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Sex, A CFO, And A Corporate Ethical Dilemma

Taub Stephen | July 5, 2006

It is a corporate ethics dilemma made in New York City tabloid heaven. Take one Brazilian native arrested on charges of prostitution, narcotics and money laundering. Accuse her of running a brothel out of her Manhattan apartment. Let the gossip columns have a field day, printing salacious details of the “sugar daddies” providing her gifts of cash and clothes.


Pace



Schwartz

And if you’re Time Warner, brace yourself—because your chief financial officer, Wayne Pace, has been identified as one of the men most prominently helping the Big Apple’s newest madam, Andreia Schwartz, to fund her lifestyle and activities.

News of Pace’s peccadilloes has set New York abuzz since Schwartz’ arrest on June 14. Time Warner initially refused to comment, but then said it would investigate the matter. In late June, the company succinctly announced that an internal probe “found no evidence of illegal conduct … or any misuse of corporate assets” for the gifts Pace allegedly gave to Schwartz.

Now comes the hard part for Time Warner’s board: What to do about an executive who apparently has not betrayed the company, but nonetheless is entangled in some very embarrassing behavior?



Donaldson

According to experts, the ethical course of action for the media giant isn’t exactly clear. Since Time Warner has concluded that Pace did not steal from the company, “this is one of those places, unfortunately, where there are no hard and fast rules,” says Thomas Donaldson, director of the ethics program at the Wharton School of Business. Indeed, as of late last week, Pace remained on the job and the company had no public plans for disciplinary action.

Several experts contend that since Pace has been cleared by the company, his personal life—even one dissected in the gossip columns—is his. Others argue that the higher up an executive is, the more that right to personal freedom must be balanced against the role the executive serves as a spokesman or symbol of the company.

“In the research we do, leadership has a huge influence on employees’ belief that standards really matter in an organization,” says Patricia Harned, president of the Ethics Resource Center.


Shapiro

Then there’s the hard line, toed by the likes of Barry Shapiro, head of the corporate practice at law firm Meyer, Suozzi, English & Klein. Pace may not have used company funds in his relationship with Schwartz, he says, but “this is a public company. Any action which brings management into disrepute is a firing offense.”

Conduct And Misconduct

Like virtually every public company, Time Warner has a code of conduct for all employees as required by Section 406 of Sarbanes-Oxley—in this case, called the Standards of Business Conduct. Senior executives and financial officers must also obey an additional Code of Ethics. Among the standards executives agree to follow is to “engage in and promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships” (see box above, right).

Values do play a role in deciding how to address a situation like Pace’s. In 2004, consulting firms Booz Allen Hamilton and the Aspen Institute surveyed senior executives at 365 companies. Nearly 90 percent reported that their company had a written values statement, and that ethical conduct was a principle in those statements.

The survey also found that 85 percent of respondents said their companies rely on explicit CEO support to reinforce values, and 77 percent said such support is one of the most effective practices to maintain a company’s ability to act on its values.

So what should be done if an executive appears to have violated a company’s code of conduct or acted against corporate values? And who even makes the determination that a violation occurred? Usually, legal experts say, the audit committee spearheads any internal investigation—especially if the CFO is involved, because of the potential misappropriation of funds.


Annex

“In today’s world, there is the risk due to Sarbanes-Oxley and 404 that if there is a misappropriation, it will attack the internal controls,” warns Alan Annex, head of the corporate practice at the law firm Greenberg Traurig.

Shapiro says potential violations also are often referred to the human resources department, which can then work closely with a member of the audit committee and in-house counsel.

If the audit committee determines no misappropriation of funds occurred, it then tries to determine whether the executive was unfairly smeared. But if an investigation ultimately determines that the executive engaged in questionable—but not illegal or professionally irresponsible—behavior, the company still has much latitude in how it reacts. “It’s done on a case-by-case basis,” Shapiro explains.

Most times, the company must also tread carefully; firing an executive for cause is a delicate matter. Often, Annex says, if an executive demonstrates bad moral conduct, yet the behavior did not affect the company, it’s difficult to fire the executive without paying severance. For those like Pace at the stratospheric heights of Corporate America, that can get expensive: Pace’s 2005 compensation totaled $6.8 million.

Other Poor Judgments

Time Warner is not the only company forced to deal with a high-level executive’s personal behaviors spilling into public view. In March 2005, Harry Stonecipher, then president and chief executive officer of Boeing, resigned after the disclosure of an extramarital affair he had with a female executive at the company. At the time Boeing was praised for its swift action and tough commitment to ethical behavior, as Stonecipher was considered a good CEO professionally.

And in May, IT consulting firm Keane ousted Chief Executive Officer Brian Keane—son of the company’s founder—after one current and one former employee made allegations of sexual harassment against him. A subsequent press release identified the current employee as Georgina Fisk, vice president of marketing, who was paid $1.14 million in a settlement with the company and resigned last month.

In making the announcement that Keane stepped down, the company asserted that his conduct “reflected poor judgment.” As a result, the company said the board concluded that “Keane could not continue to provide the leadership that [the company] requires and that his continued service as CEO would not be in the best interests of the company.”

Annex believes that in today’s environment, ultimately Pace or others who find themselves in similar situations will cut a deal where the company will pay him to leave.

But Shapiro at Meyer, Suozzi, English & Klein stresses that this does not mean the Puritans have taken over Corporate America. “If every company had an executive with an adulterous relationship get fired,” he says, “there would be a lot of resumes out there.”