It’s been quite a field day for those of us engaged in the responsibility “business” or who are passionate about the paradigm shift in consciousness now underway.

As some consistency in a better direction takes hold regarding the economic recovery, the trickle has become an avalanche. The disturbing revelations out of Penn State’s “Happy Valley” and Syracuse University are part of a series of sorry stories in the ongoing saga of breached trust and confidence among peoples, institutions, and their leaders.

A quick recall brings to mind a few that only scratch the surface: Rupert Murdoch and the News Corp hacking episodes; municipal management and law enforcement of the “Occupy” squatting; the dubious personal behavior of presidential hopeful Herman Cain; the terminal nepotism of televangelist Robert Schuller in bankrupting his Crystal Cathedral Ministries; the “hijacking” of Congressional due process in the debt debate; and the pervasive credibility deficit of big banks while financially-stressed homeowners struggle to hold onto their mortgages.

It’s now looking like a bad B movie in which one implausible charade after another is woven together in a sub-text of absurdity that attempts to culminate in an “ah ha” moment to make singular sense of it all for a world of good. Any lasting revelation, however, will need to come from a long gaze in the mirror.

In his 2010 Rolling Stone investigation of the role Goldman Sachs and the investment banking industry played in the economic crisis (“The Great American Bubble Machine”), journalist Matt Taibbi made the enlightening, however troubling, point that certain powerful entities took advantage of “an extremely unfortunate loophole in the system of Western democratic capitalism” to seize advantage, knowing that in “a society governed passively by free markets and free elections, organized greed always defeats disorganized democracy.”

Alas, the underlying lesson is laid bare: It is possible that we have been, to a great degree, victims of our own self-assurance about our leaders and the integrity of our institutions? Is it reasonable to expect our leaders to conduct themselves ethically and uphold a standard of competency as a moral imperative?

This question is asked in jest as we should inquire: What can we realistically expect from those who step in to take on such expectations if they are destined to falter from a futile attempt to live up to ideals projected largely by the gap that has resulted from our own abdicated responsibilities?

While there is no excuse for the breaches in trust and confidence brought about by the individuals and institutions that have failed us so acutely, it is also irresponsible to dismiss outright our own role in engendering a culture of duplicity, incompetence, and corruption as if it all could manifest from unsupported solo acts. The now daily drone of news in the Penn State and Syracuse University scandals is particularly illustrative of such abdicated responsibility as more witnesses point to an institutional culture of benign neglect (at best) – or one that promoted an insidious cover up.

How could any of these recent headlining violations reach so far and wide without a system that conspired, however unintentionally, to enable and empower them?

I don’t suggest for a minute that we start blaming the victims for these gross violations of ethical and moral standards but if we are serious about preventing future inflictions, than perhaps we should take stock of the common themes that run through it all. And take back the power that we so readily relinquished.

How we got here

There are many explanations as to how we came to our current state. Here are a few to ponder:

For too long we bestowed blind deference to celebrity out of a need to project unrealistic ideals on others whose own flawed humanity rendered them incapable of consistently fulfilling them.

By engaging in the entertainment of trumped-up and exploitive ‘wedge’ politics, we rendered as old fashioned the substantive debate of critical public policies.  In avoiding responsibility for doing the heavy lifting of personal consciousness that leads to enlightenment about the valid truths of others, we encouraged a culture of easily digestible, sound bite depictions that served our own misconceptions and ignorance.

In accepting manufactured credentials and pandering to values “check lists” as qualifiers for leadership, we failed to establish real-world measures for competency and integrity that tested our leaders on the hard choices for the good of the whole - instead of those driven by self-preservation and political expediency.

Conversely, what common themes run through the behavior of the alleged offenders? More than a few come to mind:

• The pursuit of self-aggrandizement, through a ‘negotiated state’ of limited consciousness, that negated the consequences of their behavior upon the very stakeholders and system that made their success possible
• Delusional overconfidence that tripped into blinding arrogance, engendering fear among subordinates and discouraging the truth-telling that’s essential for responsible decision-making
• A fixated world view that did not accommodate contrarian perspectives and was defended by a distorted understanding of context (group think)
• A relentless drive for self-preservation and power perpetuation that was disguised as protecting the interests of the institution
• A misread of one’s success and its accompanying increase in stakeholder trust and confidence as ‘permission’ for invincibility, which led to unchecked risk-taking
• Complacency resulting from market or industry dominance in the former era of historically high barriers to entry and less access to information
• Playing all sides of the investment equation, in opposition to the interests of your primary client, to ensure your own success regardless of the outcome
• Shifting from the ethical practice of avoiding conflicts of interest to a policy of leveraging such conflict as ‘opportunities’ to manage

The road that must be traveled

How can things be made different going forward? Most polls indicate Americans are now convinced that indeed things will be different. Too many of these scandalous events will likely become game changers of yet-undetermined proportion.

Returning to the pre-recession manic state of leveraged, irresponsible consumption is not an option. Are we on the cusp of an era of prolonged, responsible materialism? If so, what will it look like and how will business leaders adjust their competitiveness in a reset marketplace framed by a greater priority on public interest values?

Beyond these concerns are others that I keep hearing more people expressing. Never mind the obvious – that we will have to be smarter about our money and where we put it, how we use it for personal wellbeing, or whether to heed a moral call and reach out to those less fortunate for the collective sustainability of the whole.

Many economists believe that we are now enduring a somewhat painful but necessary transition from consumer-driven growth – premised upon acquiring, consuming, and amassing material assets – to growth that is driven by a healthier proportion of actually making things (TBD), exports, and an improved trade balance.

The most perplexing question before us is: What will be so different in our thinking and behavior that will initiate authentic transformation to this new responsibility paradigm? Regardless of your view of the ‘Occupy’ movement for example, perhaps its one definitive success is in having changed the national conversation.

Concurrently, the breach in trust and confidence that continues to plague the financial sector shifts into fast-forward the call for formalizing measurement of the social, economic, and governance activities of certain industries and professions – certainly those which serve as critical hinges to the stability and functionality of the whole system. The ongoing struggle to fully implement Dodd-Frank is one snapshot of the terrain ahead of us.

No easy street to better ethics

Dismissing the necessity for consistent, ethical practices will blind companies to their implicit social contract with constituent communities. While shareholders want a good return with strong valuation and upside stock potential, they recognize the severe price to be paid when business strays from its alignment with public interest values in a now stakeholder-driven society.

Conscious leadership is the path to clarity. It is during the best of times that leaders need to build up the savings bank of reputation equity and credibility. Ethical lapses that remain unaddressed lead to imbalances and injustices. They accumulate and become self-perpetuating, often tempting corruption and other acts of acute destruction.

Ethical Corporation, an independent research and conference firm that provides competitive intelligence for business sustainability, regularly polls senior ethics and compliance executives from a cross-section of sectors as to what they perceive are their greatest current challenges. In one of its recent surveys, the top three answers came from 35% of responses received from such companies as Tata Steel, GE, DHL, Imperial Tobacco, Transparency International, Teco Energy, Weatherford, Novo Nordisk, and Marriott International.

The top ten challenges identified are:

• Getting employee buy-in and commitment for true ethical behavior
• Getting support from top management and changing the view of compliance as a cost center
• Fighting against the ‘turn-a-blind-eye’ culture, and the way ‘business has always been done’
• Managing an effective global program that complies with different, sometimes contradicting local laws
• Keeping abreast of legislation and ensuring that new requirements are met
• Managing compliance in a resource constrained environment
• Managing changing stakeholder expectations and avoiding negative publicity as a result
• Increased liability of individual prosecution under a tough legislative regime
• Educating, monitoring, and managing activities of third parties to ensure compliance
• Defining ‘adequate’ for your company’s compliance efforts and knowing you’re doing enough

Let us grow into a sustainable recovery having learned some hard lessons: Elections matter, as they bestow power not only upon the candidate but also their legacy relationships and personal connections. Hard choices require homework. Deference should be judicious. Leadership is a collective succession of everyday acts. Unchecked, concentrated power is a clue to ethics running amuck. Power should never fall far from the tree in your own back yard. Responsibility should be everyone’s business.

