Beware of corporate consulting firms offering awards for corporate ethics.

Commentary about business and finance.
March 19 2010 5:50 PM

It's All Good

Beware of corporate consulting firms offering awards for corporate ethics.

Screenshot from ethisphere.com.
Screenshot from ethisphere.com

Sometime in the next week or so, something called the Ethisphere Institute is scheduled to announce this year's list of the "World's Most Ethical Companies." If past years are any indication, the winners will have their press releases ready to go, and news outlets across the country will eat it up. There's just one hitch: These ethics awards—let's call them the Ethies—may have ethics issues of their own.

The Ethisphere Insitute, which describes itself as "a leading international think-tank dedicated to the creation, advancement and sharing of best practices in business ethics, corporate social responsibility, anti-corruption and sustainability," is actually a for-profit company. The institute also lends itself credibility with an "advisory panel" of ethicists, yet several former members say they've had little if anything to do with it. Finally, the institute and an affiliated company sell services to and collect fees from some of the same companies Ethisphere extols.

As might be expected, the Ethisphere Institute's director, Alex Brigham—also president and CEO of Corpedia, which helps corporations develop and review their ethics programs—is sensitive to any conflict-of-interest concerns. "The list is compiled 100 percent independently of any economic relationship with Ethisphere or Corpedia and is based strictly on a numeric formula developed with outside expert help and keyed off the Federal Sentencing Guidelines," he says. It is one of several "on-the-record quotes from Alex Brigham for use in your story" that were e-mailed to me by Joshua Galper, a Washington-based lawyer hired by Ethisphere. (Another quote: "We practice what we preach at Ethisphere. This means holding ourselves in addition to the companies we rate to the highest standard.")

Over the phone in an earlier interview, Brigham sounded less like a lawyer. Ethisphere is an ambitious undertaking, and "I've got to figure out a way to fund all this stuff," he says. "I'd love it if someone wants to give me money to create a huge, separate institution to do it. ...We're just trying to do something good." As part of an effort to be transparent about the Ethies, the institute will also issue an annual report—the first one came out just last week—detailing the "methodologies, editorial approach, and financial relationships" behind the list.

There can be little doubt that fostering greater interest in business ethics, as well as corporate competition to be more ethical, is a good thing for society. There is something about lists that is irresistible, after all, and if you've never heard of the Ethisphere Institute before, it certainly sounds important. In just a few years—Ethisphere has been compiling its list since only 2007—the institute has become an influential player in the unsurprisingly crowded field of awards for corprate awesomeness (see, for example, the "100 Best Corporate Citizens" or "The Most Sustainable Companies").

Brigham started Ethisphere five years ago as part of Corpedia, which has more than 500 corporate clients. Ethisphere, now legally a seperate entity, lists a New York address on its Web site but shares personnel and office space with Corpedia, which is based in Phoenix, Ariz. (After our interview, Ethisphere added information to its Web site to clarify its relationship with Corpedia.) Ethisphere also publishes bulletins, reports, and a quarterly magazine about corporate ethics.

For its ethics awards, Ethisphere accepts outside nominations, and it scores a corporation on several factors. Some of these are fairly straightforward—What is its history of litigation? Does it have a top-notch code of conduct?—and some of them are, well, not: What is the "tone from the top"? Does it provide a product or service that "positively contributes to public well-being"? For example, the institute has ruled that cigarette and alcohol companies cannot be considered for its awards. But McDonald's—a three-time winner—treats its animals well enough (before they become burgers, anyway), and does enough charity, to offset its super-sized health impacts.

The scoring is based mostly on information provided by the companies themselves, and Ethisphere says its questionnaire should take 30 to 40 minutes to complete. Ethisphere then asks companies for documentation to support survey answers and reviews other sources, such as news articles, court records, and Consumer Reports. Ethisphere says it reviewed more than 10,000 corporations for last year's list.

