"Preserving the Integrity of Important Institutions"
A Luncheon Keynote Address
by
Dick Thornburgh
Counsel, Kirkpatrick & Lockhart Nicholson Graham LLP
Former Attorney General of the United States and Governor of Pennsylvania
To
The PricewaterhouseCoopers
Intellectual Property and Commercial Litigation
Leadership Forum 2006
How to Prepare for the New Idea Economy
Scottsdale Arizona
Thursday, February 16, 2006
Institutional integrity is a very important element in our democracy. The integrity of our
institutions, public and private, is essential to guarantee their credibility and their effectiveness,
their fidelity to the roles to which they are assigned and the goals that they seek to fulfill. If
important institutions fail, then cynicism and skepticism gain an opportunity to stunt our
potential to enjoy the blessings of those characteristics of our society and our economy which
offer so much promise of fulfillment to all of us.
America stands today as a worldwide exemplar of the benefits that can be realized by a
devotion to the rule of law, to democratic principles and to human rights. Coupled with the
economic opportunity offered to all by our free enterprise system, our citizens enjoy unmatched
prospects for attainment of a standard of living and individual freedom unique in the world's
history. A vital component in this system, I suggest, is the credibility of those institutions, public
and private, that we have established to enable the pursuit of these goals. It is the need for the
integrity of those institutions which I propose to address today.
I am going to address this need not in the abstract, but by focusing on three recent
personal experiences three encounters with threats to the integrity of key institutions, both here
and abroad which affect the prospects of those worldwide who depend on the ability of these
institutions to fulfill their roles in this complex world. I will share with you experiences in the
conduct of assignments which (1) challenged corruption in international business, my
experiences as a consultant to the World Bank; (2) problems of corporate governance, our
investigation into the bankruptcy of WorldCom where I served as a court-appointed examiner;
and, finally, (3) standards in reporting the news, drawing on my service as the co-chair of the
panel that examined the CBS News "60 Minutes Wednesday" program on President Bush's
service in the Texas Air National Guard.
I.
First, the World Bank. This is an area which you have highlighted in your recent Global
Economic Crime Survey, published last November which concluded, among other things, that
some 45% of companies worldwide have fallen victim to economic crime in the past two years.
A particularly pernicious from of such criminal activity is official corruption
bribes, kickbacks
and extortion in the execution of public contracts estimated by the World Bank to total $1
trillion annually.
Here a little personal history and background may be helpful. My own insights into
international business corruption actually began during the 1970's when I served as the head of
the Criminal Division in the U.S. Department of Justice in Washington, DC during the
administration of President Gerald Ford in the immediate post-Watergate era. It was during that
time that the first criminal charges were brought against American companies for making illegal
payments to officials in other countries to aid in getting business. We worked with the Securities
and Exchange Commission to secure convictions of major American corporations and
individuals within those entities for illegal overseas payments.
The exposure of these activities resulted ultimately in the passage of the Foreign Corrupt
Practices Act in 1977. Interestingly enough, the passage of that law in a way made Americans
the laughing stock of the rest of the world. Others viewed this law as a quixotic attempt to
impose U.S. business morality and ethics on their countries. In fact, the law did produce
competitive disadvantages for some American companies. There were few countries that
followed our example and many even allowed, for example, the deduction for income tax
purposes bribes of paid to get business so that our companies were left at a further disadvantage.
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Later when I served at the United Nations, I learned that attitudes were similar there.
One of the recommendations in my report to the Secretary General when I left the office of
Under-Secretary General for Administration and Management in 1993 was to create a strong
Inspector General function to combat fraud and corruption within the United Nations itself. My
proposal was very coolly received. In fact, in some quarters I was told my report was actually
shredded rather than even read. Finally, only after the United States threatened to withhold a
portion of its United Nations dues, was such an office first created two years later.
During this last decade, however, we have seen a significant reversal in attitudes toward
corruption and fraud in the international community. Among the leaders in that effort was
President Jim Wolfensohn of the World Bank. In a 1995 speech, he identified corruption as a
priority target for the World Bank. In a given year this organization distributes some $20-25
billion in loans and aid to developing countries. But ten years ago, they had no capability
whatsoever to deal with what was perceived to be widespread corruption in those programs. In
fact, we were told that an estimated fifteen to twenty-five percent of the amounts distributed by
the bank ended up in some public official's Swiss Bank account as the fruits of bribery, extortion
or other improper payments. Corruption, we were told, had been thought of up until 1996 as a
"political" problem with which the bank should not become involved. Mr. Wolfensohn changed
that, noting that "corruption and poor governance worsen poverty directly by diverting resources
away from the needy and indirectly by harming the climate for private investment, the key to
growth and poverty reduction."