Art Stewart, MPM, is President/Chief Strategy Officer of Boston-based Stewart Strategies Group (www.stewartgrp.com). He teaches a custom course on corporate and social responsibility at Emerson College and is a Research Fellow at the Bentley University Center for Business Ethics.

Yesterday (11/28), federal judge Jed Rakoff slammed the Securities and Exchange Commission for making a toothless settlement with Citigroup over financial crisis misdeeds, arguing that it obscured the basic facts of what actually happened. Today (11/29), Bloomberg has an important story by Richard Teitelbaum that, from a very different vantage point, demonstrates the same infuriating point: Despite the economic wreckage we are still trying to repair, we have yet to have an adequate accounting of how the financial crisis happened, what caused it, and who knew what when.

Former U.S. Treasury Secretary Hank Paulson (2006).

According to the story, on July 21, 2008, then-Secretary of the Treasury Hank Paulson met with "a dozen or so hedge-fund managers and other Wall Street executives" and discussed "a possible scenario for placing Fannie [Mae] and Freddie [Mac] into 'conservatorship.'" That's a fancy term for a government seizure that would have allowed the entities to keep operating, but would have caused severe adverse consequences to holders of the Frannies' equity and, possibly, debt. A fund manager told Bloomberg he was "shocked that Paulson would furnish such specific information -- to his mind, leaving little doubt that the Treasury Department would carry out the plan." After the meeting, this manager consulted a lawyer, who told him to cease trading immediately in the Frannies, lest he later be accused of - here's the rub - insider trading.

The Bloomberg story cites law professors to say that Paulson did not break the law. But the story's implicit allegation is that the former head of Goldman Sachs was so clueless - or contemptuous - of his role as Secretary of the Treasury of the United States of America that he engaged in a clubby tête-à-tête with his former peers and handed them what Bloomberg says "amounted to inside information."

It's actually worse, because as Bloomberg also reports, Paulson was publicly playing down the possibility of dramatic government action -- practically the opposite of what he confided behind closed doors to those elite traders.

Paulson didn't comment for the Bloomberg story, and his spokesperson referred questions to his book, On the Brink: Inside the Race to Stop the Collapse of the Global Financial System - which, Bloomberg points out, doesn't mention the meeting.

There are limits to what a reporter can get - starting with whether any of those powerful and canny Wall Street sharks profited on the information. They may have shorted the Frannies, but, as the Bloomberg story points out, "tracking firm-specific short stock sales isn't possible using public documents." We need a more powerful entity - perhaps a Congressional committee? - to find that out. And, here are a few more questions that cry out for answers:

1. What is the justification for such a meeting? Former St. Louis Federal Reserve bank president William Poole suggests that the Treasury needs to be able to prep the market with information.

Fair enough. A Treasury Secretary should talk to smart market participants, and needs to know how the market might react to any given action.

But there's a difference between meeting to receive information and telling a chosen few market-moving plans. Hank Paulson and now Timothy Geithner should receive information from all types of parties. If they want to float a trial balloon, they have to float it in such a way that doesn2019t give select participants market sensitive information.

2. Why did Paulson meet with these people specifically? The Bloomberg piece notes that Eric Mindich, a hedge fund manager who is a former Goldman Sachs employee, hosted the meeting. Several Goldman Sachs executives attended.

If the Treasury secretary is going to hold meetings with market participants, the attendees should be chosen based on - you are going to laugh here - merit, not connections. And they should be transparently disclosed at the time.

3. How many other meetings like this were there? As Felix Salmon recalls, Andrew Ross Sorkin in his book "Too Big To Fail" revealed that Paulson met with the board of Goldman Sachs in June 2008 in Moscow -- a month before the meeting Bloomberg has revealed -- and discussed market conditions, and even contemplated that Lehman Brothers might fail.

Here's how Sorkin wrote about this:

For the nearly two years that Paulson had been Treasury secretary he had not met privately with the board of any company, except for briefly dropping by a cocktail party that Larry Fink's BlackRock was holding for its directors at the Emirates Palace Hotel in Abu Dhabi in June.

Anxious about the prospect of such a meeting, [Paulson Chief of Staff Jim] Wilkinson called to get approval from Treasury's general counsel. Bob Hoyt, who wasn't enamored of the "optics" of such a meeting, said that as long as it remained a "social event," it wouldn't run afoul of the ethics guidelines.

Still, Wilkinson had told Rogers, "Let's keep this quiet," as the two coordinated the details. They agreed that Goldman's directors would join him in his hotel suite following their dinner with Gorbachev. Paulson would not record the "social event" on his official calendar.

One possible defense for Paulson floating government conservatorship of Fannie and Freddie is that by the time of his July meeting with traders and executives, the market was widely anticipating the government would take that action. But what if the market only anticipated this because there were other, previous meetings between Treasury officials and well-connected investors in which such plans were floated?

4. What did this meeting do for the Treasury?

My sense of Paulson's approach - act first, act boldly, move on and dwell no more - is that his actions weren't well thought out at all.

But let's concede, arguendo, that Paulson and the Treasury held this meeting as part of a carefully thought-out strategy to prep the market for the Frannie conservatorship. What did that get the government? If anything, the prepping only would make the investors more likely to extrapolate and short or sell other financial stocks.

If preparation was indeed the rationale and justification, then Paulson and Treasury needed to have a contingency plan for investor reaction. Which they almost certainly didn't, since Lehman then failed and they were forced into a series of desperate actions. Over the next weeks, they scrambled to create the Troubled Asset Relief Program, or TARP, and then remake it into the preferred equity-buying program (rather than the toxic asset purchasing program).

Without a full and convincing accounting, we are left with a picture of a Treasury Secretary who took care of his buddies while allowing the system to blow up. This is the kind of thing that a crony capitalist system - and only such a corrupt system - would allow.

Photo: U.S. Treasury

Jesse Eisinger is a senior reporter at ProPublica, covering Wall Street and finance.  In April 2011, he and Jake Bernstein were awarded the Pulitzer Prize for National Reporting for a series of stories on questionable Wall Street practices that helped make the financial crisis the worst since the Great Depression.

ProPublica is an independent, non-profit newsroom that produces investigative journalism in the public interest.   This article is republished with permission under a Creative Commons license.

Consider the case of MF Global Holdings Ltd., a New York-based securities firm that filed for bankruptcy protection on Oct. 31 after disclosing sizable exposure to derivatives and other investments related to billions of dollars in European sovereign debt. The firm was headed by Jon S. Corzine, a former CEO of Goldman Sachs who was subsequently elected U.S. Senator and, later, Governor of New Jersey.  After losing his gubernatorial re-election campaign to Chris Christie in 2009, Corzine returned to banking as CEO of MF Global.

In this video clip, “Daily Show” host Jon Stewart compares and contrasts the positions and behavior of Jon S. Corzine, the politician, with Jon S. Corzine, the banker.

John Ruggie

The principles grew out of a six-year consultative process which began in 2005, when UN Secretary General Kofi Annan appointed Harvard University Professor John Ruggie as his Special Representative for Business and Human Rights.  While implementation is still in its earliest stages, the Principles have been lauded by non-governmental organizations and endorsed by major corporations. The Coca-Cola Company has praised the “flexible framework” of the Principles; GE has said they will “no doubt serve as a lasting beacon for business entities seeking (to) grow their service and product offerings while respecting human rights.”

John Ruggie recently joined the Corporate Social Responsibility practice of the law firm Foley Hoag as a senior adviser, working with the firm and its clients on issues related to implementation of the Guiding Principles; he continues his association with the Harvard Kennedy School, where he holds a chair in human rights and international affairs, and Harvard Law.  In the following interview with Business Ethics Magazine Editor & Publisher Michael Connor, Ruggie discusses implications of the Principles and why he thinks a newly-coined term – “human rights due diligence”- has already become a permanent entry in the lexicon of international business.

