Business Ethics and Compliance ... - Fraud Conference

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Business Ethics and Compliance:

Government and Contractor Cooperation

in Fraud Prevention and Detection

Eric R. Feldman

Senior Advisor to the Director for Procurement Integrity

21st Annual ACFE Fraud Conference,

July 26, 2010 – Washington, DC

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Overview

The Evolution of Business Ethics

State of Ethics Today

Who Has Time To Worry About Ethics Now?

The New FAR Rule: More than Just Mandatory Disclosure

“The Ethical Enterprise”

Best Practices: Role of the Chief Ethics and Compliance Officer

Building an Ethical Framework: What Makes a Good Corporate

Ethics Program?

Future Trends in Ethics

A New Ethics and Compliance Paradigm

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Definition of Business Ethics

“Applying society’s ethical norms to

business dealings.”

Business ethics applies to all aspects of

business conduct and concerns the actions

and decisions of individuals as well as the

enterprise.

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The Evolution of Business Ethics

Aristotle:

• Theft and immorality

• Distribution of rewards

Contractibus Mercatorum (1468): Johannes Nider (Dominican Friar)

• Attempt to reconcile Church teachings with realities of economic activity

• Caveat Venditor: Warning for the business person to take responsibility

for the product

17th/18th Century Philosophers

• Immanuel Kant

• Adam Smith

• Karl Marx

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Business Ethics in the United States

Early Days: Corporations given strict state charters

• ―Public purpose‖ only

• Limited life span

Thomas Jefferson’s embargoes on England and France

• American companies replaced embargoed products

• No longer limited to public service

• Profit orientation

Post-Civil War/Westward Expansion/Industrial Revolution

• ―Robber Baron‖ enterprises/monopolies

• National Banking Act, Tariff Act, Homestead Pacific Act

• Sherman Anti-Trust Act of 1890

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First Corporate Codes of Conduct

• Edward Filene’s Personal Code (1920)

United States (U.S.) Business Ethics tied to labor conditions as well as monopolies

• Legislation from 1930s–1960s regarding fair labor practices, equal pay, and civil rights/discrimination

Large corporations began to replace ―Mom and Pop‖ operations in the 1960s

• Concept of corporate social responsibility

• Business schools begin to teach ethics in the 1970s

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Foreign bribery scandals in the late 1970s prompted more companies to establish corporate codes of ethics.

In the wake of highly publicized problems in defense contracting in the 1980s, defense industries banded together and created the Defense Industry Initiative (DII) in 1986.

Era of junk bonds and corporate raiders in the 1980s, fraud scandals in the 1990s, and the Enron/WorldCom/Tyco/Adelphia debacles at the turn of the 21st century.

• Need for greater oversight at the corporate governance level.

• Increased funding for the Securities and Exchange Commission (doubled to nearly $300 million between 2000 and 2004).

• Sarbanes-Oxley Act of 2002.

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Sarbanes Oxley Act of 2002 (SOX)

• Protects investors by requiring publicly held companies to:

Meet higher reporting and disclosure standards.

Hire outside auditors to ensure there is no fiscal wrongdoing.

Establish an independent oversight board.

• SOX also:

Created sobering individual and corporate accountability (fines and

imprisonment).

Required employee training in ethical business practices.

Established confidential processes for employees to report

wrongdoing.

Created whistleblower protections/prohibitions against retaliation.

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Federal Sentencing Guidelines strengthened in November 2004.

• Required that companies’ governing authorities be

―knowledgeable about the content and operation of…[their

company’s] compliance and ethics program‖ and ―exercise

reasonable oversight with respect to the implementation and

effectiveness of the…program.‖

State governments also became more aggressive.

• California corporate reform legislation increased fines and

penalties.

• Jail sentences for corporate executives found guilty of fraud

were lengthened to a maximum of 20 years.

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“Lie, Cheat, and Steal: High School Ethics Surveyed”*

• 78% of high school students surveyed reported cheating.

• 64% of students cheated on a test in the past year and 38% did so two or more times, up from 60% and 35% in a 2006 survey.

• In the past year, 35% of boys and 26% of girls acknowledged stealing from a store; one-fifth said they stole something from a friend; 23% said they stole something from a parent or other relative.

• 60 years ago, only 20% of college students admitted to having cheated while in high school; today, only 22% report they did NOT cheat.

_

*Source: Josephson Institute 2008 Study of 29,700 Students

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“Did You Cheat to Get Into Graduate School?”*

YES!!

Liberal Arts – 43%

Education – 52%

Law and Medicine – 63%

Business – 75%

*Source: Rutgers University Survey of Students

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Graduate School Cheating

MBAs: 56%

Engineering: 54%

Education: 48%

Law: 45%

Source: Rutgers University Survey of Students

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Why do they cheat?

Students in the Rutgers Study rationalized their cheating:

• Too many pressures

• Desire to please parents and professors

• Intense competition for jobs

• Everyone is doing it

• Disinterested in required classes

• Professors don’t care about students

• It’s the ―way of the world‖; getting others to do their work is a skill they will use in business.

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Graduating MBAs

• 76% were willing to understate expenses that cut into their

companies’ profits.

• Convicts in 11 minimum security prisons had higher scores on

an ethical dilemma exam than MBAs.

*Source: Rutgers University Survey of Students

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―Student Cheating Is A Predictor of Adult Behavior‖ – Josephson Institute

Study, October 2009

• First-ever study of the relationship between high school attitudes and

behavior and later adult conduct.

