In Midland, Mich., population 38,000, the downtown is a mere four blocks long. The community boasts a top-rated school district, 58 churches, and two corporate giants: Dow Chemical Co. and Dow Corning Corp. Midland is a law-abiding, God-fearing town, where ethics and values still mean something. That's why allegations that Dow Corning sold faulty breast implants have dominated the talk among early-morning regulars at the Holiday Inn restaurant on Wackerley Road.

What makes the disclosures all the more puzzling is that Dow Corning has long been recognized as a pioneer in corporate ethics. It was among the first to establish an ethics program, which many believe to be the most elaborate in Corporate America. Yet the controversy now swirling around Dow Corning highlights the limitations of such initiatives, and it may serve to remind other companies that even the best plans are no guarantee against lapses.

`SPRAY AND PRAY.' Ethics programs reached nearly faddish proportions in the late 1980s. Business schools added ethics courses. Consultants peddled lectures and seminars. "The rule in ethics was spray and pray," says Mark Pastin, director of the Lincoln Center for Ethics in Tempe, Ariz. Consultants looked for big companies, asked for big fees, "then sprayed some ethics over them and prayed that something happened."

Dow Corning took a different route. "It was more than just: 'Do good and avoid evil,' " says Kenneth Goodpaster, a former professor at Harvard business school who prepared a trio of case studies on the company. "It was thought by everyone to be a brilliant process."

The system got its start in the early 1970s, in the aftermath of Watergate and the reports that Lockheed Corp. spent millions bribing foreign officials. Dow Corning's chairman at the time, John S. Ludington, sought to create a corporate culture that emphasized high ethical standards. In 1976, he launched a Business Conduct Committee, made up of company executives who report directly to a board committee.

SHINING BEACON. From the beginning, it was an ambitious effort (table). The company immediately began a series of audits to monitor compliance and communicate with employees about ethics. These sessions were to take place at every operation once every three years. Two company training programs included segments on the subject, and Dow Corning's semiannual employee opinion surveys had an ethics section.

That extensive commitment to ethics was what attracted the attention of Goodpaster, whose case studies on the Dow Corning program have since been hashed over by thousands of MBAs and managers in executive-education classes. One study showed how an early audit uncovered a major Dow Corning distributor overseas who was bribing customs officials to obtain lower duty rates. Many executives left Harvard hoping to establish similar programs in their own companies, Goodpaster says.

The system that so impressed others, however, seemingly failed to pick up any signs of controversy over the safety of breast implants during four separate audits since 1983. Executives from Dow Corning's conduct committee descended on the Arlington (Tenn.) facility of Dow Corning Wright, the unit that makes silicone implants, for a review in October, 1990. The safety issue didn't crop up during the three-hour audit with nine employees, says Jere D. Marciniak, an area vice-president who is chairman of the conduct committee.

LEAKY NET. Yet as far back as 1976, the same year Dow Corning launched its ethics program, the engineer who sounded an early alarm on the product's safety quit the company in protest. A Dec. 15, 1977, memo from employee Frank Lewis recounted reports by four doctors that 52 of 400 implant procedures had resulted in ruptures. Those and other internal documents suggest that Dow Corning was aware of problems for years and tried to keep the public from learning of them--although the company maintains it has done nothing wrong.

Whatever the ultimate verdict, Goodpaster is incredulous that the ethics program failed to uncover signs of internal dissent. "It's puzzling because those are the kinds of memos and concerns that this audit practice might bring to the surface," says Goodpaster, now a professor at the College of St. Thomas in St. Paul, Minn.

Why didn't it? For the most part, ethics programs aren't designed to deal directly with complex problems. Instead, they are there only to help cultivate an overall environment of proper conduct. At Dow Corning, issues of product safety or efficacy typically go through normal management channels. In this case, the concerns surfaced before the company's Medical Device Business Board, which decided to conduct further safety studies. "It wouldn't have been necessary to bring up the implants' safety inside a code-of-conduct meeting unless an employee thought the process wasn't working well and wanted to raise the issue," says Marciniak.

MUTED WHISTLES. But some ethicists are now beginning to question whether Dow Corning's program was really as well-designed as they once thought. Boston consultant Barbara Ley Toffler points out that few managers are likely to speak openly about moral issues in a room filled with many employees, including one's boss. "You need small groups of about six people, and even then the reality is that someone inside won't talk freely to someone in-house," she says.

Likewise, you won't get many red flags when top managers believe concerns about safety are unwarranted. Dow Corning still argues that the product does not pose an unreasonable risk, and Keith R. McKennon, who recently succeeded Ludington as chairman, vigorously defends the conduct of the company's managers. "I have a high regard for their sincerity and integrity, and I don't ascribe bad motives to anyone," he says.

What becomes of the implant business now is anyone's guess. In early January, a Food & Drug Administration advisory committee issued a sort of split verdict: Implants may remain on the market in limited use, but clinical trials will test their safety. McKennon says he is thinking of abandoning implants, which represent less than 1% of Dow Corning's $1.8 billion in sales. But there's one part of Dow Corning he has no plans to touch: the ethics program. Although it apparently failed to tip off the company to potentially unethical behavior, says Marciniak, "it still will aid and guide us through this difficult time."

       -- Six managers serve three-year stints on a Business Conduct Committee. Each 
      member devotes up to six weeks a year
       -- Two members audit every business operation every three years. The panel 
      reviews up to 35 locations annually
       -- Three-hour reviews are held with up to 35 employees. Committee members use 
      a code of ethics as the framework and encourage employees to raise ethical 
       -- Results of the audits are reported
      to a three-member Audit & Social
      Responsibility Committee of the
      board of directors
      DATA: BW
Before it's here, it's on the Bloomberg Terminal. LEARN MORE