MICHAEL CONNOR: The new Guiding Principles rest on a framework that has what you call three pillars – “protect, respect and remedy.”  Can you explain those?

JOHN RUGGIE: Yes. The first pillar is simply that under the existing international human rights regime, states are required to protect against human rights abuses - not only those committed by state agents, but also by third parties.  So when a country adopts a human rights treaty or convention, there is the requirement that those whose rights are enumerated in those instruments are protected against abuse. By definition, third parties include business. States also have certain legal obligations under customary international law. The bedrock of the Guiding Principles is that they do not attempt to privatize human rights protection: it’s a fundamental duty of states.

Ruggie with UN Secretary-General Kofi Annan in 2004.

The second pillar is what I call the corporate responsibility to respect rights. I chose the word responsibility, rather than duty, because for the most part international law doesn't apply directly to companies.  It applies to states, and through what states do domestically, it applies to companies. The exception to the rule is corporate involvement in the most egregious human rights violations, including crimes against humanity, where domestic courts may apply international standards—as under the U.S. Alien Tort Statute. The corporate responsibility to respect human rights is a social responsibility over and above compliance with applicable laws. It is the minimum expectation society has of business conduct in relation to human rights. It means that as business goes about its business, it should not infringe on the rights of others. So manufacture your mouse traps, deliver whatever services you provide, but don’t infringe on others’ human rights in the process.

The third pillar - access to remedy - includes both judicial remedy, which again is a duty of the state to provide, and non-judicial grievance mechanisms which companies themselves may create to deal with issues before they escalate and turn into major campaigns or lawsuits.  The idea in the latter case is for companies to deal with grievances in an early stage.

MICHAEL CONNOR: What's the business case for concern about human rights?  Why should companies care?

JOHN RUGGIE: If you go to company websites, you won’t find one that says “we don’t respect human rights.”  They will invariably say - if they say anything on the subject, and more and more companies do - that they respect human rights.  I assume they do it in part because it's the right thing to do, and because expectations by external stakeholders have raised the issue on company agendas.  There are also very material reasons.  You’ll recall that way back in the 1990s Nike first got interested because there was a worldwide campaign against the company.  The extractive industry has been hit by lawsuits in courts in Europe and the United States probably more than any other sector. Internet and mobile telephone service providers are under growing legislative and social pressure for revealing user information to authorities and providing them with other tools to track down dissidents. And so on.

"It’s important to keep in mind that the principles are principles.  They're not a toolkit.  You don’t take it off the shelf and plug it in and get an answer."

MICHAEL CONNOR: So there's financial risk?

JOHN RUGGIE: There can be huge financial risks. We're still finishing a research project called the Cost of Conflict with Communities, which was triggered by a Goldman Sachs study about the international oil majors.  Goldman looked at 190 projects and found that the time from first approval to the time the first drop of oil was pumped out of the ground had doubled over the course of the previous decade, creating substantial cost inflation.  They looked into what the factors were and they discovered that it had a lot to do with various permitting issues, with resistance from communities, with demonstrations against projects, with lawsuits.

So we looked into this. One company went back over its own figures. It discovered that in a two-year period it had left $6.5 billion on the table.  Now that attracted attention.  We also did some work in the mining industry.  For a world-class mining operation, which requires about $3-5 billion capital cost to get started, there’s a cost somewhere between $20 million and $30 million a week for operational disruptions by communities.  Another estimate used by the mining industry is that an asset manager is supposed to spend between 5% and 10% of his or her time on community engagement issues.  We found that it can be anywhere from a one-third to 50%, and in some cases 80% of their time.  So there are opportunity costs, financial costs, legal costs and reputational costs.  All this has escalated tremendously, which is why companies themselves have been so interested in the UN mandate I’ve led.

MICHAEL CONNOR: Your report notes that we live in a world of “192 United Nations member states, 80,000 transnational enterprises, 10 times as many subsidiaries and countless millions of national firms, most of which are small and medium sized enterprises.  When it comes to means to implementation therefore, one size does not fit all.”  In that context, how do you go about getting these principles implemented?

JOHN RUGGIE: It’s important to keep in mind that the principles are principles.  They're not a toolkit.  You don’t take it off the shelf and plug it in and get an answer.  Issues of context, issues of industry sector, matter. The size of a company may matter. For example, you don’t want to impose the same sets of rules on a small or medium-sized enterprise that has maybe 100-150 employees and occasionally sources something from overseas that you would apply to a company that has 300,000 employees in all the countries of the world.  So it's a principles-based framework, not a rules-based system, and it certainly isn't a toolkit.  But whatever the granular operationalization that companies develop, it has to meet certain criteria, and that’s what the principles really are intended for.  They're benchmarks against which specific tools that are adopted by companies as a way they implement things can be measured by themselves and other stakeholders.

MICHAEL CONNOR: Are there specific countries or parts of the world that might be more affected by implementation of the principles?

JOHN RUGGIE: One of the things we found is that there's a negative symbiotic relationship between company involvement in human rights abuses and conflict zones -for example, the eastern parts of the Democratic Republic of Congo.  That's one of the types of situation that requires enhanced due diligence.  You're not operating in Denmark; you're operating in a conflict-affected area where the writ of the government is weak to non-existent. There are also sectoral differences: the mining industry and the oil industry, because of their huge physical footprint, have tended to generate community-related issues.  Footwear and apparel and the electronics industry have labor issues.  The IT sector has end-user issues. Pharma has access to essential drug issues. That’s why you can't write a detailed check-the-box toolkit for the globe.  But you can, as I say, provide benchmarks against which such things can be assessed.

"In just three years, the concept 'human rights due diligence' – which didn’t exist before—has entered into a variety of international and domestic policy arenas."

MICHAEL CONNOR: What's been the reaction from business so far?

JOHN RUGGIE: Business has been supportive. I made it a point to reach out to business literally from the beginning, first through the international business associations – the International Chamber of Commerce, International Organization of Employers, the U.S. Council for International Business and the like – and worked closely with them from the start.  And then individual companies started getting involved.  Over the course of the six years, we held 47 international consultations; business was invited to participate, as were other stakeholders.

A number of companies worked with us to pilot various projects. A group of Dutch companies, including Unilever and Shell, piloted the idea of “human rights due diligence” processes, which is one of the key elements in the Guiding Principles.  They spent a year examining whether they could make sense of this concept, and what it would take to make it work.  And then they issued a public report saying “Yes, this actually is a good idea, we can make it work.”

We also got five companies in different countries to pilot site-level grievance mechanisms to see how you make them work.  For example, Tesco set up a pilot in the Western Cape of South Africa for a network of fruit supplier farms.  Sakhalin Energy participated in a pilot in Russia of their natural gas operation on Sakhalin.  We had a Hong Kong-based company collaborating with us in its operations in Vietnam. Cerrejon Coal in Colombia participated. Hewlett-Packard collaborated in China.  So we tried to work with business to make sure that what we were going to propose would have legs by road testing ideas on the ground.

MICHAEL CONNOR: When you talk about human rights, what are the key conflict points?  What violations of human rights most often show up?

JOHN RUGGIE: Again, it varies by industry.  If you look at the extractive and infrastructure sectors, one of the main issues initially has to do with taking over land and resettling the population.  This has to involve adequate consultation and compensation. Particular issues relate to indigenous communities, which have special protections under many national laws and also under international law.  Then there’s issue of the physical security of the person: conflicts between companies and communities; security forces that shoot demonstrators; or, as has been often alleged and sometimes proven, security forces protecting company facilities that trade access for sex, or that rape and sometimes kill people.

In manufacturing, the issue invariably has to do with labor rights.  Do you remember the Foxconn story of last year, when there was a rash of suicides by workers?  Foxconn is a major Chinese supplier of electronic equipment, mobile, telephones, computers and the like, to western brands; those were workplace related grievances.  In the information technology and telecommunications area, a major problem in recent years has been privacy rights. The latter are not always easy cases; they pose dilemmas.  When Google faced the issue in China, they tried to figure it out: “What do we do? Can we move our servers? We don’t want to be complicit in putting dissidents in jail.  At the same time, we're in China and we can't outright violate Chinese law, otherwise we're not going to be here very long.”  One of the things we tried to do in the Guiding Principles is to better inform decision-making in dilemma situations, not to pretend that there are always easy solutions to be had.

