wave of corporate scandals ranging from off-balance-sheet deals at Enron Corp. to overstated profits at WorldCom Inc. might make it seem that "business ethics" has become an oxymoron.

In reality, however, rarely — if ever — have directors and top executives been focused so keenly on propriety, local observers say.

Large institutional investors have long held management and the directors of the companies in which they invest accountable.

"It's to your benefit to invest in companies that follow three basic guidelines — independence, transparency and fiduciary responsibility," said Joel Koblentz, an independent adviser on corporate governance to boards and executive leadership.

Corporate scandals across the country have brought into question just how dedicated many corporate leaders are to those principles

"Companies — large and small — have cause to do a bit of self-examination in the light of the Enron case," said John Knapp, president of the Southern Institute for Business and Professional Ethics. "They need to ask themselves if the organization may be vulnerable to many of these same problems."

Although few question that most executives of public companies are conducting business in an open and above-board manner, most also know the landscape for business has changed and it will take time to recover.

"The credibility of corporate leadership is at a low," said Joe Goodwin, president of the Goodwin Group, a retained executive search firm specializing in boards and senior leadership. "People are saying, `I don't want anyone that is tainted in any way.' "

He said companies and their boards are being more careful when selecting leaders.

"People don't want to have — particularly at a CEO level — any kind of surprise," Goodwin said.

Candidates for executive positions who would have been hot properties six months ago have fallen out of favor because they worked for companies that have been tainted by scandal, Goodwin said.

Firms have ample evidence that ethical behavior is more than just the right thing to do — it also affects the bottom line. Following its recent conviction for obstruction of justice, one-time accounting giant Arthur Andersen LLP is on the verge of extinction. Other companies have suffered significant drops in stock prices due to allegations of impropriety. Tyco International Ltd. (NYSE: TYC), whose former CEO, Dennis Kozlowski, was indicted for alleged sales tax evasion, was trading recently at about $14 a share, well off its 52-week high of $60.09. Adelphia Communications Corp., which had a 52-week high of $42.39 a share, was trading at less than $1 a share recently and has filed for bankruptcy protection. The nation's sixth-largest cable television operator disclosed that the family of founder John J. Rigas had engaged in $3.1 billion of off-the-books borrowing.

Everybody, it seems, is being held to a higher standard of ethical conduct.

Koblentz said investors are directing their capital into markets where both risk and opportunity can be quantified.

"Institutional shareholders have been moving away from companies that have complicated financials and might have weak executive oversight," said Martin Tilson, an attorney with Kilpatrick Stockton LLP. "There's going to be a lot more emphasis on the CEO knowing what's going on — even to the extent of signing the financial documents, rather than passing the responsibility down the chain of command."

Tilson added that companies going public in the near future will emerge into a new, more regulated world and will have to adjust accordingly.

Just what form that new environment takes will be determined by one or more of the 50-plus bills now making their way through Congress.

Tighter regulations concerning the major stock exchanges also are taking shape. And the Securities and Exchange Commission is looking at the rules governing executive compensation through stock options. Under current rules, companies can disguise the true cost of stock options in their reports to stockholders.

There also are likely to be changes in the composition of boards. Gone are the days when few demands were placed on directors, and the position was considered almost honorary. With rates for directors' and officers' liability coverage rising as stockholder lawsuits multiply, many potential directors are passing up the opportunity because of the risk involved.

Koblentz said boards are likely to become smaller, but directors will have greater expertise. They will have to spend more time working on board issues, and compensation is likely to increase — perhaps to as much as twice the current rate.

"They're not only going to have to be competent and willing to share their expertise, but they're going to have to be experienced in dealing with these kinds of [financial and ethical] issues," Koblentz said. "There just aren't many people who fit that description."

Even though scandals have multiplied, Atlanta companies have remained a bright spot on the business map. So far, they have been largely untouched by the problems plaguing Enron, Tyco International and others.

"In Atlanta, we've been pretty lucky," Koblentz said. "We haven't had any company — other than Mirant — be questioned about its transactions."

Local firms, such as BellSouth Corp. and Delta Air Lines Inc., have been characterized by either long-serving leadership or new leaders who have been carefully chosen through a succession-planning process.

"We've had very solid management and very open management," Koblentz said. "I attribute that to [the fact that] the people who are running these companies are also community leaders. They care about more than what's going on in their own companies."

The bottom line for business is the quality of individual leaders matters most.

"The problem with all this is you can't legislate behavior," Koblentz said. "If somebody wants to figure out how to get around the rules, they can always do so. What we're looking for is some way to modify the behavior of these boards."

© 2002 American City Business Journals Inc.