In 2001, Mr. Wolfensohn asked me to head a team for the World Bank to create a
credible anti-corruption mechanism within that organization. Following our report, that
mechanism named, incidentally, the Office of Institutional Integrity, came into existence in 2001
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and new rules of the road were enacted for that organization. Now the World Bank has a fully
staffed group of skilled investigators and auditors on the job to help root out program fraud and
corruption and to further efforts by borrowers to bring corrupt public officials to account.
Their first report rendered last year documented the sanctioning of over 300 firms and
individuals for fraud and corruption in bank-financed projects and the referral of a number of
cases for criminal prosecution. More important, it evidenced the institutional commitment
necessary to send a signal that corruption will no longer be overlooked in World Bank programs.
The jury is still out on how effective this effort will be and it will bear close watching,
particularly with recent changes in the management of the organization. But its very
establishment is emblematic of the changes that have taken place worldwide. For example, the
United Nations itself now has a convention dedicated to combating corruption around the world,
to which over one hundred nations have pledged compliance, and similar conventions have been
adopted by the OECD, the European Community, the Organization of American States and other
international organizations.
The issue of corruption has thus finally come center stage in the international community.
It, of course, was highlighted most recently at the United Nations by the investigation into
charges of corruption in the $64 billion oil for food program in Iraq, an investigation headed by
former Federal Reserve Board Chairman Paul Volcker, which incidentally found that the
mechanism which had been established in the 1990s by the United Nations to deal with the
problem of corruption was simply not equal to the task due to insufficient backing from United
Nations leadership and the lack of necessary skills on the part of those who appointed to serve
there.
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Now with the presence of an aggressive pro-reform U.S. Ambassador to the UN and a
heightened insistence by major donors that the United Nations weak capability for detecting
fraud and corruption be beefed up, chances are better that we will see a much improved climate
for anti-corruption efforts at the United Nations as well.
When I was at the United Nations, Ed Perkins was our ambassador. When asked about
what the United Nations' management mission was, he always said it was to be both effective
and efficient.
Being effective, he said, means doing the right thing.
Being efficient, he
added, means doing the thing right. And it's in doing the thing right that the United Nations
has fallen short over the years and the world now expects considerable progress to ensue. But we
can count on the forces of lethargy, the status quo and human venality to resist this effort. The
UN s future efforts, like those of the World Bank, will bear close watching.
II.
Next closer to home. Let's look at WorldCom, at the end of the last century, one of the
world's largest telecommunications companies, which became during this decade a kind of poster
child for corporate fraud and corruption.
In 2002, I was appointed to serve as Examiner in the WorldCom bankruptcy proceedings
in New York, the largest in U.S. history. Our assignment was to tell the Bankruptcy Court the
story of what happened so that similar debacles might be avoided in the future. The headlines
related to some $11 billion in accounting irregularities, accomplished through a series of socalled top-side adjustments to WorldCom s earnings, nothing more or less than a classic case
of simply cooking the books. Why was this undertaken? WorldCom's growth had been
accomplished through a constant series of acquisitions that were fueled by what seemed to be a
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steadily rising stock price. In order to keep that stock price advancing, there was enormous
pressure to make the numbers, that is, to meet the expectations of the financial community
with respect to corporate earnings. When the telecommunications boom finally ended as we
entered the new century, and a proposed WorldCom merger with Sprint was disapproved by the
authorities, it became increasingly difficult for WorldCom's management to continue to meet
Wall Street's expectations. So they undertook ever more aggressive accounting efforts and
ultimately resorted to simply entering earnings into the books that weren't there. In fact, during
the last thirteen quarters prior to bankruptcy, in each of which they reported "making their
numbers, they actually failed to do so in eleven quarters and, in the last four quarters prior to
bankruptcy, should have actually been reporting losses.
But it wasn't only accounting problems. We, in fact, found a more basic problem in the
near-complete breakdown in corporate governance and the existence of what we styled as a
"culture of greed" in top management. It was these that created the environment which bred the
disregard for proper accounting practices that was to thrive. The checks and balances which are
normally in place to prevent improper activity simply didn't work. As one of my colleagues said,
"The checks didn't balance and the balances didn't check." There was, moreover, a failure to
carry out basic fiduciary responsibilities on the part of the board of directors and various board
committees, especially the audit committee and the compensation committee. The board,
dominated by CEO Bernard Ebbers, gave only cursory perusal to management proposals, often
approving complicated transactions through brief conference calls with insufficient
documentation. The audit committee failed to enlist the internal auditors and the outside
accountants in an effort to create the kind of seamless web of audit accountability which could
have detected accounting irregularities. Meanwhile, the compensation committee was approving
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some $400 million in personal loans from the company to CEO Ebbers, with little due diligence
or attention to the sufficiency of the collateral utilized by Mr. Ebbers.