MICHAEL CONNOR: The guidelines specifically state that businesses may be involved in adverse human rights activity either through their own activities or as a result of their business relationships with third parties.  Does that put a greater obligation on companies to closely monitor their supply chain relationships?

JOHN RUGGIE: Yes.  That's how this all started in the first place.  To go back to Nike in the 1990s, they didn't own any factories; they were buying from independent contractors.  Nike’s first reaction back then was, “This is not our problem, we're just buying stuff.”  But that argument didn't hold for very long.  So yes, it does put a greater obligation on companies to do adequate due diligence.  Now if you have 100,000 suppliers, as Wal-Mart I think does by now, you obviously can't monitor the day-to-day activities of each and every one of your suppliers.  So it becomes a risk-based approach.  Where are the areas of highest risk?  Companies have enough intelligence sources to know that. They can ask the question: “What are the sectors, what are the geographical areas, where we need to pay most attention?”  That’s part of the due diligence process.

"We now have a foundation on which we can build going forward.  It doesn't solve all the problems.  But at least we now know what the foundations are and how to frame future debate."

MICHAEL CONNOR: Take out your crystal ball for me if you can and look forward 10 years.  How broadly will these principles be embraced by countries and business?

JOHN RUGGIE: Yogi Berra said it was hard to make predictions, especially about the future (laughing). But judging from the reception and uptake so far, I think it's clear that some things are going to move fairly rapidly.  Before 2008, no one had ever used the term “human rights due diligence.”  It was introduced in my 2008 report.  It is now everywhere.

By everywhere, for example, I mean big companies - like GE and the Coca-Cola Company, which have endorsed the Guiding Principles, as have big law firms, like Clifford Chance.  Human rights due diligence is now also in the requirements of the OECD (Organisation for Economic Development and Cooperation) guidelines on multinational enterprises.  What's unique about the OECD guidelines is that they come with a complaints mechanism, so that people who feel that their human rights have been harmed can actually bring a complaint against a company to an office in any the 42 countries that adhere to the OECD guidelines.

The principle has been incorporated into a new ISO (International Standards Organisation) standard, ISO 26000.  The International Finance Corporation has updated the performance standards it requires of clients, which now reference the business responsibility to respect human rights.  The European Commission has incorporated the same principles, including human due diligence, into a new EU strategy on corporate social responsibility. In the U.S., the Dodd-Frank Act includes a due diligence element for companies sourcing certain minerals closely tied to conflict in the Democratic Republic of Congo.

So in just three years, the concept “human rights due diligence” – which didn’t exist before—has entered into a variety of international and domestic policy arenas. It is going to become standard operating procedure going forward.  Companies themselves have welcomed the principle and many are already applying it in practice because adequate due diligence can only be their friend: it provides protection in law suits and other liability issues.  It doesn't absolve companies when they commit wrongs, but if they can demonstrate that they’ve done everything possible to get things right, that can only be helpful.

Another element of the Guiding Principles that has had really good resonance inside the corporate community itself, particularly in the extractive industry, is the idea of site-level grievance mechanisms.  Again, that wasn’t anything that people generally did or talked about three years ago.  I remember being in Peru talking to a community leader; he had just led a community in a demonstration, a long shut-down of a mining operation run by an American mining company. It turned ugly, as these things often do, and people got hurt.  I met with him afterward and asked: “So what brought you to this point? Why did you close down the mine?”  He said something I'll never forget: “They wouldn't listen to us when we came to them with small problems, so we had to create a big one.”

Companies understand that it's better to deal with small problems before they escalate, particularly when they are embedded in a local community, as the extractives are.  I know of a number of companies - I don’t think they’ve announced it publicly, because they don’t want to get too far ahead of the game - that are rolling out site-level grievance mechanisms throughout their operations.

Thirdly, I think the national regulatory regimes in different countries have been as perplexed in the past by business and human rights challenges as business itself was.  But they too are beginning to realize that there are certain preventative measures - like human rights due diligence - which if you write them into policy requirements have tremendous potential positive consequences.  It's always harder to deal with issues after bad things have happened: you end up in the courts, with problems that might have taken place on the other side of the earth, and are costly to resolve.  In the past, we tended to think about effective remedy largely in terms of after the fact judicial remedy. Now the regulatory authorities in various countries are beginning to realize that there are a lot of preventative measures that can and should be used, which lower the incidence of corporate involvement in human rights abuse in the first place, and thereby also lower the burden on the rest of the remedy system.

Finally, judicial remedy will continue to evolve. Judicial reform in countries where the rule of law is weak and governments are corrupt is a slow process, but it is happening. And the web of legal liability for corporate involvement in egregious violations is expanding in the home countries of multinational corporations—a trajectory that will continue no matter how the U.S. Supreme Court rules on the applicability of the Alien Tort Statute to legal persons, such as corporations.

MICHAEL CONNOR: How does it feel, having spent six years on this project, now that it's done?

JOHN RUGGIE: It's not done.  It goes on.  When I wrapped up my mandate in June, I said to the Human Rights Council that this is not the end, but I believe it is the end of the beginning.  What I meant was that we now have a foundation on which we can build going forward.  It doesn't solve all the problems.  But at least we now know what the foundations are and how to frame future debate, which was all over the place in the past.

MICHAEL CONNOR: So is there a feeling of accomplishment about that?

JOHN RUGGIE: Yes.  I mean it hadn't been done before.  And I don’t have to travel as much (laughing).  I get to see my wife and talk to my son more often.

MICHAEL CONNOR: It seems a well-deserved change of pace.  Thanks, John, for speaking with us.

This interview transcript has been edited for length and clarity.

Early last year, as they weighed whether to bar banks from speculative trading with their own money, congressional staffers turned to a key regulator for advice.

The response from Julie Williams, the chief counsel of the Office of the Comptroller of the Currency, was startling, according to people familiar with the conversations. Williams insisted new rules were unnecessary since this type of trading did not play a major role in the financial meltdown.

President Barack Obama signs the Dodd-Frank Wall Street Reform and Consumer Protection Act alongside members of Congress, the administration and US Vice President Joe Biden. July 21,2010.

Congressional Democrats went ahead and wrote the trading prohibition into Dodd-Frank, the sweeping overhaul of the nation's financial rules pushed through last July.

But now, behind closed doors, financial agency powerbrokers are jockeying over how to implement the law, a process turning out to be as bitterly contentious and politicized as passing Dodd-Frank in the first place.

Government officials -- including Williams and the OCC -- are inserting exemptions as they formulate rules to enforce the law. Some regulators, facing severe budget constraints, caution that they may not be able to carry out some of its key provisions. Foes of the law in Congress, and even some former friends, are voicing concern that aspects of the law could erode American competitiveness. Wall Street is mounting a determined lobbying campaign to blunt provisions it failed to defeat on the floors of the House and Senate.

To some, the emerging roadblocks reinforce a fear that Dodd-Frank, which was intended to touch on almost every aspect of the American financial system, may never provide the sweeping reform it promised.

"It was doomed at the outset and nothing can possibly salvage it. We might even have been better off without it," said Arthur Levitt, a former chairman of the Securities and Exchange Commission.

Dodd-Frank is so sprawling -- the legislation runs to more than 2,000 pages -- that the law firm Morrison & Foerster dubbed the tracker it created to monitor the implementation process "FrankNDodd."

The law laid out principles but often left it to regulators to write the actual rules. Those would be the same regulatory agencies that failed to prevent the financial crisis and that, in some cases, view the banks they oversee, not taxpayers, as their primary constituents.

Dodd-Frank requires 387 different rules from 20 different regulatory agencies. The Byzantine, tedious rulemaking process has occasionally pitted regulator against regulator and proved a bonanza for lobbyists.

