Do Business Ethics Apply to Me?

March 14, 2012

By: John M. Tanner

There is an old adage that one cannot legislate morality.  That does not stop folks from trying, though.  And they seem to be trying more often.  For example, in the wake of the Enron, Tyco, and Worldcom scandals, Congress is trying to legislate business ethics via the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1514A).  Anyone who has heard the story of Enron (especially via the book or movie The Smartest Guys in the Room) cannot blame Congress for trying.  The effect of Sarbanes-Oxley is to make the CEOs and CFOs of publicly-traded companies liable for false reports in the company’s public filings.

Sarbanes-Oxley, as written, applies to a relatively few number of companies—only those that are publicly-traded.  Many private companies are deciding to voluntarily comply, however.  Not necessarily because they think it is a good idea, but because it is in their financial interest to do so.  After all, the exit strategy of many private companies is to be bought by a public company.  At the moment such a sale closes, the CEO and CFO of the acquiring publicly-traded company can become liable for any Sarbanes-Oxley violations by the acquired company.  As a result, publicly-held companies have become careful about acquiring private companies.  The purchase of companies not in Sarbanes-Oxley compliance is being held up until they are, and the cost of getting them into compliance reduces the price the buyer is willing to pay.  Private companies have therefore realized that compliance will get them both a better purchase price and a quicker closing at a sale to a publicly-held company.  It is in their best interests, financially, to become Sarbanes-Oxley compliant.  Companies are thus saved the ethical dilemma of doing the “right” thing at a financial cost.  

Then, in 2006, Colorado voters passed Amendment 41 (now Article XXIX of the Colorado Constitution).  Although presented to the voting public as an effort to rein in out-of-control lobbyists, the text of the article indicates it applies to anyone who does business with the State of Colorado, the employees of that company, and their families.  It has been estimated that it applies to 60% of Coloradoans if enforced as written. 

Just last month the Independent Ethics Commission created by Article XXIX issued its first “Position Paper.”  The paper says, among other things, that scholarships to the family members of people covered by the article are not improper gifts, even though both the Attorney General and the state’s official voter guide (the “Blue Book”) took the position during the election and subsequent litigation that such scholarships would be barred.  This change of position has left Colorado businesses confused about how Article XXIX applies to them, especially in areas other than scholarships (the Commission has not spoken about the vast majority of possible violations).

As written, Article XXIX applies to everyone from the Governor to the small business owner, such as a local print shop that makes copies for a state agency.  For example, suppose the print shop owner has a child who has a best friend.  The best friend’s family wants to bring the child with them on vacation, to keep their own child company.  The plane fare, hotel, food, etc. add up to $1,500 over a week.  The print shop, its owner, and the family friends could all be hauled before the Independent Ethics Commission.  That Commission can then assess a fine against the shop, the owner, or the family of the child’s friend for up to $3,000, and none of the accused get the benefit of a jury in their dispute before this un-elected commission. 

From a business ethics perspective, it is important to consider parallels that we can draw from our experiences with Sarbanes-Oxley? Is it in the best interests of a company not covered by Article XXIX to nevertheless comply?  Any company may be skittish about acquiring another company if the latter has outstanding ethical complaints against it, or even a chance of the same.  As a result, “Article XXIX compliance” could become a standard item on a closing checklist in a merger or acquisition, just as “Sarbanes-Oxley compliance” has become.  In today’s economy, harder bargains are likely to be driven by the buying company, as businesses scramble to find ways to hold on to capital.  This gives smaller businesses an even greater reason to voluntarily comply with the article, even if they are in the minority of Coloradans not technically covered by it.

Now, a third try at legislating ethics is on the ballot:  Proposed Amendment 54.  Just as Article XXIX was, the proposed Amendment is being pitched as a way to reduce corruption by limiting the ability of the recipients of “sole source” contracts to make political contributions.  (Ironically, it defines “sole source” as whenever there are less than three bids, making one wonder whether its proponents cannot read, cannot count, or just think voters cannot do one or the other.)  If Amendment 54 passes, there will need to be a new analysis of whether businesses not covered by it should nevertheless comply, either for financial or ethical reasons.

All this activity raises another question:  if ethics means doing more than the law requires or less than it allows (its usual definition), and one is simply complying with the law, is it still a question of ethics at all?

This Article is published for general information, not to provide specific legal advice. The application of any matter discussed in this article to anyone's particular situation requires knowledge and analysis of the specific facts involved.

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Comments or inquiries may be directed to:
John M. Tanner