There was culpability on the part of other gate keepers as well. The outside auditors,
Arthur Andersen, had designated WorldCom as a high-risk account and yet failed to do the
kind of drilling down into the numbers that was consistent with that designation. Salomon Smith
Barney, the investment bankers who handled the offerings and deals that were involved in
WorldCom's expansion program, literally bought their way into the business by extending
financial favors and opportunities to CEO Ebbers. He personally earned about $11 million in a
series of sweetheart deals that were arranged for him by the investment bankers. Salomon Smith
Barney itself earned $100 million in fees in handling transactions in connection with the
WorldCom expansion program. Moreover, one of their securities analysts, Jack Grubman, was
to issue a series of euphoric reports on the prospects of the company right up to the time when it
went over the edge into the abyss. Grubman for his trouble was paid some $20 million a year and
when he left was given a severance payment of an additional $30 million dollars. Talk about a
culture of greed ! Grubman was ultimately banned from the securities business and the
investment bankers had to pay a considerable amount back in the WorldCom bankruptcy
proceedings.
Others had to pay a considerable price for their misconduct as well. Criminal charges
were brought against Bernard Ebbers, the CEO, and others involved in management. All were
convicted and have been sentenced to prison. Civil suits were brought against officers and
directors and the outside accountants, investment bankers and others and about $6 billion worth
of those damage claims have already been settled. When you total it all up, the WorldCom
experience represents a clear example that crime indeed does not pay. There was a lot of hand-8-
wringing at the time for fear that these folks would not be brought to account. But, thanks to the
diligence and persistence of investigators at the SEC and the prosecutors at the Department of
Justice, that did not come to pass.
Needless to say, the WorldCom debacle and others like it promoted a considerable
reaction from the Congress and the regulatory agencies. Under the Sarbanes-Oxley Act and new
stock exchange and SEC rules, we have a whole new set of ground rules for publicly-held
corporations in this country. Although business has often complained about these new burdens,
not all the results have been negative. Most important, this episode has had the effect of
empowering what I like to call the good guys within corporate America to do the right thing.
And by the good guys, I mean men and women who as directors are less reluctant to subject
questionable proposals by management to thorough scrutiny and more eager to fulfill their
fiduciary responsibilities to shareholders. I mean men and women who as members of
management are willing to be more transparent and are genuinely committed to getting feedback
from a truly independent board of directors. I mean men and women who as corporate lawyers
will be less reluctant to raise difficult legal issues and more willing to provide unvarnished
advice on questionable transactions. I mean men and women who as investment bankers will
seek to perform their vital function in the American free enterprise system without offering
improper financial inducements to obtain business and investment analysts who will "call them
as they see them" and seek to inform rather than to delude the investing public as to the true
worth of potential investments. And, of course, I mean men and women who as auditors will
conform to the traditional view of the auditor as that flinty-eyed visitor with a green eyeshade
who will not let anything of a suspect nature pass muster without the kind of scrutiny that is
necessary to deter faulty accounting.
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If we implement these new rules and empower these good guys which I have identified
we will certainly see fewer opportunities existing for the recurrence of the kinds of scandals
which brought about the demise of WorldCom. And that will contribute to the overall
strengthening of our free enterprise system.
III.
Finally, let me refer to the CBS News investigation, the most recent of my own
experiences in dealing with the integrity of important institutions. Needless to say, one of the
most cherished institutions in our society is a free press. In the United States, a vital component
of a free press has always been a vigorous tradition of investigative reporting. In the midst of the
2004 presidential election campaign, I was appointed, along with Lou Boccardi the former CEO
of the Associated Press, to investigate a CBS News "60 Minutes Wednesday" report during the
heat of that campaign which dealt with President Bush's service in the Texas Air National Guard
during the late 60's and early 70's.
You will recall that the military service of both presidential candidates was very much an
issue in the last campaign. The CBS segment in question referenced allegations of favoritism
that had benefited George W. Bush as a member of the Texas Air National Guard. These
allegations were based on four documents allegedly taken from the file of his commanding
officer which had been obtained some six days before the broadcast was carried on the network.
Within two weeks of the broadcast, following a firestorm of criticism, CBS News was obliged to
acknowledge that they could not prove that these documents were authentic and they were
obliged to apologize for having run the segment.