"The decisions that are coming down are not promising," said Ted Kaufman, the former Democratic senator from Delaware who worked on the legislation. "The regulators are not making the hard decisions. If the Congress would not make the hard decisions, how can you expect the regulators to make them?"

Regulatory agencies also are caught between Republicans who complain they are moving too fast and Democrats who urge them to comply with the deadlines set in the law.

Congress set aggressive deadlines for regulators to make rules to enforce the law, and, unsurprisingly, they are failing to meet them. The agencies missed each of the 26 deadlines they were supposed to meet for April . So far, regulators have finalized 24 rules and missed deadlines on 28, according to the law firm Davis Polk.

Treasury officials are sanguine about the delays. "If we have to sacrifice a little bit of time to get to the right answer, that's the right thing to do," said Mary Miller, the assistant secretary for financial markets.

The law's defenders say most aspects of the implementation process are going well. Among the successes they point to: The Consumer Financial Protection Bureau, a new agency created to protect consumers from dangerous financial instruments they don't understand, is coming together, though the Obama administration has yet to appoint a person to head the agency. Rules have been agreed upon for portions of Dodd-Frank that give shareholders a say on executive pay, register municipal advisers and create a program to reward whistle-blowers.

"The first set of rules are going to be good ones," said the law's namesake, Rep. Barney Frank, D-Mass. "These regulators are on the right side."

Still, while the process is far from complete, the early signs suggest that several of Dodd-Frank's most critical elements are in danger, an outcome that could increase the chances of another financial crisis.

"I am concerned that we are not putting in place the things that we need to do to prevent this from happening again," says Kaufman.

Here are a few areas where followers of the process see the most cause for concern:

The Volcker Rule

What Dodd-Frank does: Colloquially named after Paul Volcker, the former head of the Federal Reserve who championed it, the rule bars banks from an activity known on the Street as "proprietary trading" -- making investments on their own behalf, rather than for clients.

The reason for the rule: During the credit bubble, highly leveraged investment banks speculated heavily in mortgage-backed securities. When those securities went bad, banks like Merrill Lynch and Citigroup were crippled. A report by the United States Senate Permanent Subcommittee on Investigations detailed how proprietary trading "led to dramatic losses in the case of Deutsche Bank and undisclosed conflicts of interest in the case of Goldman Sachs."

To comply with the law, Morgan Stanley and Goldman Sachs and other banks have jettisoned their internal hedge funds and private equity firms.

Stumbling blocks: Regulators are haggling about complicated, but vitally important, definitions.

The OCC is pushing for banks to have wider latitude in making trades to balance and manage their assets and liabilities. Dodd-Frank specifies Treasury securities as suitable for this purpose; the OCC has suggested in private negotiating sessions with fellow regulators that banks be allowed to invest in other securities as well, according to people familiar with the talks.

As currently written, the Volcker rule allows banks to trade in securities for existing clients but blocks them from doing so for future clients. The OCC has advocated lifting that restriction in the negotiating sessions, according to people familiar with the conversations.

Critics fear that adding the provisions sought by the OCC would mean banks could make almost any trade and claim an exemption, rendering the rule meaningless.

Last year, Volcker himself reached out to Acting Comptroller of the Currency John Walsh to express worry that Julie Williams, the agency counsel, was trying to weaken the rule. Walsh took umbrage at the suggestion, according to a person familiar with the conversation.

Frank said he and other lawmakers were so concerned about Williams, who has held her position since 1994 and has served as the acting comptroller twice, that they inserted a provision in the financial reform legislation that strips her job of civil-service status. "I disagree with her very strongly," Frank said. "Her job tenure was eliminated, and a new comptroller can appoint new counsel. That was deliberate."

OCC officials would not comment specifically about the agency's efforts in regard to the Volcker rule. The agency didn't respond to detailed questions about Williams' role and declined to make her available.

"We're working on an interagency basis to implement the Dodd-Frank Act in a way that is faithful to congressional intent," an OCC spokesman said. "It would not be appropriate to discuss confidential interagency deliberations regarding the formulation of pending rulemaking."

Derivatives

What Dodd-Frank does: Aiming to remake this multitrillion-dollar shadow arena into a transparent, regulated market, the law calls for most derivatives to be traded on exchanges.

Reason for the rules: Congress had prevented regulation of derivatives, which involve side bets on anything from currencies to commodities to corporate bonds, which exacerbated the losses at AIG and other banks during the financial crisis.

Stumbling blocks: Bringing order to the unregulated derivatives market has turned into one of the most difficult challenges in Dodd-Frank implementation. The rulemaking process has sparked a barrage of opposition, even from previously supportive legislators.

In late April, the Treasury Department proposed that some foreign exchange derivatives be exempted from the requirement that derivatives trade on exchanges. This could allow many transactions in the derivatives market to remain out of easy sight of participants, possibly encouraging banks to structure noncurrency trades to fit the definition of a foreign exchange swap in order to qualify for the exemption.

Treasury Department officials defend the exemption, which isn't final. "Just to say everything should be painted with the same brush is not effective," said Miller, the assistant secretary for financial markets. This part of the market "worked very well through the financial crisis."

On May 17, New York lawmakers -- including Democratic Sens. Charles Schumer and Kirsten Gillibrand, who voted for the original law -- wrote a letter to regulators and the Federal Reserve warning that aspects of the new derivatives rules impose "significant competitive disadvantages" on U.S. banks.

Another area where regulators have lagged is in the creation of data repositories mandated by the law. These repositories are supposed to make the industry less opaque to regulators and, thus, easier to oversee.

Though Dodd-Frank requires that most derivatives trade on exchanges there is an exception: Trades can also be conducted on another platform, known as a "Swap Execution Facility." Watchdogs worry that such facilities wouldn't make information on the prices at which some investors were offering to buy and sell, known as bids and offers, available to all participants. Nevertheless, the Securities and Exchange Commission has issued an initial rule, subject to finalization, that such facilities can conduct derivatives trades if they have the capacity to show participants that information, not that they do so.

"It seems like some of the regulators accepted the argument from many market participants that they should be able to continue business as usual," said Heather Slavkin, the senior legal and policy adviser for the AFL-CIO's Office of Investment. Some regulators have said that they "don't want to disrupt current market practice -- but hold on a second. The purpose of Dodd-Frank was to change market practices."

Credit Rating Agencies

What Dodd-Frank does: Creates a new regulatory structure to oversee credit ratings agencies.

Reason for the rule: Credit rating agencies were compromised by their relationships with their paying customers -- investment banks -- and issued unduly optimistic ratings on mortgage-backed securities. When the ratings proved erroneous, investors who had relied on them suffered billions of dollars in losses.

Stumbling blocks: The SEC has yet to fully staff a new office to oversee credit rating agencies. Instead, for budgetary reasons, it has opted to add personnel to existing offices to perform examinations on the rating agencies.

The SEC has created a special part of its website just to list elements of Dodd-Frank that "were deferred due to budget uncertainty, and are currently being reassessed in light of the [Fiscal Year] 2011 budget."

The SEC also has indefinitely tabled a provision that holds credit rating agencies legally liable for their ratings if they are included in securities offering documents.

The full credit rating agency reform envisioned under Dodd-Frank is turning out to be difficult to put into practice. Credit ratings have been hardwired into legislation governing everything from pension funds to municipal bonds. The law calls for more disclosure on how ratings are created, stricter supervision of the agencies by regulators and the scrubbing of legislation or rules that mandate them. But credit ratings are integral to so many investment products that it may take some time to strip from applicable laws the requirement that they be used and find suitable replacements. "[Congress] should have done the work on the front end," says Barbara Roper, director of investor protection for the Consumer Federation of America.

Resolution Authority

What Dodd-Frank does: Gives regulators the power to seize and unwind "too big to fail" financial institutions that are on the brink of failure.

Reason for the rule: Regulators hope to avoid another economically disruptive situation like the collapse of Lehman Brothers, where government officials contend their only option was to put the company into bankruptcy.

Stumbling blocks: Some wonder if Congress ordered regulators to do more than they could feasibly and legally accomplish.

