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The business scandals of the past few years are not entirely without their benefit; they have provided an educational opportunity. I believe we have learned many things from the scandals we are still working our way through. One of the lessons, illumined by the WorldCom affair, is that one manages human organizations by financial ratios only at great peril to the company and people in it. Financial gauges are necessary but insufficient guides for managing human activity in organizations. They are means rather than ends in themselves. Using them as a be-all and end-all is tantamount to letting the tail wag the dog. Scott Sullivan’s fixation with maintaining line costs at 42 percent of revenues, for instance, was one of the factors that led him to get overly creative and begin capitalizing operating leases.

As an aside, the New York Times recently reported that pressures on CFOs to reach unrealistic numbers are driving them from the profession. [1] Says one, “I got tired of spending years defending strategies I knew were flawed, of working with values that weren’t my own, of being responsible to chief executives and boards that were under huge pressure to perform.” Says another, “Every CFO has been pushed at times to take something that is clearly black and white and color it a shade of gray.” Financial reality is only one truth in a human organization, and, ultimately, not the most important at that. If operations are run properly and the market winds blow to fill the company’s sail, ratios will follow. One cannot do truth if one is obsessed with a partial reality, if one serves means rather than ends in themselves.

The Greater Significance of Ethics

We have also learned that ethics is not merely another variable to be factored into a cost-benefit analysis. Elias and Dees write of “strategic compliance,” or the belief “that business managers should gauge the extent to which the law and public pressure might hinder their pursuit of the firm’s objectives and treat compliance to moral, social, and legal codes as a function of costs and benefits.” [2] Though few would acknowledge it, the avalanche of financial restatements would seem to indicate that something of the sort is on many managers’ minds. Too many restatements look like “pump-and-dump” schemes, where the financials are misstated to pump up share price for as long as it takes to exercise options and capture huge profits by dumping cheap stock into the market at inflated prices. [3]The stock price falls and investors lose big money with the ensuing restatement, but the insider is “out” by then with a windfall. In such a case, personal “gains from breach or violation … exceed the social costs (as reflected in the penalty).” Elias and Dees speculate that “transformation to a society where everyone viewed legal penalties and social sanctions as a price system would bring about more objectionable conduct and greater enforcement costs, and punishments that no longer ‘fit’ the crime.”

In other words, if managers adhere to strategic compliance – that is, take a strategic, rather than honest view of compliance with moral and legal norms of conduct – then society’s surest way to protect itself will be to raise the “costs” of non-compliance. This seems the only way to read Jamie Olis’ otherwise mystifying 24-year sentence, and perhaps even Martha Stewart’s and Frank Quattrone’s unlikely incarcerations. It is also worth considering in this light the calls for the indicted, fired and disgraced Sanjay Kumar – formerly CEO and chairman of the board at Computer Associates – and other fallen stars of burned out, restating companies to pay back bonuses earned while financial statements were inflated. [4] The only other way to bring costs and benefits in line with one another is to curtail benefits, retroactively if necessary, whether a company’s restatement reflects unforeseen changes in honestly presented data, or fraudulent hype. Once again, the entire business community unfortunately pays the bill for some managers failing to act in accordance with the truth.

Related to what I have just said about strategic compliance, but at a more theoretical level, we have generally learned that modern teleology is an insufficient ethic for accomplishing truth in action, and hence inappropriate for business activity. Living by truth is often costly, and it may not always pay in cash terms. Yet, the crude proportionalisms, so congenial to a narrow conception of self-interest, also come with a high cost. Michael Novak observes that self-interest rightly conceived encompasses moral virtue, and the network of people to whom one is connected. [5] “The real interests of individuals … are seldom merely self-regarding.” [6] For people in pharmaceutical companies, for instance – to pick one industry currently sweating under the spotlight of scrutiny – that “network of connections” would minimally seem to include the FDA, which monitors its products, and the patients who use them.

The Example of the Pharmaceutical Industry

The industry-wide business model is such that profits from very successful drugs compensate for the vastly more numerous drugs that don’t make it out of the staggeringly expensive R&D stage. Very few drugs as a proportion of those researched make it, and the cost for developing a successful drug and bringing it to market can reach $1 billion. [7] Obviously, the pressure to get drugs to market and produce winners is very high. Nevertheless, this model has produced a plethora of wonder drugs, and I, for one, have no desire to meddle with it. In many ways, the pharmaceutical industry is paradigmatic of the market economy’s happy ability to regularly meet human needs – very serious health needs – with ingenious products and services.