We were asked by CBS news management to determine just how this could have
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happened. Of course, our investigation initially focused on the authenticity of the documents
themselves but what we soon discovered was an overall serious failure by those involved to meet
CBS News' own standards of accuracy and fairness. Clearly, the documents presented on the
program had not been properly authenticated. Specific technical questions were raised in the
wake of the broadcast about the typeface, the spacing and the font characteristics of the
incriminating documents offering clues that they could not have been produced on typewriters
available during the early 70's. Indeed, some of these very questions had been raised prior to the
program by CBS News' own experts.
But there was much more. The alleged source of the documents, Lieutenant Colonel Bill
Burkett, an anti-Bush zealot and former Guardsman, had not been properly backgrounded before
the program ran. Tough questions that you would have expected to be asked by management
were simply not put to the segment's producer, Mary Mapes, who had championed Burkett and
his documents in hurrying the production to air within a week, with what we styled as "myopic
zeal." We found no chain of custody for the documents had been established so that CBS News
was left to depend solely on Burkett's word as to their source, which, incidentally, seemed to
regularly change.
Moreover, after the segment was aired, a stubborn "circle the wagons" defense was
mounted by CBS News supervised by Mary Mapes and correspondent Dan Rather, the very
same people who had produced the show in the first place. CBS News was also insensitive to
appearances of political bias inherent in a contact by producer Mapes with the John Kerry
presidential campaign which effectively shared some of the anti-Bush material that she had
developed.
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There was, we found, in the entire production process, an undue deference by nearly
everyone involved to the Mapes/Rather team. And, of course, that is understandable. Dan
Rather had been the "face of CBS News" for more than a quarter of a century. Mary Mapes was
a prize-winning producer who had overseen the production of programs involving Senator Strom
Thurmond's bi-racial daughter and the Abu Ghraib prison controversy. Those responsible for
supervising the preparation of the CBS News "60 Minutes Wednesday" show were new on the
job and were seemingly reluctant to challenge such a high-powered team. Interestingly enough,
Dan Rather now acknowledges that he did have misgivings about the program before it was
aired. But they certainly were not expressed to anyone in CBS News management at the time.
In the final analysis, the faults in the Bush National Guard segment were perhaps best
summed up by Dan Rather himself. He said, I made a mistake. I didn't dig hard enough, long
enough, didn't ask enough of the right questions.
We made a series of recommendations to try to guard against repetition of such a fiasco, all
of which were accepted by CBS management. Furthermore, the four persons responsible for the
production of the show, including Ms. Mapes, were fired. Dan Rather gave up his CBS
Evening News anchor job and the 60 Minutes Wednesday program itself was ultimately
cancelled.
Within the year following our report, Mary Mapes authored her own version of events, a
book entitled Truth and Duty, a self-serving effort replete with fabricated accounts of our
review process as well as personal attacks on most of the principal players. It gained little
traction, especially after The New York Times Book Review noted
Truth and Duty is perhaps
most valuable as a lesson (often unintentional) in how not to put together an investigative piece.
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As noted previously, none of our findings or recommendations were intended to hobble
the very important process of investigative reporting. Done accurately and fairly, investigative
reporting serves a critical role in a free society. Done inaccurately, as it was here, it has a
potential for great harm. We expressed the hope that our findings and recommendations could
reduce the incidence of occasions where, in the words of Dan Rather, reporters don t dig hard
enough, long enough, [don t] ask enough of the right questions in the cause of assuring fairness
and accuracy in their reporting. If such is the case, our report may well, as former CBS News
Anchor Walter Cronkite predicted, be a standard study in journalism schools and we will feel
that our labors have been amply rewarded.
*
*
*
Thomas Jefferson once said eternal vigilance is the price of liberty and eternal
vigilance must be exerted in establishing and maintaining the kinds of standards that ought to be
applied to institutional integrity both here and around the world. Effective policing of integrity
within institutions, public and private, can have two distinct positive effects. First, obviously, as
indicated in these three examples, wrongdoers, people who violate their responsibilities, are
brought to account in one way or another. But perhaps more important is the deterrent capability
engendered with respect to those who might be tempted to follow in their footsteps, who would
seek to carry out similar schemes of fraud, corruption, misrepresentation or the like.
The prevention of the recurrence of such shortcomings as I have outlined today will
require a firm and visible commitment of leadership within these institutions to the highest
standards in their everyday operations. Strong leadership should never countenance a climate
within an organization where subversive codes of conduct can be conveyed with a wink and a
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nod. In the long run, strict adherence to principles that embody the highest standards of integrity
will build ever stronger institutions and greater rewards for all involved in their governance.
International finance, domestic corporate governance and news gatherers and
disseminators will, I suggest, all be better equipped to carry out their important roles in the wake
of the experiences which I have described for you today. But the real lesson is that no institution
can count itself exempt from threats which follow a disintegration of integrity in its operations.
And no institution should ever let down its guard in attempting to combat such threats.
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