Take Citigroup. It has more than 260,000 employees, operations in 160 countries and jurisdictions, over 200 million clients, and more than 170 subsidiaries worldwide. It's the poster child for the classic "too big to fail" institution. Unwinding a company the size and complexity of Citigroup in a way that preserves value and does not harm the economy may well be impossible.

"How do you put together resolution authority for these banks that have $2 trillion in assets? How do you do it across country lines?" Kaufman said.

Frank and Treasury Department officials acknowledge the potential difficulty in successfully winding down these huge institutions, but they argue that there is no other alternative.

"It's not easy, but it's not optional," Miller said.

Jesse Eisinger and Jake Bernstein were awarded the Pulitzer Prize for National Reporting in April 2011 for a series of stories on questionable Wall Street practices that helped make the financial crisis the worst since the Great Depression.

ProPublica is an independent, non-profit newsroom that produces investigative journalism in the public interest.   This article is republished with permission under a Creative Commons license.

Cash bonuses paid to New York City securities industry employees declined by nearly 8 percent to $20.8 billion in 2010, as Wall Street firms shifted toward more deferred compensation and higher base salaries, according to an estimate released by New York State Comptroller Thomas P. DiNapoli.

For the average Wall Street worker, however, that still translated into a 2010 cash bonus of $128,530, according to DiNapoli’s estimate.   And although cash bonuses were down, it's estimated that total compensation on Wall Street rose 6 percent last year, DiNapoli said.

“Cash bonuses are down, but that’s not an indicator of a weakness on Wall Street,” DiNapoli said. “Wall Street is changing its compensation practices in response to regulatory reforms adopted in the aftermath of the greatest financial meltdown since the Great Depression.  Past practices rewarded short-term gains at the expense of long-term profitability.”

Profits of the broker/dealer operations of New York Stock Exchange member firms, the traditional measure of Wall Street profitability, totaled $27.6 billion in 2010, “making 2010 the second most profitable year on record after the $61.4 billion record set in 2009, which was fueled by federal bailouts, low interest rates, and proprietary trading,” according to DiNapoli.

DiNapoli’s office annually releases its estimate of bonuses paid to securities industry employees who work in New York City.  Bonuses paid by New York City-based firms to their employees outside of the City (whether in domestic or international locations) are not included.  DiNapoli’s office said the estimate is based on tax collections and reflects cash bonus payments and deferred compensation for which taxes have been prepaid. The estimate does not include stock options that have not yet been realized or other forms of deferred compensation.

The securities industry in New York City added 3,600 jobs between August 2010 and December 2010, according to DiNapoli, and trends in unemployment insurance data suggest job gains may have been even stronger during this period.  The securities industry in New York City lost 30,700 jobs during the recession, a decline of 16 percent, or 3.5 times the rate of total job loss in New York City, according to the state comptroller’s data.

An audio file of Comptroller DiNapoli's press briefing on this report is available here.

The New Year is a time for reflection, so it was heartening to see Goldman Sachs come out with 63 pages of resolutions.

The investment bank published its “Report of the Business Standards Committee” last week, a document in which it reiterated its principles and announced the formation of many new committees. Goldman will be an open book, the firm pledges, disclosing more clearly how much business the firm does for itself (not as much as all those detractors think) and how much it works for its clients (every waking moment).

Goldman suffered a brutal year, paying a $550 million fine to settle federal claims of civil securities fraud and being vilified at a Senate hearing. Even the $15.38 billion the firm has set aside for compensation in 2010 wasn’t enough to salve the pain. Goldman would like our love, too. And so the powerful investment bank has embarked on a journey of self-improvement, a great American ritual from Ben Franklin to Elizabeth Gilbert. Goldman’s report should have been titled “Eat, Pay, Trade.”

In a video that accompanies the report, Lloyd C, Blankfein, the chairman and chief executive, said the firm conducted a “thorough self-assessment,” followed by a “recommitment to core values and principles.”

It’s language that “reads straight out of a Tony Robbins retreat manual, not your usual business document,” said Christine B. Whelan, a University of Pittsburgh sociologist who has studied the self-help industry.

Of course, releasing the report is a public relations stunt. Some of it was welcome, like the increased financial disclosure. Some may fall by the wayside, like most New Year’s resolutions. Some seems as disingenuous as any piece of professional flackery.

Goldman’s effort fits neatly into what the historian (and former New York councilwoman) Eva S. Moskowitz has called the therapeutic gospel, a doctrine so ingrained in American society that few of us consciously recognize it. The gospel consists of three tenets: Happiness is the supreme goal, problems stem from psychological causes, and those psychological problems are treatable.

The therapeutic gospel is all about me and my problems. Goldman thinks its problems stem, if not from psychological issues, then from attitudinal ones. Significant management and operational changes are starkly missing from Goldman’s leaf-turning exercise. Instead, Goldman has decided that its troubles emanate from not having treated clients nicely. Or, more likely, Goldman thinks its problem is that the world thinks Goldman didn’t treat its clients nicely.

But that wasn’t the problem with Goldman Sachs in the fall of 2008. Creating collateralized debt obligations and betting against their clients was unseemly, but it wasn’t the cause of the global financial crisis. Goldman’s leverage — and the leverage at other major financial institutions — was the real issue.

Goldman’s business model was broken because it made a classic banking mistake: It lent long and borrowed short. All banks are susceptible to runs. Bear Stearns and Lehman Brothers had theirs, deservedly. By the fall of 2008, it was Morgan Stanley and Goldman Sachs’s turn. Goldman took taxpayer dollars and was granted access to cheap Federal Reserve money. Goldman insists that it would have survived the crisis anyway. We’ll never know whether it would have, because the fact is that Goldman received assistance.

Goldman, like all the other major investment and commercial banks, had become too big and intertwined, making the financial system too fragile.

In other words, the flaws in the financial system were structural, more like the problem of poverty and not based on character. As such, they require solutions beyond pledges of better behavior.

Unfortunately, despite a hulking financial reform law, the American financial system still has largely the same structural issues that it had before the crisis. Neither Goldman nor the government shows any inclination to face these issues. What about investors?

The covenant that equity investors have struck with investment banks goes something like this: Deliver high returns and we will allow employees to take about half of the revenue for themselves as compensation. It was always a bad bargain, made worse by the financial crisis. Lehman investors were wiped out. Bear Stearns investors took huge hits. (Whether investors have learned from that experience, or whether they have learned to expect bailouts, is debatable.)

Despite Goldman’s reputation in some corners as Evil Genius, its shares are actually suffering in the marketplace because investors worry about its volatile and unpredictable results from quarter to quarter. These concerns were validated when Goldman reported Wednesday that trading and securities services profit took a big hit in the fourth quarter, dropping 31 percent. The stock slid 3 percent by mid-afternoon in response.

Investors prefer annuities to swing-for-the-fences profits. Compared with pure asset managers and investment banks that specialize in either advisory work or making markets, Goldman stock trades at a discount these days. Goldman’s price-to-earnings ratio stands at less than 10, while Lazard (a pure advisory firm), Jefferies (a market maker) and BlackRock (an asset manager) trade at significantly higher multiples.

Investors often prefer to look at a price-to-book ratio to value financial firms; even on that measure, Goldman is far below its peak valuation.

Could there be an argument that Goldman should break up into three smaller, more focused companies? It would be better for the financial system, and just might lead to the self-improvement that Goldman is searching for.

ProPublica is an independent, non-profit newsroom that produces investigative journalism in the public interest.   This article is republished with permission under a Creative Commons license.

Investment banking giant Goldman Sachs Group Inc., seeking to repair damage to its reputation suffered in the aftermath of the global financial crisis, said its management and board had adopted and begun implementing 39 new policies and practices that represent a “fundamental re-commitment” by the firm to “reputational excellence” and increased transparency and disclosure.

“In particular,” the firm said, “our approach must be: not just ‘can we’ undertake a given business activity, but ‘should we.’”