Many now claim that this model is threatened by captive regulators – just as captive auditors, [8] and research analysts [9] brought ruin to the clients they “served” in the very recent past – and by management that is less than forthcoming with information and too-quick to give itself a pass when confronted with information that should stop it dead in its tracks for violation of fundamental values, e.g., human life. The FDA is currently besieged for too often seeing “the pharmaceutical industry as its customer, a vital source of funding for its activities, and not as a sector of society in need of strong regulation.” [10] This echoes similar expressions of prior concern regarding the auditing profession, which came to see itself as purveyors of a management tool rather than as a quasi-public watchdog. [11] This analogy alone in the post-Andersen, Sarbanes-Oxley era should spur business generally, and the pharmaceutical industry specifically, to police itself even more closely, and people in business (especially in pharmaceutical companies) to exercise more interior control. Subsequent to the dot.bomb explosion, which was fueled by the combustible analyses of compliant research analysts, it is nearly a fundamental truth of the market place that industry co-opts its watchdogs at its own peril. If the watchdog has somehow become captive, then each and every conscience in industry must serve as a watchdog, even more so than usual.

Because of the FDA’s limited resources, and because seven times the number of employees work exclusively on drug approvals as do on post-approval safety, “The FDA typically waits for studies from drug makers to trickle in on a voluntary basis.” [12] This disquieting fact calls for unimpeachable conduct from industry practitioners, a special effort by them to live truth. While the evidence is controverted, it appears to the contrary that Merck was aware as far back as 2000 that Vioxx, its $2.5 billion per year in revenues painkiller, approved in 1999 by the FDA, was linked to an increased incidence of cardiovascular risk. [13] Rather than study the link directly, Merck – widely regarded as a leader in ethics, [14] and heralded by the “corporate social responsibility” community for its “volunteer” efforts to fight river blindness [15] and AIDS [16] in Africa – opted to follow clinical trials in which Vioxx would be tested for other uses. [17] Despite a growing body of evidence establishing a direct link between taking Vioxx and an elevated risk of suffering a heart attack, and preliminary test results confirming that evidence in November of 2003, the company waited until 10 days after receiving definitive test results in September of 2004 to announce the drug’s withdrawal. [18]


Contrast this behavior with an anecdote recounted by James Burke, the celebrated former CEO and Chairman of the Board at Johnson & Johnson. [19] Bobby Johnson – the son of the company’s first dominant leader, Robert Johnson II, and a friend of Burke’s – had taken a keen personal interest in a couldn’t-miss “beautiful product, beautifully packaged.” It was his baby; he was its manager and champion. Just before going to market, clinical trials indicated a “slight level of irritation in about 5% of the [test’s]subjects.” The problem only affected subjects with preexisting skin problems who used the skin lotion on a “very intensive basis.” Despite all that he had invested in the project in terms of money, energy, prestige and hope, he pulled the plug on the product without hesitation. Burke recounts Bobby’s saying: “We’re not going to go ahead. Dump it in the Raritan River if you have to.” He would not be responsible for harming even a few customers however slightly, though the product had “cost the corporation a lot of money.” The action had a profound effect on Burke, who grew to become what many people consider to be a moral exemplar for people at the top. “I thought at the time that this was the kind of thing that made Johnson & Johnson different, and that thought returned many times over the years.”

Admittedly, over-the-counter cosmetics and prescription drugs are different types of product even if produced by the same companies. Matters are not always so clear in an industry where “safe” does not mean “risk-free.” [20] Nevertheless, contrast the probity of Johnson’s conduct with recent revelations on Capitol Hill. Dr. Girkurpal Singh, an adjunct professor at Stanford University, appeared in hearings before the Senate Finance Committee last November. He testified that after calling public attention to Vioxx: “I was warned that if I continued in this fashion there would be serious consequences for me. I was told that Dr. Louis Sherwood, a Merck senior vice president and a former chief of medicine at a medical school had extensive contacts within academia and could make life very difficult for me at Stanford and outside.” [21]

Dr. David Graham, a drug reviewer with the FDA’s office of Drug Safety for the past 20 years, estimates that between 88,000 and 139,000 American users of Vioxx suffered heart attack or stroke as a result of taking the drug, and that as many as 55,000 of them died [22] While Dr. Graham is a controversial figure within the agency itself, has been criticized for being like a “broken clock” (right twice a day) [23] and as a purveyor of junk science, of the 12 drugs he has recommended to be pulled from the market in his career, 10 are no longer sold. [24] “Despite efforts to silence him, he has persisted. And he’s nearly always been right” [25] says Dr. Sidney Wolfe, director of Public Citizen’s health research group and a Graham defender.

News reports say that he is a devout Roman Catholic, and that he keeps a picture on his office wall of “Jesus calling Peter and Andrew to be his disciples.” [26] He looks at it throughout the day, notes the New York Times , “and it reminds me why I’m here.” [27] “He’s one of the jewels of the FDA. … He’s just a very moral guy who’s got a lot of courage,” [28] says University of Maryland epidemiologist, Paul Stolley. Dr. Graham resists exhortations at the FDA for him to get “on the team.” [29] In refusal he says, “We all have a responsibility to honor the truth.” [30] Despite great pressures on his career, and personal sacrifice, Dr. Graham walks the walk rather than just talking the talk. My only wish for him, and those with the same cut of jib, is that he someday take a job in business. To my mind, he, and the many like him already working there, are better advocates of the market economy than some of the people running companies.

