Trial highlights arrogance vs. responsibility

NEW YORK -- Arthur Andersen executives contend government regulators have overzealously pursued the accounting firm. If that's so, maybe Andersen's criminal trial in a Houston courtroom this week is the ultimate example of how a good company's fate was unfairly snatched from its control.

But the trial of Andersen, accused of obstructing justice by shredding documents in the collapse of Enron Corp., also raises questions of just how much stubbornness by the accounting firm is to blame for its troubles.

Many now see the trial as a prelude to Andersen's demise. Did it miss opportunities to contain the crisis and limit the damage?

"The Securities and Exchange Commission was trying to hint to them that you've got to deal with this, but their guy was stubborn," said Larry Elliott, referring to Andersen's now resigned CEO, Joseph Berardino. Elliott is co-author of an upcoming book on corporate scandal, "When Companies Lie."

"Here's a case where, perhaps, a period of a little bit of arrogance has led to the fall of what otherwise was a great company."

The Tylenol example

It's an interesting point because, while it's clear individuals are motivated by arrogance, corporations are supposed to base their decisions on quantifiable, objective standards. Even so, the tug of war between embracing accountability or refusing to accept it, has long been central to corporate crises.

Ask most business ethics experts to point to a company that acted wisely in a crisis by seizing responsibility and they'll point to Johnson & Johnson. The pharmaceutical firm is widely admired for the way it ordered all its Tylenol capsules off drugstore shelves in 1982 after seven Chicago-area consumers died from taking pills that had been laced with cyanide.

In responding to the crisis, Tylenol executives insisted that their consumers' health would come first, and took responsibility for a problem even though the company itself was not to blame for the poisonings.

That turned out to be good for consumers. And in the long run, it was also good for Johnson & Johnson, allowing it to resuscitate a highly profitable business that some marketing experts dismissed as beyond saving.

The flipside to Johnson & Johnson's handling of the Tylenol crisis makes for a far longer list. Ford Motor Co. executives knew about safety problems with the company's Pinto compact cars but decided to hide the dangers from consumers. The Pinto is gone, but Ford is still alive and well.

Top executives at Dow-Corning Corp., confronted with lawsuits in the 1980s and 1990s alleging its silicone breast implants were leaking and causing health problems for women, stood by their product -- which accounted for just 1 percent of sales -- so vociferously that it put the company out of business.

More recently, the rollover problems in Ford Explorers saw the automaker and tiremaker Firestone blaming each other, rather than take responsibility.

"The vast majority of companies act that way and there is an argument that they have a responsibility to act that way, not just for shareholders and investors ... but you have employees, they have families," said Mark Schwartz, a lecturer in business ethics at The Wharton School at the University of Pennsylvania.

Good money after bad

But Schwartz and some other experts believe that, for all the attention to dollars and cents, the corporate crisis management often shows an element of hubris that is difficult to quantify.

In economic terms it's the root of so-called "sunk costs," throwing good money after bad, said Arie Y. Lewin, a professor of business administration and psychology at Duke University. Psychologists would call it "escalation of commitment," exemplified by bankers who extend more credit to a risky client rather than cut their losses and acknowledge mistakes.

Elliott, a retired Air Force colonel, compares the risk of executive decisions based on such factors to the dangers fighter pilots pose to themselves when they lose "situational awareness" of the threats that surround them.

Regardless of what its labeled, they are a sign that corporate behavior, even by the most sophisticated executives, can hinge on very human tendencies.

"Everyone makes mistakes, things they regret. Is your first instinct to apologize, to take responsibility?," Schwartz said. "I think you can reduce the corporate attitude to the individual level."