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10/13/2006
07:05 PM
Rob Preston
Rob Preston
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Down To Business: No 'Small' Problems When It Comes To Ethics

At their tamest, backdating, 'pretexting,' and other ethical violations are a huge distraction. At their worst, they're a sign of deeper trouble.

When it comes to corporate ethics, you should sweat even the small stuff. Hold your tech vendors to the highest standards. It's a matter of business urgency, not just principle, in the political, prosecutorial, and media fishbowl in which every public company now lives.

Take stock option backdating. In a news analysis story a few months ago, InformationWeek explored why customers should be alarmed by this all-too-common tech industry practice, whereby vendors let employees exercise options based on an earlier, lower stock price rather than the price on the actual day of the grant. Common sense says this practice is shady, even if it's not always illegal.

Still, what does this financial practice have to do with the ability of tech vendors to serve their customers? It's pretty simple: Even if you think backdating is a relatively harmless way for vendors to compensate top execs without dipping into cash reserves, the ramifications can be far from harmless.

Even the appearance of impropriety can set a company back many months as it shifts into damage control, conducts internal investigations, makes examples of key executives, deals with regulators, holds corporate-hygiene sessions with employees, handles the media, etc.

The latest example is security vendor McAfee, which last week said chairman and CEO George Samenuk had retired and president Kevin Weiss had been fired after the company found accounting discrepancies in its stock option grants. The McAfee case goes beyond the appearance of impropriety; the company will likely have to knock $100 million to $150 million off past financial statements, as it granted employees favorably priced options over a 10-year period without recording the necessary compensation expenses. If you're a McAfee customer, do you feel as secure today as you did six months ago, when the vendor's financials were in order and top management was laser-focused on software?

Shelby Bonnie, chairman and CEO of tech media company CNET, also resigned last week in connection with stock option backdating, as did the company's general counsel and HR chief. Apple CEO Steve Jobs might be on the hot seat himself if he weren't such a Wall Street and media darling and were held to the same standards on backdating as the McAfee and CNET chiefs. Brocade Communications, Comverse Technology, Juniper Networks, and Mercury Interactive are just several of the other tech vendors that have lost top execs and/or restated financials because of the practice.

Perhaps their product development proceeded apace through the turmoil. Perhaps their customer service missed only a beat or two. The vendors will tell you as much. But it's more likely that they're still recovering.

Beyond backdating, other ethical lapses have been known to spiral into havoc. The most obvious recent example is with Hewlett-Packard, which has lost half a dozen board directors and executives and spent millions of dollars of shareholder money over the past month trying to correct the judgment errors of a few of its people. Talk about a buzz kill: Just as HP's profits, stock price, and morale were on the rise under new chief Mark Hurd, he's forced to spend much of his time trying to explain why investigators the company hired spied on insiders and journalists using the dodgiest of techniques.

If the boardroom bungling is the worst HP's power brokers have done, the company is squeaky clean. But with the Spitzers and other politicos and Wall Street Journals (and InformationWeeks) looking for the next Enron or WorldCom to out, no ethical transgression, no matter how seemingly minor, will go unnoticed.

At its worst, ethical misconduct is evidence of much deeper malfeasance, even fraud. There's a reason stock prices often plunge on the first whiff of financial irregularity. And if a company isn't straight with its auditors or employees, why should we expect it to be straight with its customers and partners?

Rob Preston,
VP/EDITOR IN CHIEF
rpreston@cmp.com

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