• Younger generations are significantly more likely to engage in dishonest

conduct than those in older generations.

• Cheaters in high school are far more likely as adults to lie to their

spouses, customers, and employers, and to cheat on expense reports

and insurance claims.

“The hole in the moral ozone seems to be getting bigger—each

new generation is more likely to lie and cheat than the preceding

one.”

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Josephson‟s Conclusion:

“Teens are five times and young adults are three times more

likely than those over 40 to hold the cynical belief that lying and

cheating is necessary to success. This belief is one of the most

significant and reliable predictors of dishonest behavior in the

adult world.”

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Corporate Ethics Survey

The Ethics Resource Center’s (ERC) 2009 National Business Ethics Survey results showed improvement since its 2007 Survey:

• Fewer employees said they witnessed misconduct on the job; the measure fell from 56% in 2007 to 49% in 2009.

• More employees reported misconduct they observed; 37% of those who witnessed misconduct did not report it in 2009, down from 42% in 2007.

• ERC’s measure of the strength of ethical culture in the workplace increased from 53% in 2007 to 62% in 2009.

• Perceived pressure to commit an ethics violation—to cut corners, or worse—declined from 10% in 2007 to 8% in 2009.

• The only factor that appeared to negatively increase between 2007 and 2009 is the expectation of retaliation; 39% feared retaliation in 2009 as opposed to 36% in 2007.

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Specific Forms of Retaliation Experienced as a

Result of Reported Misconduct (2009)

*Source: Ethics Resource Center

62%

55%

48%

43%

27%

20%

18%

4%

Your supervisor or management excluded you from decisions and work activity.

You were verbally abused by your supervisor or someone else in management.

You almost lost your job.

You were not given promotions or raises.

You were relocated or reassigned.

Any other form of retaliation.

You were demoted.

You experienced personal harm to your person or property.

60% Other employees gave you a cold shoulder.

42% You were verbally abused by other employees.

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2009 National Business Ethics Survey

Conclusions

We are experiencing an ethics bubble. When economic conditions

improve, incidents of ethical breaches will likely increase.

Ethical culture is the single biggest factor determining the amount of

misconduct that will take place in a business.

Executives who don’t elevate ethics culture to a priority risk long-

term business problems.


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2009 National Business Ethics Survey

Recommendations

Establish performance goals for senior managers on ethical

leadership.

Create an ethics committee of the board.

Recruit knowledgeable ethics professionals to serve on the board.

Establish financial incentives for ethical leadership by the chief

executive officer (CEO).

Policymakers should pay greater attention to corporate ethical

culture.


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Who Has Time to Worry About Ethics Now?

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Mistrust of ―Corporate America‖ is at an all-time high; according to the 2009 Edelman Trust Barometer, public trust in U.S. business stands at 38%, down from 58% only one year ago.

Committee on Oversight and Government Reform identified 187 contracts valued at $1.1 trillion that have been plagued by waste, fraud, abuse, or mismanagement over the last six years.

The Justice Department has made corporate fraud and misconduct a national priority.

According to the Ethics Resource Center, misconduct in the workplace rises as much as 11% when financial or economic turmoil rocks an organization. Employees, supervisors and managers all feel extra pressure to meet goals—and may cut corners.

PricewaterhouseCoopers Advisory Group reports that breakdowns in companies’ internal controls occur most often in (1) operations that are soon to be discontinued, and (2) units that are subject to severe cost cutting pressure.

Deloitte Financial Advisory Services survey found that 63% of executives expect accounting fraud to increase during the next two years because of the recession.

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―The Perfect Storm‖

Companies are

downsizing, which

has an immediate

effect on internal

controls.

Budgets are

decreasing.

Companies are

doing more

with less.

With increased

pressure and

decreased internal

controls , people

will explore more

opportunities to

create fraud.

Credit crisis and

other external

factors are

increasing.

Layoffs are

increasing.

Stock prices are

declining.

Internal

Controls

Opportunity to

Commit Fraud

Internal and External

Pressure

Source: Fraud Magazine, May/June 2009 issue

The Potential

For Fraud

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Reform and Oversight of Federal Contracting

Practices Is an Administration Priority.

“Far too often, the spending is plagued by massive cost

overruns, outright fraud ,and the absence of oversight and

accountability…in some cases, contracts are awarded without

competition; in others, contractors actually oversee other

contractors.”

-- President Obama, 4 March 2009

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―The FAR Rule‖

Published: Federal Register 73 FR 67064

(November 12, 2008)

Effective Date: December 12, 2008

All federal contractors are required by law to disclose to inspectors general credible evidence of a violation of federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations, or a violation of the civil False Claims Act, where such evidence arises in connection with a federal contract.

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July 1986 – Department of Defense (DoD) Inspector General (IG)

Voluntary Disclosure Program.

August 2004 – National Reconnaissance Office (NRO) amends

contracting manual to require mandatory contractor self-reporting of

fraud to the IG.

October 2006 – National Procurement Fraud Task Force created;

Private Sector Outreach and Legislation Committees begin

discussing contractor fraud reporting (Conclusion: Voluntary

Disclosure Program no longer effective).

May 2007 – Assistant Attorney General for the Department of Justice

(DoJ) Criminal Division proposes a modification to the Federal

Acquisition Regulation (FAR) to energize government contractor

fraud reporting.