In Conclusion

I have set out to demonstrate that truth is an essential component of success, and hope that I have made a reasonable case for that proposition. I do not think that the recent scandals attest to any deficiency of the business economy, but rather to a temporary loss of vision. It is my belief that what is lost will be restored, because in business, there is always a price to pay for one’s acting on incorrect assumptions.

Throughout, I have perhaps given the impression that business is held to a higher moral standard than other spheres of human activity. I believe that it is, and also that this double standard is all to the good of business. In these times of nearly reflexive relativism, and chronic inability to accept responsibility for one’s actions, to be held to a standard of objective truth in a world that purports not to believe in such a thing is an honorable distinction. This ordering to what is noble and true also ensures that business will serve as a beacon and civilizing agent along the lines that Michael Novak envisions. For, in a world of theoretical mist concerning objective reality, the holding of so crucial a social component of society as business to an objective norm signals in practice what theory obscures: that truth exists and that people are axiomatically, naturally inclined to seek and embrace it when found. If the public can demand that business practitioners live and act in accordance with truth, then it cannot be long in coming that people ask the same of themselves.


[1] Claudia H. Deutsch, “Where Have All the Chief Financial Officers Gone?” New York Times , November 28, 2004.

[2] Jaan Elias and J. Gregory Dees, “The Normative Foundations of Business,” Harvard Business School Press , No. 9-897-012 (June 10, 1997).

[3] See

[4] Floyd Norris, “His Bonus Was Based on Inflated Profits. Will He Give It Back?” New York Times , October 10, 2003, C1. Also , Gretchen Morgenson, “Why Not Restate Bonuses?” New York Times , April 25, 2004.

[5] Novak, op. cit., pp. 92-95.

[6] Ibid., 93.

[7] See Sidney Taurel, “Money and Medicine: Roles and Responsibilities of Pharmaceutical Companies.” Remarks of Eli Lilly’s Chairman, President and CEO to the Commonwealth Club of California, March 1, 2001. See also Taurel, “Where Drugs Come From: The Facts of Life About Pharmaceutical Innovation,” . For a slightly dated but thorough description of the industry-wide business model, see McGahan, et al., “The Pharmaceutical Industry in the 1990s,” Harvard Business School Publishing , 1995.

[8] See Arthur Levitt (former Chairman of the Securities and Exchange Commission), “The Numbers Game,” speech delivered to the NYU Center for Law and Business, September 28, 1998, . Consider this prophetic speech in light of subsequent events, especially the collapse of Arthur Anderson in 2002.

[9] Ibid. Consider the speech in light of the bust in 2001 and the $1.4 billion settlement in 2003 between various securities regulators and the ten largest firms on Wall Street.

[10] Editor’s Choice, “Drug Delivery; New measures aim to improve drug safety,” Aging & Elder Health Week , November 28, 2004, p. 10.

[11] See Brewster, op. cit.

[12] News, “Does another Vioxx lurk among your prescriptions?” USA Today , November 22, 2004, p. 14A

[13] Mathews and Won Tesoriero, “FDA Official Assails Agency on Monitoring of Risks,” Wall Street Journal , November 19, 2004, A1.

[14] Alex Berenson, “For Merck Chief, Credibility at the Capitol,” New York Times , November 19, 2004, p. C1.

[15] See Kirk O. Hanson, Merck & Co., Inc. (A-D), Harvard Business School Publishing , 1991. The cases are copyrighted by The Business Enterprise Trust: “a national non-profit organization that honors exemplary acts of courage, integrity and social vision in business.”

[16] Weber, et al., “Merck Global Health Initiatives (A-B),” Harvard Business School Publishing , 2001.

[17] Barry Meier, “Earlier Merck Study Indicated Risks of Vioxx,” New York Times , November 18, 2004.

[18] Meier, op. cit.

[19] See Richard S. Tedlow, “James Burke: A Career in American Business (A), Harvard Business School Publishing , 1989, pp. 9, 10. All quotations and aspects of the following anecdote are drawn from this case.

[20] Gardiner Harris, “F.D.A. Failing in Safety, Official Asserts,” November 19, 2004, A1, p. C3.

[21] ibid.

[22] ibid. Cf. News, “Does another Vioxx lurk among your prescriptions?” USA Today , November 22, 2004, p. 14A.

[23] Gardiner Harris, “A Firebrand on Drug Safety,” New York Times , November 20, 2004, A16 [hereafter, “Harris (2).”]

[24] Kohn and Bor, “Scientist’s warnings on drugs stir debate; Some doctors question FDA officer’s assessment of 5 popular prescriptions,” Baltimore Sun , November 20, 2004, p. 1A.

[25] Harris (2), op. cit.

[26] ibid.

[27] ibid.

[28] Kohn and Bor, op. cit..

[29] Harris (2), op. cit.

[30] ibid.

Professor Maximilian B. Torres is a Visiting Professor of Business Ethics and Organizational Behavior at IESE Business School in Barcelona, Spain.  He is the founder of the Three-dimensional Leadership Institute in Ann Arbor, MI.