Brigham acknowledges that the system is imperfect. "Could they be lying to us?" he says. "Sure, they could. ... Over time, we're going to have to figure out how to verify that. And no one is going to pay us to verify it, and if we try to charge them to verify it, we're going to have reporters like you make it sound like we're getting paid off."

Ethisphere says its methodology was developed with the help of a panel of independent experts. But as I dialed up half a dozen of the 20 committee members, I found only one (George Ash) who said he actually contributed to shaping the methodology. Others said they made a suggestion that wasn't heeded (Thomas Donaldson), or didn't seriously analyze the methodology (Patrick Barwise, John Dienhart, Chris MacDonald), or didn't know they were on the panel (Karen Paul). Ethisphere says that it assumed panel members who didn't respond to its queries simply agreed with the methodology and that each member explicitly agreed to be on the panel. Since my inquiries, Ethisphere has named a new, smaller panel, and none of the people I spoke to are still on it.

Methodology aside, the list faces a deeper dilemma: Ethisphere charges companies to be part of its membership groups, buy ads in its magazine, and certify them with its "Ethics Inside" label, which they receive only if Ethisphere determines that "its compliance and ethics activities are demonstrably better than competitors." At first, Brigham told me that "because our fees are so small," there was no possibility of conflicts of interest. I would have "a better, sexier story," he said, if Ethisphere were "a wildly profitable enterprise."

Then Ethisphere announced that for the 2010 list of the world's most ethical companies, which has yet to be released, 10 percent have "a material economic relationship with Ethisphere," and 5 percent have one with Corpedia. What, exactly, is a "material economic relationship with Ethisphere"? The institute's "Media Responsibility Report" defines it "as any customers that have represented one percent (1%) or more of the prior year's (2009) sales bookings of any product or service."

As for the wall between the profit-making and award-giving divisions, "we separate them as much as possible," says Brigham, who is part of the small team that ultimately determines Ethispehere's list of the "World's Most Ethical Companies." "Look—we're not a huge operation." Ethisphere says that it prohibits employees from doing consulting work with any corporations they are reviewing for awards. But such explicit conflicts are the easy ones. The problem is the inherent tension in trying to be both neutral judge and interested party—as anyone who has paid any attention to Wall Street in the last two decades can attest.

Corpedia has many clients that don't make the list, Brigham says. And the awards have lost Corpedia business, he says. "The list has actually cost Corpedia and Ethisphere clients and revenue—because companies have been upset about how they've been treated, because they don't think they need its help because they are already rated highly on the list, or they are afraid that they could be wrongly accused of buying stature if they were later to have any economic relationships with the organizations."

Still, even the editor-in-chief of Ethisphere magazine, Stefan Linssen, seems to comprehend the quandary, at least in theory. "If you're getting money from something and you're making ratings, you just have to be very careful that there's no conflicts of interest," he said. "If there was even a perception of conflict of interest, that would just lose all credibility for the list." In practice, however, Linssen says Ethisphere is transparent and careful enough to avoid this dilemma.

It's tempting, of course, to dismiss all this as just corporate window-dressing, and in fact Canadian ethicist Chris MacDonald, who until recently was on Ethisphere's advisory panel, warned me to take such awards "with a grain of salt." And then there are people like Gretchen Winter, former ethics officer for "World's Most Ethical" winner Baxter International and current director of the Center for Professional Responsibility in Business and Society at the University of Illinois. Winter says the institute's conflicts of interest and reliance on self-reported information make its awards "less credible." At the same time, she says, the awards help in "advancing the conversation about ethics and compliance programs in the executive suites and boardrooms."

They may just as easily be used, however, to squelch conversation. Last year, while working on another story, I was interviewing a corporate spokesman about allegations of fraud against his company and government fines for a radioactive waste spill. He sent me a press release trumpeting the news that Ethisphere had named his engineering and construction firm, CH2M Hill, one of the "World's Most Ethical." It "speaks for itself," he said. If only he knew.

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