New FAR Requirements: Historical Perspective

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DoD Voluntary Disclosures

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November 2007 – The FAR Council publishes a proposed rule for

comment which incorporates the DoJ requests and carries

exemptions for contracts performed overseas and for commercial

item contracts.

January 2008 – Comments received by FAR Council, which include

overall objections from contractor community; DoJ objects to

exemptions.

May 2008 – Far Council issues revised draft rule without exemptions

for further comment.

June 2008 – President signs 2008 Defense Supplemental

Appropriations Bill (War Supplemental), which contains the ―Close

the Contractor Fraud Loophole Act.‖


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―Sec. 6102. The Federal Acquisition Regulation shall be amended

within 180 days after the date of the enactment of this Act pursuant

to FAR Case 2007-006 (as published at 72 Fed Reg. 64019,

November 14, 2007) or any follow-up on FAR case to include

provisions that require timely notification by Federal contractors of

violations of Federal criminal law or overpayments in connection

with the award of performance of covered contracts or subcontracts,

including those performed outside the United States and those for

commercial items.‖

―Sec. 6103. In this chapter, the term covered contract means any

contract in an amount greater than $5,000,000 and more than 120

days in duration.‖

―Close the Contractor Fraud Loophole Act‖

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Final FAR Rule also:

• Amplifies the requirements for a contractor code of business ethics and conduct

• Requires effective training programs for contractor principals and employees, as well as agents and subcontractors

• Outlines specific requirements for a contractor’s internal control system to ensure effectiveness of the ethics awareness and compliance program

• Calls for periodic reviews of company business practices, procedures, policies, and internal controls for compliance with the business ethics and conduct program

• Adds a business integrity component to the agency’s required evaluation of a prospective contractor’s past performance

Other Elements of the FAR Rule:

More Than Just Disclosure

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New Federal Agency Responsibility

FAR Subpart 9.1(d) now directs that a

contractor’s record of integrity and business

ethics be a required element for the government

to determine that a prospective contractor is a

“responsible party.”

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Most major U.S. companies have an ethics officer.

Ethisphere Institute reports that many companies have paid lip-service to corporate ethics and compliance, maintaining such departments but sidelining them in major decisions.

Global Compliance (operates whistleblower hotlines for 2,500 companies) reports that many companies ―did little more than check the boxes on ethics . . . abiding by the letter of the law by publishing codes of conduct without really changing the culture of the company . . .‖

Some of the most notorious companies had previously been recognized for their ―world class‖ business ethics and compliance programs.

Don’t Most Contractors Have Business Ethics and

Compliance Programs?

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ENRON Ethics Program Considered ―World Class‖

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Values vs. Rule-Based Ethics

Individuals and companies at the heart of today’s most egregious corporate scandals often obeyed the letter of the law, not the spirit (e.g., AIG/Lehman actions unethical, but not illegal).

Many companies choose not to go beyond the minimum requirements of the code of ethics provisions of Sarbanes-Oxley.

Ethics developments in industry have been largely rule-based.

• Less emphasis on values than on implementing statutory requirements (Law is the ceiling rather than the floor of behavior)

• Ethics Officer and Compliance Officer titles often interchangeable; both managed by or through Legal Dept.

• Training focused on legal obligations versus ethical considerations

• Federal Sentencing Guidelines: designed to ―prevent and detect criminal conduct‖

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Code of Ethics vs. Corporate Culture

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―The Ethical Enterprise‖

American Management Association (AMA)/Human Resource

Institute (HRI) Business Ethics Survey conducted in 2005.

• 1,121 executives and managers responded.

• 53.4% from the U.S.; 24.9% from Canada.

• Human resources, general management, operations functions.

Study included the following questions:

• Why are business ethics important to the organization?

• What drives unethical behavior?

• What are the drivers impacting business ethics today and in ten

years?

• What business practices contribute to an ethical corporate

culture?

• How do we measure the effectiveness of programs/policies

intended to support ethical business practices?

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Importance of Business Ethics to an Organization

AMA/HRI Survey Results:

• Protection of Brand and Reputation

• The ―Right Thing to Do‖

• Customer Trust and Loyalty

• Investor Confidence

• Public Acceptance/Recognition

• Litigation/Indictment Avoidance

• Positive Impact on Financial Results

• Employee Retention and Performance

• Supplier/Partner Trust

Protecting the company‟s reputation is seen as the top reason

for running a business in an ethical way, today and into the

future. Worker retention and performance are expected to

become even more critical during a “war for talent.‖

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Drivers Impacting Business Ethics

AMA/HRI Survey Results:

• Corporate Scandals

• Marketplace Competition

• Demands by Investors

• Pressure from Customers

• Globalization

• Executive Compensation

• Change: Mergers and Acquisitions, Restructuring

• Diversity, Including Generational

• Pressure from Prospective and Existing Staff

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Drivers Impacting Business Ethics

“Pain Avoidance”

Globalization

Demands by Investors

Employees

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External Environmental Drivers

of Business Ethics

Laws and Regulations rule in motivating Business

Ethics.

Survey respondents predict that both ―corporate social

responsibility‖ and ―environmental issues‖ will become

increasingly important over the next decade.

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Drivers of Unethical Behavior

Pressure from management or the board to ―meet

unrealistic business objectives‖ is the leading factor most

likely to cause unethical behavior (70% of Survey

Respondents).

