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March/April 2004 - By Andrew W. Singer

MCI’s New Ethics Officer Has A ‘Seat At The Table’

Nancy Higgins is a veteran ethics officer who has worked at companies like Boeing and Lockheed-Martin. Today she serves at a firm that "committed what appears to be the largest accounting fraud in history."

That company is MCI, formerly WorldCom. Together with Enron, Arthur Andersen, and a few others, it was a leading miscreant in the recent corporate scandals.

According to the Breeden Report, WorldCom’s Bernard Ebbers "was allowed nearly imperial reign over the affairs of the company." The former CEO secured some $400 million in ‘loans’ from shareholders, loans that are "unlikely ever to be repaid." In the end, "approximately $200 billion in shareholder value was first created, and then destroyed." Today MCI is in bankruptcy, although it is expected to emerge soon.

In October 2003, Higgins became the firm’s Executive Vice President of Ethics and Business Conduct. Asked how she aims to restore trust in an employee base that is arguably battle-scarred and cynical, she answers, "I don’t believe we have cynical employees." Most employees, in fact, were "horrified and embarrassed about what happened at WorldCom."

‘Restoring trust’

The aforementioned report, "Restoring Trust: On Corporate Governance For The Future of MCI, Inc," was prepared by former SEC Chairman Richard C. Breeden for the U.S. District Court judge overseeing MCI’s bankruptcy. Released in August 2003, it notes:

"WorldCom was then, and is today, an enormous global company with more than 55,000 employees and over 20 million individual and corporate customers who freely choose its services as a competitor. After exhaustive multiple investigations, the fraudulent accounting activities seem to have involved fewer than 100 persons out of the entire employee base."

Those "100 persons" are now gone from the company, observes Higgins, in a recent interview with ethikos. Indeed, people in MCI company headquarters in Ashburn, Virginia, most of whom came from the MCI part of the business (as opposed to the WorldCom side—Mississippi-based WorldCom acquired MCI in 1998), now refer to the period when they came under WorldCom’s control as that time when they were "abducted by aliens."

That said, there is now a concentration on ethics and compliance at MCI as is seen at few other companies. While the company could perhaps survive a business failure, observes Higgins, "none of us could survive another ethics failure. So we have to act that way every day." The company must be a model of corporate governance and integrity, she asserts.

Higgins serves on the CEO’s 7-person executive leadership team, along with MCI’s chief operating officer, chief financial officer, general counsel, chief strategy officer, chief of staff, and executive vice president for human resources. She reports to the Office of the Chief Executive and the Audit Committee of the Board of Directors. Her title, Executive Vice President of Ethics and Business Conduct, makes her one of the highest ranking "pure" ethics officers in corporate America (i.e., she doesn’t have other portfolios, like general counsel or CFO).

Observes Higgins: "I’ve got that ‘seat at the table’ that [Harvard Business School Professor] Lynn Sharpe Paine wrote about years ago."

Emerging from bankruptcy

MCI’s CEO, Michael Capellas, 49, was president of Hewlett-Packard Company before joining MCI in December 2002. Before that he was the chairman and CEO of computer-maker Compaq. He has set high standards, says Higgins, "and talks about ethics all the time."

As noted, MCI is looking to emerge from bankruptcy. It filed an extension with the bankruptcy court recently, however, because it needed more time to revise its financial statements from the years 2000 to 2002.

"It’s highly complicated," explains Higgins. "We had to build ledgers from the ground up because they were in such disarray." That job has taken longer than anticipated. One could say, "It’s just history," and cut the process short. "But we know we will be scrutinized, and we want to get it right"—even if it means spending more time in bankruptcy. Throughout the recent board meeting in which the matter was discussed, she recalls, CEO Capellas mentioned repeatedly, "We’re taking more time because it’s the right thing to do."

Higgins attends all Board meetings, as well as those of the Board’s audit and compensation committees. Capellas has told her that she is "free to contact any board member whenever you like for whatever reason." In some companies, this might be discouraged, or the protocol could be for the ethics officer to go through the corporate secretary. Here she has relatively free rein.

