How is a company regulated legally? Legal regulations are the specific laws governing the products or processes of a specific industry. When enough people feel that a particular ethical standard is important, it eventually becomes law. For example, in 1962, the Consumer Bill of Rights was passed in Congress. This bill made the following ethical standards legal rights: the right to safety, the consumer’s right to choose, their right to information, and their right to be heard.24

Another example is the Organic Seal of the U.S. Department of Agriculture (USDA), which assures consumers of the quality and integrity of organic products. To certify a product as organic, a company must meet stringent conditions set by the USDA, including annual and random inspections to check on standards.

Legal compliance refers to conducting a business within the boundaries of all the legal regulations of an industry. Various government agencies, such as the Equal Employment Opportunity Commission (EEOC) and the Securities and Exchange Commission (SEC), provide guidance to companies to help them maintain legal compliance. The EEOC monitors their compliance by investigating complaints about discrimination, sexual harassment, or violations of the Americans with Disabilities Act (ADA) in the workplace. The ADA of 1990 requires companies to make a reasonable accommodation to the known disabilities of an applicant or employee, as long as it doesn’t require undue hardship for the employer. The SEC governs the securities industry to ensure that all investors are treated fairly and have the same access to information about companies.

Violations of federal laws can severely damage a company. We mentioned previously how ADM, the agriculture giant, was involved in a large price-fixing scheme in which it bilked its own customers out of millions of dollars. The company was later fined $100 million for its role in the price fixing. Likewise, in 2010, British Petroleum agreed to establish a fund of $20 billion to begin to meet claims of damage resulting from the Deepwater Horizon oil spill.25

Don’t companies often break the law and still make money? There are plenty of cases in which companies have broken the law and seemed to benefit—for a time. Take the case of Enron. Enron had grown to become the seventh-largest company in the United States. The company was lauded by Fortune magazine as the Most Innovative Company in America many times and was in the top 25 of Fortune’s 100 Best Companies to Work For. Enron had published its social and environmental positions, noting that the company made decisions based on three values:26

• Respect. Mutual respect with communities and stakeholders affected by the company’s operations

• Integrity. Examining the impacts, positive and negative, of the business on the environment and society and integrating human health, social, and environmental considerations into the company’s management and value system

• Excellence. Continuing to improve performance and encouraging business partners and suppliers to adhere to the same standards

However, by 2001, it was discovered that Enron’s success had been based largely on fraudulent activities. The company had hidden debts totaling more than $1 billion to inflate its own stock price; manipulated the Texas and California power markets, causing enormous hardship; and bribed foreign governments to win contracts abroad. A few months later, the company filed bankruptcy, and founder Kenneth Lay was convicted on 10 counts of fraud and conspiracy. He later died while awaiting sentencing. CEO Jeffrey Skilling was convicted of 18 counts of fraud and is now serving a 14-year prison sentence.

The global accounting firm that Enron had hired, Arthur Andersen, was convicted of obstruction of justice for destroying thousands of documents relating to its work with Enron and its knowledge of the fraud. The fraud ultimately led to the internal collapse of both companies. Thousands of employees who did not know their managers were participating in illegal activities lost their jobs and pensions as a result.

To avoid future occurrences such as these, the Sarbanes-Oxley Act of 2002 was enacted. Under this act, CEOs are required to verify their companies’ financial statements and vouch for their accuracy with the SEC. The act didn’t put an end to financial fraud though. In 2008, one of the largest financial scandals of all time was exposed: a massive Ponzi scheme led by New York financier Bernie Madoff. A Ponzi scheme is a swindle whereby investors believe their money is being invested and earning returns for them but is instead being siphoned off by the schemer. A Ponzi scheme works as long as there are not as many investors wanting to withdraw their money from the investment fund. When too many of them do, there is not enough to pay them all, and the scheme is exposed. For decades, Madoff had been collecting billions of dollars in funds from his many prestigious clients, including celebrities, pension funds, and not-for-profit charities. But then it was revealed that more than $65 billion was missing from his clients’ accounts.27 He was ultimately convicted and is serving a 150-year prison sentence.

What if your company is breaking the law and you want it to stop? Some people risk their positions and future careers to stop corporate abuse when they see it in the workplace. A whistle-blower is an employee who reports misconduct, most often to an authority outside the firm. Famous examples include Jeffrey Wigand, a vice president of a tobacco company who, in 1996, revealed on the television show 60 Minutes that his company was deliberately upping the nicotine in its cigarettes to make them more addictive. Another example is Sergeant Joseph Darby, who sent to the U.S. Army Criminal Investigation Command an anonymous note and photos of prisoners being abused at the U.S. prison Abu Ghraib in Iraq. The information sparked an investigation that eventually revealed to the public the abuses at the prison. Darby later received a John F. Kennedy Profile in Courage Award, but he and his wife were forced to live in protective custody in an undisclosed location because of threats made against them.

Legal protection for whistle-blowers varies from state to state and industry to industry. For the people who take such a step, the pressure of the conflict between what they see and their own ethical standards forces them to make tremendous sacrifices.

Can a company really recover from an ethical lapse? Companies that try to recover from highly publicized ethical lapses often face a long road. Recovering from a scandal almost certainly requires pervasive change. Usually, employees who were not involved in the wrongdoing work to forge a new image. If the corruption is bad enough, sometimes a company goes so far as to “clean house”—that is, terminate all of its current managers and maybe even its employees to try “save face” with the public. That’s what happened at Tyco International when it was discovered in 2003 that the firm’s president and chief financial officer had ripped off the company by hundreds of millions of dollars. The money was siphoned off via illegal corporate loans and by manipulating the company’s stock price. Both men were convicted of fraud and later sentenced to up to 25 years in prison. Within a few months of being hired, Tyco’s new CEO replaced all of the members of the company’s board of directors as well all of the firm’s 290 employees.

Companies that are attempting to recover from scandal often follow some common strategies:

• They work to find a leader who will set an example of the new ethical image of the company.

• They restructure their internal operations to empower all employees to consider the ethical implications of their decisions and feel free to speak up when they spot a concern.

• They redesign internal rewards, for example, restructuring their incentive packages for sales employees so that they are financially rewarded for building ongoing relationships with their clients rather than just closing one-time sales.

By using creative thinking and adhering to clearly stated ethical principles, a company can actually turn a scandal into something good. For example, when many shoppers boycotted Target because the chain had a policy of not allowing solicitors to collect money outside its doors, they managed to turn the incident into positive publicity. It began with Target not allowing volunteers collecting for the Salvation Army. The Salvation Army reported the ban cost the charity more than $9 million in possible donations. Target could have responded with a defensive attack on the Salvation Army or by pointing out that the retailer already was investing 5 percent of its profit in local communities. Instead, the company chose to work with the Salvation Army, first donating the lost $9 million directly and then creating an online “wish list” shoppers could use to donate toys, clothes, and household items to needy families during the holiday season. By acting together with the Salvation Army in new ways, Target was able to turn a negative situation into something beneficial for both itself and the community.