The ―Ambitious and the Afraid‖ are more likely to violate

ethical standards.

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Drivers of Unethical Behavior

Working in an ―environment with cynicism or diminished morale‖ is the next most cited factor leading to unethical behavior (31.1%).

Other factors cited include:• Improper training about, or ignorance that, acts are unethical

• Perceived lack of consequences if caught

• Need to follow the boss’s orders

• Peer pressure/desire to be a team player

• Desire to steal from or harm the organization

• Desire to help the organization survive

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What is ―Ethical Culture‖?

Some basic elements to ask (per Ethics Resource

Center):

• What are the values that drive ―how things are really done

around here‖?

• How much pressure is there to perform, and to cut corners to do

so?

• How confident are employees that executives are committed to

ethics as a fundamental part of doing business?

• What do employees actually do when they observe misconduct?

• Is there reason to fear doing the right thing?

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Leadership and Ethical Culture

According to AMA/HRI Survey Results, organizations can establish

policies and processes that help create an ethical culture. These

include:

• Leadership support and modeling of ethical behavior

• Consistent communication from all leaders

• Integrating ethics into the foundational processes: corporate

goals, processes, and strategies

• Make ethics a part of performance management systems

• Make ethics a part of the recruitment and employee selection

process

• Put measures in place to assess the effectiveness of business

ethics programs and strategies (ethics audits)

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―Laws and regulations are, and will remain, the most

influential external drivers of corporate ethics, but

legislation is no substitute for the presence of

leaders who support and model ethical behavior.”

-- Edward T. Reilly, President and CEO

American Management Association

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The top-ranked process for sustaining a business ethics culture:

―leaders support and model ethical behavior.‖

• Safe to assume that ALL public companies officially advocate ethical behaviors.

• The real issue: Do leaders at all levels practice what they preach/―Walk the

talk‖?

• Deloitte LLP Ethics and Workplace Survey 2009: 77% cited the behavior of

management or a direct supervisor as the top factor influencing their conduct.

• ERC 2009 National Business Ethics Survey: Strong ethical leadership drives

perceptions on CEO compensation and organizational misconduct.

The most important ethical leadership behaviors cited by AMA/HRI

survey respondents were:

• Keeping promises

• Encouraging open communication/keeping employees informed

• Supporting employees who uphold ethical standards (system of rewards, not just

sanctions)

• Ensuring there is no retaliation for those who ―blow the whistle‖

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Business Ethics and Compliance

Programs and Practices

Having a Code of Conduct is clearly the most important internal practice, essential to ensuring an ethical corporate culture.

• Reflects and reinforces the values and principles of an organization

• Not just internally important to the company

• Also viewed as critical for the board of directors and suppliers; codes need to apply to everyone that has a direct impact on the reputation of the company

However, the Code of Conduct must be reinforced with effectivetraining.

• Not just a paper trail

• Must be required for all employees, including senior executives

• Should contain a variety of mechanisms, including live interaction and discussions, aimed at instilling ethical behavior into everyday corporate decision-making

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An Ethical Corporate Climate

“An ethical corporate climate is either

developing or deteriorating, enriching itself or

impoverishing itself. It needs constant care and

attention.”

-- Study by the Woodstock Center

Georgetown University

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Business Ethics and Compliance

Programs and Practices

Ombudsman, Ethics Hotlines, and Whistleblower Policies

Viewed as Critical to Creating an Ethical Culture.

• Respondents viewed ―transparency‖ as a key objective for

customers and investors.

• Desire for transparency likely to increase with the Internet,

24-hour news cycles, etc.

Corporate Social Responsibility Programs Now Viewed as an

Essential Element of the Ethical Culture.

• Environmental (Green) Operations and Attitude.

• Labor Issues (particularly with overseas suppliers and

vendors).

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Ethics as a Business Process

Corporate Ethics follows a familiar evolutionary path, from ―Requirement‖ to ―Business Imperative.‖

• Diversity

• Quality Movement

• Corporate Social Responsibility

Evolution from ―Soft‖ to ―Hard‖ Science

• Win in marketplace.

• Improve competitive advantage.

• Achieve higher market valuations.

• Increase employee recruitment and retention.

• Strengthen customer relationships and satisfaction.

Sound, ethical culture viewed as key to avoiding scandal, safeguarding corporate reputation, and sustaining brand value.

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The ―Carrot‖Being Ethical Generates Significant Business Value

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IT CAN PAY TO BE

ETHICAL*

The World’s Most Ethical

Companies consistently

outperform the Standard &

Poor’s (S&P) 500. Investing in

ethics is beneficial for any

company, even in a recession.

The graph to the right

compares the ―WME Index,‖ or

all publicly traded 2010 World’s

Most Ethical Company

honorees, against the S&P 500

and the Financial Times & the

London Stock Exchange

(FTSE) since 2005.

*Source: Ethisphere Institute, 2010

WME vs. S&P 500 vs. FTSE 100

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The ―Carrot‖DoJ Credit for Effective Ethics Programs

Principles of Federal Prosecution of Business Organizations

United States Attorney’s Manual

• Truly effective program can result in a decision not to charge a

corporation, OR to mitigate charges or sanctions against the

corporation.

2010 Amendments to Federal Sentencing Guidelines

• Reaffirmed the importance of Ethics and Compliance.