Higgins will provide regular reports to the board’s audit committee regarding contacts from the company’s ethics hotline, and she will report to the full board on the overall ethics program.

At the last Board meeting, Capellas explained, "Nancy is here as chief ethics officer," something that he viewed simply as "a matter of good corporate governance." She appears to be in good company. The MCI board includes notables such as Eric Holder, former Deputy Attorney General of the United States, and Nicholas Katzenbach, former U.S. Attorney General.

A ‘solid foundation’

When Higgins arrived at MCI, she received some twenty e-mails from employees in different parts of the company welcoming her. One person in the billing area, with whom she had a conversation on some business matter, said, "Oh, yeah, I know who you are. I just want to tell you how happy we are to have you here."

According to the Breeden Report, "There was no formal Ethics Office [at WorldCom], and under Ebbers the company did not communicate values such as truthfulness or transparency to its employee base, and it did not live by them as a company either."

That began to change in 2002, however. Bernard Ebbers announced his resignation from WorldCom in April of 2002. An ethics office was established, and an ethics hotline and ethics training were implemented. Indeed, when Higgins arrived in October 2003, she found a "solid foundation for ethics" already in place.

Regarding the ethics hotline, for instance, "they were getting activity" when she arrived. The rate was about 75-80 calls a month in early 2003. Then WorldCom/MCI "published and distributed an ethics code, and activity in the ethics office picked up." People were calling up about the code, in some cases quoting chapter and verse, while asserting, "I think this is a violation." Later, ethics training commenced, and hotline activity increased further. From about 90 hotline calls a month in August 2003, the rate rose to 200 in September, 300 in October and 400 in November. The monthly average now stands at about 300. "This was great. It showed us that what MCI did was working."

Many companies that establish an ethics office, first have to answer the question: Why are we having an ethics office? "You don’t have to do that here," observes Higgins. People know.

Ethics training

There are several stages in MCI’s ethics training. Phase one consists of a videotape in which executive officers of the company discuss different parts of the code.

Phase two consists of interactive, web-based, on-line ethics training. The program was put together by professors at NYU and the University of Virginia’s Darden School. These sessions last about an hour. They have been completed by MCI’s 55,000 domestic employees and contractors. Training of overseas employees is now beginning.

The training has already helped to foster a common vocabulary within the company, says Higgins. The scenarios make use of a protagonist named "Julie." "What would Julie do?" has become a way to raise an ethics issue within the company.

Phase three training is targeted at all financial employees, and those at the director level or above. At MCI, more than 10,000-11,000 employees are at the directors level or above. Taught by a Darden School professor, these sessions consist of a general ethics component, and then discuss specifics to ensure fair and accurate public financial disclosure. (This is the so-called Sarbanes-Oxley training.) The sessions are also offered via Webcast, allowing off-site employees to participate and ask questions.

Additional training will begin in March to deal with corporate governance issues. A further phase will address employment law issues, including topics like sexual harassment, and avoiding conflicts of interest.

Isn’t all this costly? "It’s expensive, but it’s worth it," says Higgins. The company doesn’t want employees to tolerate a situation in which someone is breaking the rules. Admittedly, one often can’t stop a determined rule-breaker, "but we can make it clear that they’re not doing it for MCI." This sort of behavior is not what the company wants.

A large part of corporate misconduct arises from employees simply not understanding what is expected of them. "It’s hard to know what motivates people. Employees tend to hear the last thing said." There is a tendency to think that "‘x’ is all that matters" if ‘x’ is the last thing a manager has mentioned. From her experience, Higgins knows that the "vast majority of issues that come to an ethics hotline are simply miscommunications." A manager says, "We have got to get that contract" and neglects to add, "within the confines of the law and ethical conduct."

Restoring trust is surely one of the major challenges facing the company. "The new MCI is not what people think of when they think of WorldCom," says Higgins. "We have a new management team, with the highest ethical values."

