

Anne Federwisch

Tim Noonan's PowerPoint Presentation

Timothy J. Noonan, former COO, interim CEO and member of the board of directors at Rite Aid Corp., spoke to a recent meeting of the Business and Organizational Ethics Partnership about his experiences during a legal and ethical crisis at the company from 1999-2000. Though he offered insights on his behavior, he did not offer excuses or shift blame. Rather, he presented a frank account of an ethical lapse that he wished he had avoided.

As Jim Balassone, executive-in-residence at the Markkula Center for Applied Ethics, noted in his introduction, “Tim and I are the same age, with similar backgrounds and education. Perhaps the only difference is that I went to work for a company where it was easy to be ethical and Tim went to work for Rite Aid. I’d like to think that I would have acted differently or escaped some of the traps Tim will talk about—I would like to think that, but I’m far from sure that would be true.”

Noonan outlined his purpose by saying, “I'm here today to spend a little bit of time with you to talk about the crisis at Rite Aid. It could have been your company, your associations. It could be anyone's. It was a real crisis. And I hope it’s the kind of crisis that none of you ever get yourself caught up in,” he said. “I made some bad decisions, but ultimately, you’ve got to make some right decisions. I’m no different than you. I want you to understand that this could happen to you, it could happen to anybody.”

History of the Rite Aid Crisis
Alex Grass founded Rite Aid, a mom-and-pop health and beauty aids store, in Scranton, Pa., in 1962. The company went public in 1968, and by 1995, Grass’s son forced him out as CEO. Amid rapid expansion, numerous acquisitions, and costly innovations, Rite Aid got involved in a financial crisis resulting in a $1.6 billion restatement, shareholder lawsuits, and ultimately, indictments and convictions of officers of the company. Noonan himself eventually pled guilty to misprision, defined as the failure by someone who is not an accessory to prevent or notify the authorities of a felony. (For more on the financial crisis, view William Black’s PowerPoint presentation.)

Noonan began at his career at a pharmacy that was eventually acquired by Rite Aid, moving from stock boy, to pharmacist, to COO and eventually to interim CEO of Rite Aid. The company had state-of-the-art warehouses and an innovative robotic pharmaceutical system industry leading technology, unique store design, and was very active in acquisitions. “The company was a great company. The employees were great employees. The jobs I had were the greatest jobs you’d ever want to have,” he said.

Not that there weren’t ethical questions even early in his career. He confronted management about a possibly illegal 50-cent surcharge on Medicare prescriptions and refused to make questionable payments.
Should he have left the company then? he asked. “These things were few and far between, but they did happen. And they did raise eyebrows.” Taken as a whole, they did not reflect well on the company’s ethical culture but were minor transgressions, Noonan concluded.

The Whole Truth
But there was a definite crisis when Noonan left the company; there was a cash flow crisis, a major drop in the stock price, and rumors of manipulation of the company’s financials. He got called in to speak to a law firm brought in to investigate the situation.

“There is no question that when I went to those interviews, I wasn’t fully truthful. No question about it,” he admitted. “I was perfectly honest with them, upfront, the vast majority of the time. But there were some items I wasn’t truthful about that became part of this case.”

For example, although he admitted to investigators that he had gotten a severance package, he neglected to tell them about the secret, backdated package (which he never exercised) that the former chief legal counsel and former vice chairman handed him, It was signed by the ousted CEO after he left the company, backdated almost a year, and worth millions of dollars more than his official deal. And although he told them some of what he knew about pharmacy rebates, “I didn’t fully tell them all I knew.”

After Noonan’s third meeting with investigators, he said, rumors ran rampant, innuendoes abounded, and he decided to speak directly with government officials. “I wanted to clean up any of the interviews I had in the past,” he said.

Lying to the investigators was a big mistake, he said. “Ultimately, you have to correct it. You have to face reality,” he said. “What I would share today is whenever you get yourself into these situations, you’re better off right up front facing the issues. Kind of difficult, I’ll tell you that.”

Eventually, Noonan told the government what he knew. He wore a wire when talking to other principals in the case. He did not get immunity, and as a result of his guilty plea to the felony misprision charge, he got two years’ probation, and a $2,600 fine. He eventually paid significant dollars to resolve the shareholder lawsuit, lost his severance, and was left with huge legal bills. “No question, your reputation gets damaged,” he said.

“You might ask why I wasn’t candid to the internal investigators when I went to them,” he mused. “First and foremost, I’ll tell you it was my fault. No question about it. My fault. But those long-term friendships—30-plus years of relationships—they do get in the way. They do have an impact on how things go.”

Compounding the problem, he said, were “years of legal coaching—how to take a deposition, what to say, what not to say, say it this way, don’t say it that way, change the subject on this question. All that stuff comes into play. It’s not right, but it comes into play.”

Retrospective Red Flags
Did Rite Aid have ethical lapses before the crisis? “Looking at it in retrospect, yes,” he admitted. The company did not communicate or discuss ethical values. The code of conduct and ethics hotline were more form than substance. Positive leadership role models were lacking. The company stressed the short-term result rather than the long-term. Gatekeepers were ineffective.

Using Marianne Jennings’ seven signs of ethical collapse as a guide , he noted that he could probably give a concrete example of each one. Pressure to achieve numbers. Pervasive fear and silence. Larger-than-life CEO. Weak board. Conflicts of interest. Innovation like no other. Goodness “there” atones for wrong-doing “here.”

“They were all there. Were they something that you could have looked at and seen? Probably not,” he said. “I don’t want to paint the picture that you could see this on the wall. There were a lot of other things going on.”

But were there warning signs that he probably should have paid attention to? “Sure,” he admitted. He knew the company was operating in gray areas. “I knew about vendor fraud because I was at an executive meeting where the former CEO brought it up and said, ‘I want the marketing and financial people to do it this way.’ And it was done that way, way into the ’90s.”

But, as he asked rhetorically throughout his talk, where do you go when an ethical problem arises? What do you do?

With 20/20 hindsight, he can look back and see the red flags clearly. He can look at his behavior and identify better alternatives. He said he wasn’t the one directing the fraud, “but maybe I should’ve been doing something about it and said, ‘We are not going to do it.’”

There is no doubt, he said, that he made some bad decisions. So he talks about his experiences as a lesson to others not to let themselves get caught up in a cascade of events with such a high personal and professional cost.

He summed up his advice by saying, “Sooner or later, you have to make the right choice. Sooner is better than later.”

Anne Federwisch is a freelance writer.

Oct 13, 2015