• Compliance should be embedded at the top of the organization.

• New requirements on promoting ethical culture, conducting

independent assessments, and reporting by ethics officials to

high-level personnel and the board.

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The ―Carrot‖DoJ Credit for Effective Ethics Programs

Siemens

• Most egregious example of systemic foreign corruption ever

prosecuted, according to DoJ.

• Tremendous benefits flowed from extraordinary cooperation.

$450-million fine vs. $1.35–2.76 billion called for in sentencing

guide.

Penalty was 67–84 percent less than what the company would have

faced without extraordinary cooperation, government access to

documents, and extensive remediation.

Helmerich and Payne

• Self-disclosed improper/questionable payments

• Non-prosecution agreement

• $1 million penalty (30 percent below guidelines)

• Compliance self-reporting (no independent monitor)

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The ―Stick‖Heightened Enforcement by DoJ

Financial Fraud Enforcement Task Force

Increase in DoJ resources to address financial fraud

Aggressive law enforcement techniques (i.e., Foreign

Corrupt Practices Act (FCPA) wiretaps and undercover

operations)

Ramped-up Securities and Exchange Commission

enforcement, including use of deferred and non-

prosecution agreements

Coordination with foreign law enforcement

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The ―Stick‖Heightened Enforcement by DoJ

Aggressive FCPA Enforcement

Since 2004, fraud section achieved 37 corporate FCPA and

foreign bribery-related resolutions

• Fines over $1.5 billion

• 81 individuals charged (CEOs, chief financial officers, other senior-

level corporate execs)

• 46 individuals charged since the start of 2009

More than the total number of individual charges in the previous

seven years combined

Charging individuals is part of a deliberate enforcement strategy

to ―deter and prevent corrupt corporate conduct‖

New United Kingdom Bribery Act criminalizes failure of a

corporate entity to prevent bribery

• Must show ―adequate procedures in place‖ to deter and detect such

conduct

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The ―Stick‖Cost of Ethical Lapses

Association of Certified Fraud Examiners’ 2010 Report to

the Nations on Occupational Fraud and Abuse

• Examined 1,843 cases of occupational fraud that occurred

worldwide between January 2008 and December 2009.

• Participants estimated that the typical organization loses five

percent of its annual revenue to fraud.

• Median loss: $160,000.

• More than a quarter of the frauds involved losses of at least

$1 million.

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The ―Stick‖Cost of Ethical Lapses

Boeing $615 million

Tenet $900 million

Columbia/HCA $1,700 billion

AIG $1,500 billion

Marsh and McLennan $850 million

Fannie Mae $400 million

KPMG $465 million

Tyco $750 million

Cardinal Health $600 million

Pharmas $2,400 billion

Siemens $463 million

Prudential $2,800 billion

UnitedHealth Group $915 million

BAE $200 million

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The ―Stick‖Future Business with Government Customers

FAR requires federal agency assessment of a potential

contractor’s ―ethics and integrity posture‖ as part of the

―responsible party‖ determination for future source

selections.

New FAR provisions specifically identify suspension

and debarment as the remedy for a contractor’s ―failure

to timely disclose‖ fraud or other illegal activities under

the mandatory reporting provisions.

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Building an Ethical Framework

1. What is the relationship between ethics and other performance metrics in the company?

• Cost of preventing a scandal is exponentially lower than the costs of fixing ethical problems.

• Current data indicates that ethical companies are more competitive, profitable, and sustaining than unethical companies.

2. Is our required ethics training more than rote introduction of the company’s code of conduct?

• The most successful ethics training moves from theory to practice, and from the conceptual to the real.

• Live case studies can help employees, leadership, and management solve relevant ethical dilemmas.

Ten Important Questions to Ask When Trying to

Build an Ethical Culture

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3. What is the relationship between exercising sound ethics and retaining great talent?

• Fortune’s top 100 companies to work for contains a wide variety of companies with no obvious common denominator (salary, benefits, career opportunities, profession, location all vary).

• Common factor: trust between employer and employee.

• Ethical behavior can lay the groundwork for attracting and retaining the best talent.

4. Have we conducted a risk assessment to determine our exposure to major ethical damage? What is our potential Enron?

• Each company has its own ethical nightmare, but most face similar ethical exposures (theft, accounting irregularities, kickbacks and gratuities, etc.).

• Companies should examine the potential hazards of perverse incentives (e.g., compensation based 100 percent on financial goals) and the various unintended consequences of policies, procedures, or expectations.

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5. How can we be proactive in the area of ethics, culture, and corporate citizenship?

• Leaders need to own and shape the culture as much as any other management initiative.

• Characteristics of predictable ethical outcomes include management credibility, upward communication, perceived organizational support, and teamwork.

• Well-tested diagnostic tools can help measure success in these areas.

6. What tone should executive leadership set regarding ethics, integrity, and transparency?

• What leaders say, think, and feel affects the tone as much as their actions.

• Mistrust, cynicism, or indifference can erode loyalty to the organization and push ethical leaders out the door.

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7. What does management need from the board of directors and

senior leadership to enhance and buttress corporate ethics?

• Employees who view the board and executive leadership as

unconcerned will discount any directives about ethics that may come

from them.

• Consistency and authenticity from the board and senior executives

(often expressed in terms of time, talent, and resources) is essential to

success.

