compliance and ethics roundtable -talking to the board- acc-gny september 30, 2010 © sirota...

Compliance and Ethics Roundtable-Talking to the Board-

ACC-GNYSeptember 30, 2010

© Sirota Consulting LLC, 2010

For Further Information, Contact: mmeltzer@sirota.com

2Contents

• The Essential Messages

– Message 1: Culture is Key

» The Formalities of Compliance are Important but Not Sufficient

» Culture is Central to Good Risk Mitigation

» It results in good business outcomes

– Message 2: Culture is An Oversight Function of the Board

– Message 3: Culture can be Defined, Shaped and Measured

– Message 4: Your Organization is Not Monolithic…. Look beneath the surface

• Suggestions …. Before You Start Talking– Suggestion 1: Translate Lawyer Talk into Business Talk

– Suggestion 2: Relate your Comments to Strategy and Mission

– Suggestion 3: Get Practical

– Suggestion 4: Talk “Best Practices”

For Further Information, Contact: mmeltzer@sirota.com

3Message 1: Culture is Key

§8B2.1. Effective Compliance and Ethics Program

(a) To have an effective compliance and ethics program … [section references

omitted] … an organization shall—

(1) exercise due diligence to prevent and detect criminal conduct; and

(2) otherwise promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law.

The Formalities of Compliance Are Important but Not Sufficient

For Further Information, Contact: mmeltzer@sirota.com

4Culture is Key

Because if you check all the boxes but continue to have ethical lapses …

(i) The process is deeply flawed … the organization is neither protected nor its business advanced; and

(ii) you have failed to achieve the sentencing guideline conditions for mitigation

Ethical Culture is Central to Good Risk Mitigation

For Further Information, Contact: mmeltzer@sirota.com

5Culture is Key

A Recent Study of ~500,000 employees world wide by the Corporate Executive Board* found that integrity has a tangible impact on corporate performance.

Findings demonstrate that companies with weak ethical cultures experience 10 times more misconduct than companies with strong ethical cultures. (Surprise!)

Findings also show that tangible business benefits are associated with organizations that maintain cultures of ethical conduct.

Ethical Org Culture Results Positive Business Outcomes

*For further information on CEB’s findings on corporate cultural integrity and the key attributes for addressing cultural integrity risk, see: www.executiveboard.com/legalandcompliance

For Further Information, Contact: mmeltzer@sirota.com

6Culture is Key

“I gave into the pressure,” said [name removed for privacy] in a statement that was read by one of her attorneys while she sobbed out of control. “I should have blown the whistle. I disgraced my family, my friends, for fear of not being part of the team.”

Account of statement at sentencing of Enterasys Networks executive who cooperated with the government prior to receiving federal prison sentence in which the sentencing judge, Paul Barbadoro, specifically made mention of the corrupt corporate culture at the Cabletron Systems spinoff

But it Can Be Positive or Negative!

For Further Information, Contact: mmeltzer@sirota.com

7Culture is Key

“…no accidents, no harm to people, and no damage to the environment."

But it can Not Simply Be “Declared”

Guess Who?

For Further Information, Contact: mmeltzer@sirota.com

8(answer…)

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9Message 2: Culture is An Oversight Function of the Board

Ensuring that your organization has a culture of ethical conduct is a top responsibility for Directors and feeds in to other aspects of their role.

Greenberg, Michael (ed.), Directors as Guardians of Compliance and Ethics Within the Corporate Citadel: What the Policy Community Should Know (Rand Corporation, 2010), p. 15

Culture is a due diligence issue for Boards.

Foley Lardner LLP report: Board Oversight of Corporate Culture 2007 National Directors Institute

“... your corporate culture runs your business 90 percent of the time--especially when you're not there, and is an important ingredient in the company's performance “ And, while … “Corporate culture is the responsibility of the CEO “…. The CEO oversight is a core function of the Board!

Edward McVaney, Former J.D. Edwards CEO speaking at the Vail Leadership Institute Center for Corporate Change, 2004

For Further Information, Contact: mmeltzer@sirota.com

10Message 3: Culture Can Be Defined, Shaped and Measured

• Organizational Culture is “… internalized … core corporate values … companies are to be held accountable to these standards. 1

• Culture is an abstraction … to make sense out of the relationship between behaving individuals … [ i.e., what people do in fact] … and the setting in which this behavior occurs. 2

• “… the standards and values that define how people in an organization are expected to behave especially in their relationships with each other”. 3

• When people come together with a shared purpose, a culture is formed. 4

• “... a set of distinctive spiritual, material, intellectual and emotional features … of a social group, and that it encompasses, in addition to art and literature, lifestyles, ways of living together, value systems, traditions and beliefs”. 5

Some Definitions:

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11Culture Can Be Defined, Shaped and Measured

• Grounded in internalized shared values

• Driven by leadership

• Descriptive of behaviors that distinguish groups one from the other

• Observable behaviors - it is always “de facto”

In sum …

For Further Information, Contact: mmeltzer@sirota.com

12Culture Can Be Defined Shaped and Measured

• Because culture describes belief systems and behavior patterns- it is predictive of outcomes.

• Because culture is driven by leaders, it can be shaped.

• Because culture is descriptive, distinguishable and observable, it can be measured (as an absolute, or comparatively, longitudinally, and against goals and norms).