The new policies and practices are described in a 63-page report prepared by a Business Standards Committee set up by the firm last year.   Goldman said the committee “operated with oversight by the Board of Directors, which established a four member Board Committee to provide additional focus and guidance. “ In addition, the firm said it engaged two consulting firms to provide independent advice to the committee.

In July 2010, Goldman agreed to pay a record $550 million penalty and reform a number of its internal business practices to settle Securities and Exchange Commission charges that the firm misled investors in a subprime mortgage product just as the U.S. housing market was starting to collapse.

The SEC had alleged that Goldman misstated and omitted key facts regarding a synthetic collateralized debt obligation (CDO) it marketed that hinged on the performance of subprime residential mortgage-backed securities.

Among other changes to its business practices, Goldman said it would change its financial reporting methods to provide greater insight into the percentage of the firm’s business derived from proprietary trading.

“Our clients must be at the heart of the firm’s decision-making, thinking and committee governance, both formally and informally,” the firm said. “Above all, we must be clear to ourselves and to our clients about the capacity in which we are acting and the responsibilities we have assumed.”

Goldman said it was establishing a new Client and Business Standards Committee “to place our client franchise at the center of our decision-making processes and to reflect the important interrelationships between clients, business practices and reputational risk management.”

It has also established a New Activity Committee “to consolidate and strengthen existing processes for approving new products and activities and to assess the important question of not just ‘can we’ undertake a given business opportunity, but ‘should we.’”

Goldman said an internal global program to explain and implement the new policies and practices “will represent a large investment of time of our senior management team over the course of 2011.”  The firm said its annual employee performance review and compensation processes would include increased emphasis on “reputational risk management” as well as a focus on “leadership, culture and values.”

It's been over three years since credit markets started shaking with the early tremors of the subprime crisis, and two years since that spread into a marketwide collapse. Prosecutors, regulators, Congress and journalists have spent the year uncovering the financial shenanigans that brought the market to its knees. It's been marked by a few blockbuster settlements and more revealing investigations -- as well as by some noticeable inaction in the reckoning.

Let's start at the ground level, with selling risky mortgages to homeowners. Nobody symbolized the subprime market -- from its growth to its downfall -- better than former Countrywide CEO Angelo Mozilo. This fall, the Securities and Exchange Commission reached a $67.5 million settlement with Mozilo in its only major case against a financial executive. The SEC charged Mozilo with praising Countrywide to investors while internally doubting its lending standards. As part of the settlement, Mozilo admitted no wrongdoing.

Moving up the finance chain, we come to the banks that sold mortgage deals to investors. Much of the scrutiny focuses on a type of mortgage deal called collateralized debt obligations, or CDOs, which are essentially bundles of other mortgage bonds that were sold off to investors.

Though nearly every bank is rumored to be under investigation, the year was marked by one major case looking at the CDO business. In April, the SEC accused Goldman Sachs of creating a mortgage deal that was designed to fail. The SEC's argument was that Goldman's hedge-fund client helped design the deal specifically to bet against it -- without Goldman explaining the relationship to investors. In July, Goldman settled for $550 million (or about two weeks' worth of profit), admitting a "mistake" but no wrongdoing.

The idea of betting against deals lies at the center of a number of other investigations as well. The SEC is looking into whether JPMorgan Chase allowed a hedge fund named Magnetar to choose assets for a mortgage deal without disclosing Magnetar's role in selecting what went into the deal. As ProPublica reported in April with the radio programs This American Life and NPR's Planet Money, Magnetar encouraged banks to put together riskier deals and bought the riskiest bond slices that otherwise may have been unsold. Magnetar then bet against some of those deals, standing to make far more by shorting its losses on those risky slices if the housing market went south.

U.S. prosecutors are also looking into whether Morgan Stanley created a series of CDOs that its own trading desks bet against, the Wall Street Journal reported in May. A few months later it reported on how Deutsche Bank also bet against the souring housing market at the same time it was marketing new mortgage deals.

The SEC is also looking into whether Citigroup improperly encouraged an independent manager to stuff a deal with leftover pieces of other deals that it couldn't sell in the market. In September, ProPublica and NPR's Planet Money reported on self-dealing among CDOs, showing how banks structured deals to buy portions of each others' often leftover inventory of hard-to-sell pieces. This created a daisy-chain of investments that manufactured demand, thereby prolonging the housing bubble. The SEC has said it is investigating one independent management firm and looking into about 50 others.

The year ended with rumors of mass settlements, where banks and the SEC settle broadly over their CDO practices rather than battling over individual deals, according to the Wall Street Journal.

Deal-by-deal fights may flame up in courts, however, with investors pushing banks to buy back sour deals, egged on by new evidence that banks may have known the mortgages underlying the deals were flawed. With such complicated shenanigans going on behind the scenes, investigators also want to know how banks hid their exposure to these risky securities from investors. The investigations are looking into various tactics, from general misstatements, like the Citigroup's $75 million settlement with the SEC for not disclosing $40 billion in subprime risk, to accounting maneuvers that moved certain deals off bank balance sheets.

In the spring, a court-appointed examiner in the bankruptcy of failed investment bank Lehman Brothers shined a light on a practice known as "Repo 105," where Lehman moved $50 billion in assets off its books right before it had to submit investor reports. Last week, the New York attorney general filed civil charges against the accounting firm Ernst & Young, saying it had "substantially assisted" Lehman's "house-of-cards business model" that misled investors. Executives from the now-bankrupt Lehman have not been charged.

Despite revelations coming up and down the financial spectrum, there have been no major criminal charges and almost no civil charges against executives. And while the SEC and some government prosecutors have been active, federal bank regulators have so far been quiet.

This all comes as Congress passed the Dodd-Frank financial reform bill this summer, seeking to overhaul the oversight of everything from mortgage securities to how banks make bets with their own money. As regulators hammer out the rules of the reforms, the devil may lie in the hotly contested details.

ProPublica is an independent, non-profit newsroom that produces investigative journalism in the public interest.   This article is republished with permission under a Creative Commons license.

A feisty debate over the safety of a widely used chemical has put Colgate-Palmolive at the center of a case study in product disclosure and corporate responsibility - one that may ultimately help outline how companies wading through a murky regulatory review and unsettled science should attend to their stakeholders and customers.

The current squeeze on Colgate stems from a U.S. Food and Drug Administration decision this year to train its microscopes more closely on triclosan, a chemical with antibacterial properties that in recent decades has been added to scores of products, but now is under new scrutiny because of studies that suggest it may harm both human health and the environment. And while the FDA conducts its review – and critics of triclosan mount their arguments to curtail its use by consumers – Colgate and other product manufacturers have to decide what they can and should say to the marketplace, not to mention when and how to convey it.

The hurdle the company faces is clear: a core ingredient of its top-selling Colgate Total toothpaste is suddenly the heart of a public health tempest, but regulators have neither banned the chemical nor deemed it unsafe. There is no well-tested playbook for the scenario, says David Nash, partner at McMahon DeGulis, an environmental law firm based in Cleveland.

“The dilemma becomes, what kind of legal, moral, or socially responsible duty do they have to stakeholders to go beyond where the regulatory agency has already gone?” he asks. “In this fast-moving field, I would be hard-pressed to say [there is a] consensus on best practices.”

It complicates matters for Colgate that few products have gotten more mileage out of triclosan than Colgate Total, which won special FDA approval in 1997 for its use of the chemical in a patented formula to prevent gingivitis, a common form of gum disease. In short order, Colgate Total vaulted above competitors to become the top-selling product, and today it remains a big contributor to Colgate’s worldwide 44.4% share of the global toothpaste market and its 35.6% slice of the U.S. market, according to company filings this year. At the beginning of last year, Colgate announced that among its toothpaste varieties, the Colgate Total brand by itself had 16% of the overall market in North America.

Another thorny issue for Colgate is that the FDA is heightening attention on triclosan (PDF) at the same time it serves as the first line of defense against critics. That’s because on the one hand, the FDA is teaming up with other federal regulators, particularly the Environmental Protection Agency (PDF), to sponsor new research on triclosan’s safety. But on the other, the FDA has issued a statement that “triclosan is not currently known to be hazardous to humans” and that the agency “does not have sufficient safety evidence to recommend changing consumer use of products that contain triclosan at this time” – and won’t have its first answers until spring 2011.