8. Who is driving ethics and compliance in the company?

• Companies need to designate key senior internal drivers who move

along the discussions, training, and initiatives.

• Chief ethics and compliance officer (CECO) concept: independence,

authority, connection.

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9. Do we have consistency of message between and among the

board, the CEO, the senior executive team, and the employees in

terms of ethics and culture?

• Common vocabulary.

• Consistency of tone and guidance.

• Rewards and sanctions: demonstration of value.

10. Are there any roadblocks that discourage honest conversations on

ethics and the implementation of ethical practices, procedures, and

protocols?

• Need to have the mechanisms in place to assess the current state of

play.

• . . . and the willingness to make changes, when necessary.

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“In looking for people to hire, you look for

three qualities: integrity, intelligence, and energy.

And if you don‟t have the first,

the other two will kill you.”

-- Warren Buffet

CEO Berkshire Hathaway

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Best Practices: Role of the CECO

Role of the chief ethics and compliance officer (CECO)

Responsible for overall ethics and compliance program

• Supports CEO and board in promoting corporate values and

standards

• Full member of executive management team

• Participates in major company decisions

• Singular focus on ethics and compliance

Reporting relationships

• Dotted line to the CEO

• Direct line to the board of directors (Chair of Audit Committee or

other relevant board entity)

Source: Ethics Resource Center, 2007

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Best Practices: Principles for the CECO

Accountability to appropriate authority for fiduciary responsibility

Independence to raise matters of concern without fear of reprisal or

conflict of interest

Authority to have decisions and recommendations taken seriously

Connection to company operations, to build an ethical culture and

enforce standards

Source: Ethics Resource Center, 2007

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Ethics Under Legal Department?

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Ethical Leadership: Tone at the Top

Creation of an Ethical Culture

Internal Control Program

Corporate Code of Ethics

Ethics Training

Ethical Behavior Rewards and Sanctions

Anonymous Reporting Process

Internal Investigations Capability

Mandatory Disclosures to the Office of Inspector General

Key Assessment Areas:

What Makes a Good Corporate Ethics Program

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AMA/HRI identified several practices/approaches (2005) that

would be part of the “Composite Perfect Company” in 2015.

Board of Directors

• Obligated to uphold the code of conduct AND a specific Governance

Code of Conduct.

• Directors sign the code each year and participate in an ethics workshop

that includes the ―Train-the-Trainer‖ certification, as well as in-depth

discussions regarding the application of the Board’s code.

• Criteria for selecting and retaining board members ensures the Board is

diverse and independent.

• Organizational ombudsman has direct access to the Board and provides

unfiltered communications.

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Suppliers, Customers, and Investors

• Supplier/Subcontractor Code of Conduct.

• Company provides required training to the suppliers on the code of conduct and the company’s expectations of the relationship.

• Suppliers have access to the company’s ombudsman and hotline to discuss any unethical behavior that may have been observed.

• Representatives from the supplier are required to attend a business ethics conference held twice a year.

• Principle of transparency: company provides current and prospective customers with access to clear and complete information on its business ethics and corporate social responsibility programs.

• Shareholder trust is critical; company has created processes to provide timely and complete information and to obtain timely feedback for existing and potential investors.

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Business Ethics Effectiveness Measures

• Company knows that just having business ethics programs in place does not guarantee that an ethical culture will permeate the organization.

• The leadership team uses measures and indicators to determine if the business ethics programs are effective.

• Outcomes versus outputs (i.e., not just numbers of people trained).

• Ethics scorecard: performance results on the ethics goals required of the entire leadership team, and potential correlations with information on the retention of high-performing employees, customer loyalty, and investor confidence.

• Employee Ethics Survey.

• Annual Ethics Audit of both programs and practices.

• Supplier/Vendor Audits.

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Code of Conduct

• Additions viewed as ethical imperatives:

Environmental ethics

Cultural sensitivity

Disaster avoidance

Preparedness and security

• Because too many people were signing off on the code without

internalizing it, employees are required to receive ethics training and

pass a test when hired or transferred/promoted.

• Requirement applies to executives as well.

• Board members must pass an exam before they are appointed and

follow the process annually to retain their positions.

• Code is tailored to specific positions on the Board.

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Ethics Committee and Decision Model

• An ethics committee (with representatives from employee groups, the Board, customers, and suppliers) reports directly to the CEO and is responsible for reviewing the Code of Conduct and other ethics program activities for effectiveness.

• Ethics survey expanded to the Board, suppliers, customers, and investors to better understand different perspectives and concerns.

• A formal decision-making model is used to address true ethical dilemmas.

Effectiveness Measures

• Ethics audits conducted on a continuous, proactive basis; internal data mining is ongoing to identify violations, malfeasance, hotline/helpline cases, vendor audits, etc.

• All employees have business ethics goals they are asked to meet.

• Attempt to correlate achievement of ethics goals with employee retention, productivity, cost controls, and loyalty/business from customers.

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A New Ethics and Compliance Paradigm

Government has traditionally taken a ―law enforcement‖ approach to

promoting business ethics, and industry has responded with rules-

based programs.

New FAR requirements on business ethics and integrity present

government agencies an opportunity to work with industrial partners

to improve the ethical culture; tighten internal controls; better

manage risk; and increase confidence-building measures.

Shift focus from prosecutorial metrics to agency mission

accomplishment.

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Is the Government ―Walking the Talk‖?

