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Crisis of Ethics

Ethics officers predict a new wave of corporate scandals. Plus: Companies saddle employees with more healthcare costs, mini-businesses will have to cough-up more health care premiums, and top tech companies fizzle out.
Stephen Taub, CFO.com | US
June 19, 2002

Another day, another scandal. Or so it seems since the Enron debacle broke. However, it's not over yet, say top corporate ethics officers, who anticipate many more scandals.

A majority of ethics officers expect that at least a half dozen more "major" business ethics scandals will emerge during the next 12 months; and some expect more than 20 such cases, according to a poll of nearly 100 senior ethics executives attending The Conference Board's annual Business Ethics Conference in May. "Major" is defined as events causing more than $200 million in lost shareholder value.

The majority of executives polled work in ethics/compliance, human resources and legal departments of their respective companies. More than 80 percent work for major for-profit companies; 18 percent in non-profit organizations.

What's more, a majority of the corporate ethics officers say that even ethics training would not have prevented the collapse of Enron. About 54 percent of those surveyed say that even if Enron's senior management had received extensive ethics training, it would have made little or no difference in preventing the scandal laden bankruptcy.

What most contributed to Enron collapse? The ethics officers most cited management's ethical lapses and collapse, followed by Enron's auditor Andersen, Enron's outside law firm, investment analysts, and government regulators, in that order.

"These findings show that an absence of ethical leadership and a culture of 'anything goes as long as it makes a buck' will prevail over even the best training, code of conduct or hotline, " said Steve Priest of Ethical Leadership Group, who conducted the survey, in a statement. "This emphasizes the critical importance of building integrity into the essence of the corporation."

Other survey findings:

Shifting the Health Care Burden
As health care premiums continue to rise, employers will increasingly shift the burden of costs to their employees. This is the overriding conclusion of a health care survey conducted by the UCLA Anderson Forecast that polled executives from 460 companies across the US.

A whopping 85 percent of those surveyed said their health care premiums rose by at least as much as 10 percent over the past plan year, according to Dr. Christopher Thornberg, senior economist with the UCLA Anderson Forecast. Twenty-five percent of the respondents saw their premiums rise by more than 20 percent.

"What's interesting about these results is that companies believe that the current premium health care increases are just the beginning of a longer trend," Thornberg said in a statement. "Specifically, 80 percent of the companies surveyed anticipate that premiums will continue to rise by another 10 percent, while one quarter believe that increases next year will be more than 20 percent."

Other findings from the survey:

"The difference between the situation now compared to that in the late 1980s and early 1990s is that many employers are now simply passing on the increased healthcare costs to their employees," Thornberg commented. In fact, the companies that altered their plans this year are more likely to transfer rising health care costs to their employees in the future, he noted in the report. Forty-two percent of respondents from companies that did alter their plans believe it is likely that the company will revise its plan again in the future if premiums continue to rise.


The surveys were completed by human resources managers representing a variety of large and small businesses.

It's Worse for Very Small Companies
If you think the health insurance crisis is worsening, look what's happening to so-called micro businesses and the self-employed.

More than two-thirds of owners of mini businesses say they are unable to afford health insurance for themselves or their employees altogether, according to a study by the National Association for the Self-Employed (NASE).

Seventy percent of the smallest businesses said they do not provide any type of health care coverage to eligible employees, according to the NASE "Affordability in Health Care" study. The main reason: Costs.

"Participants in the study say the situation is worsening as health insurance premiums for micro-businesses are increasing at double-digit rates while insurance benefits and plan choices are decreasing," according to a press release accompanying the study.

"The businesses that can least afford it are paying disproportionately more than bigger businesses for access to quality health insurance," said Robert Hughes, NASE president, in a statement.

The cost of health insurance premiums incurred by micro businesses increased by an average of nearly 13 percent from 2001 to 2002, according to the study. No surprise, then, that 96 percent of micro-business owners believe the cost of insurance is unreasonable for their business, and 46 percent say their employees cannot afford to share in the cost of coverage premiums.

One reason for the crisis afflicting very small companies is the inequalities in the tax code.

Under the current code, self-employed individuals must pay self-employment tax on health insurance for themselves and dependents. As for micro-business owners, they are subject to federal income tax and self-employment tax that larger businesses do not incur. Micro-businesses also frequently miss out on the economies of scale available to bigger businesses when purchasing health insurance.

Interestingly, 75 percent of the respondents said they would be likely to purchase insurance for employees if the premiums were 100 percent deductible. Nearly 80 percent said they would be likely to purchase health insurance for their employees if they were given tax credits. Eighty-four percent say they would provide insurance if they were able to deduct their premiums as a business expense.

Oracle CFO Issues Big Warning
Don't count on a tech-led recovery anytime soon. At least four major technology companies dished out bad news on Tuesday alone.

For example, Oracle Corp. CFO Jeff Henley said software sales in the current quarter could fall as much as 25 percent from a year ago. Worse, he said future sales visibility remained "very limited."

"Our assumption is that the US economy will continue to improve, at least gradually, but technology spending will not show signs of improvement probably for another six months," he reportedly told analysts in a conference call.

As a result, Henley predicted Oracle's software license sales would fall between 15 percent and 25 percent from a year ago.

Elsewhere, Apple Computer Inc. and Advanced Micro Devices Inc. warned that current quarterly results would come in weaker than forecast. And Intel Corp. said it would take a $100 million pre-tax charge related to getting out of its ill-fated Web hosting business in recognition of the popping of the Internet bubble.

Short Takes

>>Verizon Global Funding, the finance arm of Verizon Communications Inc., issued $2 billion of bonds but at a yield that was 10 basis points above its current outstanding debt, according to reports.

Verizon Global Funding issued $1 billion of five-year notes priced to yield 210 basis points above comparable Treasurys. It also issued $600 million of 10-year notes priced to yield 215 points more than Treasurys and $400 million of 30-year bonds at 240 points over Treasurys.

Verizon's long-term debt is rated A1 by Moody's and A-plus by Standard & Poor's.



>> Medical device firm HealtheTech Inc. withdrew its plans to go public hours after it lowered the price range of its IPO to between $11 to $13 per share from $14 to $16 per share. HealtheTech designs health monitoring products for the weight management and fitness markets.




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