Magazine article Strategic Finance

Why Do Unfortunate Things Happen to Good Corporate Citizens?

Magazine article Strategic Finance

Why Do Unfortunate Things Happen to Good Corporate Citizens?

Article excerpt

THERE MAY BE A COMMON THREAD AMONG RECENT VISIBLE ETHICAL CHALLENGES occurring at three companies with excellent reputations as good corporate citizens. The companies (and their NYSE symbols) are: McDonald's (MCD), Eli Lilly (LLY), and Xerox (XRX). The link may be that each company's code of conduct either lacked sufficient ethical dimensions or its ethics system was incomplete or not managed effectively. For example, none of the three companies have Ethics Officers or are members of the Ethics Officer Association. Each company's ethics systems appeared to have weaknesses.

McDonald's states, "being a good citizen has been inherent in the fabric of the company since its inception?" It ranks 78th in the "100 Best Corporate Citizens" of 2001, according to Business Ethics magazine. It deserves the many kudos it gets for its social consciousness. MCD's recent ethical problem resulted from fraudulent actions of an employee of its long-standing supplier of Happy Meal prizes, sweepstakes, and other games. The FBI arrested eight suspects (but no McDonald's employees) for stealing $20 million in promotional game prizes.

The McDonald's "Code of Conduct for Suppliers" (CCS) clearly states its "commitment to high standards of business conduct." The CCS further vows MCD will not do business with suppliers "who do not uphold in action as well as words, the same principles." [2] On the surface it appears the cause of MCD's unfortunate experience may be MCD did not provide effective monitoring and sufficient oversight. It appears the company's Code of Conduct was also ineffective in preventing this occurrence. The charter of the MCD audit committee makes no mention of any oversight responsibilities relating to ethical aspects of the internal control structure. [3]

Immediately after the FBI announcement, MCD announced a new instant giveaway game with a $10 million prize to "right this wrong." [4] The company also announced formation of an independent security task force that will "include leading independent anti-fraud and game security experts and is charged with scrutinizing our promotion processes to identify the ideal mix of checks, balances, and oversight to ensure the integrity of future promotions." [5]

The second company, Eli Lilly, also has a fine ethical reputation. The Lilly Foundation is very well regarded for its many good works. LLY is ranked 66th on Business Ethics's 2001 list of Best Corporate Citizens. This ranking reflects superior scores for LLY's impact on the community, employment practices, and employee relations. The overall score is good in spite of a very poor showing (the very lowest score of the 100) on the company's impact on customers. [6]

The recent ethical challenge that LLY faced is accusations that its salesperson should have told the company of his suspicions that a pharmacy customer had diluted a LLY cancer drug before dispensing it. The salesperson first noticed unexplained record discrepancies in 2000, which were thought to be due to poor record keeping. After discussing the situation with a using physician in May 2001, the salesperson had real concerns about diluted product but apparently never shared them with Lilly. Shortly thereafter, the physician advised the FBI of dilution concerns because patients were not experiencing expected side effects. In August 2001, the FBI contacted the salesperson with evidence of product dilution, who then informed Lilly. [7]

Lilly has responded publicly to several lawsuits that alleged it suspected a dilution problem but was negligent in failing to inform law enforcement officials. LLY's CEO says, "Lawyers are wrongly blaming the drug maker in the case of a pharmacist charged with diluting chemotherapy drugs" [8] Does this statement make it appear that LLY is attempting to fend off a legal challenge while disclaiming responsibility to patients? …

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