And Therefore …

For Further Information, Contact: mmeltzer@sirota.com

13Message 4: Organizations are Not Monolithic

Belief Systems and behaviors will vary and morph:

Geographically

By business lines or units

Among age groups

Within work groups

Between different managers in the same department!

Over time

After organizational changes, especially existential

After leadership changes …You cannot assume the organization acts as a whole- segmentation helps uncover bright spots and problem areas

For Further Information, Contact: mmeltzer@sirota.com

14Organizations are Not Monolithic

Look under the surface for important messages…..

For Further Information, Contact: mmeltzer@sirota.com

15Organizations are Not Monolithic

Culture of Compliance Items (% Favorable)

Blue = 5 most favorable departments on itemRed = 5 least favorable on items

38

33

Look under the surface for important messages…..

For Further Information, Contact: mmeltzer@sirota.com

16Organizations are Not Monolithic%

Fav

orab

le

20

40

60

80

100

Day-to-day actions ofmanagement are

consistent with theirwords

Top managementencourages reportingimportant informationup-the-line, even if it’s

bad news

Rate XYZ on beingethical in its business

dealings

Rate XYZ on taking agenuine interest in thewelfare of communities

in which it doesbusiness

Rate safety where youwork

20

40

60

80

100

Top 10%

Bottom 10%

Average *

Look under the surface for important messages…..

For Further Information, Contact: mmeltzer@sirota.com

17Suggestion 1: Translate Lawyer Talk into Business Talk

Stop talking like you’re in court or sharing war stories with your colleagues.

Your board does not want to know the name of the case and they don’t care that this Circuit is more liberal than that Circuit. You’ll lose them quickly if you speak on that level.

But have that detail available, perhaps in handouts, because there is always one person who will want to drill down… you can satisfy that person, and your personal need to obsess over details, with a written summary of the particulars that support your recommendations

For Further Information, Contact: mmeltzer@sirota.com

18Suggestion 2: Relate Your Comments to Strategy and Mission

Compliance is not only about risk mitigation and staying out of jail; how does creating a company known to be ethical and in fact engaging in ethical behaviors further the mission and strategy of the organization…. How does it fit into your organization’s values?

Rather than: “is this a good or bad behavior”Consider: “Is this behavior productive?”

Productive for the organization (for example): Consonant with the mission

Creating sustainability (using long term thinking)

Enabling Transparency

Inclusive, Diverse treatment of others

Honesty and Integrity

For Further Information, Contact: mmeltzer@sirota.com

19Suggestion 3: Get Practical

Recommend actual practices and policies that translate the legal principals that you have made relevant to mission, vision and values, into practical measures that are actionable by the board

Have a proposed plan ready to present

And a process to implement your recommendations…

Be ready to discuss the budget implications.

For Further Information, Contact: mmeltzer@sirota.com

20Suggestion 4: Talk “Best Practices”

Your board is likely to be comprised of senior leaders, in some cases who are on multiple boards and may be senior execs in their own companies.

So be prepared to answer such questions as:

what do other companies of like size in our industry, region, organizational structure and situation do?

What would you consider “best practices” and

how do you know they are the best?

For Further Information, Contact: mmeltzer@sirota.com

21Appendix

I. Surveys vs. Audits

II. Footnotes

III. Other References

For Further Information, Contact: mmeltzer@sirota.com

22Benefits & Limitations of Surveys Vs. Audits

Shows Actual Activity that Has Occurred

Assesses Processes and Communications Around Activities

Potential endorsement from internal and external auditors

Benefits of Audits Benefits of Surveys

Shows Impact of Activities on People

Shows variability among occupations and divisions

Shows where attention should be focused

Cues about what you need to do

Does not indicate impact on people

Does not address requirement to create a culture of compliance

Limitations of Audits Limitations of Surveys

Does not address the execution of many specific compliance mechanisms

Does not directly measure behavior

For Further Information, Contact: mmeltzer@sirota.com

23Footnotes

1. Pitts and Sherman, United Nations BLIHR project. Chip Pitts, Stanford Law School, former CLO Nokia, Chair, Amnesty International, partner Baker & McKenzie and co-author of the book “Corporate Social Responsibility: A Legal Perspective”. John F. Sherman, III, Esq., Senior Fellow at the John F. Kennedy School of Government at Harvard, and the recently retired Deputy General Counsel of National Grid.

2. Proshansky and Seidenberg, 1966

3. Sirota, Mischkind and Meltzer, The Enthusiastic employee (Wharton School Publishing, 1995), p. 266

4. Thorsen, Debra, “A Definition of Corporate Culture”, Ezinearticles, com. 5. UNESCO, Universal Declaration on Cultural Diversity (2002)

For Further Information, Contact: mmeltzer@sirota.com

24Other References

• Paine, Lynn S., Value Shift (McGraw Hill, 2003)• Kraut, Allen I., Organizational Surveys (Jossey-Bass, 1996)• Schein, Edgar H., Organizational Culture (American Psychologist, February, 1990, pp. 109-

119)• Greenberg, Michael (ed.) Directors as Guardians of Compliance and Ethics Within the

Corporate Citadel: What the Policy Community Should Know (Rand Corporation, 2010)• Smith, Neil, “Is there a Culture of Secrecy Behind Corporate Responsibility?” (CSR Wire,

September 13, 2010)• Heskett, James and Sasser, W. Earl, “Ten Reasons to Design a Better Corporate Culture,

December 22, 2008, Harvard Business School Working Knowledge Review of Faculty Research