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Some Concluding Thoughts…

“There are seven things that will destroy us:

Wealth without work; Pleasure without conscience;

Knowledge without character; Religion without sacrifice;

Politics without principle; Science without humanity;

Business without ethics.”

-- Mahatma Gandhi

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Some Concluding Thoughts…

“Don‟t think there are no crocodiles because

the water is calm.”

-- Malayan Proverb

“Relativity applies to physics, not ethics.”

-- Albert Einstein

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The Anti-Fraud Business Is Booming…

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Ethics Training Gone Awry

http://www.hulu.com/watch/38485/the-office-merediths-confession-1009










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Industry ―Best Practices‖ Observed

Integration of Ethics into Business Process

• Ethics officers, both at the corporate and business unit levels, are part of the senior leadership team and attend/participate in all staff meetings and strategic business decisions.

• Ethics measures incorporated into business financial and operating results presentations given by business presidents to the CEO; ethics reported twice each year in business performance reviews.

• Business Development Account Framework integrates conflict of interest and ethical considerations very early in the process.

• Integrity/Ethics measures (including behaviors consistent with the company’s values) are explicitly included in employee performance appraisals.

• Ethics involved in the vetting process for promotions to vice president (VP) level and above.

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Leadership and Executive Training

• Leadership Development Program for high-potential employees two

years out of school emphasizes that ―doing the right thing gets you

ahead in business.‖

• Ethical leadership education module promotes the role of good

management and leadership skills in maintaining an ethical

environment.

• Message: Same behaviors that create an ethical environment improve

performance.

Creation of an ethical culture that promotes honest and open

communication between managers and employees.

Resolve workplace issues early/prevent and minimize ethical

escapes.

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Leadership and Executive Training (continued)

• Ethical Leadership Maturity Model.

Designed to set expectations for ethical leadership behavior.

Self-assessment against criteria; coaching to subordinate

managers.

Integration into leadership training; possible use in performance

appraisal process.

• Focus on Supervisor Ethics Training for Leaders.

Importance of ―walking the walk and talking the talk.‖

Business imperative of integrity and values-based leadership.

Reinforces company support of leaders.

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Organizational Structure

• VP-level individual runs corporate program and reports to chairman and

CEO, rather than president.

• VP/Corporate Responsibility (CR) or Corporate Governance approach

combines all aspects of internal governance for synergy (Ethics and

Compliance, Internal Audit, Corporate Investigations, etc.).

• CR director AND ethics and compliance program manager in each

Value Center; mixture of outside ethics/compliance professionals and

business expertise.

• When culture/history places ethics activity under legal, individual other

than general counsel properly empowered with independent leadership

and board reporting arrangements.

• Senior VP/chief compliance officer officially reports to the chair of the

board of directors’ audit committee; administratively reports to the CEO.

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Organizational Structure (continued)

• Ethics and Compliance Review Board/Management and Business

Conduct Committee/Ethics and Advisory Committee.

• Dedicated Business Conduct Officer (BCO) assigned to groups of 50

employees; BCO is at manager/director level, not Human Resources,

Law, or Audit.

• Ethics Oversight Committee includes senior company leadership, an

outside director from the board, and a senior line manager from one of

the company’s business units.

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Ethics Survey

• Conducted every two years.

• Survey results used as a training tool; results operationalized and accountability assigned.

• Action Plans required by supervisors, with flow-downs to direct reports.

• Survey results drive ethics education and ethics communication program development.

• A few ethics questions posted on website each month, along with previous month’s results; avoids overload and prevents stagnant web content.

• Use of customer perception survey to evaluate ethics posture.

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Ethics Training

• Live training at working-group levels most effective.

• Separate compliance modules (online), uniquely tailored to highest risks

in each business unit or value center.

Testing for comprehension required for all computer-based training,

including those on company Code of Conduct.

• Scenario-based live discussions on ethical decision-making (video

vignettes) provided annually at all levels.

• ―Integrity Minute‖: Serial video program using ethics vignettes as a

teaching tool; branching out into gray areas of ethical decision-making

and employee reporting responsibilities.

• EthicsSpace mini-series uses video vignettes to encourage employee

attention to ethics matters.

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Ethics Training (continued)

• Annual Recommitment and Challenge.

Business unit customization.

Managers lead discussions.

Personal stories/case scenarios/celebrations of success.

• Internal Audit testing of employee knowledge in high-risk areas (i.e.,

International Traffic-in-Arms Regulations/Foreign Corrupt Practices Act

(FCPA) in international businesses) provides feedback on effectiveness

of training.

• Monthly Ethics Scenario Discussions.

.

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Ethics Training (continued)

• Videotape of actual employees used in Annual Ethics Training

Forty-eight employees videotaped, addressing ―what ethics means to me.‖

Effective peer learning opportunity; high degree of credibility with colleagues.

• Annual 4-hour Values-Based Ethics Training Requirement, fulfilled during the employee’s birth month.

• New Employee Ethics packet includes detailed information on key areas such as export controls, FCPA, Internet, kickbacks/gratuities/conflicts of interest, procurement integrity, product substitution, and time and labor charging.

• New employees receive personal contact from Ethics within 30 days, and ethics and compliance training within 60 days.

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Communications

• Constant leadership integration of ethics and integrity into presentations; ethics not a separate ―campaign‖ or special interest topic.

• Ethics Blog: posts generate employee input and participation, and stimulate management/employee communication.