That leaves product makers with decisions that perhaps they would not have faced even 10 years ago, when corporate social responsibility factored far less in the strategic thinking at most companies. Should a company proactively inform its customers that a key ingredient of its product is facing questions? Should it amend its marketing? Should it play an active role in the scientific debate? Should it publicly defend its turf? Should it simply do nothing and wait?

Colgate’s response to date largely has been to point those who specifically ask about triclosan to the FDA’s prior approval of Colgate Total. A company spokeswoman points to a statement on the FDA website (PDF) that says, “In 1997, FDA reviewed extensive effectiveness data on triclosan in Colgate Total toothpaste. The evidence showed that triclosan in this product was effective in preventing gingivitis.” Colgate’s own statement adds that since the approval, “Colgate has routinely provided FDA with updated information, consistent with the agency’s guidelines, and is confident that further study will continue to add to the substantial body of research that affirms the safety of triclosan in Colgate Total.”

It’s a detached defense, sticking to discussion of its product and not engaging in the greater triclosan debate. What time will tell is whether Colgate is telling consumers enough to position itself best for when the FDA makes a final determination on triclosan, says Barbara Burton of The Burton Company in La Jolla, Calif., a corporate responsibility consultant.

“You have to determine what to disclose,” she adds. “When you’re not disclosing what you should, you assume risk.”

Nash says the corporate social responsibility issues Colgate faces – and their impact on how the company communicates with consumers – are bound to repeat themselves in other industries and settings. He points to prominent cases from just the past year, citing Toyota’s struggle with scrutiny on accidents involving its vehicles that were attributed by some to faulty equipment; the firestorm that Goldman Sachs faced when securities regulators essentially accused it of cheating its customers; and BP’s very public missteps in the wake of its giant Gulf of Mexico oil spill. And Nash says the rules of engagement for these episodes are in constant flux.

“Science changes,” he adds. “Medicine changes. So does perception. So does politics. So does tolerance for risk.”

Widespread Use and Unknown Impact

Triclosan is hardly just Colgate’s concern, but its wide use actually makes matters trickier for the company. The chemical – first developed in the 1960s by Ciba – appears in products as varied as clothing, kitchenware, furniture, toys, and even food, says Douglas Throckmorton, deputy director for regulatory programs at the FDA’s Center for Drug Evaluation and Research. “Every time I’ve asked for a list [of products using triclosan], they say, ‘Beware – we’re sure we’re missing some,’” he says.

One of the most prominent uses, however, is in antibacterial soaps, hand sanitizers, and body washes, and that’s where the current debate is centered. Throckmorton says that since 1994, the FDA has been working on its “monograph” of definitive rules governing the use of ingredients such as triclosan in these products, and that until the work finishes, companies can use these kinds of substances. The slow progress is what inspired critics of the process to step up their arguments this year that the monograph’s delay was allowing products to continue using triclosan despite new research studies indicating it is unsafe.

It’s notable that Colgate isn’t at the nucleus of the debate. Throckmorton says Colgate’s use of triclosan doesn’t fall under the proposed monograph, or even under a separate pending monograph for toothpastes, because its 1997 “new drug application” approval from the FDA was built on extensive and specific studies showing Colgate Total’s “safety and efficacy” in preventing gingivitis. That means even if the agency were to ban triclosan from hand soaps, Colgate could still use it in Colgate Total.

For now, the scientific dispute has several fronts. Throckmorton says the FDA’s announcement in April that it was coordinating with the EPA and other agencies to further study triclosan stems from research studies in recent years analyzing the chemical’s potential impact on animal reproductive systems; its possible carcinogenic effects on skin; its widespread appearance in environmental and population samples; and its role in anti-microbial resistance. One of the biggest concerns is its potential as an “endocrine disruptor,” which means that it can alter hormone behavior.

Most recent studies have traced triclosan’s impact on animals, although its pervasiveness in humans is clear. The federal Centers for Disease Control and Prevention reported several years ago that it found triclosan in the urine of three-quarters of participants in a 2,500-person health survey.

Some public health advocacy groups say growing evidence points to triclosan’s negative health effects, and have urged the FDA to act swiftly. The Natural Resources Defense Council filed a lawsuit against the FDA in July 2010 to force the agency to finish its soaps monograph. And the FDA’s April announcement to step up its review appears to have been pushed by inquiries from Rep. Edward Markey of Massachusetts, who chairs a House panel on energy and the environment and has asked the agency to restrict triclosan use.

Arguing the opposite case have been triclosan’s defenders, particularly chemical companies that make the substance for commercial use as well as industry groups such as the American Cleaning Institute, which dismisses the critics as fear-mongerers and contends that products with the substance have been used safely for decades in homes, hospitals, and offices.

Colgate has been on the periphery of the debate because of its special approval status. But any negative finding against triclosan would undoubtedly impact the company. And both NRDC and Markey have called on the FDA to revisit its approval of triclosan in Colgate Total.

“We didn’t have data on the endocrine disruptor effect when it was approved,” says Sarah Janssen, senior scientist for NRDC. “We have asked the FDA to review those applications and determine whether it really does meet that bar of being safe.”

Exposure and Disclosure

As the triclosan debate swirls, Colgate has planted itself behind the FDA’s 1997 blessing of Colgate Total as well as similar endorsements, such as the product’s clearance for use in 173 countries and seals of approval from dental associations. The spokeswoman declines to go beyond the company’s basic statement, saying, “We are unavailable to further discuss.” It also is not openly combating the critics raising general questions about the chemical.

McMahon DeGulis partner Nash says Colgate is “absolutely entitled” to stand on its FDA approval as a valid response to questions.

But that doesn’t dismiss the question of whether Colgate ought to tell customers about the broader argument over triclosan’s safety. Burton, the consultant, says the tide is turning toward greater disclosure, particularly with initiatives such as the United Nations Global Compact and the development of the International Organization for Standardization’s 26000 standard on social responsibility, which calls for broad transparency with stakeholders on matters related to product safety.

“You don’t want to take the chance of not disclosing information about potential safety concerns,” she says.

She adds that while wide disclosure in a case like Colgate’s could have a negative short-term impact on market share, it also could generate long-term customer good will.

However, in instances as messy as the triclosan safety debate, there is also risk of disclosing data that simply breeds confusion, says Ken Strassner of Strassner Consulting in Sandy Springs, Ga. “I do not believe that you have to automatically disclose everything,” he adds. “There is a fair amount of consumer research that shows people don’t understand the science.”

There is also the concern of disclosing information that could wrongly inflame fear among customers. “We talk to our clients about being transparent, but doing it in a smart, responsible way,” Nash says.

Indeed, a company faces risk management questions if inappropriate disclosure exposes “the company to frivolous legal action [or risk] to its share price or to the investing community,” he adds.

In order to decide what to disclose, Strassner says a company must fully understand the “best available science.”

That’s also critical for risk management, because a company needs to vet the “credibility and validity of the data,” as well as the scientists conducting the studies, to ensure “advocacy science” is not driving decisions, Nash says.

Strassner also says a company in Colgate’s situation should stay engaged in the overall review, offering its technical expertise and input on findings. “I would participate in these processes in an open, straightforward, technical way,” he adds. “I’m not suggesting you run to the head of FDA and say ‘Kill the investigation.’”

If Colgate’s case underscores how balancing socially responsible conduct with company interests is more than ever a tightrope walk, it also should remind corporate leaders that such challenges are sure to multiply.

“We’re in a very complex society with very complex technology,” Nash says. “Frankly, this kind of stuff is going to come up again, and I think it’s going to come more frequently.”

Tom Stabile has worked as a reporter and editor for 19 years at magazines, newspapers, and trade publications in New York, Washington, D.C., and Santo Domingo covering business, education, government, criminal justice, and the arts.