"There is no question that regaining public trust is our top priority," said CEO Capellas at a recent industry meeting. "The good news is morale is absolutely outstanding, particularly in the field. Internally, trust from an employee point of view was a problem I thought we would face—it was inherent in the organization, but we’ve had very low turnover."

There are process adjustments, of course, like improving the ethics hotline so that it can be used to get at the root causes of some problems that may exist in the company. Higgins also wants to build a network of ethics advisors throughout MCI so employees "can go to a live person" if and when they have concerns. She wants to "beef up the web site." The overall idea is to give employees lots of ways to get information.

Higgins wants the company, too, to become more active with professional ethics and governance groups, so "other companies that didn’t have the problems that we had can avoid these things." (Along these lines, MCI recently joined the Defense Industry Initiative, which may seem like a stretch for a telecom company, but MCI is a large supplier to the U.S. government, including the Department of Defense.)

Her biggest challenge? "Trying to understand MCI as a company so as to understand what will work here." Not all the lessons she learned at defense companies like Boeing and Lockheed-Martin are apt. The strict rules by which one must abide in the defense industry often don’t apply to commercial companies. Higgins doesn’t want to "import" from the government contracting part of those ethics programs things that won’t really make sense. For example, if a customer of a government contracting firm becomes ill, and has to spend time in the hospital, the defense contractor can’t send flowers to the hospital. Why not? There’s a $20 limit on gifts that government employees can accept. (One presumes that would exclude flowers, though maybe one could send daisies, or some less expensive species.) Where the client worked for a commercial company—and not the government—one could send flowers. And there’s really nothing wrong with that (provided it complies with the company’s gifts rules).

On a more positive note, Higgins learned at both companies—Boeing and Lockheed-Martin—how it is "important to talk about ethics often, and in new ways." In its program’s early days, Boeing presented the same ethics videotape to employees year in and year out. That got pretty stale. Eventually the company went to scenario-based ethics training, with sessions led by a Boeing manager. That manager was able to select from a basket of ethics scenarios. A manager training factory-floor workers wouldn’t be forced to talk about antitrust issues, say, or other matters that weren’t really pertinent.

One reason this is the "most exciting task" in Higgins’ ethics career is that she has the opportunity to "design the program" from the bottom up "in a way that makes sense." That wasn’t the case at Boeing and Lockheed-Martin. Both already had good programs in place when she arrived. At those companies it was a matter of sustaining or, at most, enlivening something that was very sound. "Here it’s starting at the beginning and having tremendous management support." CEO Capellas "wants this to be a world-class program."

There’s a recognition that it is important to have someone in a company with her ear to the ground, someone who keeps thinking about ethics issues. "Right now they’re doing it themselves, asking, ‘What’s the right thing to do?’ or ‘What would Julie do?’" There is "so much enthusiasm" right now where ethics is concerned.

‘How far we’ve come’

Business ethics in the United States has clearly evolved since 1986 when Nancy Higgins arrived at the Boeing Company as a corporate attorney. Told at that time that the company had an ethics hotline, a relative novelty in corporations then, her immediate reaction was: "I hope it’s within the law department—so conversations are privileged." No, she was told. It was outside the legal department. And hotline conversations were not covered by attorney-client ‘privilege.’ To say that she was horrified might be an exaggeration. But she was surely surprised at the risks that the company seemed to be running.

Today, Higgins laughs at the reaction of the young corporate attorney. Most hotlines today are housed outside the legal department. And that seems to work fine for both the company and employees. "It shows how far we’ve come."

Footnote:
  1. The Breeden Report, or RESTORING TRUST, Report to The Hon. Jed S. Rakoff, The United States District Court For the Southern District of New York, On Corporate Governance For The Future of MCI, Inc. Prepared By Richard C. Breeden, Corporate Monitor, August 2003.o

Andrew Singer is Co-Editor of ethikos.
Reprinted from the March/April 2004 issue of ethikos.
© 2004 Ethikos, Inc. All rights reserved.

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