• Interactive Ethics Posters feature real employees with a short story on each one posted on Ethics Website.

• Business Conduct Program captured on plastic card attached to identification badges; core values and contact information close.

• Rotating screen savers on all computer screens contain ethics messages; serves as a constant reminder of corporate commitment to integrity and ethics.

• Ethics Program pamphlet with points of contact, reporting responsibilities, etc., sent to employee home addresses (also contains

information on Equal Employment Opportunity, harassment, etc.).

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Board of Directors

• Active Compliance Committee that oversees Ethics Program and is part of

VP/Ethics selection process.

• Board approves the Code of Conduct.

• Board of directors ethics training every two years.

• Separate ―Standards of Business Conduct‖ for board of directors.

• New Ethics Committee of the Board, separate from Audit.

Rewards and Sanctions

• Performance Appraisals rate ethical conduct/decision-making and compliance

with disclosure procedures; verified by Internal Audit.

• Rewards programs recognize particularly courageous ethical decision-making,

upward communication of difficult issues.

• ―President’s Integrity and Ethics Award‖ recognizes sustained commitment to

ethics, integrity, and the company’s reputation.

• ―Police Blotter‖ regularly identifies violations of Code of Conduct and company

actions taken.

• Ethics Office includes statistics on disciplinary actions (linked to code violations)

in monthly staff bulletins to publicize corporate commitment and follow-through.

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Ethics Program Assessments

• Peer reviews of ethics programs in each business sector focus on how well ethics is embedded into the business.

• External Assessment. Led by independent, third-party ―contractor.‖

Assessment of ethics, procurement integrity, and specific compliance areas.

Over 100 employees interviewed on topics of ethical leadership, peer commitment to ethics, and supervisory reinforcement.

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Code of Conduct• Pocket-sized Code of Conduct targets most relevant business process

risks, is clearly organized, and is easy to read and reference.

• Code of Conduct organized into a series of questions and answers.

• Code title, ―The Spirit and the Letter,‖ outlines CEOs explicit direction: “Do not allow anything—not „making the numbers,‟ competitive instincts, or even a direct order from a superior—to compromise your commitment to integrity.‖

• ―Winning with Integrity‖—Links financial goals to corporate values.

• Employee ―duty to report‖ code violations clearly spelled out, along with possible punitive actions for failing to report.

• Global Code of Conduct balances different cultures and regulatory regimes, with sections on local requirements.

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Code of Conduct (continued)• Written acknowledgements focus on employee reporting obligations:

―I understand that I have an affirmative obligation to report all actual or suspected violations.‖

―I have reported all actual or suspected violations of the standards now known to me.‖

• Code contains a section on FCPA ―red flags‖ to increase employee awareness.

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Subcontractor Flow-down• Company requires that subcontractors certify in the Request for Proposal that

they will have a Code of Conduct in place within 30 days of contract award, and that they will have an Ethics Program in place within 30 days after contract award.

• Subcontract and supplier terms and conditions, and/or supplemental representations and certifications for subcontracts, cite FAR 52.203-13 requirements for Ethics Programs, Codes of Conduct, and training.

• Ethics VP participation in conference with subs and suppliers.

• Annual Supplier Conference used as a forum to lay out expectations.

• Written standards for Supply Partners published in a brochure format; Ethics, Human Rights, Environmental issues, and expectations of ―mutual respect‖ addressed.

• ―Associates Brochure‖ highlights ethics program/Code of Conduct requirements.

• Require subs/suppliers without their own code to adopt the prime’s, and offer training opportunities.

• Website for subcontractors, suppliers, and vendors contains comprehensive ethics information, including training and Code of Conduct.

• Internal vendor evaluation system captures ethics and integrity performance of subcontractors.

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Investigations

• Documented investigative procedures cover key areas, including initiating,

planning, and conducting investigations; documenting interviews; attorney-client

privilege; and reporting format.

• Investigative teams supplemented with expertise appropriate to the allegation

(human resources, finance, legal, internal audit, information technology, etc.).

• Internal and external training in basic investigative techniques periodically

provided to Ethics Officers and others tasked with conducting internal

investigations.

Mandatory Disclosure Requirement

• Leveraging of quarterly ―survey of principals‖ required under Sarbanes-Oxley to

meet FAR mandatory fraud disclosure requirement.

• Mandatory Disclosure policy requires reporting of possible violations to sector

General Counsel within 2 working days.

• Company publishes a comprehensive list of reportable matters in categories

such as contract award, contract performance/closeout, and overpayments.

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Other Areas

• Separate and distinct labor charging initiative.

• Ethics Program materials and hotlines adapted and translated for

international business units; local ethics officers, attorneys, and internal

auditors with language capability assigned.

• Ethics integrated into recruiting process; students briefed on company

values and ethics, and advised not to apply without buy-in.

• Proactive fraud risk assessments and risk-based monitoring conducted

by Compliance staff in coordination with internal audit.

• Well-stated Ethics Program goal: ―Help employees recognize,

appreciate, and resolve ethical dilemmas and issues.‖

• Online process for disclosure of Conflicts of Interest (COI) and

certification of adherence to standards of business conduct.

Seven questions asked regarding COI-related issues.

Must be completed annually and upon changes in circumstances.

First-level review by manager; Ethics Office also conducts assessment.

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Documents

Business Ethics and Compliance ... - Fraud Conference