compliance and ethics roundtable -talking to the board- acc-gny september 30, 2010 © sirota...
TRANSCRIPT
Compliance and Ethics Roundtable-Talking to the Board-
ACC-GNYSeptember 30, 2010
© Sirota Consulting LLC, 2010
For Further Information, Contact: [email protected]
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: [email protected]
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: [email protected]
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: [email protected]
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: [email protected]
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!
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7Culture is Key
“…no accidents, no harm to people, and no damage to the environment."
But it can Not Simply Be “Declared”
Guess Who?
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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: [email protected]
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: [email protected]
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: [email protected]
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: [email protected]
14Organizations are Not Monolithic
Look under the surface for important messages…..
For Further Information, Contact: [email protected]
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: [email protected]
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: [email protected]
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: [email protected]
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: [email protected]
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: [email protected]
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: [email protected]
21Appendix
I. Surveys vs. Audits
II. Footnotes
III. Other References
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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: [email protected]
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: [email protected]
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